Breakout Session #805 Andy Habina Director, Compliance and Internal Audit

2. Subcontractor Issues under T&M Contracts Breakout Session #805 Andy Habina Director, Compliance and Internal Audit Date Tuesday April 15, 2008 Time 2:10 pm- 3:10 pm

3. Solicitation Clauses T&M- Proposal Requirements-Non-Commercial Item with Adequate Price Competition (52.216-29) • (b) Offeror must specify whether the rates proposed are for • Offeror • Subcontractors • Affiliates of the offeror  (c) Choices for establishing fixed hourly rates • Separate rates for each category of labor proposed for the offeror, subcontractor and afflicate • Blended rates for each labor category • Combination of the above two methods

4. Solicitation Clauses T&M- Proposal Requirements -Non-Commercial Item without Adequate Price Competition (52.216-30) • Offeror must specify whether the rates proposed are for • Offeror • Subcontractors • Affiliates of the offeror

5. Solicitation Clauses T&M- Proposal Requirements- Commercial Item Acquisition (52.216.31) (b) Offeror must specify whether the rates ` proposed are for • Offeror • Subcontractors • Affiliates of the offeror

6. Solicitation Clauses T&M Proposal Requirements -Non-Commercial Item Acquisition with Adequate Price Competition (252.16-7002 Alternate A) (c) The offeror must establish fixed hourly rates using separate rates for each category of labor to be performed by • each subcontractor and for each category of labor to be performed by • the offeror, and • for each category of labor to be transferred between divisions, subsidiaries, or affiliates of the offeror under a common control.

7. Solicitation Clauses • Prime contractors will have to disclose who is performing the work and at what rates • Concern is that primes were earning “excessive” profits on subcontractor effort. • For DoD Contractors, the DFARS clause allows DoD more breakdown of costs by prime/sub than on non-DoD contracts. • Additional requirements regarding primes and subs are contained in another DFAR regarding excessive pass through

8. Solicitation Clauses • Key Items to consider • Will small businesses be considered non-responsive if they do not provide the required information? • What if the proposed mix of prime versus subs changes? • Will auditors be required to validate the proposals and compare to actual experience even on contract where there is competition or commercial items? • What are the consequences of not providing the information if there is a sole source procurement? • Will the clauses be enforced for ID/IQ awards when the split is not know or only at the task order level?

9. FAR 52.232-7 (FEB 2007)Payments Under T&M and Labor Hour Contracts The Government will pay the Contractor as follows upon the submission of vouchers approved by the Contracting Officer or the authorized representative: (a) Hourly rate. • (1) Hourly rate means the rate(s) prescribed in the contract for payment for labor that meets the labor category qualifications of a labor category specified in the contract that are— • (i) Performed by the Contractor; • (ii) Performed by the subcontractors; or • (iii) Transferred between divisions, subsidiaries, or affiliates of the Contractor under a common control. • (2) The amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number of direct labor hours performed.

10. FAR 52.232-7 (FEB 2007)Payments Under T&M and Labor Hour Contracts • (ii) Materials means— • (A) Direct materials, including supplies transferred between divisions, subsidiaries, or affiliates of the Contractor under a common control; • (B) Subcontracts for supplies and incidental services for which there is not a labor category specified in the contract; • (C) Other direct costs (e.g., incidental services for which there is not a labor category specified in the contract, travel, computer usage charges, etc.); and • (D) Applicable indirect costs.

11. FAR 52.232-7 (FEB 2007)Payments Under T&M and Labor Hour Contracts • 4) Payment for materials is subject to the Allowable Cost and Payment clause of this contract. The Contracting Officer will determine allowable costs of materials in accordance with Subpart 31.2 of the Federal Acquisition Regulation (FAR) in effect on the date of this contract. • (5) The Contractor may include allocable indirect costs and other direct costs to the extent they are— • (i) Comprised only of costs that are clearly excluded from the hourly rate; • (ii) Allocated in accordance with the Contractor's written or established accounting practices; and • (iii) Indirect costs are not applied to subcontracts that are paid at the hourly rates.

