Administration wants tighter reins on contractor fees

New regulations would limit awards fees and pass-through charges

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.

Award fees

In another interim rule announced today, the councils proposed limits to award fees for contractors’ performance.

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.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

Reader Comments

Mon, Oct 26, 2009 WindShadow

Many agencies Pass-through the bulk of the work and blame to the contractors. I worked in a few agenicies so I have seen this constantly. What about contractor's Civil Rrights?? I agree that a 70% threshold is still too high. --- Are any of these comments ever read by the government? ---

Mon, Oct 19, 2009 Jaime Gracia Washington, DC

It is interesting that the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council are seemingly ready to amend the FAR without proper analysis and justification for why these issues are occurring. Mainly, it is typical symptom fixation without a focus on the disease. For small businesses, many firms rely on obtaining work through primes that have closing vehicles due to archaic, and in some instances, Spartan and arbitrary decisions by agencies that award these vehicles. This gets to the process of increasing the quality of vendors who have these vehicles, and reviewing the experience of firms in their totality. If more and higher quality small businesses could qualify for vehicles, value could increase and costs could decrease. Further, it is the award fees and how they are managed where real cost savings could be realized through proper oversight and contract administration. The Government simply needs to focus its limited resources on areas of maximum benefit to see real change.

Mon, Oct 19, 2009 Sic O' It

Just another piece of fluff. Who are these pimps kidding? 70%! It's time there was an emancipation proclamation for the contract slaveworkers under the thumb of the man. One might think the president would be more sensative to this system the enshrines profits for priviledged special interest and enshrines the creation of second class workers.

Fri, Oct 16, 2009 mafatrifo

Small Vs. Large? A sad state of the business. The best way to look at this relation is to work together for a greater good. Have seem abuse both ways- in fact, more so coming from the large business end of the equation. Predator vs. Pray. Large Business

Fri, Oct 16, 2009 oracle2world

"Regulators chose 70 percent as the threshold because it represents a substantial amount of subcontracting, the notice states." W**? How about 51% as the threshold? If the prime isn't doing half the work, the gov't should just go direct to the sub. But once you start adding "social engineering" goals to procurements, no one really cares one way or another about performance.

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