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Required Practices Concerning Subcontracts

January 8, 1997


Subject:   Required Practices Concerning Subcontracts
From: Betty L. Bailey, Director /S/
Office of Acquisition Managment
To: OAM Division Directors
Regional Contracting Officer Supervisors
Howard Corcoran, OGC


Summary: This Procurement Policy Notice (PPN) provides guidance on required procedures when consenting to subcontracts. This guidance addresses issues pertinent to both preaward and postaward subcontracts.

Effective Date: Date of issuance (shown above).

Expiration Date: Upon cancellation or until superseded.

For Further Information Contact: Paul Schaffer on (202) 260-9032, or GroupWise Schaffer-Paul. [NOTE: As of August 19, 1997, Paul Schaffer's phone number is (202) 564-4366; E-Mail address is schaffer.paul@epa.gov]



In response to an Office of Inspector General (OIG) audit of subcontract awards by EPA prime contractors and EPA's oversight of prime contractors' use and control of these subcontracts, the Office of Acquisition Management (OAM) agreed to issue guidance reminding contracting officers (COs) of required practices when consenting to subcontract. This guidance addresses issues pertinent to the preaward and postaward review of subcontracts. Subcontracts represent a unique contractual instrument in which the Government has no direct legal relationship with subcontractors, sometimes referred to as no "privity of contract" (defined as that relationship which exists between two contracting parties). There is essentially no relationship between the Government and its subcontractors. The prime contractor is selected for its technical and management abilities, including the right to manage the contract and subcontractors used in the performance of the contract.

Prime contractors are responsible for planning, awarding, and administering subcontracts. However, COs play a key role in subcontract oversight, since they are responsible for the overall prime contract price and performance. COs are responsible for assessing the need for subcontracts, and the additional cost of subcontracting before granting consent. Before granting consent to a subcontract, COs review the adequacy of the prime contractor's cost and price analysis, and determine whether the proposed subcontract costs are realistic for the work to be done. Finally this PPN addresses consenting to subcontracts. Specifically, this PPN clarifies and supersedes three practices identified in a June 8, 1994, OAM memorandum concerning subcontracting: consenting by letter, ceilings, and increasing the estimated amount of subcontracts. In addition, two other practices regarding subcontracting consent are discussed: the role of the procuring contracting officer (PCO) and the administrative contracting officer (ACO) in the consent process, and the review of the proposed subcontract document. COs should refer to FAR Part 44 and this PPN for policies and procedures before granting consent to subcontract.

Roles and Responsibilities

Before consenting to a subcontract, the CO reviews the request and supporting data and considers such factors as: technical need for services, compliance with the prime contract's goals for subcontracting with small disadvantaged business and women-owned business concerns, adequacy of competition, responsibility of the proposed subcontractor, proposed type and terms and conditions of the subcontract, and adequacy and reasonableness of cost or price analysis performed. The project officer (PO) reviews the prime contractor's request for subcontract consent, and provides comments to the CO on the technical need and appropriateness of the supplies or services, the reasonableness of the subcontract estimate in terms of level of effort, and types and quantities of proposed other direct costs; location, duration, number of travelers and purpose of proposed travel; skill level, labor mix, and direct labor hours to be expended; and the capabilities of the proposed subcontractor.


Preaward Team Subcontractors

Preaward team subcontractors are competed as part of the original prime contractor's proposal, which is subject to the competitive evaluation process. During preaward competition, the technical capability and costs of each prime and its subcontract teams are evaluated as a combined entity, which is evaluated against other prime offerers' contract teams. Selection for award is based on the management abilities of the prime contractor, and the combined technical capabilities and price of the prime and its subcontract teams. The CO does not need to comply with FAR Subpart 44.2 at the time of contract award, since team subcontracts are competed for subcontract consent purposes as part of the contractor's proposal, which is subject to the competitive evaluation process prior to award. Collusive Team Arrangements COs must be alert for restrictive bidding patterns where contractors may have agreements with other contractors not to compete or bid against each other for a prime contract to be awarded. In return, the contractor submitting a prime proposal may include other contractors as team subcontractors. For example, EPA contractors who are technically qualified to bid on the prime contract may choose to be proposed as a team subcontractor, perhaps at higher rates, and avoid the preparation of expensive prime proposals. Restrictive competition reduces the Agency's assurance that it is obtaining the most technically qualified prime contractor at the best price to the Government. Whenever such an arrangement is suspected, it should be referred to the OIG, since such practices may be a violation of the Antitrust Act.



