Subcontract Administration - Part 4 - Ensuring the Propriety of Incurred/Claimed Costs

Happy New Year everyone. We're back and we're continuing our series on subcontract administration. So far, we've looked at the contractual requirements for prime contractors to monitor their subs (Part 1), the consent to contract requirement for contractors that do not have approved purchasing systems (Part 2) and what it means to "monitor" subcontracts (Part 3). Today we're going to examine a particular reporting requirement that pertains to prime contractors with cost-reimbursable subcontracts.

Most every Government contractor is familiar with the requirement to submit annual incurred cost proposals whenever flexibly-priced contracts (CPFF, CPIF, CPAF, FPI, T&M, etc.) exist. Those requirements and the structure required are spelled out in FAR 52.216-7. One of the required schedules, Schedule J, requires the following:

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers, subcontract value and award type, amount claimed during the fiscal year, and the subcontractor name, address, and point of contact information).

Sometimes there is a bit of controversy over whether this requirements includes all subcontracts or just flexibly-priced subcontracts. Logically, it pertains only to cost-reimbursable subcontracts because those will need to be "settled" before the prime contract can be closed out. Also, the auditor will need to determine whether the prime contractor can and will audit the subcontractor or will need to request an assist audit. We've seen auditors go both ways on this requirement.

The DCAA Information for Contractors Pamphlet however make is clear that the schedule pertains only to cost reimbursable subcontracts. See Enclosure 6, Page 87 of the Information for Contractors. This example also requires data that is not listed in the FAR, specifically the subcontract period of performance. We always recommend contractors include the period of performance information even though not required by FAR. It is easily obtainable and will facilitate the eventual audit.

Once the auditor establishes that a contractor has flexibly-priced subcontracts, he/she will inquire  as to the status of the prime contractors' audit of incurred costs. The requirement to submit annual incurred cost submissions is a flow-down provision meaning that subcontractors must also submit annual incurred cost claims. If the subcontractor is also a prime contractor, it is likely that the Government, through its own contract auditors or an outside organization, will audit incurred costs. If the subcontractor has no prime contracts, the prime contractor will have to determine how it will go about ensuring that claimed costs are allocable, allowable, and reasonable and otherwise proper.