Proposed Rule on Prohibiting Excessive Subcontracting

Yesterday we discussed a provision in the Senate version of the Fiscal Year 2013 Defense Authorization Act that, if enacted, will give the Government statutory access to contractor internal audit reports. This week, we will be looking at a number of provisions in the bill that affect government contractors. Today, we will discuss a provision that would limit the amount of subcontracting that a prime contractor can include in a price proposal.

The impetus behind this proposed regulation is the recent revelations, both in the news and later in Congressional hearings that large companies were using small companies as fronts for obtaining contracts that were intended for small businesses. Although the contracts were awarded to small businesses, the large businesses, acting as subcontractors, were essentially performing the entire contract. 

The proposed legislation prohibits the award of contracts (or task orders) above $150 thousand unless the contractor agrees that at least 50 percent of the direct labor cost of services to be performed under the contract will be expended for employees of the contractor or of a subcontractor that is specifically identified and authorized to perform such work.

Exceptions are available if the contracting officer prepares a written justification that reliance on subcontractors making up more than 50 percent of the direct labor is in the best interest of the DoD. Also, the Secretary of Defense will have authority to override this provision.

It seems to us that this prohibition can be easily circumvented. Two parties can easily transfer employees from one to the other making it look like the small business has sufficient employees to perform at least 50 percent of the work.