DoD Contracting Officers Cannot Withhold Consent to Subcontract where Purchasing System has been Approved

DoD issued a final rule amending its FAR Supplement (DFARS) that for Defense contractors with approved accounting system, contracting officers are not permitted to withhold "consent to subcontract" unless it has written approval from a program manager.

FAR 44.201 regarding subcontract consent and advance notification requirements, distinguishes between contractors with approved purchasing systems and those without. For contractors with approved purchasing systems, consent is required for subcontracts specifically identified by the contracting officer in the subcontracts clause of the contract.Why would a contracting officer call out a specific subcontract for consent?  When the contracting officer has determined that an individual consent action is required to protect the Government adequately because of the subcontract type, complexity, or value , or because the subcontract needs special surveillance. In other words, its a judgment call by the contracting officer.

For contractors without approved purchasing systems, consent to subcontract is required for cost-reimbursement, time-and-materials, labor-hour, or letter contract and also for unpriced actions under certain fixed-price contracts.

This new DoD provision applies to contractors with approved purchasing systems. Evidently, some contracting officers have been feeling their oats and have made life miserable for contractors - often for picayune reasons - so much so that programs were being impacted because contractors have been unable to award subcontracts in a timely manner. This problem came to Congress' attention and Congress included a provision in the 2019 NDAA (National Defense Authorization Act) to make it unlawful for contracting officers to withhold approval unless it receives concurrence from a program manager. 

Specifically, the new provision, applying only to DoD contracts, and appearing at DFARS 244.201-1, reads as follows:

In accordance with Section 824 of the National Defense Authorization Act for Fiscal Year 2019 (Pub. L., 115-232), notwithstanding the requirements in FAR 44-201(a), the contracting officer shall not withhold consent to subcontract without the written approval of the program manager, or comparable requiring activity official exercising program management responsibilities, if the contractor has a approved purchasing system as defined in FAR 44.101. 

2019 NDAA - Consent to Subcontract

The President signed the 2019 NDAA (National Defense Authorization Act) named for Senator John McCain today. So beginning today, we will be covering just a few of the provisions included in the legislation - those that might be of interest to Government contractors (and prospective Government contractors).

Section 824 of the NDAA deals with an inconsistency that has vexed many contractors. Contractors work very hard to maintain "approved" purchasing systems. We've discussed on this blog the process of becoming "approved". The Government conducts a CPSR (Contractor Purchasing System Review) every three years examining purchasing and subcontracting policies and procedures, deciding whether they are adequate (they usually are), and testing compliance with those policies and procedures (one can always find an infraction). At the end of this little dance, which usually takes several months, the Government will approve or disapprove the purchasing system. Most of the time, the systems are approved.

What has happened all to frequently however is that even with an approved system, contracting officers sometimes withhold their consent to subcontract solely on disagreement with the proposed subcontract price. Well, if a contractor has an approved system, the Government has already satisfied itself that the policies for selecting and determining fair and reasonable subcontract prices are sound and satisfactory for Government contracting. So, in cases where approval has been withheld, was there something new to the contractor's process that hadn't been evaluated previously or did the contractor deviate from its approved practices. Sadly, no. A contracting officer is just being officious and wielding power.

Under the 2019 NDAA, a contracting office can no longer unilaterally withhold consent to subcontract merely because he or she disagrees with the proposed price.They can still withhold consent but now they must obtain written approval from the program manager prior to withholding consent. That should reduce the incidences of withholding consent - at least until contracting officers can conger up other reasons, other than disagreement with price, to withhold consent.

Consent to Subcontract - Important Reminder

This is an update to previously published postings on the importance of obtaining consent to subcontract when required by regulations and a reminder to contractors of the consequences of ignoring or shorting the requirements.

Advance notification and consent are required before the award of subcontracts if the prime contractor does not have an approved purchasing system, where the Government is assuming a large portion of the contract risk and  therefore, has a vested interest in knowing and controlling costs with the contract. There are relatively few contractors with approved purchasing systems and therefor, the advance notification and consent requirements have broad application. Keep in mind however that even if a contractor has an approved purchasing system, the contracting officer retains the discretion to require advance notification and approval.

When advance notification is required, a contractor must notify the ACO reasonably in advance of placing certain subcontracts. The contractor must incorporate an appropriate lead time into its purchasing process to ensure the information required by FAR 52.244-2 is obtained and provided to the ACO for review prior to placing an award.

The ACO is required to review the information in a timely manner to ensure that it complies with the requirements of the clause (i.e. 52.244-2) and to notify the contractor immediately if the notification package is incomplete or insufficient.

The ACO's consent approval is required to be in writing and will include a statement that it is not a determination of allowability or acceptability of costs.

Failure to obtain advance consent could result in disallowance of all subcontract costs, as it did in the case of Technology Systems, Inc. (see Failure to Obtain Consent to Subcontract - All Subcontract Costs Disallowed).

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.

Government Consent to Subcontract - Does the Requirement Serve a Useful Purpose?

It’s been some time since we last wrote about the requirement for contractors to notify contracting officers before the award of certain subcontracts and obtain their consent to subcontract. In fact, it was back in 2010 that we discussed these requirements in some detail. To read those timeless postings, see Part 1 and Part 2.

Federal Acquisition Regulation (FAR) 52.244-2, Subcontracts, requires prime contractors to provide contracting officers notification before the award of any cost-plus-fixed-fee subcontract, or certain fixed-price subcontracts. This requirement for advance notification is driven by statutory requirements in 10 U.S.C. 2306 and 41 U.S.C. 3905. FAR clause 52.244-2 also requires prime contractors to get consent to subcontract for cost reimbursement, time-and-materials, labor-hour, or letter contracts, and also for unpriced actions under fixed-price contracts that exceed the simplified acquisition threshold. 

The objective of requiring consent to subcontract, as discussed in FAR Part 44, is to evaluate the efficiency and effectiveness with which the contractor spends Government funds, and complies with Government policy when subcontracting. The Government requires a contractor to provide certain information (e.g., subcontractor’s name, type of subcontract, price, description of supply or services, etc.) reasonably in advance of placing a subcontract to ensure that the proposed subcontract is appropriate for the risks involved and consistent with current policy and sound business judgment. The information provides the Government time and a basis for granting, or withholding consent to subcontract. 

These requirements should be addressed in every contractors' purchasing system description, policies, and procedures. In fact, if they're not covered and DCMA decides to perform a CPSR (Contractor Purchasing System Review), the lack of coverage would probably be written up as a deficiency.

The consent to subcontract exercise comes at a cost however and this is another one of those areas where unique Government contracting requirements adds cost to the process. The Government estimates that each Government contractor will submit an average of three advisories/consent to subcontract per year and each of those submissions will take about two hours to prepare. We think that two hours per submission significantly understates the actual time required. Multiply that out by your hourly rate and you'll get an estimate of the cost to comply. 

The FAR Councils are now asking for public input on the efficacy of these procedures to produce the results intended when Congress passed the law. If you care to comment or wish to read more, click here.