Subcontract Administration - Part 3 - Monitoring Subcontracts

Continuing on in our discussion of subcontract administration, we look today at the contractor's responsibilities for administering subcontracts. The fundamental requirement is found in FAR 42.202(e)(2) as follows:

The Prime contractor is responsible for managing its subcontracts. The CAO's (contract administration official) review of subcontracts is normally limited to evaluating the prime contractor's management of the subcontracts. Therefore, supporting contract administration shall not be used for subcontracts unless

• The Government otherwise would incur undue cost,
• Successful completion of the prime contract is threatened, or
• It is authorized by some other regulation.

The term "managing subcontracts" encompasses not only what contractors might consider necessary but also activities that the Government considers necessary. For example,

1. Subcontract award
2. Technical performance
3. Financial performance
4. Monitoring (including QA and QC)
5. Payment

A contractor's internal control system over subcontracts (and intercompany orders as well) should provide for appropriate flow-down clauses into the subcontract. There are a lot of prime contract clauses that must flow-down to subcontracts. Depending upon the type of subcontract, clauses (i) giving the prime contract access to a subcontractor's books and records, (ii) limiting billings to only allowable costs, and (iii) requiring subcontractors to submit annual incurred cost proposals must be flowed down to the subcontracts.

Essentially, anything that the contracting officer does when awarding contracts (establishing requirements, selecting the contracting vehicle, selecting source, and negotiating prices), is expected of contractors when awarding subcontracts. After award, anything that DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) does in administering and providing oversight of contracts is expected of prime contractors with respect to their subcontracts.

DCMA conducts periodic purchasing system reviews of the most significant Government contractors to ensure that their subcontracting policies, procedures, and practices are adequate for protecting the Government's interests. It is to the contractor's benefit to have their system considered adequate to avoid the need to secure the contracting officer's consent to subcontract and also to avoid billing withholds.