Bill Walter & Lenn Vincent January 11, 2017 · Bill Walter & Lenn Vincent January 11, 2017 Issues in Focus Webinar Series. government contracting 2 Your Presenters @DHG_GovCon Bill

1government contracting

@DHG_GovConSubcontract Closeouts: A High Priority

Bill Walter & Lenn VincentJanuary 11, 2017

Issues in Focus Webinar

Series


@DHG_GovConYour Presenters

Bill WalterDixon Hughes Goodman [email protected]

RADM Lenn Vincent (ret.)The Subcontract Management [email protected]

mailto:[email protected]

mailto:[email protected]


@DHG_GovConAgenda

• What is a Subcontract?

• Close-out Process

• Why the Hub-Bub?

• Systemic Issues & Challenges

• Helpful Hints


@DHG_GovCon

What is a Subcontract?


@DHG_GovConDefinition

• The FAR contains many definitions of “Subcontract”:

– FAR 3.502 - a contract or contractual action entered into by a prime contractor or

subcontractor for the purpose of obtaining supplies, materials, equipment, or

services of any kind under a prime contract.

– FAR 3.10 - any contract entered into by a subcontractor to furnish supplies or

services for performance of a prime contract or a subcontract.

– FAR Part 12 - includes, but is not limited to, a transfer of commercial items

between divisions, subsidiaries, or affiliates of a contractor or subcontractor.

– FAR 15.4 - (except as used in 15.407-2) [dealing with make or buy programs]

also includes a transfer of commercial items between divisions, subsidiaries, or

affiliates of a contractor or a subcontractor

– FAR 44.101 - means 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. It includes but is not limited to purchase orders, and changes

and modifications to purchase orders.”


@DHG_GovConSubcontracts are “Different”

• Like price and contract type, terms and conditions are a risk-sharing

mechanism:– Price agreement alone does not define the business arrangement.

– The price must be associated with agreement on the terms and conditions.

• There is no privity of contract between the subcontractor and the

government.– FAR 42.505(b)(1) requires the Government to recognize that there is no privity between the

government and the subcontractor.

– However, the government requires the flow down of terms and conditions to comply with law.

– The prime contractor flows down the mandatory terms and conditions to comply with its

obligations under the prime contract.

• Subcontracts under a government prime contract are a hybrid of industry

commercial clauses and FAR clauses, which implement federal acquisition

law and regulations.

• The primary governing body of law in the subcontracting environment is

commercial contract law (not the FAR or federal law).

• This generally takes the form of state enacted versions of the Uniform

Commercial Code (UCC).


@DHG_GovConRelationships - Stakeholders

• PCO

• Program Office

• Oversight – DCAA/DCMA

• Congress/Agency/Etc.

Government

• Contract Manager

• Program Manager

• Subcontract Administrator

• Accounting & Finance

Prime Contract

• Program Manager

• Subcontract Manager

• Accounting & FinanceSubcontract


@DHG_GovConRelationships - Perspectives

• Prime Contractor

– Contractual relationships are often rocky, and hard to manage, but

subcontracting is critical for success in the global market place

– The value proposition is based on technical expertise, international market

and global customer knowledge

• Subcontractor

– The prime-subcontractor relationship is critical and growing in importance in

a dynamic global market shaped by fewer opportunities as a result of

declining budgets and a much tougher business environment

– May not want to share sensitive information with a potential competitor

– Primes must resist unfairly shifting risk to subcontractors… better

risk/reward balance

• Government

– Both prime and subcontractor must stay focused on the “main thing”

– Deliver high quality products and services at cost and within the agreed

schedule

– Strong teaming and collaboration… no surprises


@DHG_GovCon

• The majority of activities that occur at the Subcontract level

• Public, Private, Commercial, Large, Medium, Small, and Foreign Companies

can affect closing out the Subcontract

The Iceberg Effect


@DHG_GovCon

Close-Out Process


@DHG_GovConWhat is a Contract Close-Out?

• Prime – an administrative process

– Begins after contract is physically complete

• All products delivered, inspected and accepted

• All services performed and accepted

– Close-out complete when:

• All administrative actions completed

• All disputes are settled

• Final payment has been made

• Subcontract – many parallels?While the formal process begins when the contract is complete, the informal process begins with contract award and managed throughout the contract


@DHG_GovConRegulation - FAR 4.804

• Prime - Close-out of contract files

– Close-out by PCO

– Close-out by ACO

– Close-out by paying office

– Physically completed contracts

– Procedures for closing out files

• Subcontract – parallels?


@DHG_GovConFAR 4.804-1 Close-out by PCO

• Prime:

– Time standards:

• Simplified Acquisition – Closed when completed

• Firm fixed price – within 6 months

• Contracts requiring indirect cost rates – 36 months

• All other contracts – 20 months

– Procedures – standard or quick closeout

– Do not Close-out:

• Contracts in litigation or under appeal

• Terminated contracts where actions are open



@DHG_GovConFAR 4.804-4 Physically Completed

• Prime - A contract is considered to be

physically complete when:

– All deliveries are made and the Government

has inspected and accepted the supplies

– All services are performed and the

Government has accepted these services

– All option provisions, if any, have expired; or

– The Government has given the contractor a

notice of complete contract termination.



