Limitations on Sub-Contracting

Who pays the employees?

Does the prime pay the employees directly or does the prime pay the HR/recruiting company, which then pays the employees?

Thanks Vern for your quick response.

1st scenario: HR firm is a sub and pays the employees for the first 6-12 months. After 6-12 months the prime hires/picks up the employee on the primes books. This avoids paying a large recruitment fee of 5-10%.

2nd scenario: Prime pays employee on day 1, and would pay the recruiting firm the recruiting charge of 5-10%.

Scenario (1) Firm is listed as a sub.

Scenario (2) they are only listed in the recruitment/retention/staffing plan.

Thanks

Okay, this was the question:

SKoslow said:

If the Prime uses the HR/recruiting company and pays a recruiting fee, and they are the employee of the prime is there any restriction? Is there any restrictions to these scenarios?

If the employees recruited by the HR firm are employees of the prime, meaning that the prime pays the employees, not the HR firm, then those employees count toward the prime's 50 percent. There is no limitation issue. The fee paid to the recruiting firm is not pertinent.

Does that answer your question?

Vern, again thank you for your response. There seems to be more attention and conversation with regards to the Ostensible Contractor rule. I have been at this for a while, and I don't remember these conversations ever coming up.

So here is the question relating to the above. There has been recent protests where the protest has been upheld showing the contractor relied to heavily on a sub. Where is the line I wonder? If as part of the proposal you identify a sub or subs performing key work or staffing that is less than 50% of the work but is still a critical piece of work and proposal, how should the contractor manage this risk in teaming, staffing, and work share. 

Second part: The Prime must provide 50% of labor dollars not including material. I was always taught that this is over the life of the contract or task order.

Is legal to propose a phased staffing plan this is an extreme example but here you go:

Base plus 4 years services contract.

Base                   Option 1            Option 2           Option 3        Option 4

Prime Sub          Prime  Sub         Prime Sub       Prime Sub     Prime Sub

30%   70%         40%    60%         50%   50%      60%   40%     70%   30%

Thanks Scott

SKoslow said:

So here is the question relating to the above. There has been recent protests where the protest has been upheld showing the contractor relied to heavily on a sub. Where is the line I wonder? If as part of the proposal you identify a sub or subs performing key work or staffing that is less than 50% of the work but is still a critical piece of work and proposal, how should the contractor manage this risk in teaming, staffing, and work share.

Those questions are vague. Please refine them.

SKoslow said:

Is legal to propose a phased staffing plan this is an extreme example but here you go:

Base plus 4 years services contract.

Base                   Option 1            Option 2           Option 3        Option 4

Prime Sub          Prime  Sub         Prime Sub       Prime Sub     Prime Sub

30%   70%         40%    60%         50%   50%      60%   40%     70%   30%

No. See 13 CFR 125.6(e):

Quote

Determining compliance with applicable limitation on subcontracting. The period of time used to determine compliance for a total or partial set-aside contract will be the base term and then each subsequent option period.

Check 13 CFR 125.6 for answers to any other questions you may have about limitations on subcontracting.

One thing that might impact this scenario is 13 CFR §125.6(1) where similarly situated entities (small businesses) can assume part of the 50% requirement.  If the HR firm is a small business under the appropriate NAICS code, their employees are added to the prime employees towards the 50% requirement.  The Ostensible Subcontractor rule does not apply to all of the employees, it only applies to managers, key personnel and contract executives responsible for primary and vital requirements of the contract.

DWGerard, you have raised an issue that bedevils government contracting.  Not all regulations affecting contracting are found in the FAR.  There are other agencies, notably DoL and the SBA, that have the responsibility for issuing regulations that affect contracting with the FAR Councils then sometimes implementing those regulations in the FAR.  Here, SBA has promulgated regulations implementing a statute for which it has primary jurisdiction.  However, the FAR Councils have not yet implemented those SBA regulations in the FAR.  This raises the question as to what a contracting officer is to do in this situation.  Should the CO follow the SBA regulations which are consistent with current law, follow the FAR which is not consistent with current law and SBA regulations, seek a deviation from the FAR to follow the SBA regulations and statute or do something else.

The FAR provides little information and no guidance about interpretation and enforcement of the limitations on subcontracting and, except with respect to HUBZones, makes no references to information in Title 13 of the CFR. See Limitations on Subcontracting: Are They Being Enforced? Will They Ever Be?, The Nash & Cibinic Report (August 2014):

Quote

We could not find any extensive current guidance for COs about how to administer compliance with the existing limitations on subcontracting. There is nothing in the SBA regulations and nothing that we could find in the FAR and in the agency supplements. An internet search turned up nothing in the form of policy letters or memoranda. So no one should be surprised if the limitations are not being enforced. If the new limitations are to be enforced, then the SBA and the FAR councils must give contract administration guidance to COs.

There is a requirement in the proposed rule for FAR Case 2014-002, Set-Asides under Multiple-Award Contracts, that would require the contracting officer to document the prime's compliance with limitations on subcontracting. I submitted the following comment:

Quote

Items 49, 58, 63, 67, 71, and 73 would add requirements at FAR 19.505(d), 19.809-2(e), 19.1308(f), 19.1407, 19.1507(d), and 42.1503 for the contracting officer to document the contractor's compliance with the limitation on subcontracting as part of their performance evaluation. However, none of the clauses imposing the limitation on subcontracting contain a corresponding record keeping or reporting requirement pertaining to the contractor's subcontracting activity. In effect, you are requiring contracting officers to do something, but not giving them the tools to do it. What will most likely happen, and what is happening to some extent now, is that contracting officers will begin imposing their own unique record keeping and reporting requirements through the use of local clauses. This is precisely the kind of uncoordinated collection of information that the Paperwork Reduction Act was designed to prevent. Please clarify how contracting officers are supposed to obtain the information necessary to comply with the proposed requirements of documenting the contractor's compliance with the limitation on subcontracting clause. If this information is to be obtained from the contractor, please provide the corresponding OMB control number so contracting officers will be compliant with the Paperwork Reduction Act.

Don Mansfield said:

What will most likely happen, and what is happening to some extent now, is that contracting officers will begin imposing their own unique record keeping and reporting requirements through the use of local clauses.

That is sort of what is happening in my office. We starting having contractors submit a list of self-performed tasks with expected dollar values, and subcontracted tasks that exceed 5% of the contract value. While this tells us how the contractor intends on complying with subcontract limitations, I think it is very rarely monitored.

I do not know if it is entirely unique, more of an alteration of 44.201-1.

Vern Edwards said:

The FAR provides little information and no guidance about interpretation and enforcement of the limitations on subcontracting and, except with respect to HUBZones, makes no references to information in Title 13 of the CFR. See Limitations on Subcontracting: Are They Being Enforced? Will They Ever Be?, The Nash & Cibinic Report (August 2014):

Vern Edwards said:

If the new limitations are to be enforced, then the SBA and the FAR councils must give contract administration guidance to COs.

I agree.  Back in the 1990's, I worked with the Atlanta Regional SBA Office to develop an interpretation of 52.219-14, Limitations on Subcontracting, that I put into a form for proposers to quantify what and how they planned to comply with the clause.  We also developed a form for unrestricted construction contracting using the 52.236-1, Performance of Work by the Contractor. 

We used them during construction source selections and for negotiating sole source construction contracts.

However, once awarded, the ACO offices pretty much ignored enforcing the clauses.  They already had full plates, there was no guidance other than mine (which, for the 52.219-14 clause, I had coordinated with the SBA).  Plus, the Resident and Area Engineers' performance ratings reflected how few problems rose to the District Office level.  No incentive to rock the boat or draw attention to their offices.

I have been advising KOs to refer any suspected violations of the Limitations on Subcontracting to the SBA Area Office for their action.  If its a CFR issue, then its up to the SBA to resolve the problem.  The LOS scenario is similar to the Ostensible Subcontractor evaluation and the SBA is authorized to obtain employment records and financial documents so it can perform the analysis with all the needed data, and the SBA office is set up for that work so it is not contrary to the other functions like a contracting office would face.

