Subcontracting

General Subcontracting Considerations

A prime contractor’s decision to subcontract or not to subcontract is an important one. A subcontract may involve a large percentage of the prime contract’s value. It introduces an element of risk because another company becomes responsible for performing work and/or delivering supplies required by the Government. A prospective prime contractor must decide:

1. Should I provide all of the items or services to be delivered to the Government using organic (in-house) company resources?
2. If “No” to the first question, then how much of those items and/or services should be subcontracted out to one or more other companies?

If the prime contractor chooses to procure items or services using a formal subcontracting arrangement and those items or services could have been developed or delivered more efficiently using “in-house” resources, the prime contractor will suffer financially. Moreover, managing subcontracts involves tracking performance, resolving disputes, and re-negotiating agreements. These time-consuming activities must be factored into any subcontracting decision.

Despite the considerations mentioned above, a prime contractor’s ability to award subcontracts to other companies can be a wise business decision. It often leads to superior performance outcomes that can only be achieved by companies specializing in certain aspects of the Government’s work requirement. For example, aerospace companies frequently subcontract the development and manufacture of avionics, landing gear, radar systems, and other complex items to subcontractors. The prime contractor may form a team to manage one or more of its subcontracts. This team may include a subcontract administrator, equipment engineer, quality engineer, price/cost analyst, property specialist, and on-site program office representative. This team helps the prime contractor to maintain cost, schedule, technical, and configuration control over its subcontract(s).

The prime contractor retains legal and management responsibility for overall contract performance. There is privity of contract between the Government the prime contractor and between the prime contractor and subcontractor(s). There is no privity of contract between the Government and the subcontractor. However, the Federal Acquisition Regulation and its supplements contain certain contract clauses that must “flow down” to subcontractors.

Subcontracting Issues Unique to Federal Contracting

In addition to the general business considerations discussed above, prospective prime contractors can benefit by including plans to subcontract in proposals submitted in response to Government solicitations. Government departments and agencies are evaluated on how well they achieve their goals of awarding contracts that involve participation of companies qualifying under the socioeconomic programs covered in FAR Part 19 (Small Business Programs) and FAR Part 26 (Other Socioeconomic Programs). These goals are based on awards to qualifying prime contractors and on participation by qualifying subcontractors.

FAR Subpart 19.7 describes the federal government’s Small Business Subcontracting Program. Any contractor receiving a contract for more than the simplified acquisition threshold must agree in the contract that small business, veteran-owned small business, service-disabled veteran-owned small business, HUBZone small business, small disadvantaged business, and women-owned small business concerns will have the maximum practicable opportunity to participate in contract performance consistent with its efficient performance. 

FAR 19.702(a)(1): Except as stated in paragraph (b) of this section, section 8(d) of the Small Business Act (15 U.S.C. 637(d)) imposes the following requirements regarding subcontracting with small businesses and small business subcontracting plans: (i) In negotiated acquisitions, each solicitation of offers to perform a contract or contract modification, that individually is expected to exceed $750,000 ($1,500,000 for construction) and that has subcontracting possibilities, shall require the apparently successful offeror to submit an acceptable subcontracting plan. If the apparently successful offeror fails to negotiate a subcontracting plan acceptable to the contracting officer within the time limit prescribed by the contracting officer, the offeror will be ineligible for award. (ii) In sealed bidding acquisitions, each invitation for bids to perform a contract or contract modification, that individually is expected to exceed $750,000 ($1,500,000 for construction) and that has subcontracting possibilities, shall require the bidder selected for award to submit a subcontracting plan. If the selected bidder fails to submit a plan within the time limit prescribed by the contracting officer, the bidder will be ineligible for award. 

FAR 19.704(a) describes what is required to be included in subcontracting plans submitted by offerors in response to Government solicitations. In addition, FAR 15.304(c)(4) requires that, for solicitations involving bundling that offer a significant opportunity for subcontracting, the contracting officer must include proposed small business subcontracting participation as an evaluation factor. There are certain restrictions on when companies may actually use subcontracting on a Government contract. FAR Subpart 44.2 discusses “Consent to Subcontracts.”

Since 2007, companies winning federal contract awards have reported their subcontracting activity in the Electronic Subcontracting Reporting System (eSRS). Government contracting officers use this information to evaluate offerors on the success of their subcontracting efforts under past federal contracts.