Today we are continuing our series on prime contractor responsibilities toward their subcontractors. After learning that Lockheed Martin paid out $15.8 million to settle a civil suit brought by the Government because its oversight was found to be lacking, we thought it would be beneficial to discuss those responsibilities. Yesterday we focused on making certain that the proper clauses (the flowdown clauses) were included in the subcontract document. Today we will discuss prime contractor responsibility concerning the propriety of subcontractor billings.
A contractor's (or higher tier subcontractor's) primary responsibility with respect to billings from subcontractors is to ensure that those billings are prepared in accordance with subcontract terms and conditions. Depending on the type of subcontract, there could be cost-reimbursement vouchers, progress payments based on costs, performance based payments, or simply traditional invoices. The level of prime contractor oversight required is greatest for cost-reimbursable vouchers and less for simple invoices.
For cost-reimbursable subcontracts, prime contractors must ensure that subcontractors have accounting systems that can accommodate billings under those types of contracts. This would include the capability of accumulating costs by contract, calculating and monitoring indirect rates and adjusting them when necessary, applying those rates to the appropriate base costs, reporting no less than monthly, advising the prime contractor when certain thresholds are met (limitation of funds), and more.
For progress payments based on costs, the prime contractor must ensure the propriety of incurred costs and also calculate for potential subcontract "losses". For performance-based payments, the prime contractor must ensure that the subcontractor has the capability of determining when milestones are met or achieved.
The worst thing a prime contractor can do is make payments to subcontractors without ever performing any level of review. Such reviews need not be performed for each and every billing. The prime contractor might decide to review subcontractor billing systems to gain the confidence and assurance that the system can produce accurate billing statements. Once a system is determined adequate, prime contractors can reduce testing to periodic levels.
The risk to prime contractors (and ultimately the Government) is the potential for subcontractors to bill costs prior to their incurrence or prior to when they should according to the terms of the subcontract. Excessive provisional billing rates is one method of obtaining reimbursement for costs not incurred. Milestone payments is another area that can be abused if payment percentages (or amounts) are disproportional to the level of work accomplished.