In addition to ensuring that the prime contractor is adding suitable value to the contract effort, the objective of FAR Clauses 52.215-22 and FAR 52.215-23, is to limit the amount of indirect costs and profit passed on to the Government for significant contract work performed by subcontractors. The FAR clauses define excessive pass-through charges as costs for services that add little to no value to the contract. Excessive pass-through charges do not include prime contractor costs to manage subcontracts or any applicable indirect costs on those management costs. Contracting Officers are becoming increasingly aware of the requirements of these FAR clauses, stipulating that the clauses be included in contracts and confirming that Government contractors are adhering to these FAR clause requirements.
Incorporating a subcontractor handling rate can make you more competitive by reducing the indirect costs allocated to subcontract costs. A typical indirect subcontractor handling rate allocation base consists of direct subcontracts. Costs included in a subcontractor handling pool are typically the costs to acquire, process, and administer those subcontracts included in the indirect subcontractor handling base. These costs are accumulated in a separate pool and applied to the subcontract direct costs instead of the typical G&A rate.Generally, the indirect subcontractor handling rate is smaller than a typical G&A rate due to the composition of the pool and base previously described as well as the smaller amount of pool costs associated with subcontractor handling relative to the larger value of direct subcontractor costs. This typically results in fewer indirect costs passed onto the Government when a contract has a substantial amount subcontract costs. This can be a key factor when determining proposal partners and/or when bidding on opportunities with significant subcontract costs. If your company has the capability to distinguish the costs associated with the subcontractor, it may be beneficial to consider a change to your indirect rate structure to include an indirect subcontractor handling rate.
This information can be used to explore indirect rate re-engineering changes including the addition of a subcontractor handling indirect rate and a G&A base change to a value-added allocation base. Prior to making such a change, the contractor must perform an analysis to determine if the change would fairly represent the total activity of the business and, accordingly, would not create an inequitable allocation of costs among contracts.
You may decide to update your subcontract monitoring policies and procedures. Some things to consider in reviewing these policies and procedures are regular subcontract cost reviews to monitor the 70% threshold, notification of the Government if the threshold is anticipated to be exceeded, and documentation to verify that the prime contractor is adding value to the contract.
The limitation on pass-through charges clause is a required flowdown clause to subcontractors. Therefore, take this information and review or update your subcontract agreements/contracts accordingly.
For over 40 years, CohnReznick has provided comprehensive services to assist government contractors with a full life cycle approach to winning and managing contracts. We ensure your financial and procurement processes are compliant, efficient and effective - so you can focus on what matters most, profitable growth.
InsightHome office expenses: Tax and FAR implications for government contractorsJeff Shapiro, Dana Fried, Chase ClarkLearn what costs related to helping government contracting employees work from home may be allowable, deductible, and non-taxable amid COVID-19.
Press ReleaseChristine Williamson named Business Partner of the Year in MCCC's annual awardsCohnReznick LLP, one of the leading advisory, assurance, and tax firms in the United States, announced that Christine Williamson, CPA, PMP, and a lead partner in the firm’s Government Contracting practice, has been named Business Partner of the Year by the Montgomery County Chamber of Commerce (MCCC) in its first-ever virtual 2020 Business Awards program.
InsightCybersecurity Maturity Model Certification (CMMC): A road map to complianceYou know you need Cybersecurity Maturity Model Certification (CMMC) to qualify for Defense Department contracts, but where to begin? Use our tool to get started.
InsightGOVERNMENT CONTRACTING: Effects of multistate teleworking arrangements on state taxationLance E. Rothenberg, John IannottiGovernment contractors with employees working in different states due to COVID-19 may face implications for nexus, apportionment, and withholding. Read more.
InsightNavigating government funding compliance for life sciences companies: Optimize your indirect rateKristen Soles, Robert GutierrezIn order to maximize cost recovery and profitability, government grantees should develop indirect rates based on their organizational structure. Learn more.