What are a Prime's options in this situation where we are being pressed to close and our subs cannot and/or refuse to close? Is the prime responsible for paying the sub for costs after the funds are canceled? Can we unilaterally close the contract without obtaining a contracting release? One suggestion that was provided to us was to change our subcontractor's contract type after execution has been completed.
It is generally recognized that settlement of subcontractor costs is a reason for delay of contract closeout. FAR 42.705(b)(1), Final Indirect Cost Rates, identifies this very reason as an extenuating circumstance for a lengthened timeframe for the establishment of rates.
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That said, for DCMA administered contracts, the Administrative Contracting Officer (ACO) has the responsibility for contract closeout. DCMA INST-135, March 4 2015, Contract Closeout, paragraph 126.96.36.199., Subcontractor Costs, states, "The prime contractor is responsible for auditing subcontractors and generally closes subcontracts using procedures similar to the Government. The functional specialist shall ensure that the prime has settled subcontractor costs before closing a contract/order. DCAA may issue a qualified indirect cost audit report indicating that audit of certain subcontract costs has not been completed. When the subcontract costs (direct or indirect) are considered to be immaterial, the functional specialist may proceed with contract closeout."
DCMA also addresses unsettled subcontract costs in DCMA-INST 125, April 21 2014 paragraph 188.8.131.52. "In some instances, the qualified audit opinion (due to another pending assist audit report) may relate to subcontract costs that are a type of other direct costs. Subcontract costs typically have no impact relative to settling a prime contractor’s final indirect rates."
If your subcontractor is unwilling to move forward the ACO may take unilateral action. DCMA-INST 125 paragraph 184.108.40.206.2. states "An ACO may decide not to wait for audit results when the ACO determines that regulatory time limits (such as covered by FAR 4.804-1(a)(3) and/or FAR 33.206 (Reference (d)) will not allow for additional time to wait for the results of a pending audit."
It is advised that you work with your cognizant DCMA and DCAA offices to determine the best way forward. While the government does not have privity of contract with the subcontractor, it can request a subcontract audit or even perform a rate check within DCMA for subcontract costs to assist you in establishing rates for closeout.