One of my clients is currently having a spitting contest with the Contracting types at DHHS. It seems that the CO is insisting that the Prime Contractor (my client) submit "...the necessary subcontracting forms..." which consists of a checklist made up of the 13 considerations contained in FAR Part 44.202-2(a). In addition the CO is requiring such input for all subcontractors IAW 44.201-1(b)[SAT or 5%, etc.] The client is somewhat new to Gov Con, and has asked the CO to define "subcontract" The CO's response was that anything that was not a Prime contract was a subcontract. At this point, the client asked for clarification--did the CO mean the Lease Agreement, the Coffee Service, Reproduction and office supplies--the CO's response was that anything that was not a prime contract was a subcontract. All of this brings me to the following points:
1.) Is the Contractor obligated to fill out the Checklist? It seems to me this is a list of items that the CO must consider in his approval process, and that by merely having the contractor fill in the checklist, he is not fulfilling his(CO's) obligation to objectively evaluate the proposed subcontractor using these guidelines in their considerations.
2.) If the intent is to approve a subcontract for inclusion, in the overall cost of a Prime contract, I believe that these policies and procedures (FAR 44.2)are intended to address costs incurred directly for the final cost objective, and should not address such things as rent, equipment leases, etc. UNLESS they are incurred as a direct cost of the prime contract. only.

While this is lengthy, I found it an interesting situation, where the CO is being way too literal, and the contractor is somewhat intimidated by the sheer magnitude of having to respond (after the fact) for a large group of subs, plus all of the other supporting vendors etc. Does anyone have any thoughts as to what the precedent should be for this or similar situations?

Thanks in advance for any insights!!

By Vern Edwards on Tuesday, August 28, 2001 - 06:32 pm:

Tina:

FAR 44.101 defines "subcontract" as follows:

"[A]ny contract as defined in Subpart 2.1 entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders."

It defines "subcontractor" as follows:

"[A]ny supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime contractor or another subcontractor."

Note the word "any." Taken literally, these definitions include every contract awarded by a prime contractor, and there is some old case law to that effect. See, for example, Hogan Mechanical, Inc., ASBCA No. 21,612, March 30, 1978, in which the Board found that a common carrier was a subcontractor for purposes of the default clause. In that case the definition of "subcontractor" was in ASPR and was very similar to the definition in FAR.

A common sense approach might require approval of only direct cost subcontractors, but I cannot say that the CO is wrong to include indirect cost subcontractors, as well.

By Anonymous on Wednesday, August 29, 2001 - 02:13 pm:

Tina - you've hit on a pet peeve of mine because, as Vern notes, the literal language of the FAR does seem to support the CO's position and the application of the rule varies from CO to CO. Another place where it becomes a headache is where a large contractor has to decide what clauses to flow down to "subcontractors."

Take utilities companies, for example; are they "subcontractors"? I'd think the answer is "yes" under a literal reading of the FAR (electricity & water will be used to perform the contract). Under FAR 52.244-6(c), the prime is required to flow down certain clauses "where applicable," including 52.222-26 (the EO clause). The EO clause applies to subcontracts exceeding $10,000, and this includes situations where the aggregate value of all subcontracts in any 12-month period exceeds $10,000. The annual electric bill of a large contractor can easily exceed $10,000.

Is the prime violating the law by not flowing down the EO clause to the electric company? One govt "authority" I've spoken with about this says "yes." IMHO, this is crazy.

By ji20874 on Wednesday, August 29, 2001 - 05:15 pm:

Maybe a reasonable interpretation is that a subcontract is a contract which a prime contractor issues specifically to support its prime contract -- a contract that existed before the prime contract came along and will exist after the prime contract has expired should not be considered a subcontract for flow-down purposes and similar purposes -- if there a notion somewhere that words must be interpreted in a reasonable and prudent manner, then I suggest this as a reasonable and prudent solution -- however, in the short term, your particular contractor has to deal with its assigned contracting officer...

By Ron Vogt on Wednesday, August 29, 2001 - 07:49 pm:

Tina (any relation to Tina Casman?) - A reasonable interpretation is called for here. A subcontractor is a party that has contracted with the original contractor to perform all or part of the work that such contractor has itself contracted to perform. The subcontract is an agreement to perform all or part of the work that was in the original contract. (This is paraphrased from Black's Law Dictionary).

