Subcontract Pricing in Government Contracts

Subcontract Pricing

Sponsored by Defense Pricing and Contracting

Shannon Prince

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December 15, 2021

Cost/Price Analyst

Why Talk about Subcontracts?

The Government Accountability Office (GAO) has reported,

“

Based on some estimates, 60 to 70 percent of work on

defense contracts is now done by subcontractors, with

certain industries aiming to outsource up to 80 percent of

the work.”

Source:  GAO-11-61R

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Overview

Subcontract Definitions

Pertinent Thresholds

Prime and Contracting Officer (CO) Expectations

Subcontract Types

Competitive Subcontracts

Subcontract Commercial Item Determinations (CIDs)

Sole Source Commercial Subcontracts Price Analysis

Sole Source Subcontracts Cost Analysis

Subcontracts below TINA Threshold Price Analysis

Hot Topics:  Early Engagement, Consent to Subcontract, Actuals, Long-Term

Agreements (LTAs), Field Pricing Assistance, Excessive Pass-Through Costs, Inter-

Organizational Transfers

Summary

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Subcontract Definitions

FAR Part 44



Definition - Any contract entered into by a

subcontractor to furnish supplies or services for

performance of a prime contract or a

subcontract



Includes but is not limited to purchase orders, and

changes and modifications to purchase orders



Prescribes policies and procedures for consent

to subcontracts or advance notification of

subcontracts, and for review, evaluation, and

approval of contractors’ purchasing systems

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Subcontract Definitions (cont’d)

FAR Subpart 15.4



Additional definition – “Subcontract (except as

used in 15.407-2) also includes a transfer of

commercial items between divisions,

subsidiaries, or affiliates of a contractor or a

subcontractor”



Prescribes cost and price negotiation policies

and procedures for pricing negotiated prime

contracts (including 

subcontracts

) and contract

modifications

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Pertinent Thresholds

TINA Threshold: $2,000,000 or greater



Subcontractor 

shall

 submit certified cost or pricing data

to the prime (subject to TINA) unless an exception

applies (FAR 15.403-1)



Adequate price competition



Commercial items



TINA Waivers (heavily restricted)



Prices set by law or regulation



Modifying a contract/subcontract for commercial items



Threshold applies to all tiers of subcontracts as long as

the higher tier subcontract does not meet a TINA

exception

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Pertinent Thresholds (cont’d )

FAR threshold for submission of subcontractor data to

Government as part of the prime’s certified cost or

pricing data is ≥$15M or ≥$2M and 10% of prime

proposal price (FAR 15.404-3(c)(1))



Prime must submit sub’s cost or pricing data to the

government (unless determined unnecessary by the

CO)



If the sub will not provide proprietary data to the prime

(e.g., competitors) they have the option to send the data

directly to the CO



Government also has right to obtain sub’s data below the

threshold when determined necessary by the CO

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Government Expectations of Prime

Contractor

Act as agent of Government—contract with

responsible sources and award subcontracts at

reasonable prices

Select subcontractors & suppliers on a competitive

basis to the maximum practical extent consistent

with objectives and requirements of the contract

(52.244-5, Competition in Subcontracting)



Just as we are expected to conduct competitions, so is

the prime



Sole source at the prime level does not automatically

translate to sole source at the subcontract level,

especially for “commercial products/services”

Incorporate commercial products/services to

maximum extent practicable (FAR 44.402(a)(1))

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Government Expectations of Prime

Contractor (cont’d)

Comply with TINA, obtain certified cost or pricing

data and certificates of current cost or pricing data

from subcontractors when required, and flow down

required clauses to subcontractors (FAR 52.215-12

and -13)

Follow it’s own “internal procedures”



All major contractors have procedures in place that are reviewed by

DCAA and DCMA with respect to subcontracts

Collaborate with COs on major suppliers as needed

Conduct appropriate cost or price analyses to

establish reasonableness of proposed subcontract

prices (FAR 15.404-3(b) and Table 15-2)



Conduct cost analysis for all subcontracts when certified cost or

pricing data are submitted by the subcontractor (FAR Table 15-2)

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Government Expectations of Prime

Contractor (cont’d)

Conduct appropriate cost or price analyses to establish

reasonableness of proposed subcontract prices (cont’d)