@DHG_GovConFAR 4.804-5 Close-out Procedures

• Review contract fund status

• 15 point checklist for close-out

• Prepare contract completion statement

– Subcontract file

– Communication with Customer


@DHG_GovCon15 Points – Non-financial Issues

1. Disposition of classified material is completed

2. If a final patent report is required, may proceed

with contract closeout.

3. Final royalty report is cleared

4. There is no outstanding value engineering

change proposal

5. Plant clearance report is received

6. Property clearance is received


@DHG_GovCon15 Points - Financial Issues

7. All interim or disallowed costs are settled

8. Price revision is completed

9. Subcontracts are settled by the prime

contractor

10.Prior year indirect cost rates are settled

11.Termination docket is completed

12.Contract audit is completed


@DHG_GovCon15 Points - Final Documents

13.Contractor’s closing statement is completed

14.Contractor’s final invoice has been submitted

15.Contract funds review is completed and

deobligation of excess funds occurs


@DHG_GovCon

Why all the Hub-Bub?


@DHG_GovConContract Closeout – Systemic Issues

• 2005 DoD Public meeting

• Industry identified 23 areas of comment and/or

recommendation

• #8 was Subcontracts – included:

– Closeout Plan for Subcontracts (DPAP said no)

– Require the Use if Quick Closeout Procedures for Subcontracts

(DPAP said FAR 42.202 states Prime is responsible for

managing subs under existing regs)

– Waiver of Subcontract Assist Audits (DPAP will review)

– Requirement for Audit Coordination between Prime and DCAA

(DPAP will review)

– Use of 3rd Party Auditors to Complete Subcontractor Assist

Audits (DPAP said no)


@DHG_GovConFinal Rule

• August 20, 2009 Proposed Rule to update FAR

made following changes to FAR 52.216-7 for

subcontracts:

– Spelled out requirements for incurred cost submission:

• Schedule J – Subcontract information

• Optional Schedule D – List where prime is a flex-priced sub

– Added subparagraph 5) “The completion invoice or

voucher shall include settled subcontract amounts and

rates. The prime contractor is responsible for settling

subcontractor amounts and rates included in the

completion invoice or voucher and providing status of

subcontractor audits to the contracting officer upon

request.”


@DHG_GovConFactors Affecting SubK Closeout

External

• Funding

– Amount

– Expiration

• Sub final rates not

completed

• Pending legal matters

• Business system review

status

• Open REA/Claim

• Gov’t Challenges

Internal

• Subcontract document not

clear

• Privity

• Policy / Procedure

• Document retention

• SubK data requirements

• Subcontractor compliance

• Tax or other financial

implications


@DHG_GovConQuick-Closeout Procedure

• “The contracting officer responsible for contract

closeout shall negotiate the settlement of direct and

indirect costs” in advance of the determination of final

direct costs and indirect rates if:

– The contract or order is physically complete

– The amount of unsettled direct costs and indirect costs is

relatively insignificant – ($1M or 10% of SubK)

– The contracting officer performs a risk assessment and

determines that the use of the quick-closeout procedure is

appropriate

– Agreement can be reached on a reasonable estimate of

allocable dollars


@DHG_GovConSubcontractor Delays

• Indirect rates not settled

• Accounting challenges

• Gov’t Property not dispositioned

• Final acceptance not obtained

• Unresolved Forms 1

• Missing:

– Patent or royalty reports

– Contract release

– Classified material

– Open final price re-determination


@DHG_GovConPrime Delays

• Reconciling different accounts –

Accounting vs. Subcontractor

• Access to subcontractor records / waiting

on final rates

• Waiting for funds

• Fee withholdings

• Waiting for final voucher

• Final payment not made


@DHG_GovConJoint Delays

• Overhead rate negotiation pending

• Disallowed costs pending

• Pending contract modifications

• Warranty actions

• Appeals and litigation

• Contract terminations in process


@DHG_GovConWhy does it take so long?

• DCAA ICS Backlog - improving

• Finding records

• Complex funding and associated

reconciliation

• Confirm and verify ALL requirements are

met

• Closeout is the lowest priority

• Determination of award and incentive fees


@DHG_GovConWhat can you do?

• Be proactive - Plan ahead

– The first time you talk to the subcontractor

shouldn’t be when you are trying to settle the

subcontract price

• Accounting Process

• Admin Process

– Close-out Checklist

– Tool Box

Rates –Interim / Final


@DHG_GovConWords of Advice

• Be prepared

• Communicate internally

• Communicate with Subcontractor

• Communicate with Government

• Provide leadership and decision making

• Be prepared to take some risk


@DHG_GovConNavigating Around Reluctance

• Natural aversion to take risk

• Trust but verify

• Business case often not substantiated

• Lack of quick closeout experience

• “Washington Post” test


@DHG_GovConQuestions?


@DHG_GovCon

Join us next month on Wednesday, February 8th

Issues in Focus Webinar Series