Friday, December 17, 2010

Excessive Pass-Through Costs

Back in October of 2009, the FAR Councils adopted an interim rule intended to ensure that contractors (or higher-tier subcontractors) do not receive indirect costs or profit/fee (i.e. pass-through costs) on work performed by subcontractors to which the contractor (or higher-tier subcontractor) adds no or negligible value. “No or negligible value” means the Contractor or subcontractor cannot demonstrate to the Contracting Officer that its effort added value to the contract or subcontract in accomplishing the work performed under the contract.

On December 13th, this interim rule became final (with some minor changes) with an effective date of January 12, 2011. This provision applies to most DoD contracts (exceptions include competitive and commercial procurements) above the TINA threshold (currently $700 thousand) and Civilian Agency cost-reimbursable contracts greater than the Simplified Acquisition threshold (currently $150 thousand). However, it can apply to contracts below these threshold's at the discretion of the contracting officer.

There are two provisions in this new rule. FAR 52.215-22 applies to solicitations and FAR 52.215-23 applies to contracts.

Solicitation Phase (FAR 52.215-22)

The prospective contractor must identify in its proposal the total cost of the work to be performed by the offeror, and the total cost of the work to be performed by each subcontractor. If the offeror intends to subcontract more than 70 percent of the total cost of work to be performed, the offeror must identify
  • The amount of the offeror’s indirect costs and profit/fee applicable to the work to be performed by the subcontractor(s); and
  • A description of the added value provided by the offeror as related to the work to be performed by the subcontractor(s).

Contracting Phase (FAR 52.215-23)

The Government will not pay excessive pass-through charges and it is the contracting officer's responsibility to determine whether excessive pass-through charges exist.

Contractors must notify the contracting officer in writing after contract award when the level of subcontracted effort exceeds 70 percent of the total cost of work to be performed. The notification must include the cost of the subcontracted effort and verification that the contractor will provide added value.
If the Contracting Officer determines that excessive pass-through charges exist, the excessive costs are unallowable - either by a reduction in billings or a price reduction, depending upon the type of contract.

The Government has the right to examine and audit all the Contractor’s records (as defined at FAR 52.215-2(a)) necessary to determine whether the Contractor proposed, billed, or claimed excessive pass-through charges.


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