Conduct price analysis of all subcontractor proposals (FAR Table 15-2)

Proposal Expectations



Include results of analysis with price proposal (FAR 15.404-3(b)(2), Table

15-2, 52.215-20/-21, DFARS 252.215-7010, and DoD Proposal Adequacy

Checklist (PAC) Item #17)



If not provided at time of proposal submittal, prime should provide

schedule for completion



Identify subcontract proposals for which CO has initiated or may need

to request field pricing analysis (DoD PAC Item #15)



Provide subcontractor certified cost or pricing data when required (see

thresholds & DoD PAC Item 16)



Submit basis for commercial item exceptions (DoD PAC #18)

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Government Expectations of Prime

Contractor (cont’d)

Proposal Expectations (cont’d)



Support degree of competition and basis for price

reasonableness for items over threshold for certified cost or

pricing data (Table 15-2 Section II(A)(1) and DoD PAC #20)



Submit cost proposals for Inter-organizational transfers

proposed at cost in the format given in Table 15-2 Section

II(A)(2) (DoD PAC #21)



Submit an analysis supporting exception from certified cost

or pricing data for inter-organizational transfers proposed at

price (Table 15-2 Section II(A) and DoD PAC #22)



Provide required information from 52.215-22 and DoD PAC

#36 when planning to subcontract more than 70% of cost of

work to be performed

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CO Expectations

CO is “responsible for the determination of a fair and

reasonable price for the prime contract, including

subcontracting costs” (FAR 15.404-3)



FAR directs CO to consider status of purchasing systems, prime

analyses of subcontract proposals, and whether subcontract

prices have been negotiated, but this does not relieve CO from

responsibility to analyze subcontractor’s cost or pricing data

Engage early to help prime avoid bad subcontract deals

with major suppliers



May include collaborative engagement with all stakeholders

(Prime, DCMA, DCAA, etc.) to assist (as appropriate) in

evaluating and potentially participating in prime/sub

negotiations



This may occur prior to receipt of subcontractor’s proposal or

even before subcontractor RFP release

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CO Expectations (cont’d)

Understand extent they can rely on prime’s ability to

evaluate and negotiate fair and reasonable subcontract

prices and whether field assistance is needed—risk can

be increased by



Disapproved purchasing and/or estimating systems at prime or

subcontractor level



Presence of large-dollar suppliers either as an overall value or in

relation to overall contract and establishment of long-term subcontracts

(not already reviewed)



Sole source subcontracted items versus competed subcontracts



Supplier’s refusal to provide data to prime, bad subcontract deals, or

actuals do not support negotiated prices



Lack of arm’s-length relationship between contractor and subcontractor

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CO Expectations (cont’d)

Review subcontract data as needed, e.g., major

supplier proposals

Assist prime in fact-finding/negotiations with major

suppliers when mutually agreed to

Review prime cost and price evaluations, especially

for major suppliers, and consider adequacy when

completing DoD Weighted Guidelines,

management/cost control factor

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CO Expectations (cont’d)

Hold prime accountable to schedule for completion of

subcontract analyses



Sole Source Streamlining Toolbox includes a 

Subcontract Proposal

Tracking Matrix

 that can be used to monitor schedule

Report concerns about adequacy of prime contract

analyses, failure to complete analyses, or untimely

analysis to DCMA



The ACO will want to take this information into consideration when

assessing the contractor’s purchasing system and estimating system

Evaluate Inter-organizational Transfers similarly to

prime’s proposal, since this is not an arm’s-length

relationship (can’t rely on the prime’s analysis of a

sister division)

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Subcontract Type

Prime is responsible for determining contract

type at subcontract level



For prime FFP contracts, the prime will typically flow FFP

down to the supplier level



This makes sense since the primes would not want to

take on the risk of subcontract overruns, and the

overall buy meets the parameters to be FFP



For prime cost-type contracts, it is also not uncommon for

there to be a lot of FFP subcontracts, especially at the

smaller dollar level



However, it is important for the prime to recognize

what is driving the cost-type nature of the prime

contract



Alternatives to FFP may be appropriate for risky large-

dollar subcontracted efforts

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Subcontract Type (cont’d)

