The Ultimate Guide to Subcontracting in Government Procurement

Spend Matters welcomes this guest post from Public Spend Forum, which is helping us with insights into public sector procurement.

Entering the world of government contracting requires considerable effort and education on the complicated process. Once you’ve overcome all of the hurdles and secured your first government contract, you may find you’ll require additional assistance to fulfill the job, which usually requires subcontracting.

Before you begin your search for the appropriate subcontractors, you’ll want to review the applicable regulations and compliance requirements. With the Department of Defense being one of the largest agencies issuing the greatest value of contracts, we’ll be focusing primarily on the Defense Contract Audit Agency (DCAA) for compliance details. Defense contract audits are required to be performed in accordance with Government Auditing Standards.

These standards, often referred to as the “Yellow Book,” are published by the comptroller general of the United States. Policies and guidelines more specific to defense contract auditing are detailed in the Defense Contract Audit Manual, a continuously updated online publication of the DCAA.

Subcontracting Terminology

The first thing you’ll want to learn before tackling the complicated world of regulations in government contracting is the basic terminology.

Definitions are more important than you might think; in fact, did you know that the FAR and DFARs (the Defense Acquisition Regulation) have 27 distinct definitions of a subcontract? Words matter, especially in public contracting, so a thorough review of terminology and definitions is necessary to succeeding in this market.

Prime contractor — As the business to win the bid you are the primary contractor, or “prime contractor.”

Subcontractor — Defined by the Federal Acquisition Regulation (FAR) 3.502-1 as, “Any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract and includes any person who offers to furnish or furnishes general supplies to the prime contract or a higher tier subcontractor.” Or, “any supplier, distributor, vendor, or firm that furnished supplies or services to or for a prime contractor or another subcontractor.”

Higher-tier subcontractor — a subcontractor that also contracts subcontractors to perform services or provide supplies in order to complete work for the contracts they have entered into with prime contractors.

Consultants — Be sure not to confuse consultants with subcontractors. Consultants services are defined by FAR as, “rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. Examples include those services acquired by a contractor or subcontractor in order to enhance their legal, economic, financial or technical positions. Professional and consultant services are generally acquired to obtain information, advice, opinions, alternatives, conclusions, recommendations, training or direct assistance, such as studies, analyses, evaluations, liaison with Government officials or other forms or representation.”

It’s important to understand these distinctions when assigning the correct totals for allowable costs and charging labor hours in your accounting system. Subcontracts must be reported as a portion of the prime contractor’s annual incurred cost proposal.

Subcontractor Approval Process

Before you hire a subcontractor you must secure consent from your contracting officer to subcontract. To do so, the officer will require you provide the following details:

• The proposed subcontractor information
• A description of the services or supplies being subcontracted
• The proposed subcontract price
• The type of subcontract to be used

Your consent request must include, “(1) the review package accomplished by the prime contractor and/or by the higher-tier subcontractor involved, including any cost and/or price analysis if available and (2) the subcontractor’s proposal to the prime or higher-tier contractor, including a proposal cover sheet if FAR 15.408, Table 15-2 is used, and related cost or pricing data,” according to FAR 15.404-3.

If the subcontracts will exceed the simple acquisition threshold, you may need to provide the following information to your contracting officer for them to approve consent:

• Time-and-Materials Contracts
• Letter Contracts
• Labor-Hour Contracts
• Fixed-Price Contracts

Your officer may need to verify you have an approved purchasing system, then they will assess the subcontract terms for allowability and acceptability of costs.

Responsibilities of Prime Contractors

Once you receive consent as the prime contractor, you will be responsible for selecting and awarding the subcontracts.

You will be responsible for monitoring the subcontractor’s payment and financial and technical performance, assuring all terms are met and accomplished. While you may have already done the majority of the footwork vetting subcontractors prior to receiving consent, you’ll want to be sure to choose your subcontractors on a competitive basis. 

Be sure to complete Schedule J of your final indirect cost rate proposal on your annual incurred cost submission, to ensure compliance with FAR 52.216-7.

You’ll need to include:

• List of subcontracts you have awarded to companies
• Subcontractor name, address and contact information
• Subcontract award type and value
• Subcontract and prime numbers
• Amount claimed during the fiscal year

How to Avoid Deficiencies

As the prime contractor, you will be responsible for managing not only your own accounting performance and procedures, but those of your subcontractors as well. It’s imperative to have efficient accounting systems and good communication to avoid deficiencies.

Be sure to analyze any subcontractor’s accounting while choosing them to assure they are compliant with government regulation and contracting terms. Clarify that you will need constant access to their accounting system, as well as auditors and your contracting officer, to maintain compliance with federal regulations. Be sure to monitor their accounting process to make sure billings are accurate.

If a subcontractor ever denies you access, contact your contracting officer and request a denial of access. This will document that you did attempt to follow procedures, but the subcontractor did not allow you to.

Subcontracting can be the key to succeeding in government contracting, as long as you ask for and receive consent to subcontract. Choose your subcontractors wisely by doing the legwork and research, it will pay off in the long run. Consider using a registry of qualified government contractors like GovShop, which offers a dynamic keyword search and the ability to find companies by product service code, NAICS code and contract vehicle.

You may want to consider outsourcing your accounting services for this process to help:

• Guide you to the proper accounting systems
• Prepare comprehensive financial statements
• Implement and Manage Integrated Compliant Time Tracking & Reporting Systems
• Incurred/ Contract Cost Reporting
• Develop Budget Budgets and Forecasts
• Generate Wrap rates
• Oversee Daily Financials & DCAA Compliant Chart of Accounts

This accounting team should have extensive experience in government accounting, with technology implementation specialists to provide you with the quality of support you may need.