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    Are "we" the Government required to review the subcontractor's accounting system to ensure that they are capable to adequately bill the government? (Pre-award survey) I have heard it both ways - where we are and where we are not - if the prime is responsible - I am curious because some prime/sub relationships are sensitive where the sub doesn't want the prime anywhere near their books. So how could they determined the sub to have adequate accounting practices? Does the major subcontractor get audited? if so, if they do not have an approved accounting system - would that be an issue? would just like to have this clarified. Thanks.


    1. The FAR and DFARS references quoted below in pertinent part are applicable to this response.

    FAR 16.301-3 -- Limitations
    (a) A cost-reimbursement contract may be used only when --
      (3) The contractor’s accounting system is adequate for determining costs applicable to the contract or order;

    FAR 31.204 -- Application of Principles and Procedures.
     (a) Costs are allowable to the extent they are reasonable, allocable, and determined to be allowable under 31.201, 31.202, 31.203, and 31.205. These criteria apply to all of the selected items that follow, even if particular guidance is provided for certain items for emphasis or clarity.

    (b)(1) For the following subcontract types, costs incurred as reimbursement or payments to a subcontractor are allowable to the extent the reimbursements or payments are for costs incurred by the subcontractor that are consistent with this part: (i) Cost-reimbursement.

    FAR 42.302 -- Contract Administration Functions
    (a) The contracting officer normally delegates the following contract administration functions to a CAO. The contracting officer may retain any of these functions, except those in paragraphs … (a)(12) of this section.
      (12) Determine the adequacy of the contractor's accounting system. The contractor's accounting system should be adequate during the entire period of contract performance. The adequacy of the contractor's accounting system and its associated internal control system … affect the quality and validity of the contractor data upon which the Government must rely for its management oversight of the contractor and contract performance.

    FAR 44.201 -- Consent and Advance Notification Requirements
    (a) If the contractor has an approved purchasing system, consent is required for subcontracts specifically identified by the contracting officer in the subcontracts clause of the contract. The contracting officer may require consent to subcontract if the contracting officer has determined that an individual consent action is required to protect the Government adequately because of the subcontract type, complexity, or value, or because the subcontract needs special surveillance.

    (b) If the contractor does not have an approved purchasing system, consent to subcontract is required for cost-reimbursement, time-and-materials, labor-hour, or letter contracts.

    FAR 52.216-7 -- Allowable Cost and Payment
    (a) Invoicing. (1) The Government will make payments to the Contractor when requested as work progresses … in amounts determined to be allowable by the Contracting Officer in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2 in effect on the date of this contract and the terms of this contract. The Contractor may submit to an authorized representative of the Contracting Officer, in such form and reasonable detail as the representative may require, an invoice or voucher supported by a statement of the claimed allowable cost for performing this contract.

    DFARS 252.242-7006 -- Accounting System Administration
    (c) System criteria. The Contractor’s accounting system shall provide for—
      (12) Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions.

    DFARS 252.244-7001 -- Contractor Purchasing System Administration
    (c) System criteria. The Contractor’s purchasing system shall—
      (2) Ensure that all applicable purchase orders and subcontracts contain all flowdown clauses, including terms and conditions and any other clauses needed to carry out the requirements of the prime contract.

    2. Our response assumes that the clauses at FAR 52.216-7, DFARS 252.242-7006 and DFARS 252.242-7006 were included in the solicitation and will be included in prime contract. Pursuant to these contract clauses, the contemplated subcontractor must have an adequate (i.e., Government-approved) accounting system before the prime contractor can place a cost-reimbursement subcontract with that firm. Because the requirements of the prime contract must be flowed down to the subcontractor pursuant to DFARS 252.244-7001(c)(2), then the prime contractor could not bill the Government for any costs incurred by the subcontractor pursuant to FAR 52.216-7(a)(1).because such costs would not have been shown to be compliant with the requirements of FAR subpart 31.2.

    3. Pursuant to FAR 44.201(a) & (b), the contracting officer should not even consent to the placement of contemplated cost-type subcontract until the adequacy of that firm’s accounting system is resolved. Therefore in accordance with FAR 42.302(a)(12), we believe that the contracting officer should request that the cognizant contract administration office (presumably DCMA, with assistance from DCAA) conduct a review of the proposed subcontractor’s accounting system for adequacy to receive a cost-reimbursement contract. If approved by DCMA, then DCMA’s approval letter can be furnished by that firm to the prime contractor as evidence that the firm’s accounting system is adequate to receive cost-reimbursement subcontracts.

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