12. FAR 52.232-7 Payments under Time-and-Materials and Labor-Hour Contracts (Aug 2005) (a) Hourly rate. • (1) The amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number of direct labor hours performed. The rates shall include wages, indirect costs, general and administrative expense, and profit. 4)(i) The Government will reimburse the Contractor for costs of subcontracts that are authorized under the subcontracts clause of this contract, provided that the costs are consistent with paragraph (b)(5) of this clause. (ii) The Government will limit reimbursable costs in connection with subcontracts to the amounts paid for supplies and services purchased directly for the contract when the Contractor has made or will make payments determined due of cash, checks, or other forms of payment to the subcontractor—

13. 252.215-7003 Excessive Pass-Through Charges – Identification of Subcontract Effort. Definition. “Excessive pass-through charge,” as used in this provision, is defined in the clause of this solicitation entitled “Excessive Pass-Through Charges” (DFARS 252.215-7004).   (b) General. The offeror’s proposal shall exclude excessive pass-through charges.   (c) Performance of work by the Contractor or a subcontractor. (1) The offeror shall identify in its proposal the percent of effort it intends to perform, and the percent expected to be performed by each subcontractor, under the contract, task order, or delivery order. (2) If the offeror intends to subcontract more than 70 percent of the total cost of work to be performed under the contract, task order, or delivery order, the offeror shall identify in its proposal—

14. 252.215-7003 Excessive Pass-Through Charges – Identification of Subcontract Effort. (2)(i)The amount of the offeror’s indirect costs and profit applicable to the work to be performed by the subcontractor(s); and (2)(ii) A description of the value added by the offeror as related to the work to be performed by the subcontractor(s).  (3) If any subcontractor proposed under the contract, task order, or delivery order intends to subcontract to a lower-tier subcontractor more than 70 percent of the total cost of work to be performed under its subcontract, the offeror shall identify in its proposal— (i) The amount of the subcontractor’s indirect costs and profit applicable to the work to be performed by the lower-tier subcontractor(s); and (ii) A description of the value added by the subcontractor as related to the work to be performed by the lower-tier subcontractor(s).

15. 252.215-7004 Excessive Pass-Through Charges • a) Definitions. As used in this clause—  “Excessive pass-through charge,” with respect to a Contractor or subcontractor that adds no or negligible value to a contract or subcontract, means a charge to the Government by the Contractor or subcontractor that is for indirect costs or profit on work performed by a subcontractor (other than charges for the costs of managing subcontracts and applicable indirect costs and profit based on such costs).  “No or negligible value” means the Contractor or subcontractor cannot demonstrate to the Contracting Officer that its effort added substantive value to the contract or subcontract in accomplishing the work performed under the contract. (b) General. The Government will not pay excessive pass-through charges. The Contracting Officer shall determine if excessive pass-through charges exist.

16. 252.215-7004 Excessive Pass-Through Charges c) Performance of work by the Contractor or a subcontractor. (1) If the Contractor changes the amount of subcontract effort identified in its proposal such that it exceeds 70 percent of the total cost of work to be performed under the contract, task order, or delivery order, the Contractor shall provide the Contracting Officer with a description of the value added by the Contractor as related to the subcontract effort. 2) If any subcontractor identified in the proposal changes the amount of lower-tier subcontractor effort such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract, the Contractor shall provide the Contracting Officer with a description of the value added by the subcontractor as related to the work to be performed by the lower-tier subcontractor(s)

17. 252.215-7004 Excessive Pass-Through Charges • (3) If any subcontractor not identified in the proposal subcontracts to a lower-tier subcontractor more than 70 percent of the total cost of work to be performed under its subcontract, the Contractor shall provide the Contracting Officer with a description of the value added by the subcontractor as related to the work to be performed by the lower-tier subcontractor(s).

18. 252.215-7004 Excessive Pass-Through Charges (d) Recovery of excessive pass-through charges. If the Contracting Officer determines that excessive pass-through charges exist— (1) For fixed-price contracts, the Government shall be entitled to a price reduction for the amount of excessive pass-through charges included in the contract price; and (2) For other than fixed-price contracts, the excessive pass-through charges are unallowable in accordance with the provisions in Subpart 31.2 of the Federal Acquisition Regulation (FAR) and Subpart 231.2 of the Defense FAR Supplement.

19. 252.215-7004 Excessive Pass-Through Charges ) Flowdown. The Contractor shall insert the substance of this clause, including this paragraph (f), in all subcontracts under this contract, except for—  (1) Firm-fixed-price subcontracts awarded on the basis of adequate price competition; (2) Fixed-price subcontracts with economic price adjustment, awarded on the basis of adequate price competition;   (3) Firm-fixed-price subcontracts for the acquisition of a commercial item; or  (4) Fixed-price subcontracts with economic price adjustment, for the acquisition of a commercial item.

20. Subcontractor Cost Issues Summary • For DoD Contractors, Subcontractors and Contracting Officers, there is a lot more to do to ensure compliance with T&M and Labor hour contracts • Identify prime hours and sub hours and by labor category • Identify if a subcontractor is performing more than 70% of effort and if so, determine if there is excessive pass-through costs

21. Subcontractor Cost Issues Summary • For non-DoD contractors • Determine if this is a commercial or non-commercial service • If not commercial, is there competition • Be sure that the hours are identified by prime and sub