Public Comments 2006-D057-I. Merson

COMMENT 1: A better definition of what is considered a subcontract for the purpose of this analysis is needed in order to establish the base upon which the currently proposed 70% will be evaluated. DISCUSSION: The FAR defines ?subcontract? in two places. In FAR 44.101, it states a subcontract is ?any contract as defined in Subpart 2.1 entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract.? The definition goes on to state that it includes but is not limited to purchase orders, and changes and modifications to purchase orders. FAR 15.401 also defines a subcontract with regard to pricing. It states that ?except as used in 15.407-2? (which is the section dealing with Make or Buy decisions) that a subcontract also includes a transfer of commercial items between divisions, subsidiaries, or affiliates of a contractor or a subcontractor and references (10 U.S.C. 2306a(h)(2) and 41 U.S.C. 254b(h)(2)) which is the Truth in Negotiations Act. There are a number of commercial and government practices which should be clarified with regard to this determination. The following are some examples: o Inter-organizational transfers (IOTs), while considered a subcontract with regard to pricing, should not be considered a subcontract for the purpose of pass- through charges as they are not considered subcontracts within a company. o Many firms employ contract labor to supplement their own staff. These subcontract laborers are integrated into the contractor?s work staff, report directly to and are supervised by company managers in much the same manner as its own employees. Accordingly, it is our belief that these categories of employees should be excluded from the subcontracting base. o Will the analysis of subcontract labor hours be made on the basis on the number of labor hours involved or the cost of those labor hours? In general, there is a tendency to subcontract work which involves routine labor categories while retaining more highly skilled and highly paid labor categories in-house. o There are different types of material and supply purchases. o Some purchased parts are piece parts which are ?transformed? into a finished end product, may require a statement of work, and performance of effort such as measurements. We believe these items should also be excluded from the base. o Stand alone purchased parts or items should be considered in the base. o Many formerly government-furnished property (GFP) items have been shifted to contractor-acquired items, a practice which contractors have been willing to accommodate; however, a shift in policy such as that proposed may result in an unwillingness of contractors to continue this process, particularly if the acquisition of these items are not considered ?value added.? Many of these items are often high cost which could impact the calculation of the 70%. Is the government ready, willing, and able, and does the government have the resources to revert back to acquiring, scheduling, storing, shipping, and other tasks associated with the practice of providing GFP? A DFARS definition of subcontract for the purpose of this clause would be helpful along with a definition of what constitutes ?adding value.? Review of the FAR clause 52.219-15 Limitations on Subcontracting, which describes how the government will determine if a small business will qualify as a small business for a particular buy, provides an example of providing more detailed information. COMMENT 2: The issue of contractor?s assumption of risk is not discussed nor does it appear to be specifically addressed as an area of ?value-added.? DISCUSSION: The contractor?s assumption of risk should be considered a value- added function. The type of contract involved for all subcontracts should be a specific item of risk with varying risk levels similar to what is used in determining profit via structured methodology (reference Weighted Guidelines, DFARS 215.404- 71.). Certainly the record keeping for ensuring that all subcontractors and any additional levels of subcontracting are in compliance with the 70% pass-through rule will be very difficult and should warrant recovery of associated costs and a reasonable profit. COMMENT 3: The rule as proposed does not provide sufficient guidance that will enable Contracting Officers (COs) to make consistent determination as to what are ?excessive pass-through charges.? DISCUSSION: It appears that the current definition of what constitutes ?excessive pass-through charges? is going to be very difficult to interpret. Clause 252.215- 7004 states it ?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).? Since in both examples, which are intended to show what is and is not excessive, the terms ?indirect costs and profit? are used, it seems a logical outcome will be differing interpretations among DoD contracting officers. We suggest this definition be made clearer. COMMENT 4: It should be made clear which CO makes the determination and when that determination is made or revised. DISCUSSION: It appears that it is intended that the Procuring CO, rather than the Administrative CO, will make this determination and that it will be done before award.of the contract. Prior to award would be the best time for this to be addressed, but the issue should be clarified. Another area of concern is when and if this determination is revisited. It is recommended that it only apply to situations in which changes are made which will involve cost and pricing data to be required. COMMENT 5: The proposed rule should have some reasonable parameters with regard to the number of subcontractors to whom this requirement flows down . DISCUSSION: For the purpose of this requirement, there does not seem to be any limit to the level or tier of the subcontractor. This will make compliance with this requirement extremely difficult. As an example, for convenience, many companies don?t purchase fasteners, nuts, bolts, etc. They hire a service contractor who monitors the bins for these items and orders when they reach a pre-determined level. The cost of the subcontracted items would exceed 70% of the cost of the subcontract since the service being provided is valued considerably less than the cost of the supplies being furnished. Overall, these subcontracts are generally small dollar values and are frequently with small businesses thereby providing an effective means of assisting in the achievement of small business goals. It appears that this practice could be adversely impacted by the proposed change. The number of tiers to which this applies should be limited and/or the value of the subcontract should be considered in making this determination. It seems reasonable that subcontracts that are ?de minimis? in value or less than 1-2% of the cost of the contract should be exempt.