I can say that because I work for the SBA now as a PCR (Procurement Center Representative), and I am one of the people who would receive those cases to work.

DWGerard:

But the limitations are imposed by clauses in government contracts, and neither the statute nor 13 CFR give SBA any enforcement authority or powers. Am I wrong? Isn't it a CO's job to enforce the contract terms?

Wait a minute I believe that both the CO and SBA have "enforcement authority and powers".

“13 CFR 125.6(e)(2)  Compliance will be considered an element of responsibility and not a component of size eligibility.”

FAR 9.104-3 read in full a small business that cannot “comply” with clause 52.219-14 maybe considered non-responsible.

If a CO has reason to determine a small business non-responsible prior to or post award the CO would enlist the process of FAR 19.6 Certificate of Competency.

Further  13 CFR 125.6(h) which states –

“(h)Penalties. Whoever violates the requirements set forth in paragraph (a) of this section shall be subject to the penalties prescribed in 15 U.S.C. 645(d), except that the fine shall be treated as the greater of $500,000 or the dollar amount spent, in excess of permitted levels, by the entity on subcontractors. A party's failure to comply with the spirit and intent of a subcontract with a similarly situated entity may be considered a basis for debarment on the grounds, including but not limited to, that the parties have violated the terms of a Government contract or subcontract pursuant to FAR 9.406-2(b)(1)(i) (48 CFR 9.406-2(b)(1)(i)).”

So if a small business is not complying with FAR 52.219-14 why wouldn’t a CO consider them not responsible to complete the contract, go to SBA for the Certificate, and if none is provided default terminate the small business and request further action by the SBA under the penalties paragraph of 13 CFR 125.6?

Carl:

Why would a CO make a responsibility determination "post award"? I never heard of a CO determining a contractor "nonresponsible to complete the contract." Are you saying that a CO could declare a contractor in default on grounds of nonresponsibility? What breach of contract would that be?

If the CO knew that the contractor was in noncompliance, why not simply declare them in default on that basis?

So here's another wrinkle,

the clause states 50% of the labor is to be performed by the prime. Is this a goal or requirement? So what is the CO supposed to do if the 50% drops to 49%, 40% or even 25% where is the line? If its a Deliver order contract and the work that was planned according to teaming agreements changes during execution, and the work is weighted away from the primes capabilities, is this the fault of the prime? While this is an extreme example the situation applies.

SKoslow said:

the clause states 50% of the labor is to be performed by the prime. Is this a goal or requirement?

Here's the pertinent language from the current version of the clause dated JAN 2017:

Quote

(c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for—

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

(2) Supplies (other than procurement from a nonmanufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.

(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

Note the shalls and wills. Where the clause says "shall," its stating a requirement. Anything less is a breach, but the breach might not be material if the shortfall is very small. Where the clause says "will" it's expressing intention--a goal.

Some prime’s treat contract labor and subcontract labor differently. Often, contract labor gets classified as direct labor and subcontract labor gets classified as ODC. So is direct labor equivalent to employee labor for purposes of complying with the LOS? I am not sure. Another aspect to consider is that virtually every person getting work through a contract labor firm has signed an agreement with that firm that makes that individual an independent contractor as opposed to an actual employee of the contractor labor firm. As such, virtually all contract labor is small business labor, although at the 2nd tier not the 1st tier if contract labor is considered as subcontract labor. The intent of the LOS clause is to prevent a pass through of the contract to a large business. I think using contract labor is consistent with this intent.

Vern – My thought is to hold SBA responsible for what they are charged to do.

First is it not clear by the language of 13 CFR 125.6 that not meeting the limitation is a responsibility matter?   I clearly understand that for breach of other terms and conditions that a CO has latitude but in the case of the limitation clause it seems clear they are either responsible or not?

The route is plausible when you couple a potential default of a SB with the requirements of FAR 49-402-3(e)(4) which states –

“If the contractor is a small business firm, the contracting officer shall immediately provide a copy of any cure notice or show cause notice to the contracting office’s small business specialist and the Small Business Administration Regional Office nearest the contractor. The contracting officer should, whenever practicable, consult with the small business specialist before proceeding with a default termination (see also 49.402-4).”

So with more detail…cure notice/show cause to the contractor for failure to meet the limitation, stating they could be considered not responsible to complete the contract,  copy to SBA with a request for review with regard to a Certificate.  Ball is in SBA’s court.   SBA does not provide the Certificate, T4D and request to SBA to apply penalties.

Carl:

Quote

First is it not clear by the language of 13 CFR 125.6 that not meeting the limitation is a responsibility matter?

Yes, that's clear. During proposal evaluation a prospective contractor's proposed compliance is a matter of responsibility, as opposed to responsiveness or acceptability.

But we're talking about after award. The concept of responsibility applies to prospective contractors, not to actual contractor performance, and SBA has no role in enforcing the Limitations on Subcontracting contract clause.

C Culham said:

responsible to complete the contract

PepeTheFrog has not heard about this concept (imposed after award). C Culham, have you ever found enforced this concept? If so, what were the circumstances? PepeTheFrog shares Vern Edwards' point of view-- rather than bring up the matter of responsibility:

Vern Edwards said:

If the CO knew that the contractor was in noncompliance, why not simply declare them in default on that basis?

It seems like C Culham wants to bring SBA into the picture. Is that accurate, if so, why? As a practical matter, PepeTheFrog points out that SBA is slow and "swamped." Good luck getting any of the standard requests in a timely fashion, let alone adding another duty to SBA's plate.

Pepe - Admittedly I have not enforced the concept but it seems to make sense as I thought about all the concerns expressed and personal experiences I had many years back in dealing with the limitation issue (SBA for 15 years).  

SBA needs to be brought in as it is their civil penalty provision of the CFR that could/should be applied for failure to meet the limitation.

Specific to your "Good Luck" statement it was after all SBA who developed their regulations so what is the problem with putting it on the their plate?    It sure would be interesting and fun to give it a whirl one time to see what transpires.  

PS - As to timely remember this - FAR 19.602-49(c) - discusses timely response, one would think it would apply in  a pre/post scenario?

Vern Edwards said:

But we're talking about after award. The concept of responsibility applies to prospective contractors, not to actual contractor performance, and SBA has no role in enforcing the Limitations on Subcontracting contract clause.

Vern - I get hung up here....FAR 19.104-3(d)(2) A small business that is unable to comply with the limitations on subcontracting at 52.219-14 may be considered nonresponsible.  When read with this - 13 CFR 125.6(h) - it seems SBA has to be involved.    I guess it all boils down to this - what prevents a post award determination of responsibility?   Can't a CO who awards a contract thinking a contractor is responsible and then gains further facts that leads to determination that they are not, change their mind and go the route to in the end T4D a contractor?   If not why not?

C Culham said:

Can't a CO who awards a contract thinking a contractor is responsible and then gains further facts that leads to determination that they are not, change their mind and go the route to in the end T4D a contractor?   If not why not?

They cannot because there is a contract that is already signed-- the contracting officer must wait for a breach of contract, rather than terminate for default based on their changed opinion regarding responsibility.

Responsibility helps prevent the award to contractors who will not perform. If the contracting officer changes his mind about the responsibility (ability to perform) after award, so what? The horse has left the barn. If the contracting officer is wrong, the contractor will perform-- no problem. If the contracting officer is correct, the contractor will not perform (breach the contract). There are remedies for breach of contract, e.g. termination.

PepeTheFrog wonders, C Culham, if you are hinting at suspension and debarment.

C Culham said:

it was after all SBA who developed their regulations so what is the problem with putting it on the their plate?

PepeTheFrog understands the sentiment, but SBA is notorious for putting poorly considered, poorly drafted, tardy, and overly burdensome regulations on the plate of the contracting community. Congress passes a statute that concerns small business and contracting. SBA moves first, implementing it in regulation. When it gets to the FAR implementation (for actual contracting), then SBA throws up its hands and says, "You're contracting! Figure it out."