Looked at this way, only work that is a necessary part of a deliverable in the prime contact can be a subcontract. So, are utility companies subcontractors under a production contract? No, because the prime contract does not call for the delivery of electricity, expressly or impliedly. Same for coffee, office paper, even the lease on the building you occupy. None of these are a part of the performance that the prime promised.

Is a contract for nuts and bolts a subcontract? Yes, if they are going on an item in a prime contract, because the nuts and bolts are a part of the deliverable. The prime promised to deliver an item, and these are part of it.
In short, anything that the prime itself has not contracted to perform cannot be the subject of a subcontract.

As with most analyses, there are a thousand ways to play devil's advocate. For example, what about the lubricating oil for your drill press? It certainly gets used in the production of prime contract deliverables, and in fact the item could not be made without it. However, I would argue that because the oil is not itself a part or component of the prime deliverable, then it cannot be the subject of a subcontract.

In your case, reality must override theory. It sounds like your CO is using an unreasonable definition. Try some of the suggestions in this forum and see if he or she comes around. You could even suggest that filling out the checklist for the CO, and doing anything for contracts that are not subcontracts, is work that is outside the scope of the prime contract and could result in an REA. If this is not successful, tactfully take the issue to someone in the chain above your CO. If everything fails, document your work spent on these tasks.

By Vern Edwards on Wednesday, August 29, 2001 - 10:47 pm:

Ron:

While I sympathize with your common sense approach, it has no basis in contract language. The definition of subcontract in the clause, FAR 52.244-2, Subcontracts, does not limit that term your definition: "an agreement to perform all or part of the work that was in the original contract." The definition in the clause could include an insurance company or a utility that furnishes electricity or a stationer.

What has happened to Tina's contractor is what can happen to anyone who asks questions only after they've signed a government contract.

By bob antonio on Thursday, August 30, 2001 - 08:16 am:

Vern:

I did a quick review of FAR 44.101, 2.101 (contract), and 19.701, and did not find anything there that appears to conflict with your definition.

By Anonymous on Thursday, August 30, 2001 - 08:38 am:

What if the prime has no contract with a sub....I know of many industries that sell to each other without any written vehicle.

By Tina Farquarte on Thursday, August 30, 2001 - 08:52 am:

Vern:
This contractor has been performing this work for almost 15 years, so they are not totally nieve in the wild world of govcon. The problem arises from a new CO on the contract. To my knowledge all attempts to interject logic and reason into this particular interchange have failed to date. Many of the suggestions offered here, I have already discussed with the contractor. In my last discussions with the contractor, they were awaiting the return from vacation of the CO's boss, so hopefully soon we can have this mess resolved.

Thanks to all of you for the inputs.

Ron, no relation to Ms. Casman however, we do have a close mutual friend in the business.

By Vern Edwards on Thursday, August 30, 2001 - 10:24 am:

Tina:

If there's been a change in contracting officers and the new contracting officer is interpreting the term differently than the previous contracting officer your friends may have a case that the new interpretation is a breach of contract. Of course, they need to consult a lawyer about that.

Anonymous:

The definition of subcontract in FAR 44.101 depends on the definition of contract in FAR 2.101. That definition includes only contracts that, "except as otherwise authorized, are in writing." However, I'm not sure how this applies in your case.

As I'm sure you know, in our legal system not all contracts have to be in writing.

By Eric Ottinger on Thursday, August 30, 2001 - 11:54 am:

Tina,

It has always been my understanding that a subcontractor works to the specifications of the prime contractor. A vendor works to his/her own specifications. However, the FAR treats vendors as a subset of subcontractors. See FAR 44.101 Definitions.

In any case, most vendors would be exempt from subcontract consent under FAR FAR 44.201-1.

My recommendation would be to comply with the FAR 44.201-1. If the CO wants more than the FAR requires, I would give him/her some line of stuff to the effect that my higher management has directed that I comply strictly with the FAR as written and I have no authority to provide more than the FAR specifies without consideration and the approval of general counsel. As ignorant as the CO appears to be, a bit of bluff like this will probably work.

By the way, the term is “consent,” not “approval.” There is more than a shade of difference.

