Subcontract Pricing Considerations - Prime Contractors Must Demonstrate Reasonableness of Proposed Subcontract Costs

Earlier this month, we highlighted a revised audit policy from the Defense Contract Audit Agency (DCAA) concerning the evaluation of subcontract costs included in forward pricing proposals. FAR 15.404-3(3)(b) requires prime contractors to perform whatever cost/price analysis is necessary to determine the reasonableness of proposed prices. Sometimes they don't do that so historically, DCAA has considered them unsupported and perhaps identified the omission as an estimating deficiency. That policy did nothing to advance contract negotiations nor help procurement offices to negotiate fair and reasonable prices. Under the new guidance, DCAA is to provide whatever information it has available or conduct additional analytical work (i.e. develop decrement factors) to assist in any way it can. See "Revised Audit Policy for Reviewing Subcontractor Costs" for more information on the new policy.

Contractors need to be cautioned however that DCAA's performance of alternative procedures (or requesting an assist audit) does not relieve prime contractors or upper-tier contractors from their responsibility to perform cost or price analyses of subcontract proposals.

Whatever analytical work the auditors might perform, the procurement regulations stand. FAR 15.404-3(3)(b), Subcontract pricing considerations, unequivocally requires prime contractors and higher-tier subcontractors to conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices. It also requires the prime or higher-tie contract to include the results of these analyses in its price proposal.

When auditors encounter situations where contractors or higher-tier subcontractors have not met the regulatory requirement to prove the reasonableness of proposed subcontract prices, they will include that omission as a material noncompliance with FAR 15.404-3(b) in the audit report. What are the consequences of an inadequate estimating system? Well, it could be significant. It could result in additional auditing, additional oversight, the necessity of getting contracting officer consent to subcontract (with all the additional documentation that requires), and loss of future contracting opportunities.