Administration wants tighter reins on contractor fees

The Obama administration has some new ideas designed to help agencies get hold of what they're paying to outside contractors, and help ensure that poor performers and passive performers don't get what they don't deserve.

Two new proposed changes to acquisition rules were put forward today in the Federal Register. In one proposal, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council seek to amend the Federal Acquisition Regulation (FAR) to minimize excessive "pass-through" charges by contractors from subcontractors, when the prime contractor added little or no value to the contract.

All contractors mark up their costs to make a profit. However, some companies that have been awarded a contract pass off all of the work to subcontractors. The company with the contract may just be adding another layer of markups, or pass-through charges, without doing anything else of real value. And with too many tiers of subcontractors, and thus multiple markups, the government's costs continue to rise.

The interim rule includes a solicitation provision and a contract clause to require firms offering bids for a contract to identify the percentage of work that they will subcontract. Officials want to know when subcontract costs will exceed 70 percent of the total cost of the work, the proposal states. Regulators chose 70 percent as the threshold because it represents a substantial amount of subcontracting, the notice states.

The rule incorporates the reporting threshold to let the contracting officer understand what functions a contractor will perform and to make a determination about the work to be performed. It also includes a recovery mechanism for situations when a contractor simply passes charges along to the government while performing little, if any, work.

“The rule is intended to protect the interests of the government,” the notice states. It adds that officials do not intend to disrupt the subcontracting process or other arrangements between firms.

The proposal would change the FAR to require agencies to link award fees to acquisition objectives in the areas of cost, schedule and technical performance, the notice states. Agencies cannot give a contractor an award fee if the overall performance is judged to be below satisfactory.

The interim rule also would prohibit the “rollover” of unearned award fees from one evaluation period to another. Rolling over award fees allows a contractor to earn the lost award fees in a subsequent evaluation period.

“The councils believe ‘rollover’ diminishes the effectiveness of the award-fee rating given for a specific evaluation period,” the notice states.

Officials point out that the rollover concept is used sparingly across the government and that its limited use has been decreasing.