Sub has higher GSA rates than prime contract

What is the prime contract type, please?

I’m afraid that you are going to need to clarify your post. 
Your company won a “new project”. Is it an order under your GSA schedule contract?

If yes, see also this site for further clarifications: 

https://www.gsa.gov/buy-through-us/purchasing-programs/gsa-multiple-award-schedule/schedule-features/contractor-team-arrangements

What kind of “agreement” do you have with the other Company?

If they are a sub, what do their GSA schedule rates have to do with their pricing?  And if an order under your GSA schedule,  did the ordering activity state that they have to approve subs before performing?

You have two choices.  You can enter into a team arrangement if the GSA CO is willing to revise the order.  But I doubt the CO will do that since the award has already been made.  The other choice is have company Y reduce their rates to fit within your company X contract rates.  Your subcontracting has to be transparent and consistent with your GSA service contract labor categories and prices.

Thanks for all the replies. The contract that we received from the government is a Time and Material contract. In order to keep everyone happy, we are thinking of developing a firm fixed price contract with our subcontractor and they will give us monthly hours reports. We will take the hours from their monthly report and bill the government accordingly on our contract. As long as the labor requirements map out correctly, is this something that we can do? Can we have a firm fixed price contract with a subcontractor while also being the prime on a time and materials contract? 

This sub was already preapproved before we won the contract, but the contract is set aside for EDWOSB so it was exclusively awarded to our company.

Thanks

JohnB4774 said:

The contract that we received from the government is a Time and Material contract.

Which clause FAR 52.212-4 Alt I or 52.232-7 applies to your contract?  Also, is the "contract" an order under a GSA schedule contract?

JohnB4774 said:

Thanks for all the replies. The contract that we received from the government is a Time and Material contract. In order to keep everyone happy, we are thinking of developing a firm fixed price contract with our subcontractor and they will give us monthly hours reports. We will take the hours from their monthly report and bill the government accordingly on our contract. As long as the labor requirements map out correctly, is this something that we can do? Can we have a firm fixed price contract with a subcontractor while also being the prime on a time and materials contract?

Right.  I think you are in good shape as long as labor requirements map out and you bill the government consistent with your corresponding rates.  Just be sure you bill for work (time expended) accurately.

Retreadfed said:

Which clause FAR 52.212-4 Alt I or 52.232-7 applies to your contract?  Also, is the "contract" an order under a GSA schedule contract?

the contract is an order under our GSA schedule contract. FAR 52.212-4 Alt I applies to our contract

formerfed said:

Right.  I think you are in good shape as long as labor requirements map out and you bill the government consistent with your corresponding rates.  Just be sure you bill for work (time expended) accurately.

thanks for the clarity and reassurance

JohnB4774 said:

This sub was already preapproved before we won the contract,

I'm not sure what this means, but were you asked to price out the proposal for the order using FAR 52.216-31?