Can the prime include the G&A on subcontracts in the calculations to achieve the goals of 51% per the above referenced FAR?
1. The FAR references quoted below in pertinent part are applicable to this response.
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FAR 2.101 Definitions
“Direct cost” means any cost that is identified specifically with a particular final cost objective. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract.
“General and administrative (G&A) expense” means any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period.
FAR 15.306 -- Exchanges With Offerors After Receipt of Proposals
(c) Competitive range. (1) Agencies shall evaluate all proposals in accordance with 15.305(a), and, if discussions are to be conducted, establish the competitive range.
(d) Exchanges with offerors after establishment of the competitive range. Negotiations are exchanges, in either a competitive or sole source environment, between the Government and offerors, that are undertaken with the intent of allowing the offeror to revise its proposal. These negotiations may include bargaining. Bargaining includes persuasion, alteration of assumptions and positions, give-and-take, and may apply to price, schedule, technical requirements, type of contract, or other terms of a proposed contract. When negotiations are conducted in a competitive acquisition, they take place after establishment of the competitive range and are called discussions.
(3) At a minimum, the contracting officer must, subject to paragraphs (d)(5) and (e) of this section and 15.307(a), indicate to, or discuss with, each offeror still being considered for award, deficiencies, significant weaknesses, and adverse past performance information to which the offeror has not yet had an opportunity to respond.
FAR 52.219-14 -- Limitations on Subcontracting
(b) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for --
(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.
2. The GAO and Court decisions quoted below in pertinent part are also applicable to this response.
a. Addx Corporation, B-404888, May 4, 2011
Where a proposal, on its face, demonstrates that an offeror is taking exception to the subcontracting limitation clause, the proposal is technically unacceptable. TYBRIN Corp., B‑298364.6, B‑298364.7, Mar. 13, 2007, 2007 CPD para. 51 at 5. This is so because the limitation on subcontracting is a material term of the solicitation, and a proposal that fails to conform to a material term or condition of a solicitation is unacceptable and may not form the basis for an award.
The issue of compliance with the subcontracting limitation does not concern whether a bidder or offeror can or will comply with the subcontracting limitation requirement during performance of the contract, which is a matter is one of responsibility or in certain cases, contract administration, but rather, whether the bidder or offeror has specifically taken exception to the subcontracting limitation requirement on the face of its bid or proposal. TYBRIN Corp., B‑298364.6, B‑298364.7, Mar. 13, 2007, 2007.
b. The Centech Group, Inc., v. U. S. and Tybrin, Inc., 07-513C, Filed Dec 7, 2007, Refiled Dec 13, 2007
[U. S. Court of Federal Claims; affirmed by U. S. Court of Appeals for the Federal Circuit]
[T]he Small Business Act, 15 U.S.C. § 644(o), provides that a concern may not be awarded a contract as a small business unless it agrees that at least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern. The Small Business Act, 15 U.S.C. § 644(o), plainly requires the small business prime contractor to agree to perform at least 50 percent of the cost of personnel with its own personnel. It is undisputed that Centech’s proposal, on its face, did not do that. As such, Centech’s proposal violated the mandate of the Small Business Act, which makes the prime contractor’s agreement to perform 50 percent of the labor costs itself a prerequisite to obtaining the award. Secondly, GAO correctly determined that Centech’s proposal was unacceptable because it failed to comply with the LOS clause -- a mandatory, material solicitation requirement.
3. As indicated above, FAR 52.219-14(b)(1) states that the base for calculating the prime contractor’s “50%” (i.e., versus a “51%”) expenditure requirement is the cost of contract performance incurred for personnel. First, because G&A expense includes both labor and non-labor costs, the entire G&A expense could not, in any event, be counted in the labor cost base to determine whether the contractor’s proposal is compliant with the “50%” work percentage requirement because the relevant cost of contract performance must be incurred for personnel only. Furthermore, pursuant to the definition in FAR 2.101, unlike “direct” labor cost, G&A expense covers the general management and administration of the business unit as a whole and does not include those management expenses whose beneficial or causal relationship is associated with a particular cost objective (i.e., an individual contract). Therefore, even if that portion of the G&A expense which represents only labor costs could be segregated, such labor costs cannot be included as part of the performance cost base to determine compliance with "The 50% Rule".
4. Based on the above, in our opinion, the prime contractor’s G&A expense cannot be included in the labor cost base used for determining compliance with "The 50% Rule” specified in FAR 52.219-14(b)(1). As a result, pursuant to the GAO and Court rulings referenced above, among others, and based on the information provided in the Background statement concerning the 8(a) offeror’s proposal, it would appear that this offer on its face fails to conform to a material term and condition of the solicitation (i.e., FAR 52.219-14(b)(1)) and is therefore unacceptable and may not form the basis for an award. However, if the offeror is otherwise determined to be in the competitive range, then the Contracting Officer must hold discussions with the offeror pursuant to FAR 15.306(d) and permit the offeror the opportunity to revise its proposal to correct this deficiency if possible.