There may be times when the CO needs to

engage with the prime on subcontract type



Example: FPIF prime whereby CO learned that

major supplier’s actual cost varied widely from

what was negotiated; CO influences

subsequent subcontract buy to be FPIF

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Competitive Subcontracts

Competition at the subcontract level is vital for purposes of

avoiding data denials and overpriced parts

Competed subcontracts facilitate agreement on

reasonableness of subcontract pricing, and reduce the

subcontract analysis burden for both parties

Acquisition teams should encourage prime contractors to

compete subcontracts whenever possible



In follow-on acquisitions this discussion can begin well in advance

of RFP issuance



This would be important to explore if the prime has determined a

subcontract requirement to be commercial

Must conduct price analysis to determine the competed

price is fair and reasonable



Comparing prices received in response to a solicitation is a

preferred form of price analysis

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Competitive Subcontracts (cont’d)

Prime role in subcontract competitions



Per Table 15-2, prime shall “P

rovide data

showing the degree of competition and the

basis for establishing the source and

reasonableness of price for those

acquisitions…”



Prime should follow its own procedures, which

would normally include documentation of

subcontract competitions



Example:  Describes evaluation criteria, lists offers

that were received, supports presence of adequate

price competition, and in case of “best value,”

describes the tradeoffs that were made

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Competitive Subcontracts (cont’d)

CO role



Review prime documentation when appropriate, e.g.,

competition of major suppliers



For competitions based on trade-offs among cost or

price and other non-cost factors rather than lowest

price, prime analysis should include discussion of factors

considered in analysis



If prime analysis is inadequate, CO should return for correction

of deficiencies (DFARS PGI 215.404-3(a)(v))



CO can challenge the prices obtained through

competition if the prime ultimately did not demonstrate

adequate price competition



Example:  one offeror responded, incumbent subcontractor was

not solicited, and price went up 20%



May serve as advisor to prime for purpose of developing

subcontract solicitation



DCMA/DCAA may be able to help

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Subcontract Commercial Item

Determinations (CIDs)

Responsibilities—DFARS 244.402 Policy requirements

(a) Contractors are required to determine whether a

particular subcontract item meets the definition of a

commercial item. This requirement does not affect the

contracting officer’s responsibilities or determinations

made under FAR 15.403-1(c)(3). Contractors are expected

to exercise reasonable business judgment in making such

determinations, consistent with the guidelines for

conducting market research in FAR Part 10.

Prime should follow its established practices for

commercial item determinations

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Subcontract Commercial Item

Determinations (cont’d)

CO Reliance on Prime CIDs



Under DFARS 244.402, it is the prime’s responsibility to

determine whether a subcontract item meets the commercial

Item definition



If the prime does due diligence in making a commercial item

determination you should be able to rely on prime CID



Unless they are in error, without foundation, or are in 

direct conflict

with existing government acquisitions which are treating the same

item as other than commercial



In order to achieve consistency within the DoD, it is

important for the prime’s CID to be consistent with how the

primary government buying activity—the “expert”—procures

that item

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Subcontract Commercial Item

Determinations (cont’d)

CO Reliance on Prime CIDs (cont’d)



Since commercial items require a written determination by the CO for

acquisitions over $1M (DFARS 212.102(a)(i)(A), it is a reasonable

expectation for contractors to follow suit in order for the CO to rely on

their determination (and understand the basis for it)



Companies should follow their own procedures for CIDs, including for

documentation



For history on the commerciality of an item the PCO can check the

Commercial Item Database and with the DCMA Commercial Items

Group (CIG)



Not relying on a prime’s CID does not require leadership approval, but

keep your leadership well informed



However, if you are not relying on a prime’s CID that was based on a prior PCO CID,

you must get Head of the Contracting Activity (HCA) approval



In the exceptional event you do not rely on a prime’s CID



Helpful to notify the DCMA CIG for purpose of consistency across DoD



If the buy does not meet a TINA exception, e.g. Adequate Price Competition, you

will need to work with the prime to obtain a TINA compliant proposal

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Sole Source Commercial Subcontracts

Price Analysis

This area can be challenging, especially in situations where sole

source suppliers refuse to share information with prime

Prime’s role



Follow its own procedures, including for documentation



Utilize the principles in Subpart 15.4 for price analysis



 When comparing proposed prices to historical prices paid—



Prior price must be valid basis for comparison, considering time lapses, differing