Carl:

When a small business set-aside solicitation includes the Limitations on Subcontracting clause and a company submits a proposal, the CO may notice that by the terms of the proposal the contractor will not be able to comply with the limitations. In that case, the matter must be handled as a matter of the offeror's responsibility. When it appears that the offeror is not agreeing to comply it's a matter of the proposal's acceptability. Actual compliance is a matter of contract administration. See Cyber Solutions & Services, Inc., B-413563, 2016 CPD ¶ 352 at 3:

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With regard to small business set-aside contracts for services, FAR clause 52.219–14(c)(1), Limitations on Subcontracting-which was incorporated by reference in the RFQ-provides that “at least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.” RFQ at 30. As a general matter, an agency's judgment as to whether a small business offeror will comply with the subcontracting limitation clause is a matter of responsibility, and whether the contractor actually complies is a matter of contract administration. Geiler/Schrudde & Zimmerman, B–412219, et al., Jan. 7, 2016, 2016 CPD ¶16 at 7; citing Raloid Corp., B–297176, Nov. 10, 2005, 2005 CPD ¶205 at 4. Neither issue is one that our Office generally reviews. Id. at 7–8; see also 4 C.F.R. §21.5(a), (c). However, as our Office has consistently held, where a proposal, on its face, should lead an agency to conclude that an offeror has not agreed to comply with the subcontracting limitation, the matter concerns the proposal's acceptability. Id. at 8; citing Sealift, Inc., B–409001, Jan. 6, 2014, 2014 CPD ¶22 at 4. Because the limitation on subcontracting is a material term of the solicitation, a proposal that fails to conform to it is unacceptable and may not form the basis for an award. Id.; citing Addx Corp., B–404888, May 4, 2011, 2011 CPD ¶89 at 3–4.

What we have been talking about in this thread is performance of the contract, which, as you can see, is a matter of contract administration. The concept of responsibility and the Certificate of Competency program are not applicable in contract administration, because if the contract has been awarded the contractor has already been determined to be responsible. If you tell SBA that you are referring a contractor to them for a certificate of competency because they are not complying with the limitations on subcontracting they will say that's a matter of contract administration, not prospective contractor responsibility.

You ask:

Quote

I guess it all boils down to this - what prevents a post award determination of responsibility?   Can't a CO who awards a contract thinking a contractor is responsible and then gains further facts that leads to determination that they are not, change their mind and go the route to in the end T4D a contractor?   If not why not?

Once a contract has been awarded, both parties are bound by its terms. What clause allows a CO to do what you described? That's why SBA will not rescind a COC based on new information if the contract has already been awarded. See 13 CFR 125.5(l). What clause allows a CO to terminate a contract for default merely because new information bearing on its responsibility leads him to conclude that he should not have considered them to be responsible in the first place? T4C? Sure.

I cannot see that SBA has any responsibility or authority with respect to enforcement of the limitations. Their consultative role is just that,

I can see that you really like the idea of a post award COC referral, and I can see that I'm not going to be able to persuade you that it won't work, so I'm going to drop the matter. I doubt that we'll ever see it done, but if we do, then we'll know one way or the other.

Vern/Pepe - Thank you.   As Vern notes I may not be fully convinced.  No further debate but rather I leave the discussion with this. 

To say "I cannot see that SBA has any responsibility or authority with respect to enforcement of the limitations. Their consultative role is just that, " leaves a big hole as to who pursuant to  13 CFR 125.6(h) will level the penalty.   As the penalty provision is part of the SBA's regulations and pursuant to the statute requiring its implementation it would seem authority lies solely and fully in SBA's lap.   To which I raise the question how does one refer to SBA a matter for penalty?   The CFR is not clear but as Pepe notes SBA may not help in clarifying in the FAR either.

I will leave the conversation with one additional note. When I was a CO in my past life we had these discussions often for services type of work. If the contractor was providing monthly financial reports that show that the labor was close to 50%, and had a plan to get back to 50% we never challenged the reports. If they were below 50% we would add this to their CPARS (I had 1 instance of this). I never had a situation where I would have ever considered a T for C, or D, for this situation, or where I would have requested the SBA to get involved.

SKoslow said:

When I was a CO in my past life we had these discussions often for services type of work. If the contractor was providing monthly financial reports that show that the labor was close to 50%, and had a plan to get back to 50% we never challenged the reports. If they were below 50% we would add this to their CPARS (I had 1 instance of this). I never had a situation where I would have ever considered a T for C, or D...

Interesting. Consider the following from the Limitations on Subcontracting clause:

Quote

(c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for—

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

Suppose that the contractor's actual percentage fluctuates from time to time during the course of performance, sometimes falling short of 50 percent, sometimes exceeding 50 percent, but that by the end of performance the cumulative percentage is within the limitation. When is performance determined? Continuously or cumulatively? Month by month or at the end of performance? Is the contractor in breach the moment performance falls short or only if it has fallen short at completion?

Regarding 13 CFR 125.6, as updated June 30, 2016 per the 2013 NDAA, the final rule was published in the Federal Register on May 31, including extensive background explanation at : https://www.federalregister.gov/documents/2016/05/31/2016-12494/small-business-government-contracting-and-national-defense-authorization-act-of-2013-amendments

Vern Edwards said:

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

I always found this language interesting. I understood it as services being concerned with cost of performance incurred not actual performance of work, per se. Seems, under the old method, this could easily be manipulated by increasing employee wages. If the contractor was facing a penalty - it could make sense in many SAT procurements.

Now I know the SBA is moving from the labor-cost calculation to an amount-paid calculation, but what if the cost of the contract performance incurred exceeds the contract total? (Amount to be paid by the government)

I assume the only amount that matters is the contract amount.

Jamaal, if you are asking about limitations on subcontracting under the revised SBA rules, see the above link that I listed, which states, in part::

"Section 1651 of the NDAA, as codified at 15 U.S.C. 657s, requires that the limitations on subcontracting for full or partial small business set-aside contracts, HUBZone contracts, 8(a) BD contracts, Service-Disabled Veteran-Owned (SDVO) Small Business Concern (SBC) contracts, and WOSB and Economically Disadvantaged Women Owned Small Business (EDWOSB) contracts, be evaluated based on the percentage of the overall award amount that a prime contractor spends on its subcontractors."

On ‎1‎/‎26‎/‎2017 at 8:46 AM, Vern Edwards said:

DWGerard:

But the limitations are imposed by clauses in government contracts, and neither the statute nor 13 CFR give SBA any enforcement authority or powers. Am I wrong? Isn't it a CO's job to enforce the contract terms?

The SBA can perform the evaluation and provide the KO with the information he or she needs to know in relation to the LOS regulation.  The authority to enforce remains with the KO, but the information and evaluation process is difficult and time consuming for a KO (I know that some KOs would disagree, but I have been told it was too hard to do many times by KOs), so I as a PCR will perform the evaluation for the KO if there is a serious concern regarding a contractor's adherence with the LOS regulation

DWGerard1102 said:

The SBA can perform the evaluation and provide the KO with the information he or she needs to know in relation to the LOS regulation.  The authority to enforce remains with the KO, but the information and evaluation process is difficult and time consuming for a KO (I know that some KOs would disagree, but I have been told it was too hard to do many times by KOs), so I as a PCR will perform the evaluation for the KO if there is a serious concern regarding a contractor's adherence with the LOS regulation

You'll evaluate based on what? The clause does not require the contractor to collect, maintain, or provide any data on its compliance. It does not give the government any audit rights in that regard. It does not cite or incorporate the SBA regulations.  Neither a CO or a PCR can compel a contractor to submit based on any contract term that I know about. So if a contractor tells you to get lost, what are you going to do?

Vern, I'm not sure what kind of data you have in mind when you say "[n]either a CO or a PCR can compel a contractor to submit", but if the data is cost data concerning contract performance, why would the audit clause, FAR 52.215-2, not provide the government the right to such data if we are talking about a contract to which the audit rights under that clause apply?

