1. What costs are allowable for the prime and subcontractor?
2. If prime contractor is already performing work under contract, should the Government allow cost for prime contractor such as Superintendent, Project Management, material, labor, equipment, overhead, profit, etc.? Is this considered double charging the Government, when the subcontractor is performing the work?
FAR 31.201-2 provides the definition of an allowable cost. Among other things, the costs have to be reasonable, allocable and in accordance with the Cost Accounting Standards. Further guidance on allowability can be found in the Contract Pricing Reference Guides, Volume 3, Chapter 3 - Identifying Considerations Affecting Cost Allowability.
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For your construction contract, FAR 36.214(a) states: Agencies shall follow the policies and procedures in Part 15 when negotiating prices for construction. Therefore, if the proposal is over the certified cost or pricing threshold, you are required to obtain certified cost or pricing data and do cost analysis on each cost element. If the proposal is not over the certified cost or pricing threshold, you can still obtain data other than certified cost or pricing data to help you determine a fair and reasonable price.
So basically, you are going to have to analyze the appropriate data to determine what costs are allowable and, if they are allowable, to what extent. Your technical analysis should help you determine which labor or supervisory types are appropriate and how many hours are appropriate for each type. Also, you will be looking for duplication or unnecessary effort that should be eliminated from the proposal, as appropriate. From there, you will establish your Government position and you will negotiate with the contractor to establish a fair and reasonable price.