Terms and Conditions (Ts&Cs), or uncertainty of reasonableness of prior price



Adjust prior price to account for materially differing terms & conditions,

quantities, and market and economic factors and adjust for material differences

for “similar items”



Use expert technical advice when accomplishing comparisons to similar items or

analyzing commercial items that are “of a type” or require minor modifications, to

ascertain the magnitude of changes required and to assist in pricing the required

changes



DoD has proposed amending DFARS to implement Section 803 of the

FY2020 NDAA which prohibits contracting officers from determining

the price of a contract or subcontract as fair and reasonable based

solely on historical prices paid by the Government

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Sole Source Commercial Subcontracts

Price Analysis (cont’d)

Prime’s role (cont’d)



Obtain minimum necessary data to conduct price analysis



Required by DFARS 252.215-7010 (Jul 2019) to insert the substance

of the provision in subcontracts exceeding the simplified

acquisition threshold and require prospective subcontractors to

adhere to requirements for data other than certified cost or pricing

data in paragraph (d)



Requires minimum information necessary to permit a determination

the proposed price is fair and reasonable, to include DFARS

215.402(a)(i) and 215.404-1(b)



When data is uncertified, it shall be provided in the form in which it is

regularly maintained by the subcontractor in its business operations



Requires subcontractors to provide data within 10 days of request or

explanation of inability to comply



Prime may not require cost data from prospective subcontractors

when there are sufficient non-Government sales of same item to

establish reasonableness



If relying on sales data for similar items, only obtain technical

information necessary to support conclusion items are technically

similar and explain differences accounting for variances in price

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Sole Source Commercial Subcontracts

Price Analysis (cont’d)

Prime’s role (cont’d)



Understand DFARS 215.404-1(b), which provides hierarchy for

obtaining data



In the absence of adequate price competition, pricing based on market

prices is the DoD’s preferred method to establish a fair and reasonable

price



If market research is insufficient, prices paid for similar items under

comparable Ts&Cs by both Government and commercial customers is

next



If that is insufficient, the next step is to obtain information on prices

paid—



For same/similar items under different Ts&Cs;



For similar levels of work or effort on related products or services;



For alternative solutions or approaches; and



Other relevant information that can serve as basis for price reasonableness



If that is insufficient, then other relevant information (including

uncertified cost data) can be requested



No cost data may be required when there are sufficient non-government sales

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Sole Source Commercial Subcontracts

Price Analysis (cont’d)

Prime’s role (cont’d)



Understand 215.404-1(b)(v) factors that affect relevance of

available information



Market Prices—Current prices that are established in the course of

ordinary trade between buyers and sellers free to bargain and that

can be substantiated through competition or from sources

independent of the offerors



Age of data—depends on industry, product maturity, economic

factors



Volume and completeness of transaction data—relevant sales to all

types of customers and includes key information such as date,

quantity, price, customer, etc.



Nature of transactions—info necessary to understand transaction

such as terms and conditions, type of customer, preferred customer

rewards, etc.



Alert CO when subcontractor is refusing to provide data

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Sole Source Commercial Subcontracts

Price Analysis (cont’d)

CO role



Assist the prime in making requests to the DCMA Commercial Item Group

(CIG) when appropriate



Review commercial price analyses, especially large dollar



Expect prime to conduct market research and obtain data when

necessary



Prime analysis based exclusively on prior sole source awarded

commercial subcontracts may need extra scrutiny



FY2020 NDAA, Section 803 prohibits COs from determining the price of a

contract or subcontract as fair and reasonable based solely on historical

prices paid by the Government.  This has yet to be incorporated into

DFARS (DFARS draft proposed rule 2020-D008)



On occasion, may be the recipient of proprietary data a subcontractor

refuses to provide the prime



Provide results of any government evaluation to prime for purpose of

incorporating into analysis or negotiations (depending on timing)

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Sole Source Subcontracts

Cost Analysis

Primes must follow their internal procedures, including

for documentation

Primes shall obtain certified cost or pricing data from

subcontractors who do not qualify for a TINA exception



Obtain as instructed in DFARS 252.215-7010, Requirements

for Certified Cost or Pricing Data and Data Other Than

Certified Cost or Pricing Data (Jul 2019)