Vern Edwards said:

You'll evaluate based on what? The clause does not require the contractor to collect, maintain, or provide any data on its compliance. It does not give the government any audit rights in that regard. It does not cite or incorporate the SBA regulations.  Neither a CO or a PCR can compel a contractor to submit based on any contract term that I know about. So if a contractor tells you to get lost, what are you going to do?

Not necessarily so, if the contract is for construction, subject to the DBA and the other labor clauses for construction. The contractor must provide payroll info, which might allow a reasonable enough approximation to confirm or question compliance.

Retreadfed said:

Vern, I'm not sure what kind of data you have in mind when you say "[n]either a CO or a PCR can compel a contractor to submit", but if the data is cost data concerning contract performance, why would the audit clause, FAR 52.215-2, not provide the government the right to such data if we are talking about a contract to which the audit rights under that clause apply?

Retread:

The audit clause allows for audits for the following purposes only:

1. to determine costs incurred under certain types of contracts;

2. to evaluate the accuracy, completeness, and currency or certified cost or  pricing data submitted;

3.examination by the Comptroller General; and 

4. to evaluate the effectiveness of the contractor's production of data required by other contract terms and the accuracy of those data.

How will that clause assist an SBA PCR or a CO determine compliance with the limitations on subcontracting clause?

Joel:

I question whether Davis-Bacon payroll information would be enough to "approximate: a breach of contract.

Vern, the audit clause is required to be inserted in covered subcontracts under covered prime contracts.  This gives the government the right to audit the costs incurred by both prime contractors and subcontractors under covered prime contracts and subcontracts.  Through this process, the government could determine the costs the prime contractor is incurring for its own personnel and what costs are being incurred for subcontract costs.  To me, this information would certainly be an aid in determining whether a prime is complying with the LOS restrictions.

Retread:

By its own express terms, use of the audit clause is restricted to the circumstances and purposes stated in the clause. I do not believe that a CO can invoke that clause in order to ascertain whether a contractor has complied with the limitations on subcontracting. Nor do I believe that a CO can invoke the clause for a purpose stated in the clause in order to obtain information for another purpose. An SBA PCR has no authority whatsoever to invoke the clause.

There are limits to the uses to which the audit clause can be put. See e.g., Kepa Services, Inc., CBCA 2727, 15-1 BCA ¶ 35942.  If you think I'm wrong, please cite something or provide your analysis of the clause language.

Vern

Vern Edwards said:

You'll evaluate based on what? The clause does not require the contractor to collect, maintain, or provide any data on its compliance. It does not give the government any audit rights in that regard. It does not cite or incorporate the SBA regulations.  Neither a CO or a PCR can compel a contractor to submit based on any contract term that I know about. So if a contractor tells you to get lost, what are you going to do?

Does the fact that the LOS clause has a direct nexus to 15 USC 645 have any bearing on the rights of the Government to request information specifically to determine if the contractor shall be penalized and/or debarred?

Quote

Does the fact that the LOS clause has a direct nexus to 15 USC 645 have any bearing on the rights of the Government to request information specifically to determine if the contractor shall be penalized and/or debarred?

 Carl:

I don't know. What do you think? Explain "direct nexus."

Vern – The nexus is this in that 15 USC 645 (see below) is the connection (basis) for 13 CFR 125.6(h).   As referenced in 15 USC 645, 15 USC 657s is the subcontracting limitation provisions of the statute.  

While the penalty is not stated specifically in the FAR 52.219-14 clause as things go with the regulations of SBA all conclusions. processes and actions of SBA programs are not stated in the FAR.  FAR 19.00 is clear that it implements the “applicable sections of the Small Business Act” and the LOE as noted in this discussion is an “acquisition related” part of the Act.   Supported by the fact that within WIFCON there are references by many that direct an OP to 13 CFR for clarifying information with regard to action and process on small business matters. 

Noting this along with the fact that a violation of the LOE has specific penalty as prescribe by statute and regulation YES I believe the noted connection does give the Government (CO, SBA, GAO, OIG,  Justice and ????) the right to inquire as to a contractors compliance with the LOE.

For a contractor to simply tell the Government to “get lost” when inquiry is made with regard to LOE for a specific contract would be a wrong minded action by the contractor in my view.

15 USC 645

(g) Subcontracting limitations

(1) In general Whoever violates a requirement established under section 657s of this title shall be subject to the penalties prescribed in subsection (d), except that, for an entity that exceeded a limitation on subcontracting under such section, the fine described in subsection (d)(2)(A) shall be treated as the greater of—

(A)

$500,000; or

(B)

the dollar amount expended, in excess of permitted levels, by the entity on subcontractors.

(2) Monitoring

Not later than 1 year after January 2, 2013, the Administrator shall take such actions as are necessary to ensure that an existing Federal subcontracting reporting system is modified to notify the Administrator, the appropriate Director of the Office of Small and Disadvantaged Business Utilization, and the appropriate contracting officer if a requirement established under section 657s of this title is violated.

The Federal Register notice of the final rule in the link I provided earlier discussed enforcement and why SBA dropped the contractor reporting requirements. Unfortunately, I am unable to read the report here, in the woods,  

The law and SBA regulations shifted the focus from cost of performance for labor to amount of subcontracting and performance of the work. For construction contracting, other tools available are teequired documentation for monthly progress payments. The backup info required to be submitted with a request for progress payment is information on the amount of work performed by each subcontractor and total amount of each subcontract. 

The contractor is also separately required to provide information on each subcontract awarded, at least for DoD contracts. I don't remember the details but it was an Acknowledgment form that included the name and maybe the amount.

It doesn't take a rocket scientist for a trained COR to be able to reasonably determine whether a construction contractor is self performing its share of the work...if the ACO and COR want to.  

EDIT 2/3/2017:  By "trained COR" , I am referring to those USACE Area and Resident Engineers and other personnel who are involved in the day to day contract administration on the jobsites and who are familiar with the entire contract, including the clauses, not just the technical scope of work. I'm not necessarily referring to a COTR or those appointed "COR's" who represent the project owner organization or who are "inspectors". 

I don't doubt that a PCO would have problems  unless they or their staff are intimately involved in day to day construction contract admin.  My perspective is from an organization staffed with ACO's and Contract Admin Offices.

Quote

Noting this along with the fact that a violation of the LOE has specific penalty as prescribe by statute and regulation YES I believe the noted connection does give the Government (CO, SBA, GAO, OIG,  Justice and ????) the right to inquire as to a contractors compliance with the LOE.

For a contractor to simply tell the Government to “get lost” when inquiry is made with regard to LOE for a specific contract would be a wrong minded action by the contractor in my view.

Carl:

15 USC 645 does not expressly require a contractor to maintain, report, or disclose on demand any information. Neither does 15 USC 657s. What 15 USC 645(d) says is that if there is a violation, then there is a penalty. The statutes leave unanswered the question of how the CO or the SBA would go about getting the information necessary to determine whether there has been a violation.

As to the right of the CO, GAO, OIG, DOJ, FBI, etc, to inquire. Well, they can always ask questions, but it's another thing entirely to have the power to compel an answer. Now, in this thread I have been concerned with contractual enforcement--i.e., contract administration, not investigation of crimes or other violations of law. Once we go there we run into issues associated with all sorts of complicated legal procedures--search warrants, depositions, and court enforced disclosure--that I'm not competent to discuss. So let's keep the focus on contract administration. I don't see how 15 USC 645, 15 USC 657s, or the LOS clause give a CO or an SBA PCR any contractual power of inquiry or contractual authority to compel a contractor to produce and disclose specific information. A CO can ask, but a CO cannot make a contractor answer, not based on the plain language of the two statutes, the FAR, SBA regulations, or the LOS clause. To the extent that you and others somehow infer that they grant such a power to a CO or a PCR, you have not made your argument clear to me.

I certainly respect your view about what would be a "wrong minded action" on the part of a contractor, but I don't see how that has anything to do with the problem before us.

joel hoffman said:

It doesn't take a rocket scientist for a trained COR to be able to reasonably determine whether a construction contractor is self performing its share of the work...if the ACO and COR want to.