Eric

By Ron Vogt on Thursday, August 30, 2001 - 01:17 pm:

Vern, it is hard to refute an absolutely literal reading of the FAR language. What I am saying is that a literal reading makes no sense whatsoever, especially when you look at what that literal reading would require you to do. What you are saying is that a CO, if he or she chooses to, could start requiring the prime to apply the full range of FAR subcontracting requirements to every single supplier or vendor to the prime, and there would be nothing the prime could do about it. You have given the electric utility and the insurance company as examples, but you might as well go all the way. You would have to include all utilities (water, gas, electric, sewer), the cleaning company that comes in at night, the airlines that you fly on, the gas station where you fill up your rental car, and on and on. Where does it end? (On the bright side, picture the following entertaining scenario: "Hello, TWA? We need to talk about those standard terms on the back of your tickets.")

Unless you are seriously proposing that the prime should be considering the FAR subcontracting requirements for all of these, then you have no choice but to take the common sense approach. If you don't stop at supplies and services that specifically support prime contract requirements, then you have to decide where to draw the line, and that line could go out an absurd distance.

By Vern Edwards on Thursday, August 30, 2001 - 01:45 pm:

Ron:

I agree with you that a literal reading would be too much, but what we think doesn't matter in Tina's case. The definition of subcontractor in FAR 44.101 appears in the contract clause. If a contracting officer chooses to interpret the clause literally, what are you going to say? That it's stupid? That won't wash. If the CO won't be reasonable you will have to resort to the legal guidelines for contract interpretation to prove that the literal interpretation does not reflect the actual agreement between the parties.

The CO that Tina has described is taking a literal interpretation. There would be no point at telling this person that his/her interpretation is absurd. It wouldn't get you very far with someone like that.

I'm on your side, Ron. But that may not be enough.

By Eric Ottinger on Thursday, August 30, 2001 - 02:14 pm:

Vern & Ron,

Am I missing something. A true vendor contract is very unlikely to be other than fixed price or over the 5% threshold.

If you just follow FAR 44.201-1, there should be very little reason to bother with the electric utility, the insurance company, water, gas, sewer, airlines, etc.

Eric

By Ron Vogt on Thursday, August 30, 2001 - 02:52 pm:

Eric, it may be true that many vendor contracts will not meet the threshold for FAR treatment, whether it's the consent threshold or the various flowdown thresholds. The real point, however, is that you should not even have to analyse these for whether they meet the threshold.

Maybe we can make sense of this if we take our focus off of the word "any" in 44.101, and look at the phrase "for performance of a prime contract...." Since it says "a" and not "any" prime contract, I would argue that it applies only to a subcontract particularly supporting "a" specific prime contract. Had it used "any" in that place, then maybe the definition would apply to all vendors and suppliers that provided a service that indirectly benefited any prime contract.

Any hope there?

By Vern Edwards on Thursday, August 30, 2001 - 03:02 pm:

Eric:

You're right; most indirect cost pool subcontracts wouldn't require consent even under a literal interpretation of the definition. But some might; and several might trigger the notification requirement under FAR 44.201-2.

Vern

By Eric Ottinger on Thursday, August 30, 2001 - 03:13 pm:

Ron,

I think, from the point of view of the FAR, a vendor contract which is other than fixed price or more than 5% of the prime contract, is such an odd and unlikely thing that it should be reviewed.

All Tina's client needs to do, is to insist on her right to follow the rules in the FAR, as written.

As for the hypothetical. I don't think it is a big enough problem to worry about.

From the point of view of negotiation strategy, if I am dealing with a conspicuous dim bulb, I would not confuse him/her with subtleties or fine points.

Eric

By Eric Ottinger on Thursday, August 30, 2001 - 03:31 pm:

Vern,

Speaking as someone who has done pricing on occasion--

Starting with 100% of the costs and backing out the prime contractor costs that have to be in there, backing out the true subcontracts, and taking into consideration that there will not be one, but numerous, vendors contributing, the likelihood that a single vendor contract will account for more than 5% is (it seems to me) vanishing small.

If Tina’s client somehow went hog wild down at Ralph’s Nut and Bolt store and spent more than 5% of the contract cost on nothing but nuts and bolts, I would advise him/her to obtain the consent (and to get to work on a really good story for DCAA.)

Eric

By Ron Vogt on Thursday, August 30, 2001 - 03:58 pm:

Eric, you're still addressing only the 'consent to subcontract' threshold. What about all of the flowdown requirements, many of which only need to be above the simplified acquisition threshold? For a decent-sized company, virtually all of their vendor and supplier contracts (subcontracts!) would exceed that.

By Eric Ottinger on Thursday, August 30, 2001 - 04:22 pm:

Ron,

Under FAR 44.201-1, the simplified acquisition threshold only comes into play if the threshold amount is greater than 5%.

