By Jim Phillips
Centre Consulting

Here are some comments and questions from our clients on this topic, along with our advice, comments, sage words and sometimes sympathy.

Question: What is the difference between a Contractor Teaming Arrangements (CTA) and a prime/subcontractor relationship under a schedule order?

Answer: A CTA is typically used when a contractor desires to respond to a government opportunity but the customer’s requirements exceed the scope of the contractor’s schedule offerings. A CTA enables that contractor to team with one or more other schedule contractors that have the “missing pieces” on their GSA schedules to ensure a schedule-based solution to all of the customer’s requirements. Each team member’s GSA schedule contract needs to be called out in the proposal and the resulting order. Likewise each team member is obligated to report sales and remit IFF payments to GSA based on their respective contribution to the order.

A subcontract relationship does not require that multiple schedules be used to obtain an order or be called out in the resulting order. In this situation, the prime contractor may elect to subcontract a piece of the work to another schedule or non-schedule vendor. As long as the products or services being supplied by the subcontractor are available on the prime contractor’s GSA schedule contract, the Government customer is able to place the award strictly against the prime contractors GSA Schedule contract, and the prime contractor alone bears the responsibility for reporting sales and remitting IFF payments to GSA.

There is one additional and important distinction. In the CTA situation, it is clear that the rates or prices billed the government customer will be derived from the rates or prices set forth in the schedule contracts called out in the proposal and the resulting orders. In other words the prices charged or quoted to the government customers will be the applicable schedule price, less any discount being offered. Recently, however, there has been some controversy regarding whether the same is true in a prime contractor/ subcontractor relationship. See the next question for more on this issue.

Q: What is this DCAA (Defense Contract Audit Agency) guidance on subcontracting that I keep hearing about?

A: In a nutshell, DCAA issued an audit guidance memorandum in April 2004 asserting that when a schedule contractor provides a product or service to a government customer using a subcontractor, the contractor may not charge the government more than the amount the schedule contractor paid to the subcontractor. DCAA justified this position by pointing to the presence of FAR Clause 52.237-2, Payments under Time-and-Materials and Labor-Hour Contracts, in many schedule contracts.

This guidance has created much confusion and anxiety in the GSA schedule arena. The confusion has arisen principally because it is not readily apparent how or when DCAA would have the ability to audit costs under schedule orders, inasmuch as the audit clause in most schedule contracts does not contemplate or authorize audits of schedule contractor costs.

The basis for anxiety is much more apparent. The DCAA position is contrary to the prevailing understanding of schedule contracting, including the views of DCAA. In addition, many large commercial contractors have focused their marketing efforts on schedule contracts in part because of the limited government audit rights under those contracts.

Where is this headed? Industry associations such as the Professional Services Council and the Information Technology Association of America are seeking clarification of DCAA’s position and intent. In addition, there is an on-going dialogue between GSA and DCAA on this issue. Stay tuned.

Q: Why should my company subcontract any work on a schedule order if we can’t make any money for managing the subs? There is no incentive.

A: Good comment. We are finding auditors disallowing costs paid to primes in excess of those costs paid to their subcontractors or team members on schedule orders. Given that GSA schedule contracts are also subject to small business subcontracting plan requirements, the DCAA position undermines this significant government objective at a minimum.

Q: We are a subcontractor to a large business prime on a GSA schedule order. My company has its own schedule but the prime contractor is insisting that we have to use their schedule and schedule rates. Is this legal?

A: Yes. Unless the product or service you are proposing to provide is unavailable on their schedule, they are permitted to rely on their GSA schedule to quote and receive the order and then subcontract the work to you. As discussed above, however, their ability to get paid at their schedule rates is less certain.

Q: Does the FAR or the GSAR address how much a contractor can be reimbursed for subcontractor work on a schedule order?

A: My advice is check your GSA contract and determine if FAR 52.232-7 is included in the terms and conditions. This is the clause discussed above regarding the DCAA audit guidance. If the clause is in your contract, then you’re susceptible to DCAA’s position that subcontractors must be billed to the government at cost plus a material handing mark-up. See FAR 52.232-7(b). The GSAR provides no conflicting guidance.

Jim Phillips is a principal in Centre Consulting of McLean, VA, a law, business and government consulting practice. Contact him at jphillips@centreconsult.com or 703-288-2800.