Tuesday, August 6, 2013

Formula for Measuring Compliance with the Limitations on Subcontracting Requirement

Here's a quick and easy formula to determine whether your proposal satisfies the limitation on subcontracting criteria, if such a limitation applies to the particular solicitation you're responding to. This one applies to contracts for supplies.

FAR 52.219-14(c)(2) requires that a contractor shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of material. In a recent U.S. Court of Federal Claims case, the Court established with some finality, the formula for determining whether the limitation has been (or will be) complied with. We quote:

"What is obvious from this regulatory text is that the cost of materials is not included in the comparison of the cost of the work performed by the contractor to the overall cost of manufacturing of the the finished product.... What is less obvious from the text of this regulation, however, is the formula which should be used to determine compliance with the requirement. The parties vigorously dispute the issue; unfortunately for plaintiff, the only persuasive authority on this issue favors the government's ... position."

The GAO has adopted the following formula for determining whether a contractor is in compliance with the limitations on subcontracting clause in FAR 52.219-14(c)(2).

The total contract cost (including profit) less materials and subcontracting costs is to be compared with all subcontracting costs less the subcontractor's materials.

This means that the contractors total costs figure should include overhead costs, general and administrative (G&A) costs and profit. Thus, although the text of FAR 52.219-14(c)(2) might be assumed to require a simple comparison of the labor costs of the prime contractor and the labor costs of all of its subcontractors, both the GAO and the Small Business Administration (SBA) have found that a more comprehensive formula is required to determine compliance with this regulation.

In this case, the plaintiff attempted to rebut this formula by reference to various accounting standards set forth in the FAR or developed by the Financial Accounting Standards Board (FASB). None of the plaintiff's arguments are supported by case lae, decisions of the GAO, or decisions of the SBA. The general accounting principles cited by the plaintiff were less pertinent to this case than the decisions of the GAO and the SBA which have specifically addressed compliance with FAR 52.219-14(c)(2). The Court recognized the GAO's expertise in the area and deferred to its interpretation.

This formula really makes it a simple test to determine compliance with the regulations. The only possible unknown would be the breakout of material costs from your subcontractors' proposals. Generally, you would have required this level of detail during the bidding process.

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