Requires contractors to insert substance of provision in

subcontracts exceeding the simplified acquisition threshold and

requires prospective subcontractors to adhere to requirements

for providing certified cost or pricing data in paragraph (c)



Paragraph (c) references Table 15-2 for purpose of submission

of cost or pricing data



Primes may elect to have subcontractors use DoD PAC or a

similar checklist

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Sole Source Subcontracts

Cost Analysis (cont’d)

Prime required to conduct cost analysis of subcontract

proposals when certified cost or pricing data are required

Cost analysis is the analysis of individual cost elements and

profit



Labor Hours



CO may have internal technical personnel or DCMA review prime

technical analysis



CO should ensure government findings were incorporated into prime

analysis or negotiated settlement (depending on timing)



For recurring buys, actuals are necessary to conduct an informed

evaluation



Rates



In most cases, subcontractors will not share rate information with

the prime, and the prime will need DCMA or DCAA assistance



The CO may have to provide the “impact” of differences in rates to

the prime for purpose of evaluation/negotiations—cannot reveal

proprietary information (DFARS PGI 215.404-3(a)(iii)

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Sole Source Subcontracts

Cost Analysis (cont’d)



Material & Other Direct Costs



Prime should obtain assistance from DCAA/DCMA when

needed, especially for audits on major suppliers



CO should ensure government findings are incorporated

into prime analysis or negotiated settlement (depending

on timing)



Prime should be ensuring subcontractors are performing

required analysis on lower-tiered subcontractors



Profit



COs may encourage contractor to use WGL; it is common

for large companies to use that approach



COs evaluate whether the end result seems reasonable

rather than try and obtain agreement on individual

weights/factors



COs ensure fee limitations in FAR 15.404-4(c)(4)(i) not

exceeded



COs ensure subcontract is not on the basis of cost-plus-a-

percentage-of-cost

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Sole Source Subcontracts

Cost Analysis (cont’d)



Terms & Conditions



Prime is responsible for negotiations



CO should evaluate significant terms and conditions

that have impacts to pricing or payment, such as price

breaks from combining purchases



Should review total cost actuals for the top 3-5

subcontractors that do not meet a TINA exception and

compare to previously negotiated cost lines

Prime should also conduct price analysis on buys

requiring certified cost or pricing data



Important to ensure prices are not rising at unacceptable

levels

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Subcontracts below TINA Threshold

Price Analysis

Price analysis is the process of examining the price

without evaluating separate cost elements and profit

(FAR 15.404-1(b))

Prime is responsible for conducting price analysis when

certified cost or pricing data are not required and is

required to submit the results of the analysis to the

Government

Methods of Price Analysis



Comparing prices received in response to a solicitation is a

preferred form of price analysis (competitive buys)



Comparison of proposed prices to historical prices paid for

same or similar items (prior price must be valid basis and

must be normalized)

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Subcontracts below TINA Threshold

Price Analysis (cont’d)

Methods of Price Analysis (cont’d)



Parametrics to highlight significant inconsistencies that

warrant additional pricing inquiry



Comparison with competitive published price lists,

published market prices of commodities, similar

indexes, and discount or rebate arrangements



Comparison of proposed prices with independent

Government cost estimates



Comparison of proposed prices with prices obtained

through market research for the same or similar items



Analysis of data other than certified cost or pricing data

provided by the offeror

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Subcontracts below TINA Threshold

Price Analysis (cont’d)

For more complex, higher-dollar efforts less time would

typically be spent on analyzing these costs



This is true unless they are suppliers that have been

historically problematic with respect to their pricing

practices



In those situations they would need to be evaluated in all

circumstances regardless of complexity or dollar value.