Joel:

I have been a construction CO for the Air Force and the Dept. of Energy and spent a lot of time on site. To the extent that your comment is meant to suggest that it would be easy (or relatively easy) for a "trained COR" (whatever that means) to determine whether a construction contractor is in compliance with the limitations on subcontracting, I respectfully disagree. Here is the portion of the LOS clause devoted to construction:

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(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

Thus, according to the LOS clause, the standard is 15 or 25 percent of "the cost of the contract," excluding the cost of materials. That standard does not appear in 15 USC 657s or in 13 CFR 125.6.

15 USC 657s does not establish a limitation for construction, but leaves it to SBA. 13 CFR 125.6(a)(4) and (5)  do not use the phrase "cost of the contract." Instead, they state the limitations in terms of percentages of "the amount paid by the government." I don't know why the current LOS clause (JAN 2017) deviates from 13 CFR 125.6.

According to 13 CFR 125.6(e):

Quote

(e) Determining compliance with applicable limitation on subcontracting. The period of time used to determine compliance for a total or partial set-aside contract will be the base term and then each subsequent option period.

When considered in conjunction with the language of the clause, I interpret that to mean that compliance under a construction contract must be determined after contract completion, when the amount paid by the Government is finally known.

In my opinion it would be very difficult and perhaps impossible for a COR to know the amount that will be paid by the government and the percentage performed by the contractor at any given point in time prior to final completion and payment, especially if there are outstanding REAs and claims or the possibility of undiscovered or reported constructive changes, differing site conditions, etc. In fact, the amount paid by the Government might not be determinable until years after physical completion and the close of litigation.

I frankly do not think that CORs are in any position to determine the contractor's compliance with the LOS clause and I wouldn't require a COR to do it. At most, a COR could recognize only gross violations.

If anyone knows of information indicating that I have misinterpreted the statutes or the regulations, please let me know.

My staff and/or I negotiated the sole source contracts so we knew what the contractor said they would do to comply.  I was very familiar with the clause and it's interpretation of cost of personnel and no materials, etc. I also coordinated with the SBA Regional Office to develop forms for set-aside RFP' source selections to determine what the proposers intended to self perform.  

Materials were excepted because primes were "buying" (paying the bills for) materials for subs and "borrowing" construction equipment to meet the requirements of 52.219-14.

My discussion above of the SBAs intended shift from focus on cost of personnel to what work is subcontracted refers to the FR Notice of Final Rule for updating their FR.  I don't think the FAR clauses have been updated consistent with the revised SBA Regs.  

I mentioned the shift in focus because it , as well as why reporting is not required, possible enforcement, etc. were explained in detail in the FR Notice.  I don't know if anyone here read it or not. It's on my home computer. 'm not at home.

Regarding  the length of time to determine the cost of performance , these are small business set-asides and relatively small sole source construction contracts, which were usually closed out within a few months of completion. 

You have the right to disagree with me, that's fine.

My original post began with the words "That's not necessarily so..." in response to what I read as "the government  can't determine whether the contractor is complying with LOS ".

joel hoffman said:

My staff and/or I negotiated the sole source contracts so we knew what the contractor said they would do to comply.  I was very familiar with the clause and it's interpretation of cost of personnel and no materials, etc. I also coordinated with the SBA Regional Office to develop forms for set-aside RFP' source selections to determine what the proposers intended to self perform.  

Materials were excepted because primes were "buying" (paying the bills for) materials for subs and "borrowing" construction equipment to meet the requirements of 52.219-14.

Joel:

Your experience is old and not relevant to this discussion, which is based on newer rules. In any case, that experience does not justify your claim of how easy it would be for a COR to determine compliance. For the reasons I've given, It would not be easy.

joel hoffman said:

I don't think the FAR clauses have been updated consistent with the revised SBA Regs.

The FAR councils issued a proposed rule on Dec. 2, 2016 to implement the SBA's final rule of Oct. 2, 2013. The proposed rule would not change the statement of the limitations as they appear in the current clause (JAN 2017). The councils apparently have not yet issued a proposed rule to implement the SBA's final rule of last year--the one to which you provided a link.

"Easy"????? No such "claim" made by me here.  

Old and irrelevant experience? Ok, but so is your even older experience. As far as either the Air Force or the DOE are concerned, I was in the Air Force in construction and engineering and in contract admin. I was involved with the AF as their construction agent (USACE) at numerous Bases for almost 20 years and am somewhat familiar with their current organization and how they administer construction contracts. 

DOE? I am familiar with some of their big construction projects and how they (recently) administer contracts. I also consulted on a couple of their projects and have USACE friends who are or were loaned to DOE. 

I don't doubt that either Organization would find it difficult to determine LOS compliance on FFP contracts.

We both made the point that there is little or no guidance for enforcement and I indicated that , for the most part, few KO's, ACO's or COR's care -as long as the work gets done. 

Over and out.

joel hoffman said:

Do they even care?

I don't think anybody really cares. The limitations are a sop to small business chronic complainers.

Any reading of the statute, the SBA regs, and the FAR shows that nobody really cares about anything except flagrant violations of the clause. If Congress really cared they would have required record keeping, reporting, and certification and they would have authorized compliance audits. Nobody wants COs to be aggressive in enforcement. Nobody.

A fine of $500,000 or more for a violation of even a few percentage points (15 USC 645(g)(1))? Absurd.

Quote

DOE? I am familiar with some of their big construction projects and how they (recently) "administer" contracts.

P.S. As for dodgy contract admin, people who worked in glass houses shouldn't throw stones.

Vern –I feel you have distracted the conversation on a specific point without giving consideration to the whole of what “contract administration” is with regard to assurance of compliance with contract terms and conditions and the remedies given to both parties in a contract to help assure the compliance.

At first blush your comments suggest that clauses like the limitation on subcontracting clause and possibly the 52.236-7 Permits and Responsibilities clause are worthless as either clause lacks "contractual power of inquiry or contractual authority to compel a contractor to produce and disclose specific information as to compliance with a Federal law and regulation during performance of work under a contract.

The contract provides the power of inquiry, or in other words either party can ask the other party to a contract if the party is complying.   I would agree that if asked by one party if they are complying and for data to support such compliance the other party is not compelled to answer.  In fact I would say that as a whole the contract does not “compel” one to do anything contained in the contract.   You sure hope they do but if they do not then there is a course of action with regard to a breach of promises.

As I have already provided in my comments there is a course of action if the CO does not believe the limitations on subcontracting are being adhered to during performance and in the end if the contractor does want to tell me to get lost I have the power to compel them to tell me why I should have of or should not of gotten lost.   In Federal contracting I just terminate them for cause or default and they produce the information or not, their choice, but if they do not I am guessing that they sure won’t like the outcome.

My conclusion is that in the end as a party to a contract I can compel the information.

PS - Posted after you an Joel continued to discuss.  Relevant to my response here, who knows as I spent the time to produce the above response so I am just posting, what the heck.

I dislike broad brushes and digression.  

If no one cares why is there even discussion in WIFCON on any contractual matter?    God forbid  why is there an organizations like NCMA or even prestigious publications like Nash & Cibinic?

this discussion has gone off track and I am going to take the spur line..

C Culham said:

The contract provides the power of inquiry

The contract provides the rights and obligations stipulated therein, no more, no less.

C Culham said:

I would agree that if asked by one party if they are complying and for data to support such compliance the other party is not compelled to answer.

Thank you for confirming my assertion.

C Culham said:

[T]here is a course of action if the CO does not believe the limitations on subcontracting are being adhered to during performance....

I agree. And I'm sure that the agency's lawyer will concur with a termination for cause or default if the CO can demonstrate that there will be a breach upon completion of performance.

C Culham said:

In the end if the contractor does want to tell me to get lost I have the power to compel them to tell me why I should have of or should not of gotten lost.

I'm not sure that you have that power, but let's say you do. The contractor's response: Because the contract does not say that I have to do what you want me to do. Are we in compliance? I think so. End of convdersation.

C Culham said:

In Federal contracting I just terminate them for cause or default and they produce the information or not, their choice, but if they do not I am guessing that they sure won’t like the outcome.

