Thursday, April 11, 2013

Audit Issue: Consent to Subcontract & Overseas Allowances for Consultants

Audit Issue:  Consent to Subcontract and Overseas Allowances for Independent Consultants           

This is a discussion and a possible solution in response to two of the recent audits issues showing up in multiple contractor audits (please note this post is related to prime contractors and not to organizations working exclusively under assistance instruments):

Are Independent Contractors = Subcontractors, requiring consent to subcontract and justification in accordance with the competition requirements and the Contractor procurement policy?

Can Independent Consultants receive Danger Pay and Post Differential automatically in DSSR designated areas?

Consultants are Subcontractors

The first answer is affirmative.   Here is why:

Procuring services of an independent consultant is subject to the cost principle at FAR 31.205-33 Professional and consultant services, which basically sets out the requirements and justification parameters that need to be considered in employing consultants vs employees, as well as standards for documenting the fees paid to the consultants, including copies of agreements, adequacy of terms and conditions of the agreement, invoicing detail and copies of work products.

FAR 31.205-33 defines Professional or Consulting Services to mean those services rendered by persons who are members of a particular profession or possess special skill and who are not officers or employees of the contractors.

The definition implies to individuals or concerns (i.e. companies) (See FAR 31.205-33 (d) (7)).

FAR 44.101 defines Subcontractor as any supplier, distributor, vendor or firm that furnishes supplies or services to or for prime contractor or another subcontractor.

It further defines Subcontract to mean any contract, as defined in FAR Subpart 2.1, entered into by a Subcontractor to furnish supplies or services for performance of the prime contract or a subcontract. It includes, but is not limited to, purchase orders, and changes and modifications to purchase orders.

Subcontract = definition of contract at FAR Subpart 2.1, which is:

Contract means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds and that, except as otherwise authorized, are in writing. In addition to bilateral instruments, contracts include (but are not limited to) awards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements

Therefore: Consultants are Subcontractors regardless of the fact whether they are individuals (incorporated or not) or concerns.

This means that USAID’s consent is required to obtain services of such consultants on the same basis as it is required for companies – see my post at Semantics of FAR 52.244-2 When is Consent To Subcontract Required?

Consultants are not Automatically Eligible for Post Differential and Danger Pay

AIDAR also adds some definitions to differentiate between prime contractor employees and consultants and further differentiates for regular and short term employees.

AIDAR752.202-1 Definitions:

b) Alternate 70. For use in all USAID contracts. Use in addition to the clause in FAR 52.202-1.

USAID Definitions Clause—General Supplement for Use in All USAID Contracts (JAN 1990)

(e) Consultant shall mean any especially well qualified person who is engaged, on a temporary or intermittent basis to advise the Contractor and who is not an officer or employee of the Contractor who performs other duties for the Contractor.

(f) Contractor employee shall mean an employee of the Contractor assigned to work under this contract.

USAID Definitions Clause—Supplement for USAID Contracts Involving Performance Overseas (DEC 1986)

(e) Regular employee shall mean a Contractor employee appointed to serve one year or more in the Cooperating Country.

(f) Short-term employee shall mean a Contractor employee appointed to serve less than one year in the Cooperating Country.

AIDAR 752.7028 Differential and allowances only allows reimbursement of post differential and danger pay to Regular or Short Term Employees of the Contractor.

(a) Post differential. Post differential [..] will be reimbursable hereunder for employees [..] during the time such employees actually spend overseas on work under this contract. When such post differential is provided to regular employees of the Contractor, it shall be payable beginning on the date of arrival at the post of assignment and continue, including periods away from post on official business, until the close of business on the day of departure from post of assignment en route to the United States. [..] Short-term employees shall be entitled to post differential beginning with the forty-third (43rd) day at post.

(j) Danger pay allowance. (1) The contractor will be reimbursed for payments made to its employees (presumable regular and short term – since there is no elaboration – comment added) for danger pay not to exceed that paid USAID employees in the cooperating country, in accordance with the Standardized Regulations (Government Civilians, Foreign Areas), Chapter 650, as from time to time amended.

I hear you cursing at me – stop that –especially contractors working in Iraq and Afghanistan….

Justifying Post Differential and/or Danger Pay for Consultants

There are two ways in my opinion to justify paying additional allowances to consultants under USAID contracts:

1. Just because the agreement you have is called a “Consultant Agreement”, this may not truly represent a “Consultant” arrangement in the definition of IRS or for the purpose of allowances and would be better qualified as a “Short-Term Employee” arrangement, eligible for danger pay and post dif.

The distinction being that true “consultants” in the eyes of IRS are those who perform specific delivery services/provide work products at pre-agreed prices and who do not have an assigned desk in the office, business cards or mandated hours of work, benefits etc.   If your “consultant” is overseas for 6 months and he/she has a business card, a computer and desk in the office, undefined scope of work for helping “with on-going activities”, regulated work-hours etc., this may mean that this person will be considered “an employee” by the IRS subject to tax withholding and other things and the type of agreement you have concluded is simply wrong.  If that is the case, you should review the agreement and instead convert it to a short-term or contract-based employment, which will solve your IRS and your USAID allowance problems.

2. If the agreement is a true consulting arrangement and you would like to justify paying, let’s say “danger pay”, to your consultant while he is doing some survey work for you in Kandahar, you need to treat it as you would with any other services subcontracts; which is to say – compete it or justify sole source, conduct a price/cost analysis, document it in accordance with your procurement policy and obtain consent from your USAID CO. 

Part of the price/cost analysis may be a justification of premium/additional pay or higher rate for dangers that the consultant will encounter in Kandahar vs providing the same services while sitting in Potomac, MD.  The basis for reasonableness of the percentage of danger pay may be that State Department and USAID have already established that the published DSSR danger pay % is a reasonable amount for the dangers of political or terrorist violence for that area and have approved it for their own employees and PSCs.


  1. Thank you! So would USG funded organizations have to conduct competitive bidding for all independent contracts that are above the $3,500 threshold? What if they are on a recurring basis?

    1. If you are a contractor, and not a grantee, you do not have to compete everything above $3,500. You have to compete to the maximum practical extent which is what the FAR requirement for subcontracting is. Your procurement policy must be written and comply with the standards throughout the FAR but it does not have to follow procurement thresholds that the Government follows.

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