For all others consider the following evaluation

approaches



Review the prime’s evaluation on the sub and if acceptable,

rely on it



If applicable, rely on evaluation performed by DCMA/DCAA



Apply decrements when necessary based on techniques such

as:



Utilization of resulting decrement from detailed evaluation of

large dollar subcontractors



The prime contractor’s negotiation history



Sampling of lower risk/lower dollar subcontractors



Knowledge gained from previous efforts

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Subcontracts below TINA Threshold

Price Analysis (cont’d)

For less complex, lower dollar efforts more time would

typically be spent on analyzing these costs



CO should review the basis of the proposed cost and

review the prime’s price analysis of it



Consider the following evaluation approaches



If the CO can determine that the prime’s price analysis results

in a fair and reasonable price, they should be able to rely on it



Apply decrements when necessary based on data gathered

during comparison of proposed costs with:



Updated quotes from the subcontractor



Historical prices paid that have been normalized (DoD has

proposed amending DFARS to implement Section 803 of the

FY2020 NDAA which prohibits the use of this as the sole

technique applied)



Prices obtained through market research



Published competitive price lists or published indexes



Other than certified cost or pricing data provided by the

subcontractor

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Hot Topics

Early Engagement

Consent to Subcontract

Actuals

Long Term Agreements (LTAs)

Field Pricing Assistance

Excessive Pass-Through Costs

Inter-Organizational Transfers

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Early Engagement

Purpose of early engagement is to save time on schedule

and avoid problems down the road

Requires cooperation between government and contractor

CO can identify potential problem areas based on previous

experience



Lessons learned from previous Contracting Officers and

Price Analysts



Common concerns may include:



Subcontract proposal adequacy



Subcontract refusal to provide actuals and other

relevant data



Adequacy of prime cost and price analyses



Failure of prime to consider/incorporate government

findings

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Early Engagement (cont’d)

CO should include DCMA and DCAA as early as possible

to ensure buy-in and facilitate future audits and

reviews

CO should consider release of a draft RFP to prime to

jumpstart the process

Collaborate with Prime on major subcontracts prior to

subcontract RFP release



Establish ground rules up front for Government

engagement with subcontractors



Consider codifying the arrangement via MOU with prime

DoD Sole Source Streamlining Toolbox 

provides early

engagement techniques in sections 1, 2 and 3

39

Early Engagement (cont’d)

Collaborate with Prime on major subcontracts

prior to subcontract RFP release (cont’d)



Include ways to streamline subcontract proposal analysis



Require submission of working cost models



Require submission of subcontract actuals for appropriate

subcontract RFPs



Influence contract type selection for subcontracts when

appropriate



Facilitate improvements to subcontractor proposal adequacy



Consider attending the prime’s subcontract kickoff



Communicate Government expectations



Be available to answer questions

40

Early Engagement (cont’d)

Collaborate with Prime on major subcontract

evaluation after subcontract proposal receipt



Consider conducting subcontract fact-finding in

tandem with the prime



Ensures appropriate questions are being asked



May help avoid an inadequate Cost Analysis Report (CAR)

or Price Analysis Report (PAR)



Provide rate impacts and other information as

needed to prime



When necessary, help facilitate negotiations

between prime and subcontractor to ensure a fair

and reasonable subcontract price

41

Consent to Subcontract

What is it?  Contracting Officer’s written consent for the

Contractor to enter into a particular subcontract



Normally consent is granted by the ACO unless it is retained

by the CO



Unless specified in the consent, CO’s consent to subcontract

does not

 constitute determination of the acceptability of the

subcontract terms or price or the allowability of costs

When is it required?



For contractors without an approved purchasing system



Cost-Reimbursement (CR), Time & Materials (T&M), Labor Hour,

Letter Contracts



For unpriced actions under fixed-price contracts that exceed SAT for



CR, T&M or Labor Hour subcontracts; and



Fixed-price subcontracts that exceed the greater of SAT or 5% of the total estimated

cost of the contract

42

42

Consent to Subcontract (cont’d)

When is it optional?



For contractors with an approved purchasing

system



Any subcontracts specifically identified by the CO in

paragraph (d) of FAR Clause 52.244-2

When should we consider it?