You would terminate without proof of breach? Interesting.

C Culham said:

My conclusion is that in the end as a party to a contract I can compel the information.

Okay, but I haven't seen a valid argument in support of that assertion.

For an example of what happens to an agency and its CO when they try to read obligations into a contract that are not there, see Lockheed Martin Integrated Systems, Inc., ASBCA 59508, 2016 WL 7655944, Dec. 20, 2016,  http://www.asbca.mil/Decisions/2016/59508, 59509 Lockheed Martin Integrated Systems, Inc. 12.20.16.pdf.

A hard slap down. Contracting people who do not believe in the sanctity of contracts are the bane of our business. And remember, small businesses are entitled to their legal costs under Equal Access to Justice.

C Culham said:

I dislike broad brushes and digression.  

If no one cares why is there even discussion in WIFCON on any contractual matter?    God forbid  why is there an organizations like NCMA or even prestigious publications like Nash & Cibinic?

this discussion has gone off track and I am going to take the spur line..

Okay. Bye.

Vern, I disagree with your assertion that the audit clause does not permit the government to require contractors to produce data regarding the cost of performing set aside contracts in order to determine compliance with the terms of the LOS clause.  Your reliance upon KEPA is wide of the mark.  The contract there was a firm fixed price contract.  Therefore, it was not a contract under which the government could audit the costs incurred by the contractor.  Moreover, in the context of the ability to continue to audit a covered contract, e.g., a cost reimbursement contract, while a dispute is being litigated concerning that contract, the ASBCA has ruled in Holston Defense Corp. ASBCA No. 49900, that DCAA can continue to audit the contract and does not have to follow the Board's discovery rules in order to gain access to cost data even cost data relating to the contractor's claim.

Nothing in the audit clause, 52.215-2 or the other audit provisions in other clauses such as 52.216-7 and 52.232-7 limits the uses the government can make of the data to which it has a right under those clauses.  Without a prohibition on the use of that data in determining compliance with the terms of the contract, such as compliance with the LOS clause, the payment of wages and fringe benefits under the SCA clause, 52.222-41, or compliance with the Buy America clause etc. I see no reason why a CO could not use the data to which the government is entitled to receive under its audit rights for these other purposes.

This brings up the question, if an audit determined that a contractor did not incur at least 50% of the cost of labor using its own personnel under a cost reimbursement service contract, could the government disallow the subcontract costs that are in excess of 50% of the labor cost under the contract?

Retreadfed said:

Your reliance upon KEPA is wide of the mark.

My argument does not rely on Kepa. I cited it only to show that there are limits to the uses to which the audit clause can be put.

Retreadfed said:

Nothing in the audit clause, 52.215-2 or the other audit provisions in other clauses such as 52.216-7 and 52.232-7 limits the uses the government can make of the data to which it has a right under those clauses.

I agree with you. But the clause limits the purposes for which an audit can be conducted. Paragraph (b) gives the government the right to audit in order to "reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of this contract." Reading the clause as a whole, that purpose is consistent with the limitation of its application to contracts under which compensation is based on incurred costs. It's for that reason that I believe that under a T&M contract the right to audit is limited to material costs and labor hours. I don't think that the government can audit labor costs, because compensation for labor is not based on incurred costs, only incurred hours.

I agree that once the government has obtained cost data via the audit clause it can use it for any purpose, including confirmation of compliance with the LOS clause. But I challenge the assertion that a CO can order an audit so that the CO or an SBA PCR can determine compliance with the limitations of subcontracting.

What's interesting about your position is that you seem to be admitting that a CO has no way to obtain the data necessary for enforcement of the LOS clause under FFP contracts. I wonder what percentage of all set-aside awards are FFP vs. CR, T7M, or incentive.

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This brings up the question, if an audit determined that a contractor did not incur at least 50% of the cost of labor using its own personnel under a cost reimbursement service contract, could the government disallow the subcontract costs that are in excess of 50% of the labor cost under the contract?

That's a side issue, but I think that if contractor compensation is based on the allowability of incurred costs, then the answer would be yes, the government could disallow the excess..

The collection of information contained in FAR 52.215-2 (currently approved under OMB Control Number 9000-0034) was recently submitted to OMB for a clearance extension. See 81 FR 93688-02, December 21, 2016. The stated purpose of the information collection was as follows:

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The objective of this information collection, for the examination of records by Comptroller General and contract audit, is to require contractors to maintain certain records and to ensure the Comptroller General and/or agency have access to, and the right to, examine and audit records, which includes: Books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form, for a period of three years after final payment. This information is necessary for examination and audit of contract surveillance, verification of contract pricing, and to provide reimbursement of contractor costs, where applicable. The records retention period is required by the statutory authorities at 10 U.S.C. 2313, 41 U.S.C. 254, and 10 U.S.C. 2306, and are implemented through the following clauses: Audit and Records-Negotiation clause, 52.215-2; Contract Terms and Conditions Required to Implement Statutes or Executive Orders-Commercial Items clause, 52.212-5; and Audit and Records-Sealed Bidding clause, 52.214-26. This information collection does not require contractors to create or maintain any records that the contractor does not normally maintain in its usual course of business.

I don't see how an audit conducted for the sole purpose of determining compliance with the LOS clause would be within the scope of the approved information collection.

Vern, you and I are on the same page in regard to FFP and T&M contracts. 

Don, what does "contract surveillance" as used in the notice mean to you?  To me, that has a broad meaning.  In any event, the audit need not necessarily be performed to determine compliance with the LOS clause.  When DCAA conducts an audit and issues a report on its findings, it frequently includes in the audit report what is known as a Statement of Condition.  This is used to impart information to readers of the audit report that was discovered in the conduct of the audit which may require further action by DCAA, the recipient of the report or the contractor.  Thus, for example, if in the conduct of an audit the DCAA auditor were to discover that the contractor was not paying its employees in accordance with a wage determination attached to the contract, this fact could be reported in a Statement of Condition or separately transmitted to the contracting officer.

One thing we have not discussed in this thread is the impact of the doctrine of implied certification concerning any requests for payment made by a contractor who is not in compliance with the LOS clause.  Under this doctrine, when a contractor submits a request for payment under a government contract, the contractor gives an implied certification that it has complied with all material terms of the contract.  If the contractor has not complied with all material terms of the contract, it is exposing itself to False Claims Act liability.  In this regard, auditors are required to include steps in their audit program that are designed to provide reasonable assurance that the matter being audited is free from fraud.  Because of these requirements, I see no reason why DCAA or other Federal contract auditors could not include steps in their audit programs  to check on compliance with specific contract clauses when conducting an audit of incurred costs on covered contracts and report on those findings to the contracting officer.

Retreadfed said:

Don, what does "contract surveillance" as used in the notice mean to you?

I read that sentence several times before I posted the excerpt, and I don't know what they were trying to say.

Don Mansfield said:

This information is necessary for examination and audit of contract surveillance, verification of contract pricing, and to provide reimbursement of contractor costs, where applicable.

What is examination of contract surveillance? What is audit of contract surveillance? Is it looking at the records the contractor kept in performing surveillance of its performance?

Retread:

Something has occurred to me as a result of your question about the allowability of subcontract costs in excess of the limitations. Perhaps a CO could invoke paragraph (b) of the audit clause to determine whether the contractor was complying with the LOS clause in order to determine the allowability of subcontract costs in light of the limitations.

I re-read the FR Notice of Final Rule implementing the 2013 NDAA in SBA's 13 CFR's. The Report stated that, per contract clause 52.204-10,  prime contractors are (even now) required to report first tier subcontract awards of $30k and up, including who, what for and the amount of the subcontract. This doesn't include subcontracts for transportation and some other costs. 

If the LOS clause ever gets updated, the measures of limitation of subcontracting will change from "cost of labor" basis to amounts subcontracted (less materials) to firms other than similarly situated SB firms. The emphasis (to the limited extent of possible monitoring) is intended shift to what the prime and similarly situated subs will actually perform themselves or further sub to similarly situated 2nd tier subs.  There is no reporting requirement below first tier.  