If $100K is 5% of the contract, the contract total is $2,000,000. $100,000 is a lot of nuts and bolts, on a $2,000,000 contract.

Getting back to Tina’s initial post, Tina seems to indicate that the CO will approve the cost of the subcontract. The CO will not do that (unless he/she does not know what he/she is doing).

Eric

By Ron Vogt on Thursday, August 30, 2001 - 05:35 pm:

Eric, I'm having trouble following you. Are you saying that a flowdown threshold doesn't kick in until the subcontract is greater than 5% of the prime contract? Unless I'm misunderstanding something in the FAR, flowdown is an entirely different animal than the 'consent to subcontract' requirement. Some flowdowns are mandatory for all subcontracts. Are you suggesting that this is overridden by the 5% requirement?

I don't think the problem is as "odd and unlikely" as you think. It goes beyond the 'consent to subcontract' requirement. There are mandatory flowdown clauses that must be inserted in all subcontracts. If we are to interpret a subcontract as all vendor and supplier contracts, then we must flow down these clauses in to every single one of our contracts, just because it may tangentially support the performance of a government prime contract. Even the SAT is not that difficult to meet, notwithstanding your nuts and bolts hypothetical (which, by the way, we buy $Millions per year, and easily more than $100,000 from many companies).

By Vern Edwards on Thursday, August 30, 2001 - 06:14 pm:

Eric:

Assume the following:

1. A DOD CO awards a one-year CPFF service contract with a total estimated cost of $4 million to Division A of XYZ Corporation, a big firm. The contract includes the Subcontracts clause at FAR 52.244-2. XYZ Corp, having hitherto eschewed government business, does not have an approved purchasing system.

2. Shortly thereafter, the Accounting Division of XYZ Corp., which is not a part of Division A and is located in a different city, decides to award a $1 million, three-year, FFP contract to Infosnoop Corporation for corporate-wide data processing services. Among other things, Infosnoop will process the payroll, accounts receivable, and accounts payable for XYZ's contract with DOD. This news leaks to the business press.

3. The literally-minded CO, having read the press accounts, calls his counterpart at XYZ Corp., who hasn't even heard about the pending data processing contract, and tells her that pursuant to paragraph (d) of the Subcontracts clause XYZ will have to obtain DOD's consent to the data processing contract. The CO points out that at $5 million the data processing contract exceeds the simplified acquisition threshold and 5 percent of the total estimated cost of XYZ's contract with DOD ($200,000) and that it is a subcontract as defined by the Subcontracts clause.

XYZ Corp. managers freak out. They have several contracts in the works that will exceed $200,000, but that have nothing directly to do with the DOD contract, and they can't believe that the CO demands the right to consent (or not) to those deals. "Can this be right?" they ask.

Can it? In a big company, $100,000 is not all that much of a contract.

By Anonymous on Thursday, August 30, 2001 - 07:16 pm:

I think the CO needs as much work as I have. He/she would be trying to find ways to avoid all this extra paperwork. Maybe DoD does have too many contracting people after all.

By Eric Ottinger on Thursday, August 30, 2001 - 08:02 pm:

Vern,

I have never heard of an indirect cost being treated as a subcontract. Has anybody else?

Presumably, the contractor has sufficient motivation to manage the indirect subcontractors. If this isn't done, the contractor will not remain competitive.

Ron,

I am just trying to address Tina's question. To my knowledge FAR 44.201 has no bearing on flow-down clauses, one way or another. The only question is whether or not consent is required.

Anon,

This CO is an extreme example of an 1102 taking something relatively simple and making more complicated than necessary. Unfortunately, I have seen this trait in a lot of people with much better training and more intelligence.

Eric

By Vern Edwards on Thursday, August 30, 2001 - 08:31 pm:

Eric:

Well, if you've never heard of it then you didn't read Tina's opening question, because that is exactly what she complained that the CO was doing.

The definition of subcontract in FAR 44.101 and in the Subcontracts clause does not distinguish between contracts charged directly to a prime contract and contracts charged to indirect cost pools. Tina, Ron and I think that the CO should not consider contracts charged to indirect cost accounts to be subcontracts.

You like to look for case law; see if you can find a case that distinguishes between contracts awarded by the prime contractor that are charged directly to the prime contract and contracts that are charged to indirect cost accounts. I tried, but couldn't find any.

By Eric Ottinger on Thursday, August 30, 2001 - 09:04 pm:

Vern,

I wouldn't take anything on the authority of the CO that Tina cites.