Under UCAs, contractors may not be incentivized to

control costs prior to definitization



Government typically accepts incurred costs, unless

unallowable



Avoid situations where CO does not agree with

negotiated deals



Must fill in the specific subcontractors’ names into the

Subcontracts clause

43

Consent to Subcontract (cont’d)

When should we consider it? (cont’d)



Contracts where CO considers Government to

have risk for overpaying post contract award



Example might be a cost-type contract whereby

major subcontract analyses were not completed

prior to contract award



Must fill in the specific subcontractors’ names in the

Subcontracts clause

44

Actuals

Should be requested by the prime for the top 3-5

subcontracts as certified cost or pricing data when an

item or service has been previously procured from the

same subcontractor



Applicable only to subcontracts subject to TINA



Encourage prime to include request for actuals in the

subcontractor RFP and at a level that is most relevant to

reduce administrative burden.  Examples include,



Total subcontract level



Unit cost level



Only certain elements such as total recurring engineering

hours

45

Actuals (cont’d)

Government team should not be requesting

information on subcontractor profitability



The expectation is that the cost information will be

compared to historical considered negotiated cost to

assess accuracy of cost estimates

Recommend providing instructions regarding

format so that the data is usable and easily

understood once submitted



Suggested language can be found at AFFARS MP5315.4-

1.d

46

Actuals (cont’d)

Actuals may need to be normalized to

account for:



Differences in quantity



Contract length



Work scope



Date that actuals were incurred



Partially completed items

47

Long-Term Agreements

Long-term agreements (LTA) are agreements

entered into between a prime or higher-

tiered contractor and a subcontractor to

establish pricing for future purchases of

specified items

Why LTAs can be beneficial to the

Government



Can result in more favorable subcontract pricing

due to a more stabilized business volume



Can reduce acquisition cycle times

48

Long-Term Agreements (cont’d)

LTAs are an acceptable pricing method since FAR

allows a prime to reach price agreement with a

sub in advance of agreement with the

Government



Unless an exception to FAR 15.403-1(b) applies, the prime is

required to obtain and analyze certified cost or pricing data

before awarding any subcontract regardless of how far in

advance a price agreement is reached



Contractors do not generally have to obtain updated cost or

pricing data when proposed subcontract costs are based on

existing LTAs



Expired LTAs do require updated cost or pricing data



Older LTAs should have some level of review to ensure

prices are still reasonable

49

Long-Term Agreements (cont’d)

Program Offices should encourage early

DCAA involvement in the review of LTAs prior

to the prime negotiating with the

subcontractor



“…DCAA can perform an examination of a

subcontractor proposal, submitted to support

the award of a Long Term Agreement (LTA),

prior to issuance of a Government Request for

Proposal when such an examination will benefit

the Government and is requested by the

Contracting Officer.” (15 Feb 18 DCAA Audit

Alert)

50

Field Pricing Assistance

DCAA can provide subcontractor assist audits or agreed-

upon procedures



PCO may want to consider contract type, acquisition

type, subcontract value (in relation to both prime’s

total price and absolute dollar value), negotiation

history, and known-risks when considering a request for

assistance

DCMA can also provide relevant services for subcontracts

Requests can be initiated by the prime, CO, or DCAA prime

auditor, but the key is coordination and timing to ensure the

findings actually influence the subcontract negotiations



Field pricing assistance should be initiated as early as

possible, e.g., upon receipt of subcontract proposal in

advance of prime proposal

51

Field Pricing Assistance (cont’d)

When DCAA and/or DCMA Assistance may be

most helpful



Large-dollar/high-risk subcontractors



Prime estimating system has deficiencies in area of

subcontract pricing



Subcontractor denies prime access to records



Subcontractor has estimating system deficiencies



Special concerns such as foreign subcontractors



Prime/subcontractor relationship is not conducive

to independence and objectivity (ex. inter-

organizational transfers)

52

Excessive Pass-Through Costs

The inclusion of FAR 52.215-23, Limitations on Pass-Through

Charges, and 

FAR 52.215-22, Limitation on Pass-Through

Charges—Identification of Subcontract Effort, results in the

following:



Requires contractors (prime and sub) to identify % of work

that will be subcontracted and, if work exceeds 70%, to

identify



Amount of the offeror's indirect costs and profit applicable to the

work to be performed by the subcontractor(s)



Description of the value added by the offeror as related to the work

to be performed by the subcontractor(s)



Prime also required to provide same info at the sub level if a

subcontractor is going to subcontract more than 70% of its

costs

These clauses are applicable to all efforts above TINA with

the exception of FFP/FPIF/FFP-EPA competitive and

commercial contracts

53

Excessive Pass-Through Costs (cont’d)

