Prime contractors operating under FAR Part 15 cost-type contracts face significant responsibility when evaluating subcontractor pricing. Understanding those obligations before and after award is essential for compliance and audit readiness.

In this article, we outline a high-level step-by-step approach for prospective and current prime contractors to demonstrate the reasonableness of subcontractor costs included in their proposals.

Responsibilities related to subcontractors prior to bidding on the contract

The first responsibility a potential prime contractor has relating to subcontractors is to review the request for proposal (RFP) under a cost-type contract to determine if it contains FAR 52.244-2, Subcontracts. This FAR clause requires the Prime contractor to obtain a signed consent to subcontract from the contracting officer. If this clause is in the RFP, you will need to include a consent to subcontract request letter for each of your planned subcontractors that includes the following:

• A description of the supplies or services to be subcontracted.
• Identification of the type of subcontract to be used.
• Identification of the proposed subcontractor.
• The proposed subcontract price.

While FAR 52.244-2 does not specifically require a determination of the acceptability of the subcontract price, FAR 15.404-3(b) does. So, your next responsibility relating to your subcontractors is to perform a cost or price analysis as described below:

How to perform and document your cost or price analysis of subcontractor proposals

FAR 15.404-3(b) requires the prime contractor to:

1. “Conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices;
2. Include the results of these analyses in the price proposal; and
3. When required by paragraph (c) of this subsection, submit subcontractor certified cost or pricing data to the government as part of its own certified cost or pricing data.”

So, what is a cost/price analysis?

• Per FAR 15.404-1(b), price analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit.
• Per FAR 15.404-1(c), cost analysis is the review and evaluation of the separate cost elements and profit or fee in a subcontractor’s proposal.

Key steps to subcontractor cost or price analysis

The cost or price analysis of subcontractor proposals involves several key steps to help ensure that the prices proposed are fair and reasonable.

• Conducting Cost or Price Analyses: Conduct the appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices and include the results of these analyses in your price proposal to the government as part of the certified cost or pricing data.
• Cost Analysis Techniques: The cost analysis of subcontractor price proposals involves evaluating the supporting documentation for estimates of cost and profit in price proposals submitted by contractors. Cost analysis focuses on examining the individual cost elements within a subcontractor’s proposal to determine whether each component is allowable, allocable, and reasonable. Some examples of cost analysis techniques are:
  • Verification of cost data or pricing data and evaluation of cost elements, including:
    • Assessing whether each proposed cost element is required for the effort and priced at a reasonable level
    • Reviewing past and present data to identify cost patterns and determine whether proposed costs reflect realistic trends
    • Evaluating whether proposed estimates based on cost‑estimating relationships or parametric models are logical, supported, and consistent with known benchmarks.
    • Confirming that proposed labor and indirect costs use the correct, approved, or negotiated rates and are applied accurately.
  • Evaluate the effect of the subcontractor’s current practices on future costs
    • This involves assessing whether the subcontractor’s existing processes, systems, and cost‑accounting practices are likely to increase or decrease future costs. For example, inefficiencies in labor utilization, outdated procurement methods, or inconsistent indirect‑rate application can signal higher future costs. Conversely, demonstrated improvements – such as automation, revised labor‑mix strategies, or updated estimating systems – may support lower projected costs.
  • Compare the costs proposed by the subcontractors for individual cost elements with current estimates or previous estimates/actual costs for the same or similar items from this or other subcontractors
    • Reviewing proposed labor hours, material quantities, indirect rates, or other cost elements against historical actuals or prior proposals helps determine whether the current submission is reasonable. Significant variances may indicate changes in scope, estimating errors, or unsupported assumptions. This comparison can be performed across the same subcontractor or across multiple subcontractors performing similar work.
  • Verification that the subcontractor’s cost submission is in accordance with FAR and CAS (if applicable)
    • Ensuring compliance with FAR Part 31 cost principles and, when required, the Cost Accounting Standards helps validate that proposed costs are allowable, allocable, and reasonable. This includes confirming that indirect rates are applied correctly, cost‑accounting practices are consistent with disclosed methods, and no unallowable costs (e.g., advertising, alcohol, lobbying) are included. Noncompliance may require adjustments or further inquiry.
• Price Analysis Techniques: Unlike cost analysis, price analysis does not require examination of individual cost elements. Instead, it evaluates the overall proposed price using comparative and market-based methods. Price analysis techniques help in establishing the reasonableness of pricing and ensuring that the final price is fair and reasonable. Some examples of price analysis techniques are:
  • Comparison of proposed prices received in response to your solicitation for bids received on a portion of the potential contract
    • Evaluating multiple offers received under the same requirements helps determine price reasonableness through competition. Significant variances between offers may indicate misunderstandings of the requirements, unbalanced pricing, or areas requiring clarification
  • Comparison of proposed prices to historical price
    • Reviewing prices paid for the same or similar items in prior procurements can highlight trends, escalation, or anomalies. Adjustments may be needed for quantity differences, market conditions, inflation, or changes in technical requirements.
  • Use of parametric estimating methods/application
    • Applying cost-per-unit metrics (e.g., dollars per labor hour, per square foot) helps identify whether the proposed price aligns with typical industry benchmarks. Large deviations from expected ratios may signal the need for deeper analysis or justification from the subcontractor.
  • Comparison with competitive published price lists, published market prices of commodities, etc.
    • Using catalog prices, commercial market indices, or commodity price data provides an external reference point for assessing reasonableness. This method is especially useful for commercial items or standardized products with transparent market pricing.
  • Comparison of proposed prices with independent government (or contractor) cost estimates (IGCE), if available
    • The IGCE serves as a baseline for evaluating whether proposed prices are realistic and consistent with the government’s understanding of the effort. Significant differences between the IGCE and proposed prices should be examined to determine whether assumptions or scope interpretations differ.
  • Comparison of proposed prices with prices obtained through market research
    • Market research may include vendor quotes, industry surveys, commercial pricing data, or information from similar procurements. This helps validate whether the proposed price aligns with current market conditions and typical pricing for comparable goods or services.

