Generally, the determination as to whether the functions a contractor performs relative to the subcontract provides “added value” to the contracting effort and that there are no excessive pass-through charges is made at the time of contract award. The contracting officer (and the auditors, if the proposal is being audited) reviews the ratio of subcontract value to total proposed price. If greater than 70 percent, they will then review to see if the contractor adequately demonstrated that it would provide “added value”. If the contracting office is satisfied that the prime is adding value to the subcontract, he/she will make a determination to that effect and also insert the following into the actual contract:
The Government will not pay excessive pass-through charges. The Contracting Officer has determined that there will be no excessive pass-through charges, provided the Contractor performs the disclosed value-added functions.
Sometimes however, contractors change the amount of subcontract effort after contract award such that it exceeds 70 percent of the total cost of work under the contract. This can happen for a variety of reasons – overcapacity in the contractor’s facility, more cost effective to buy than to produce in-house, or shortage of skilled workers, to name a few. When this happens, contractors must notify the contracting officer in writing of the revised cost of the subcontract effort. The notification must include verification that the contractor will provide “added value” (FAR 52.215-23(c)). If after review of the contractor submitted data the contracting officer concludes that excessive pass-through charges exist, the Government has a contractual mechanism to recoup those costs. On cost-type contracts, billings will be reduced. On fixed-price contracts, the Government will be entitled to a priced reduction. The FAR clause does not specify how these reductions are to be computed and negotiated but we would expect guidance will be forthcoming.
- Ensure the contractor’s proposal includes a description of the contractor’s “added value” as required by FAR 52.215-22.
- Evaluate the reasonableness of the contractor’s description and supporting documentation of the “added value” to assess whether the contractor is in compliance with the requirements set forth in FAR 52.215-23.
If the “added value” description is not included, contractors face potential estimating deficiencies. Auditors are being instructed to consider such a proposal to be inadequate. That will certainly slow down the acquisition process as the proposal is returned for revision.