I have worked as a contract adminstrator, albeit many years ago. I don't remember that indirect costs were ever an issue for subcontract consent.

In any case, indirects are an issue for a single ACO or PACO, not an issue for numerous CO's who might have cognizance of individual contracts.

Eric

By Eric Ottinger on Thursday, August 30, 2001 - 09:21 pm:

Vern,

To make a point which may or may not be apparent, contractors do all kinds of inappropriate things in overhead. We simply disallow the costs if they are not reasonable.

If the contractor wants to hire a lobbyist to walk the halls of Congress, he/she can do that, but the cost would not be allowable.

Consent is not the way we manage such things. It would entangle us in issues where we should not and would not wish to be involved.

I don't expect to find anything in the case law to suggest that a subcontract is anything other than a direct cost. Hence, I will leave that exercise to anyone else who might want to take it on.

Eric

By Vern Edwards on Friday, August 31, 2001 - 09:03 am:

Eric:

I agree with you. One thing, however -- you say that indirects are matters for ACOs and PACOs. Most civilian agencies don't have separate ACOs or PACOs. One person, the CO, is responsible for everything in all phases of an acquisition. In Tina's case the CO works for the Dept. of Health and Human Services.

By Kennedy How on Friday, August 31, 2001 - 01:38 pm:

My head is spinning; I'm glad there's a 3-day weekend coming up. When I did my last $139M weapons system contract, I don't ever remember having to have the Prime submit subcontracting info to me for indirects. At least the indirects concerning office supplies, electricity, and toilet paper. DCAA did do a subcontracting review, and we did have the approved subcontracting plans in place, but for the most part, indirect costs/overheads were negotiated in a pool.

I don't know at what benefit it would be to disapprove Commonwealth Edison as a subcontractor for electricity, since they're the only power source for the facility, and CE would probably tell us to stuff it if we tried to get pushy. That'd be cutting our own throats.

For the little guy, this seems like overkill. How many times have you seen an office worker at Office Max buying supplies for the office? Maybe I should put down "I normally buy toilet paper at Sam's Club, unless there's a better deal at Target or Meijers.....".

I'm sorry for the sarcasm, but I'm usually not too worried about whether the utility companies are good subcontractors or not.

Kennedy

By Ron Vogt on Friday, August 31, 2001 - 02:38 pm:

Tina's CO and you must not have attended the same training.

This discussion is starting to stray. Before we head down the A-76 path, let's see where we've been. Tina asked for opinions and advice: opinions on whether the FAR definition of a subcontractor included all supporting suppliers and vendors, and advice on how to respond to the CO who thought so.

The consensus seems to be that while the FAR definition literally includes all suppliers and vendors, it is absurd to go this far. Some, however have given examples of COs who have done just that. As for advice, a few of us have given Tina some suggestions, but more are always welcome.

Where do we go from here? Is a FAR change in order? While some say that the problem is very unlikely to occur, the examples given above say that it is not. What's the proper vehicle for getting a FAR change started? I think it would be worthwhile if the collective analyses of the contributors to this forum result in an improvement to the FAR.

By Anon2 on Wednesday, September 05, 2001 - 12:50 pm:

A FAR change to address reality is probably in order if for no other reason than to avoid the occasional idiot taking things too litterally. However, Vern stated: "but what we think doesn't matter in Tina's case. The definition of subcontractor in FAR 44.101 appears in the contract clause. If a contracting officer chooses to interpret the clause literally, what are you going to say? That it's stupid? "

== well, YES. Why wouldn't an "impossibility of performance" arguement work? Normally that's used for unrealistic specifications or performance requirements, but as long as the CO is being absurd why not an "Alice in Wonderland" response? Technically, I think such a response would in fact hold water. And if a protest on the issue should get filed, I would suspect that either more rational heads will prevail or else the FAR will, in fact be reworded. The contractor has to make some response, an impossibility of performance would probably at least get the thing on the discussion table.

By Vern Edwards on Wednesday, September 05, 2001 - 01:53 pm:

Anon2:

The contractor can't just say that compliance is impossible. It must prove that it's impossible. That might be hard to do.

Also, a disagreement about consent to subcontract would not involve a protest, since it's a matter of contract administration, not contract formation. Such a disagreement might involve a dispute, a final decision, and possibly an appeal.

Finally, while a FAR change might clear things up, the lack of board or court decisions about consent to subcontract suggests that the definition is not a significant source of disputes.