This should provide "some" resource assistance to the government in monitoring compliance for service contracts. 

And the LOS would be applicable to the predominant purpose of the work contracted for in hybrid/combined scope contracts, e.g., services/supply.

Its not an air-tight monitoring mechanism, of course. 

I haven't read the entire revised CFR on this IPhone at my camp. However, I do remember reading in the old 13 CFR that, for purposes of negotiating sole source prime contracts, if the amount of subcontracted materials isn't identified in the sub's proposal, it was counted as subcontracted labor for LOS purposes. 

Carl - I hope that I didn't give you the impression that I don't care about the LOS.  There is also a "Performance of Work by the Contractor" clause for unrestricted construction contracts that pre-dated the later LOS clause for SB preference type contracts and orders.  I was/still occasionally am a contract negotiator, contract administrator and was the lead for conducting all of our District's source selections for a period of years. 

I was extremely concerned about the various ways that primes could be awarded or attempted to be awarded unrestricted or special preference program contracts, either for themselves or as a "front" or "broker" for another firm, then subcontracted or passed-through the work to other firms. 

During my first assignment in the Air Force as a civil engineer at base level in the early 70's, I wondered why the second low bidder on many of our minor construction for building additions and maintenance and repair contracts ended up performing the work and why I never met or even saw the prime.  I didn't know to ask but suspected that something was fishy.

Then, later as I negotiated contracts and conducted source selections, I learned many of the tricks that firms will attempt to use to broker or front for others over the years. 

 I even had one firm that was one of the "mafia-type" local cartel member in one geographical area call me by mistake one day to discuss participating as a sub on a project.   We had taken the project out of an 8(a) or HubZone sole source program because we couldn't agree on a reasonable price. It was a civil works,  local sponsor cost shared  bridge replacement and that sub was behind the "front" prospective prime. We had just advertised for full and open competition when he called. The conversation went something like "Hey, do you remember that bridge project that we were working together on? It's on the street now and I was wondering if you're still interested in working for us." Imagine his surprise when I told him that I was with the Corps, not a sub!  Rather embarrassed sounding, he quickly ended the conversation.

OK, so I cared deeply and still do. But it doesn't seem that many others do. Perhaps because they haven't been exposed to or in the dark about how much of that goes on...

i developed means and methods to dissuade such tactics and to help determine compliance. My staff and I were able to reject and get SBA concurrence on numerous offered primes then get them replaced.  We were able to get successfully removed or otherwise rejected those teams in source selections that were brokers. We prevailed in the one Agency protest on an LPTA set-aside that we faced. 

Carl, as contracting policy analyst, don't give up.  Find ways to enforce the laws and CFR's.  Good luck.

Joel - Thank you.....and I never will.

Vern, DCAA requires most of what you have identified to be included in interim vouchers under cost reimbursement contracts.  However, many times the contracting officer or COR do not see these vouchers because DCAA is responsible for reviewing them so they are submitted to DCAA not the CO.

Vern Edwards said:

The easiest way to monitor compliance with the LOS clause is to include invoicing instructions in the contract telling the contractor to identify what amount of each billing is attributable to actual or prospective payments to subcontractors, to identify those subcontractors by amount, and to state the cumulative payments to subcontractor prior to the invoice. A capable CO should be able to do that in two or three sentences.

What if the use of this procedure had a significant cost or administrative impact on contractors?

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On 1/27/2016 at 8:06 P.M, Vern Edwards said:

Suppose that the contractor's actual percentage fluctuates from time to time during the course of performance, sometimes falling short of 50 percent, sometimes exceeding 50 percent, but that by the end of performance the cumulative percentage is within the limitation. When is performance determined? Continuously or cumulatively? Month by month or at the end of performance? Is the contractor in breach the moment performance falls short or only if it has fallen short at completion?

Per the 2013 NDAA, the Final Rule updating the SBA's CFR's with respect to Limits on Subcontracting was published in the Federal Register on May 31, 2016 at : https://www.federalregister.gov/documents/2016/05/31/2016-12494/small-business-government-contracting-and-national-defense-authorization-act-of-2013-amendments

It addresses your question.

On ‎2‎/‎2‎/‎2017 at 11:57 AM, Don Mansfield said:

What if the use of this procedure had a significant cost or administrative impact on contractors?

The Final Rule updating the SBA's CFR's with respect to Limits on Subcontracting  may address your question.  The SBA initially proposed to require prime contractor and first tier subcontractor reporting of compliance efforts.  After reviewing the public comments, the SBA concluded that this would have been too burdensome on small businesses.  It was deleted in the Final Rule.

The detailed invoicing requirements for progress payments in construction contracts was codified in the 1988 Amendments to the Prompt Payment Act and the FAR.  The contractor must identify what amount of each billing is attributable to actual or prospective payments to subcontractors, identify those subcontractors by amount, state the previous payments to subcontractor and the amounts, if any that have been retained and the amount of the subcontract. We got some complaints from primes when that went into effect in 1990-1991 but not so much about the administrative impact. The primes complained about the impact on project financing. The purpose of the PPA invoice reporting requirements is to help subs get paid on time from government progress payments and to prohibit primes from personally holding retainage from progress payments to their subs. It just happens that the information is also useful for monitoring compliance with the limitations on subcontracting. It will be more useful when the L.O.S. clause is updated to be consistent with 2013 NDAA and the SBA's 13 CFR's.

And the information that all primes (not just construction contract primes) have to post in the System for Award Management per clause 52.204-10** should also be useful for service contracts after the L.O.S. clause is updated.  But the reporting wasn't specifically required for the purpose of monitoring compliance with the limitations on subcontracting.  Construction contracts already require that the contractor notify the government of all subcontract awards for acknowledgment of the contract's Labor requirements. .

**Per contract clause 52.204-10,  prime contractors are required to report first tier subcontract awards of $30k and up, including name, the amount and the purpose of the subcontract. This doesn't include subcontracts for transportation and some other costs. 

Kumbya!

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Vern, DCAA requires most of what you have identified to be included in interim vouchers under cost reimbursement contracts.  However, many times the contracting officer or COR do not see these vouchers because DCAA is responsible for reviewing them so they are submitted to DCAA not the CO.

All that is required is to include an instruction to the contractor in the contract (Section G of the UCF or the appropriate place in a construction contract) that when submitting an invoice it must break out the subcontract costs for each subcontractor, so that the contracting officer can determine how much of each billing is for subcontractors. The CO should also instruct the contractor to identify which subs it claims to be "similarly situated" subcontractors and which are not. The CO can also instruct the contractor to state on each invoice the cumulative amounts previously billed for similarly situated and other subcontractors.

The CO can use the invoice information to monitor contractor compliance with the LOS clause, but not to determine noncompliance, because compliance or noncompliance can only be determined after performance is complete and final costs or payments have been tallied. But the CO can determine the likelihood that the prime will be able to comply and might be able to intervene to prevent a breach. 

The invoicing requirement should be the work of but a few moments and would not have a significant impact on a contractor, since it would have to know that information anyway in order to prepare invoices. The inclusion of false information on an invoice would make the invoice a false claim, which should motivate contractors to prepare invoices properly and truthfully. I wouldn't hesitate to use this procedure.

This procedure is much simpler than determining a contractor to be nonresponsible after contract award based on incomplete performance data and then going to SBA for a certificate of competency. Responsibility is not an issue after contract award. Postaward determination of responsibility based on contract performance is not contemplated by statute or regulation. And the issuance of certificates of competency after award is contrary to statute and SBA regulations.

The biggest debate issue in this thread as far as I'm concerned has been the question of using the audit clause, FAR 52.215-2, to obtain the information needed to monitor contractor compliance with the LOS clause. I think that issue has been as thoroughly discussed as it's going to be, so I will not pursue it further. The approach that I propose is simple. It does not require the involvement of SBA or any other agency or any separate investigation, unless the CO suspects false reporting. It would not require involvement by CORs, who might have a hard time obtaining and understanding the necessary cost or payment data. If invoices are normally submitted to DCAA, the contract can instruct the contractor to copy the contract administrator.

