Friday, July 28, 2017

Failure to Obtain Consent to Subcontract - All Subcontract Costs Disallowed

We are in the process of bringing you synopses of a recent ASBCA decision that decided a number of issues related to DCAA's (Defense Contract Audit Agency) audit of Technology Systems, Inc (TSI) fiscal year 2007 incurred costs, the ACO's subsequent sustention of the DCAA findings and recommendations, and TCI's appeal of the ACO's decision before the ASBCA. Wednesday we discussed the issue of capitalization versus expensing costs. Bottom line on that one is you can't use IRS regulations to justify your capitalization and depreciation practices. Yesterday we discussed TCI's claim for travel expenses that exceeded the JTR (Joint Travel Regulations) maximums for lodging and per diem. In that one, TCI's arguments were unpersuasive. Today we look at TCI's failure to obtain "consents to subcontract" prior to awarding subcontracts.

The subcontracts clause, included in TCI's contracts (and almost every cost-reimbursement contract) requires that prime contractors that do not have an approved purchasing system, must obtain the contracting officer's written consent to enter into cost-reimbursement, time-and-materials, or labor-hour subcontracts (see FAR 52.244-2(d)).

TSI did not have an approved purchasing system (which is pretty typical of small Government contractors) and so, was required to obtain contracting officer consent to subcontract. TSI did not obtain consent so ultimately, the Government questioned the entire subcontract amounts because it was unable to ascertain whether the costs were fair and reasonable.

The ASBCA stated that it had no reason to doubt that the subcontract prices were allocable to the contract but there is no evidence elsewhere in the record with respect to the reasonableness of the subcontract charges. The problem for TSI - a problem that it didn't address - is that there was no support for the reasonableness of the costs of the subcontractors. "This omission is fatal to TSI's attempts to provide an after-the-fact justification of these subcontracts" The Board ruled that the Government properly disallowed the full costs of the subcontracts.

This ruling seems very unfair - to question the totality of the subcontract when everyone involved acknowledged that the  work was performed and allocable to the contract. It seems to us that equity would dictate that some portion of the costs should be allocable to the Government contracts.

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