Question 1: Is the Prime entitled to any G&A at all on this particular Major Subcontractor's costs? Although the G&A was reduced, it is still called "Major Subcontract G&A" and not "Pass Through Subcontract G&A"
Question 2: When using the Weighted Guidelines to evaluate the proposed profit, the DFARS states that the Government may go lower than the normal range when designating an Assigned Value to the Management/Cost Control Risk Factor. The DFARS states:
The following may justify a value significantly below normal (B): The effort requires an unusually low degree of management involvement. The normal range is 3% to 7%. How low can the Government go in the initial Government Objective position? 1%? 0.5%? 1.5%?
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Per FAR 15.408(n), the contracting officer shall insert the provision 52.215-22 and clause 52.215-23 in the solicitation when the contract is over the threshold for certified cost or pricing data and it's a sole source, non-commercial contract. FAR 15.408(n) further states "the clause may be used when the total estimated contract or order value is below the threshold identified in 15.408(n)(2)(i) and for any contract type, when the contracting officer determines that inclusion of the clause is appropriate." Based on the information provided in the inquiry, it appears, that pursuant to FAR clause 52.215-22, the contractor identified subcontracted effort over the 70% threshold and associated indirect cost and profit. FAR clause 52.215-23 states the contracting officer SHALL determine if excessive pass through charges exist and WILL NOT pay excessive pass through charges. The clause defines excessive pass through as, "with respect to a subcontractor that adds no or negligible value to a contract or subcontract, a charge to the Government by the Contractor or subcontractor that is for indirect costs or profit/fee on work performed by a subcontractor (other than charges for the costs of managing subcontracts and any applicable indirect costs and associated profit/fee based on such costs)." The clause also defines "added value" and "no or negligible value".
Per clause 52.215-23, the contracting officer may negotiate a lower G&A, but should work with DCMA to establish the negotiation objective since it appears an FPRA may already exist. Per FAR 52-215-23, the government must also negotiate lower profit. The question is how low the government can establish the negotiation objective for profit in the weighted guidelines. As you mentioned, the designated range for Management/Cost Control is 3% to 7% and the normal value is 5% per DFARS 215.404-71-2(c). However, in accordance with DFARS 215.404-71-1 (b) the designated range is based on "above normal" or "below normal" conditions. DFARS 215.404-71-2(c), note (1), denotes that "the standard designated range should apply to MOST contracts" but not necessarily all contracts. Also note that paragraph (e) has evaluation criteria for management/cost control for "above normal" conditions, "below normal" and "SIGNIFICANTLY BELOW NORMAL". The designated range is only between "below normal" and "above normal". DFARS states this range should apply to most but not all contracts. Furthermore, the Contract Pricing Reference Guides (CPRG), Volume 3, Chapter 11, Section 11.2.1, states "weighted guidelines defines a structure for profit/fee analysis that includes designated ranges as well as normal values for objective values THAT YOU MAY TAILOR to fit the circumstances of your specific acquisition." Therefore, in my opinion, the contracting officer can assign a lower value (lower than the designated range) for Management/Cost Control in weighted guidelines as long as it is consistent with the amount of management risk to the contractor associated with the entirety of the changed work and not just the subcontracted portion. How low also depends on whether or not the prime contractor is adding little or no value for the changed work including the effort related to managing the subcontracted effort. Also, remember that DFARS 52.215-71(b) requires the contracting officer to document in the price negotiation memorandum the justification for using other than the normal value. Finally, in addition to consulting with DCMA, I recommend discussing this issue and available options with your attorney.