I see no reason to rely of good will, good faith, or the duty to cooperate to obtain information from a contractor after award that the contract does not expressly require it to provide. State the requirement in the solicitation and resulting contract and there should be no issue about it after award. Ask a contractor to provide information after award that the contract does not require the contractor to provide could result in refusal or a request for additional compensation.

A possible alternative that is close to that suggested.

Following the ideal of FAR 52.222-41 Service Contract Labor Standards include in the 52.219-14 clause a "Records" paragraph adjusted accordingly to indicate required records to support the LOS.  This paragraph would stipulate that only SBA is allowed access to the records.  As such at completion of all work under a contract (an order in some cases) if a CO suspected non-adherence to the LOS they would simply refer to SBA for investigation, penalty etc. prior to final closeout of the contract.  I am suggesting this alternative as there appears to be a parallel with regard to who should have the power with regard investigation and enforcement of violations.      In labor laws the  DOL has the investigative and penalty powers and in the latter it appears that by statute and regulation that SBA has or should have the investigative and penalty powers.

An alternative to this alternative if you will could be like that stated in 52.222-8 where such LOS records are accessible by both the CO and SBA.

In suggesting the "Records" paragraph be in 52.219-14 I believe that having the requirement for "Records" stated within the 52.219-14 clause helps reinforce its necessity without having to refer to another part of the contract.  If only the SBA is listed as that party that has access to the records I would suggest that adequate information is otherwise available during performance to suggest whether compliance will occur by completion giving the CO the foresight to possibly "intervene to prevent a breach" at contract end.  Of course having both the CO and SBA listed would be of great benefit.  That benefit being the ability to help avoid a breach in the end much like the ability to do in process inspection that is the norm for non-commercial contracts in the Federal sector.

One issue would be a performance evaluation of a contractor that was suspected of non-adherence and investigation concludes that non-adherence did in fact happen.  It would seem that this should be captured in a performance evaluation.   I am unsure if CPARS allows for revised/amended evaluation and if it does if there is a limitation on when such a amended evaluation can be done.  Here I am reminded as well that interim performance evaluations can be done and might possibly be the tool that helps the CO intervene during contract performance.

Question re limitations on subcontracting FAR clause versus limitations on subcontracting SBA regulations in 13 CFR 125.6:

Some frogs know that FAR clause updates don't affect the deal you struck when you signed the contract. You are subject to the (version of the) FAR clauses that were included in the contract at that time. If a FAR clause changes or is updated, you are still subject to the older version of the FAR clause that was included in your contract. Again, that's the deal you struck.

(1) Does this same principle apply specifically to SBA regulation 13 CFR 125.6? (13 CFR 125.6 states the limitations on subcontracting, "What are the prime contractor's limitations on subcontracting?") The regulations for limitations on subcontracting have changed a few times over the years.

(2) Is the contractor subject only to the version of 13 CFR 125.6 that existed at the moment the contract was signed, rendering future updates irrelevant for that specific contract that is already signed?

Or: (3) Is the contractor subject to changing versions of 13 CFR 125.6?

Or: (4) Is this question irrelevant, because who cares what the SBA regulations say? (The binding, contractual language is the FAR clause that implements the SBA regulation, FAR 52.219-14, Limitations on Subcontracting.)

Here's another twist:

(5) What if the contracting officer did not include the FAR clause that implements 13 CFR 125.6, FAR 52.219-14, Limitations on Subcontracting, into the contract? Do the limitations on subcontracting apply at all? If so, how? Through SBA regulations (with no FAR clause in the contract)? Through the Christian doctrine? (The limitations on subcontracting clause seems like a good candidate to meet the *two*-prong Christian doctrine test.)

From a strictly contractual point of view, the contractor is bound by what's in the contract, not what's in a regulation, unless the regulation has the force and effect of law, was in effect at the time of contract award, and the contract, when awarded, did not conform to the regulation.

Q1: Generally, a new regulation applies only to actions taken on or after the effective date stated in the Federal Register. New regulations do not apply to contracts awarded prior to the regulation's effective date. See FAR 1.108(d). That applies to 13 CFR, as well. Regulations take effect on or after their effective date.

Q2: The contractor is bound by the clause in its contract. If the clause in the contract is inconsistent with 13 CFR § 125.6 as of the time of award, it is not clear that 13 CFR prevails over the FAR. I don't think that's been decided in court.

Q3: No.

Q4: See the answer to Q2.

Q5: The Christian Doctrine will apply if the regulation is found to have had the force and effect of law. But see Q2.

Verne's invoice breakout idea would certainly work, but with FFP subcontracts all you would be "validating" is that the contractor knows how to divide a particular number by 12.  That idea also neglects the fact that the LOS is over the entire PoP; you can't put an arbitrary line in the sand to determine 'compliance'*. On a LH contract,  a (noncompliant) 49/54 prime/sub split last month could be a (compliant) 54/46 split this month.  If an option exercise occurs, the calculation gets even more obtuse.  

It seems to me that one of the core problems with the LOS clause is that you can't truly measure for compliance until the PoP is over.

We balance the prime/sub staffing mix on my  FFP contract to get as close to 51/49 as possible and cut a subcontract to reflect that balance.   I tell my sub "that's your budget to support our client for the PoP", split the invoice payments accordingly, and Bob's Your Uncle.   If the government asks questions, I am prepared to provide my subcontract.  

If I were still a working CO,  I would include  Consent to Subcontracts  any time I included the LOS clause as an avenue to ensure compliance, and then ensure that the subcontract  meets the intent of the LOS clause before approving it.  Not sure what else you can do really.

[* I maintain that "...not pay more than 50% of the amount paid by the government to it" refers to the TCV, not the amounts on individual billing cycles.]

Rea'n, please read 13 CFR 124.510 and 12 CFR 125.6.  I think the SBA has a different take on when you measure compliance with the statutory limitation on subcontracting.

REA'n Maker said:

If I were still a working CO,  I would include  Consent to Subcontracts  any time I included the LOS clause as an avenue to ensure compliance, and then ensure that the subcontract  meets the intent of the LOS clause before approving it.  Not sure what else you can do really.

Would you include the clause in contracts that it wasn't prescribed for?

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On 5/16/2017 at 4:02 PM, Retreadfed said:

Rea'n, please read 13 CFR 124.510 and 12 CFR 125.6.  I think the SBA has a different take on when you measure compliance with the statutory limitation on subcontracting.

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13 CFR 125.6 - What are the prime contractor's limitations on subcontracting?

(e)Determining compliance with applicable limitation on subcontracting. The period of time used to determine compliance for a total or partial set-aside contract will be the base term and then each subsequent option period.

§ 124.510 What limitations on subcontracting apply to an 8(a) contract?

(b)... the Participant cannot subcontract more than the required percentage to subcontractors that are not similarly situated entities for each performance period of the contract (i.e., during the base term and then during each option period thereafter)

How does that conflict with my statement that "It seems to me that one of the core problems with the LOS clause is that you can't truly measure for compliance until the PoP is over."?

REA'n Maker, the way I read the SBA regs, you do not look at the cumulative performance of the contract, but each individual performance period, i.e., you evaluate compliance with the LOS clause in each period of performance, not the total period of performance.  From what you wrote, I understood you to be saying you look at the entire period of performance, e.g., base period and all option periods combined to determine compliance with the LOS clause.

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Maker, the way I read the SBA regs, you do not look at the cumulative performance of the contract, but each individual performance period

Ah. I think I'm seeing your point. You infer  the "...and then during...." language to mean that the base/option periods are distinct and the LOS should be measured as such, which is certainly a reasonable interpretation.  I've always read that to mean the base & option periods  are additive (it is one vehicle/effort after all), but as many others have pointed out, the entire LOS clause is rather ambiguous:  http://www.publiccontractinginstitute.com/far-52-219-14-limitations-on-subcontracting/

As a practical matter, your interpretation reflects best practices anyway.  Any contractor who predicates compliance with the LOS clause on an option exercise would be playing a very foolish game.