These steps and methods are essential for ensuring that subcontractor prices are fair and reasonable, contributing to the overall integrity and efficiency of government contracting. In addition, a well‑documented price or cost analysis is essential to demonstrating that your determination of reasonableness is sound, supportable, and compliant with procurement regulations. Maintaining clear records of the techniques used, the data evaluated, and the rationale for conclusions reached ensures transparency in the decision‑making process and provides an auditable trail for future reviews.

What to do when access to subcontractor cost data is denied

In certain situations, prime contractors may not receive full access to subcontractor cost data needed to perform a complete cost analysis. When that occurs, alternative approaches must be considered. But what happens if you are denied access to a subcontractor’s records that are needed to perform a cost analysis? Here are some steps you can take:

• Perform the price analysis
• Perform a cost analysis on the elements of the proposal you can
• Hire an independent third party to conduct the cost analysis
• Seek assistance from your contracting officer

There is one other option. Can you determine if the subcontractor’s goods or services are commercial? Determining whether a subcontractor’s goods or services qualify as commercial is a critical step because it affects pricing requirements, data submissions, and the level of analysis you must perform. To make that determination, you must evaluate the subcontractor’s offering against the FAR 2.101 definition of “commercial product” or “commercial service.” In short, you must gather and evaluate objective evidence that the subcontractor’s product or service is sold commercially, offered under commercial terms, priced based on market forces, and purchased by the government in substantially the same form. You must then document this analysis in a defensible commercial item determination (CID). A CID should include the following five sections:

1. Purpose: To document the basis for concluding that the subcontractor’s proposed [product/service] meets the definition of a commercial product or commercial service as defined in FAR 2.101.

2. Summary of Subcontractor’s Commerciality Claim: This is where you document the subcontractor's assertion that the [product/service] is commercial based on the FAR 2.101 definition.

3. Evaluation of Commerciality Evidence: This is where you document you reviewed the subcontractor’s submission and performed reasonable due diligence to validate the commercial nature of the offering considering the definition in FAR 2.101. You need to include the subcontractor provided commercial pricing information demonstrating that prices are established through normal market competition.

4. Determination: This is where you state that based on the evidence reviewed and in accordance with FAR 2.101, the subcontractor’s [product/service] qualifies as a commercial product/service. The determination is supported by objective evidence of commercial sales, market‑based pricing, and the availability of the item/service to the general public in substantially the same form. Accordingly, the subcontract may be awarded using commercial‑item procedures, and certified cost or pricing data are not required.

5. Contract File Documentation: This is where you state that this CID, along with all supporting documentation reviewed, will be retained in the subcontract file to demonstrate compliance with FAR requirements and to support the reasonableness of the commercial‑item determination.

Please note that once a CID has been completed and sent to the government as part of your proposal, there must be an updated assessment of the market-based pricing to determine if the price is still reasonable prior to the contract being awarded and purchase occurring

Responsibilities related to subcontractors after winning a contract

You submit your proposal along with the results of your cost or price analyses and CID (if applicable), and you win the contract. What are some of your responsibilities related to your subcontractors now?

• The prime contractor is responsible for managing its subcontracts, which includes responsibility for:
  • Obtaining a consent to subcontract and awarding the subcontract for new subcontractors
  • Technical and financial performance monitoring
  • Payment to the subcontractor for the work accomplished under subcontract terms
• The Allowable Cost and Payment clause (FAR 52.216-7) makes the prime contractor responsible for billing subcontractor costs to the government in accordance with FAR 31.2.
• The prime contractor is responsible for settling subcontractor amounts and rates prior to submitting the final voucher for the prime contract (FAR 52.216-7(d)(5)).

FAR 42.202(e)(2) makes it very clear in its instructions to its acquisition officers, “The prime contractor is responsible for managing its subcontracts.” Therefore, you should not expect your federal partners to help ensure that your subcontractors are charging fair prices, performing adequately, or complying with the terms and conditions of their subcontracts.

Understanding the process is key

CohnReznick has performed federal contract audits for over 10 years on behalf of large civilian agencies and commercial clients. We have seen many industry best practices, and some that fall short of expectations. It is not always the largest, most tenured federal contractors who are getting things right.