Eliminating Excessive Pass-Through Costs

According to Section 802 of the 2013 NDAA (National Defense Authorization Act), the Department of Defense as well as the State Department and the Agency for International Development (AID) were required to issue guidance and regulations to ensure that contracting officers complete additional analyses prior to awarding contracts over $700 thousand ($150 thousand for State and AID) where the prime contractor proposes to subcontract 70 percent or more of the total cost of work to be performed (these are called pass-through contracts). The concern, of course, is that with significant subcontracting activity, the Government might not be getting much value out of the prime contractor’s involvement in the contract.

The NDAA requires a “Notification, Review, and Determination” procedure for pass-through contracts. Under these procedures, if an offeror intends to award subcontracts for more than 70 percent of the total cost of work to be performed, it must inform the Government and identify the amount of the indirect costs and profit/fee applicable to the subcontracted work as well as a description of the value-added the offeror will provide to the Government.

The contracting officer then, must (i) consider the availability of alternative contract vehicles and the feasibility of contracting directly with a subcontractor or subcontractors that will perform the bulk of the work, (ii) make a written determination that the contracting approach selected is in the best interest of the Government and (iii) document the basis for such determination.

In June of this year, the GAO (General Accountability Office) initiated a review to determine how well the Agencies had implemented this new rule. The GAO found that nothing had really changed in the interim. In fact, DoD had done nothing because the Department was waiting for revisions to its FAR Supplement. As a result, the GAO concluded that the Government continues to be at risk for paying excessive contract prices.

As a result of its review, the GAO recommended that DOD, State, and AID issue guidance to assist contracting officers by identifying approaches for or examples of how to assess alternative contracting approaches to include the feasibility of contracting directly with proposed subcontractors, and documenting a determination that the approach selected is in the best interests of the Government. Additionally, the GAO recommended that the Agencies revise the processes and guidance governing management reviews of procurements to ensure that such reviews assess whether contracting officers are complying with the provisions of the 2013 NDAA.

You can read the entire GAO report here.