PSC: DOD's pass-through rule needs work

The Defense Department's second interim rule to restrict excessive pass-through charges on contracts is better than the first such rule a year ago, but it still needs work, according to the Professional Services Council (PSC).

The PSC, a national trade association for service contractors, said the rule could be a burden for subcontractors. Pass-through charges come when prime contractors bill agencies for work that subcontractors perform, adding a fee on top of the subcontractor's bill.

"There are still significant inconsistencies in this second rule and further improvements and clarifications that should be made," Alan Chvotkin, executive vice president of the council, wrote on July 14 in a letter to the Defense Federal Acquisition Regulations System.

DOD is charged with implementing a statutory requirement to prevent the department from paying excessive pass-through charges on defense contracts. The statutory requirement limits the charges that DOD can pay as added fees when the prime contractor doesn't add value to the subcontractor's work.

Under the National Defense Authorization Act for Fiscal Year 2007, DOD is required to issue regulations to make sure that pass-through charges on contracts and subcontracts are not excessive in relation to the cost of work performed. The first interim rule was published in April 2007 and the second this May.

The second rule clarifies exclusions for firm fixed-price contracts and strengthened its definitions for terms, Chvotkin wrote. However, more changes are needed, he added.

The council is recommending changes to the solicitation provisions and contract clauses; further clarifications and modifications to definitions of critical terms; further clarifications on the reporting mechanisms for contractors to notify contracting officers of potential excessive pass-through charges; improvements to the rules by which excessive charges may be recouped; and clarifications to provisions that state which subcontracts may be eligible for a an exemption from a clause of the rule.

In addition, Chvotkin raised a question about recommendations issued in January by the Government Accountability Office in regard to DOD's ability to assess the risk of excessive pass-through charges for subcontracted work.

"Where, when or how will DOD implement these GAO recommendations?" Chvotkin asked in the letter.

In addition, the council said it appreciates a statement included in the supplementary information accompanying the second interim rule in which it is declared that there is no intent to disrupt the subcontracting process.

"The department has numerous other inconsistent policies that support or oppose subcontracting activities," Chvotkin wrote. "Although this important sentence is not included in the text of the regulation, we trust that this sentence will guide the department's implementation of this regulation."