Friday, January 3, 2014

Subcontract Administration - Part 5 - Common Deficiencies

Today we will finish up this series on subcontract administration. This series has been a high level overview of Government expectations for contractors with subcontractors - especially cost-reimbursable subcontractors. Anyone that has gone through a purchasing system review (commonly referred to as CPSR or Contractor Purchasing System Review) know full well the excruciating level of detail that DCMA (Defense Contract Management Agency) request and expects. Its no fun. Fortunately, unless you're in that top 100 Government contractors (or so) its unlikely that you will ever have to go through it. However, that doesn't mean the expectations are diminished. Contract administration and audit can still assess the adequacy of contractor policies and procedures over subcontract administration when reviewing price proposals or auditing incurred costs.

The easiest way to ensure adequate subcontract oversight is to assume that whatever the Government does to you, you need to do the same to your subcontractors (assuming the subcontract is the same type as the prime contract). If the Government is assessing your accounting system, you probably need to assess whether your subcontractors have accounting systems that are adequate for the type of subcontract contemplated. If the Government demands an annual incurred cost proposal, you should probably figure that your subcontractors need to submit one as well.

Following is a listing of some common subcontractor oversight deficiencies published by DCAA (Defense Contract Audit Agency). We can't tell you anything about the frequency of occurrences - only that DCAA calls them "common".

  1. Failure to verify the subcontractor has an adequate accounting system. See our previous post on what it takes to have an adequate accounting system.
  2. Failure to appropriately monitor subcontract effort. There are plenty of activities throughout the life of the subcontract.
  3. Failure to request a denial of access and notify the ACO when the subcontractor refuses access. There are situations where the subcontractor refuses to provide access to prime contractors. Often times its because the prime and sub are sometimes competitors and the historical data is proprietary. The Government understands this and will call in its own auditors to provide the necessary  oversight. Sometimes, the threat of Government auditors is enough incentive for subcontractor to have a change of heart.
  4. Failure to notify the ACO and obtain approval, to subcontract
  5. Failure to include the appropriate contract clauses in the agreement with the subcontractor. One of the toughest jobs for contractors is to ensure that the proper Prime Contract clauses are also included in subcontracts. Many times, the Government doesn't even include the right ones or omits some. 
  6. Failure to ensure subcontract billings are accurate and compliant with subcontract terms. Its not sufficient to merely pay subcontractor invoices. There needs to be some level of review (e.g. ensure the subcontractor is using the correct billing rates).
  7. Failure to obtain an adequate incurred cost submission from subcontractor.

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