If CO is informed that a prime intends to award a

subcontract that exceeds 70%, per FAR 15.404-1(h),

the CO shall—



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



Make a written determination that the approach

selected is in the best interest of the Government and

document the basis for the determination

CO makes determination as to whether excessive pass-

through charges exist by examining contractor value added

54

Inter-Organizational Transfers

Can go by many names:  IWA, IWO, IWTA

FAR 31.205-26(e)



(e) Allowance for all materials, supplies, and services that are

sold or transferred between any divisions, subdivisions,

subsidiaries, or affiliates of the contractor under a common

control shall be on the basis of cost incurred in accordance with

this subpart. However, allowance may be price when—

(1) It is the established practice of the transferring organization to price

interorganizational transfers at other than cost for commercial work of

the contractor or any division, subsidiary, or affiliate of the contractor

under a common control; and

(2) The item being transferred qualifies for an exception under 

15.403-

1

(b) and the Contracting Officer has not determined the price to be

unreasonable.

55

Inter-Organizational Transfers (cont’d)

Prime is required to provide inter-organizational

transfer cost proposals and is also required to

provide analysis supporting a TINA exception (FAR

52.215-20/-21 and DFARS 252.215-7010)

CO Role is to evaluate inter-organizational transfers

similar to prime’s proposal, since this is not an

arm’s-length relationship

56

Summary

Prime has responsibility for analyzing and negotiating

subcontracts at fair and reasonable prices

CO has responsibility 

for the determination of price

reasonableness for the prime contract, including

subcontractor costs

Both parties must understand their detailed roles when it

comes to obtaining data, evaluating data, and negotiations

Collaboration and early engagement are the keys to success

57

Questions?

58

BACKUP

59

Sample Language for Obtaining

Subcontract Actuals

L-XXX, Cost Proposal Adequacy and Structure is referenced within section 1.d. of AFFARS MP5315.4

Paragraph (d)(6) of L-XXX provides the following sample language pertaining to the submission of historical

actual costs incurred with subpart (ii) specifically addressing subcontractor actuals,

(6) Submission of Historical Actual Costs Incurred.

(i) The contractor shall provide the following information for these prior acquisitions: 

[CO

identifies the specific acquisitions for which actual cost data is required. Alternately, the CO may require

the contractor to identify prior and current contracts for the same items covered in this RFP.]

For these contracts, the contractor shall provide the following information:

a. contract number (including modification number if applicable) or other identifier;

b. contract type;

c. contract quantity;

d. contract price; and

e. actual cost incurred, including a breakout of actuals as recurring/non-recurring costs. If

performance is not complete on any of the specified contract actions, provide an estimate to

complete and the basis for that estimate.

(ii) The contractor shall also request that its top five major sole source subcontractors provide

the information listed in the above paragraphs (i) a. through e. on prior contracts for items the prime is

purchasing from the subcontractors for this effort. If a subcontractor’s information on prior actuals is not

included in the prime’s proposal, the proposal should identify status and anticipated receipt date(s). If the

subcontractor deems the information proprietary, the subcontractor may submit the information directly to

the CO.

60

Purchasing System

Government benefits of an approved purchasing system



Adequate cost control



Effective management of supply chain



Contract/regulatory compliance



Confidence in subcontracting methods

Contractor Purchasing System Review (CPSR)



Purpose:  to ensure the contractor is effective and efficient with the use of

Government funds and complies with Government policy when

subcontracting



A CPSR is conducted when a contractor’s annual sales exceed $50M* in a

12-month period



The $50M sales threshold excludes competitive FFP/FFP-EPA efforts and FAR

12 efforts



Upon initial determination, the ACO will determine if a CPSR is necessary

every three years



24 elements are evaluated as part of the purchasing system analysis

*$50M threshold based on DFARS 244.302(a) which differs from FAR 44.3 threshold of

$25M

61

61

Purchasing System (cont’d)

A disapproved purchasing system does not preclude

award, but COs should evaluate whether the deficiency

impacts the negotiations



CO should seek input from DACO/ACO



If it does impact the negotiation, the CO should consider

other alternatives such as—



Use a different contract type



Apply additional cost analysis techniques to determine

reasonableness of affected cost elements



Segregate questionable elements into a cost-

reimbursable line item



Reduce negotiation objective for profit or fee



Include a reopener clause

62

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