February 2006

The Importance of Subcontract

Management to Program Success

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We’re drowning in information and starving for knowledge.

-Rutherford D. Rodgers

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Topics

• The Relationship• Flow downs • Source Selection• Subcontracting

Process

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Contractual Relationships

• Subcontract/PO establishes relationship between prime and subcontractor

• Protects the rights of primes and the Government

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Contractual Relationships

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Contractual Relationships

• Subcontract Management tools used in Program Management:– Advance Notification– Consent to Subcontract– Debarment Process– Small Business

Subcontracting Programs

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Risk Management Tools

• Sarbanes-Oxley Act

• Make or Buy Program (FAR Part 15)

• Competition in Subcontracting (FAR 52.244-5)

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Risk Management Tools

• Prime Contract– Terms and Conditions– Statement of Work

• Subcontract Process– RFP– SOW– Selection of Subcontract

Type– Flow downs

• Lowdown Clauses– Truth in Negotiations (FAR

Part 15)– Cost Accounting Standards

(FAR Appendix A)– Right to Audit Clause (FAR

52.215-2)

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Risk Management Tools

• Proposal Analyses (FAR Part 15)

• Subcontracting for Commercial Items (FAR 52.244-6)

• Contractor Purchasing System Review (CPSR) (FAR Part 44)

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CPSR – The Customer’s Review

• Measures How Efficiently and Effectively a Contractor Spends Government funds and;

• Evaluates Compliance With Government Subcontracting Policies, Regulations, and Laws.

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CPSR – The Customer’s Review

• Subcontractor’s Government business volume exceeds $25 million (excluding competitive FFP, competitive FFP/EPA contracts/subcontracts, and commercial item acquisitions)

• Whenever an Administrative Contracting Officer or Procuring Contracting Officer specifies

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CPSR Risk Assessment: Basis for Selection

• CPSR Approval History• Identified by PCO or ACO• Increased Sales to

Government• Growth• Pre-Award Surveys• Major Programs/High Visibility• Other Audits• Self Assessment Activities

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CPSR: Identification of Risk Factors

• Signs of a Weak Purchasing System Identified During Self Assessments:– Inadequate Procurement Lead

Time– Violation of Public Laws– No or Poorly Written or

Implemented Policies – No or Weak File Documentation– Lack of Upper Management

Commitment to Compliance with Procurement Regulations

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Opportunities for Success or Failure

• 98% of firms will not pass their initial CPSR!

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Impact of an Unsuccessful CPSR on Contractors: Losing The Competitive Marketing Advantage!

• Source Selection Implications

• Past Performance Implications

• Losing A Competitive Proposal

• Loss of Revenue

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Impact of an Unsuccessful CPSR on Contractors: Long-Term External Compliance Oversight Impact

• Defense Contract Audit Agency or Inspector General’s (and Other Audit Agencies) Alerted

• Other Audits Will Follow• Possible Negative Press

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Impact of an Unsuccessful CPSR on Contractors:

Procedural Burdens with Project Management Impact

• Increase Administrative Contracting Officer Surveillance

• Delay in Placing Orders• Increase Administrative

Expenses• Delayed Billings &

Collections

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Impact of an Unsuccessful CPSR on Contractors:

Costly Internal Compliance Impact

• Implement Corrective Actions

• Change Processes• Change Culture• Implement Training

Program• Prepare for Follow-Up

Audit

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Key to Embracing Compliance

• Communication – Purchasing/

Subcontract Admin– Contracts– Program Management– Engineering– Clients

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Subcontracting Process Timeline

AC

O/P

CO

C

on

sen

t

Neg

oti

ati

on

s

Pri

ce A

naly

sis

& Tech

Evalu

ati

on

Pro

posal

/Qu

ote

RFP

/RFQ

/RFI

Sou

rce

Justi

ficati

on

PR

Deb

arm

en

t V

eri

ficati

on

Cert

ificati

on

s

PO

/Su

bK

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The Source Selection “T”

Sourcing Factors Pricing Factors

Competitive Sourcing Competitive Pricing

Non-Competitive Sourcing

Competitive Pricing, Price Analysis, or Cost Analysis

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Single/Sole Source Justification

• Required in accordance with:– FAR 52.244-5 “The

Contractor shall select subcontractors (including suppliers) on a competitive basis to the maximum practical extent consistent with the objectives and requirements of the contract.”

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Team Sourcing Documentation

• Document the Team Source Selection Decision

• Focus on Team Competitiveness

• Document Sole Source Team Members

FARFAR

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Price Analysis- Comparison Process

Identify Factors That Effect Comparability

Determine Effect of Identified Factors

Adjust Prices for Comparison

Compare Offered Prices With Adjusted Prices

Select Price for Comparison

Prices for Comparison

•Other Proposed Prices

•Commercial Prices

•Previously-Proposed Prices, Subcontract Prices

•Parametric Estimates

•Independent Estimates

Quantitative Techniques to Adjust

Prices

•Index numbers

•Trend Analysis

•Price-Volume Analysis

•Graphic Analysis

•Learning Curve

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Negotiations

• Per FAR 15.405 - Unfair Price? Negotiate!!– Price negotiation is

intended to permit the contracting officer (buyer) and the offeror to agree on a fair and reasonable price.

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Ineffective Negotiations

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Contract Management’s role

• The Role of Contract Management is Critical:– Contracts must work

with CO’s to pro-actively remove restrictive, unnecessary, or out-of-date clauses from RFP’s and contracts

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Path Forward

– Educate Process Owners in terms of how certain clauses impact the program:• Cost Accounting Standards• Cost and Pricing Data - only when

required• Consent/Advanced Notification - only

when required• Organizational Conflict of Interests

– If a clause is not required, ask that it be eliminated!