Thursday, July 15, 2010

Prime Contractor/Subcontractor Relationships

There are many situations where contractors will team together in a prime contractor/subcontractor relationship to pursue a particular contract. According to FAR , the prime contractor is responsible for ensuring that the subcontract prices are fair and reasonable or in the case of incurred costs, are allowable, allocable, and reasonable. This creates a certain conflict when the two parties are also competitors. Subcontractors who are also competitors, are necessarily reluctant to open up their books and records to their Prime partner for fear of revealing proprietary or sensitive information that could benefit the Prime in some future competition.

There is no FAR clause that permits subcontractors to deny access by a prime contractor to its books and records. A subcontractor is required to demonstrate its compliance with CAS and FAR in accordance with the applicable flow-down contract clauses. If a subcontractor denies its prime contractor access to the it's books and records, the prime contractor will have to request assistance from the contracting officer to ensure the subcontractor's compliance with CAS and FAR. As a practical matter, the contracting officer will require that the basis for the denial be adequately supported and justified. Any claim that is frivolous or without merit could jeopardize the award of a contract. The contracting officer is very sensitive to situations where prime contractors will encourage their prospective subcontractors to deny access so that the prime does not have to incur the expense of doing it themselves.

Relevant FAR contract clauses:

  • FAR 15.404-3 states that the prime contractor shall conduct appropriate price or cost analyses to establish the reasonableness of proposed subcontract prices.
  • DFARS PGI 215.404-3 provides that if a prime contractor is unable to complete its required price or cost analyses of a subcontractor's proposal because the prime contractor has been denied access to the subcontractor's records, then the prime contractor may request assistance from the contracting officer to analyze and evaluate the subcontractor's proposal.
  • FAR 52.215-2, Audits and Records, provides the contracting officer access to the contractor's books and records to determine if the records support the costs claimed and to evaluate any cost or pricing data that has been submitted. Paragraph (g) of this FAR contract clause requires the prime contractor to insert the terms of this FAR clause in all flexibly-priced subcontracts that exceed the simplified acquisition threshold for which cost or pricing data are required. Accordingly, the contracting officer and his authorized representative have access to the subcontractor's book and records.

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