When small businesses hear the word “pass-throughs,” they go up in arms. “Pass-throughs” has a negative connotation – we think of a small business obtaining a set-aside contract and funneling the work through a big business.
Pass-throughs can be permissible. That word also stands for contracts where certain products or services are to be contracted out through subcontractors (i.e., the work is “passed through” to someone else – a “divide and conquer” approach to the work required under the contract).
Successful offerors for contracts exceeding $650,000 that have subcontracting possibilities are required to submit a subcontracting plan which includes, along other things, a statement of the total dollars to be subcontracted, the principal type of supplies and services to be subcontracted, and assurances that the offeror will submit periodic reports so the government can determine the extent to which it has complied with the plan. This is so the government can keep track of who is doing what (and, more importantly, who is really getting paid).
One concern the government has with pass-through arrangements is whether it creates additional costs. Section 852 of the National Defense Authorization Act (NDAA) for Fiscal Year 2007 directed the Secretary of Defense to issue regulations to ensure that pass-through charges on contracts or subcontracts (or task or delivery orders) are not excessive in relation to the cost of work performed by the contractor or subcontractor. The DoD issued an interim rule in 2007 to this end; and the 2009 NDAA expanded requirements related to these pass-through charges. (The Federal Acquisition Regulation was amended to limit these pass-through charges).
Building on this previous legislation, in January of 2013, Section 802 of the NDAA for Fiscal Year 2013 directed the DoD, Department of State (“State”), and United States Agency for International Development (“USAID”) to issue any necessary guidance and regulations to ensure that contracting officers take additional steps when an offeror informs the agency of its intention to subcontract more than 70% of total costs of work to be performed for relevant contracts. (The FAR Council is currently developing a regulation to incorporate Section 802 requirements applicable to all executive agencies). The deadline for this was July 2013.
Fast forward to now. On December 22, the GAO issued a report analyzing the DoD’s, State’s, and USAID’s progress in developing guidance and regulations to ensure that contracting officers complete additional analyses prior to awarding pass-through contracts. In the event a contractor intends to sub out more than 70% of the total cost of the work, a contracting officer must do the following:
- Consider the availability of alternative contract vehicles and the feasibility of contracting directly with a subcontractor or subcontractor that will perform the bulk of the work; and
- Make a written determination that the contracting approach selected is in the best interest of the government; and
- Document the basis for such determination.
In general, the GAO’s report found that none of these three agencies met their requirements, and this is over two years after it was mandated to put steps in place. (They did make some progress, but nothing with “teeth” – only bulletins or guidance documents with soft language). This is a disappointment given the potential cost impact on excessive use of subcontractors, as well as small businesses’s interest in ensuring that these dollars and contract allotment are accounted for.
In the end, the GAO recommended that the DoD, State, and USAID take two actions: issue guidance to help contracting officers perform the additional steps required, and revise management review processes and guidance to verify implementation. The DoD and State agreed with GAO’s recommendations but USAID did not, stating that additional guidance might limit its contracting officers’ discretion. GAO maintains that both recommended actions are still warranted for USAID.
In general, the report is frustrating to read. The takeaway is it has been over two years since three agencies were told to take action, and the action taken was the drafting a few memoranda. And since a GAO report is a recommendation, it’s difficult to imagine that this will prompt change.
Access the GAO report here.
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