In general, unless consent requirements are waived as a result of the approval of the contractor's purchasing system pursuant to FAR Subpart 44.3 or otherwise exempted under the applicable FAR subcontract clause, subcontracts awarded after prime contract award require CO consent, and are subject to the requirements of FAR Part 44, "Subcontracting Policies and Procedures." FAR 44.202-2 lists several factors the CO must review and evaluate before granting consent. Reviewing the proposed subcontract is necessary to assure the following:

  • Was adequate price competition obtained or its absence properly justified?
  • Has the contractor performed adequate cost or price analysis?
  • Is there a sound basis for selecting and determining the responsibility of a particular subcontractor?
  • Does the subcontract contain required flowdown clauses?

Need For Subcontract

COs responsible for subcontract consent shall confirm with the PO on whether the technical skills provided by the subcontractor are needed, or are already provided under the contract by the prime or a team subcontractor. COs are responsible for reviewing the reasonableness of rates proposed by post-award subcontractors before granting consent to subcontract; prime contractors are accountable for performing cost or price analyses of proposed subcontractors.


If included in the contract, prime contractors must adhere to FAR Clause 52.244-5, "Competition in Subcontracting," where the contractor shall select subcontractors on a competitive basis to the maximum practical extent consistent with the objectives and requirements of the contract. COs may only accept justifications for sole source awards if the prime contractor provides substantive evidence that no other responsible party exists, or there are circumstances of unusual and compelling urgency. Statements of uniqueness, including requirements for geographical location, site specific experience, or that the offeror is the only available source, are not an acceptable justification for sole source subcontracting unless adequate documentation is submitted by the prime contractor. In addition, EPA experience or incumbent contractor status rarely should qualify as uniqueness under such sole source awards, absent other supporting factors. Further, lack of planning is not an adequate justification for sole source awards. COs are encouraged to work with the PO to allow prime contractors sufficient time to compete post-award subcontracts, if the prime contractor chooses to subcontract.

Subcontract Consent Documentation

One practice affirmed in the June 8, 1994, OAM memorandum, "Required Practices Concerning Subcontracts," was to identify each subcontract in the contract. For some contracts this is not administratively feasible. Because of the volume in Superfund contracts, for example, non-team subcontracts are usually consented to by letter. In recognition of these circumstances, COs may provide consent by letter for non-team subcontractors under any contract. Another practice required under the June 8, 1994, memorandum was to identify the ceiling amount in the contract for each listed subcontract. Some COs instead establish an aggregate ceiling for all subcontracts, rather than identify a ceiling for each subcontract. This raised the broader question of the necessity of establishing subcontract ceilings in Agency subcontracts. Since the estimated amount of the subcontract is covered by the CO's consent, the identification of a ceiling is technically redundant. Therefore, COs are no longer required to identify subcontract ceiling amounts in contracts. This PPN impacts yet another practice in the June 8, 1994, memorandum, of requiring a formal contract modification when consenting to an increase in the estimated amount of a subcontract. Accordingly, COs may now consent to increases in the estimated amount of subcontracts by letter or by contract modification. However, there are circumstances where it may be appropriate for the PCO to forward the contract file to the ACO without taking action on the request for subcontract consent. In cases where action is not taken, the PCO shall annotate the file on the consent request. An example could be the unavailability of an approved indirect cost rate for a subcontractor. Given the time incident to obtaining an audited rate, it would be more appropriate for the PCO to transfer the file to the ACO without taking further action. Another example is when the proposed subcontract will not be available for PCO review within a reasonable period of time after contract award. In such cases the PCO shall annotate the file as to why no action was taken on the consent request. If practicable, the PCO should consent to team subcontractors. Having already evaluated the team subcontracts from a technical and financial standpoint, the PCO is clearly the most appropriate individual to provide or deny subcontract consent in the initial contract, if the proposed subcontract has been included in the proposal. COs should not consent to subcontracts without reviewing the request and supporting data. The review of the subcontract is necessary to assure that the proposed rates, fee, and estimated cost or fixed price amount have been incorporated; the required flowdown clauses have been included; and the payment terms are appropriate. Further, FAR 44.202-2 sets forth factors COs must consider before consenting to subcontracts, some of which require review of the subcontract itself.

Directed Subcontracting

Government personnel are prohibited from directing prime contractors to contract with specific firms, or to assist a prime contractor in selecting subcontractors, or personnel to be used on a subcontract. The underlying reason is that prime contractors are selected, in part, for their management abilities, including subcontract selection and management. COs, with PO assistance, are required to review prime contractor consent requests, including the statement of work, for evidence of directed subcontracting and to decline consent where such evidence exists. If evidence exists of directed subcontracting, the CO is responsible for denying the prime contractor's request to subcontract.


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