Did you know that if you purchase or subcontract anything under your government contract that you are subject to almost all the same rules as the federal government follows?
By using your contract money to procure goods or services to support that contract, you are using taxpayer money that is subject to many rules and possibly audit. As a government prime contractor, you must know how to properly spend your prime contract money and also reduce your corporate risk. An audit is something many government contractors will face, and if you are caught not spending the money correctly, you could be subject to repaying the government or fines.
Deciphering “Subcontracting” Rules
The Federal Acquisition Regulation (FAR) is not entirely written for contractors, however contractors that ignore its rules with regards to procurement could find themselves in hot water. As a prime contractor, your company is a steward of the government’s money. The government therefore expects you to spend their money as they would, and also follow the rules and regulations specifically set out for a contractor. This applies to both grants and contracts.
“Subcontractor” is not defined in FAR Part 2, Definitions. However, if you were to dive into FAR Part 44, Subcontracting Policies and Procedures, we would see how broad the term is. Many contractors are under the false presumption that subcontracting is a much narrower term than it is. “Subcontract” 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. And “Subcontractor” means any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime contractor or another subcontractor.
We can use the definition of “Acquisition” though in FAR Part 2 to provide the parameters of a contractor’s subcontracting process.
“Acquisition” means the acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated. Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract.
A prime contractor should take the above definition, and replace the word “contract” with “subcontract” and the definition now is useful for a prime contractor. The acquisition is “by” the Federal Government because your company is using the prime contract to support the Federal Government’s needs. It is “for the use” of the Federal Government for the same reason, in addition, as it is often the case, anything procured by the prime for the government could become government property – to include intellectual property. Therefore, the prime contractor’s acquisition process needs to be in line with the rules and regulations the federal government places on itself as well as it explicitly places on the contractor via FAR Part 44 and contract-specific terms.
Your company may be subject to a Contractor Purchasing System Review or DCAA may want to understand your procurement practices to ensure that you’re spending contract dollars in an allowable and allocable manner. But, at a minimum, you’ll need to understand compliant subcontracting (i.e. procurement) to provide fair and reasonable pricing that can be backed up (and certified to if necessary) in your proposals. Compliant procurement begins at proposal and ends with closeout.