Thursday, February 22, 2018

I Don’t Think It Means What You Think It Means. Government Consent to Subcontract under Cost Type Contracts

This is the language that all Contracts Professionals cringe to see in a consent to subcontract, received from the Government: “this approval does not constitute determination of allowability of costs”.

After laboring to comply with FAR 44 in determining the needs, conducting exhaustive competition and selection of the right contractor and painstakingly documenting all the factors to present to the CO, this one little sentence tells you that all your work may be in vain, once a particularly angry auditor finds your methods not to his/her liking. 

But does this language really mean what the auditors think it means? Can the Government’s knowledge, approval and acquiescence really mean that little?

Well, not quite… This brilliantly written decision from a while ago shows you just how it is all supposed to make sense:

Husky Oil NPR Operations, Inc., IBCA 1792, 86-1 BCA ¶18,568, stating at 93,246

Although the contract provision for CO approval of subcontracts and purchase order does contain exculpatory language that such approvals do not constitute a determination of the allowability of such cost, the approval process must be taken to have some meaning. At the least, the approval process provides continual monitoring by the CO to assure that the contractor was adhering to accepted procurement practices to secure adequate competition or utilizing acceptable negotiation procedures to assure cost-effective awards. The disclosure of complete information by the contractor to the CO in order to secure the mandated approvals did assure that the CO was in the knowledgeable position to concur in the proposed award. While the approvals do not assure allowability of “such cost”, meaning the entire costs of the subcontracted tasks, the approvals must indicate a general agreement of the CO with the judgement of its CPFF contractor-manager that the award was necessary to the project, that the approach taken in subcontracting for the needed equipment, supplies or effort was acceptable, and that the costs properly expended under the subcontract would be allowed. For such judgments to be reversed by a successor CO after an auditor suggests a different approach should have been taken is an unwarranted interference with the management prerogatives of the CPFF contractor, and a lack of consistency in the Government’s obligations towards the contractor. The contemporaneous judgement of an informed CO to agree to a sole source awards, or to an award to another instead of the low bidder should be binding on the Government and successor CO’s as it is on the contractor, otherwise, the position of the Government, after audit, is that despite our agreement at the time of award, we now accept only those judgments that retrospectively applied prove to be most cost effective. This violates the basic nature of the relationship of the parties under a CPFF contract expressed in J.A. Ross & Company, ASBCA Nos.2326, et al., (Dec. 12, 1955) 6 CCF 61,801 (emphasis added)

Government knowledge. The Government obtains knowledge dealing with allowability of costs in various ways: from audit reports, disclosure statements, procurement system reviews, payment of invoices and administrative functions, like approvals of subcontracts.   It is in the contractor’s best interest to document it all with the view of proving that the Government had specific knowledge of the allowability of cost in question and it did not disagree with the proposed approach or treatment (we are not talking about expressly unallowable costs here, which Cos are not authorized to overrule).

It is not sufficient to just show that the Contractor sent something to the Government and they did not said “no”. Specific knowledge and action must be established. It is essential that you show that you relied on the Government’s knowledge, not knowing that the Government disagrees or specifically disapproves something. 

In the example of a subcontract consent pursuant to 52.244-2, the extent to which the CO is provided and examines the details of awarding a specific subcontract, determination of pricing, sole source etc. can be paramount in defending allowability for the pesky auditor or under a claim.

FAR 44.202-2 provides a road map for requesting a proper consent to subcontract and detailing the specific actions which went into determining the needs for the project, the approach taken in procurement methods, the type of awarded subcontract and price reasonableness determination.   If you follow this process, document it properly and your CO consents in writing, the documentation will go a long way to support allowability of all resulting costs (provided your subcontract is properly written and subsequently managed and enforced to protect Government’s interests).

Here are some of the details to include in your request for consent:

  • Is this subcontract needed to assist the Prime in performing the work? Was an in-house option considered?
  • General description of the services/goods being purchased and how they benefit the ongoing Prime Contract (FAR 44.202-2 (a) (3))
  • Type of Competition: Open Competition, Short List Competition, Sole Source
  • Basis for Procurement Evaluation:  Lowest Price/Technically Acceptable; Best Value Overall/Trade-Off; Sealed Bids etc.
  • Were Small Business Subcontractors considered? (not applicable if all work is performed entirely overseas) (FAR 44.202-2 (a) (4)).
  • Which Company was selected? Name, address, DUNS number (if available), Tax ID (if available)
  • Nationality of Supplier/Source of Commodity (USAID Contracts)
  • Type of Contract Selected. Is this an appropriate type of contract for risks involved and consistent with Prime Contractor procurement policy? (FAR 44.202-2 (a) (9)).
  • Environmental Considerations and Form Completed? (if applicable)
  • Was a Selection Committee convened? PCI/OCI forms on file?
  • What was the step-by-step process for evaluating the submissions, including scores, explanation of trade-off (for best value procurement) etc?
  • What was the Prime Contractor cost estimate for this procurement? 
  • Provide adequate price competition or absence explanation. For example: if only one bid was received, how was the price independently verified? (FAR 44.202-2 (a) (5)).
  • Provide adequate cost or price analysis or price comparisons and the certified cost or pricing data certification (if required). (FAR 44.202 (a) (8)).
  • Provide sound basis for selecting and determining the responsibility of the selected contractor.  What due diligence was performed?  (FAR 44.202 (a) (7)). FAR 44.202-2 (a) (12)).
  • Were all Prime Contractor Procurement Policy Forms Completed and Included in procurement File?