Subcontract Costs - A Prime Contractor Responsibility

The following comments were excerpted from written testimony before yesterday's hearing by the Commission on Wartime Contracting In Iraq and Afghanistan. That hearing focused on subcontracting risks in war zones. This excerpt underscores the importance of three interrrelated business systems (purchasing, estimating, and billing) and the necessity of making certain that those systems are adequate in order to effectively manage subcontract costs. Although it was presented in the context of contracting in Iraq, Afghanistan, and Kuwait, it applies equally to all Government contractors.

FAR 42.202(e)(2) clearly states that it is the prime contractor’s responsibility to manage its subcontractors. Prime contractors generally rely on their estimating, purchasing and billing systems as a means to manage their subcontracts. As noted in the Commission’s interim report (June 2009), adequate contractor business systems are the first line of defense against waste, fraud and abuse. In the realm of subcontracting, we find this statement to be profoundly true.

All DoD prime contractors are responsible for having an acceptable estimating system that consistently produce well-supported proposals acceptable as a basis for negotiation of fair and reasonable prices (DFARS 215.407-5-70(b)). One key characteristic of an adequate estimating system is one which addresses the prime contractor’s responsibility for determining, through review and analysis, the reasonableness of proposed subcontract prices (DFARS 215.407-5-70(d)(2)(xv)).

The proposal phase of a contract award involves the prime contractor’s estimating and purchasing systems working together to prepare an adequate estimate of cost or price. Generally, purchasing system processes identify responsible prospective subcontractors and vendors from which subcontract proposals are obtained. The estimating and purchasing systems work in conjunction to conduct and document analyses of the subcontractor proposals to ensure the awarded subcontract price is fair and reasonable (represents the best value for the Government), regardless of whether the contemplated subcontract is sole-source, competitively awarded, or for a commercial item. After contract award, the contractors billing system works in conjunction with the purchasing system to ensure only those subcontract costs which are eligible for payment (that is, allocable, allowable, reasonable, and in accordance with contract terms and conditions) are included in the prime contractor’s billings to the Government.