Senate Unanimously Passes Bill Putting Subcontracts on the Spot

Last week the senate unanimously passed the Defense Authorization Bill which included a rule that would require all prime contractors to perform 50 percent of the services portion on awarded contracts, delivery orders, and task orders.  If more than 70 percent of the services will be performed by a subcontractor, the contracting officer is required to ensure amounts paid for overhead and profit are deemed reasonable.

The language is crafted to prohibit award unless the contractors agree to the provision.  Contracting officers will undoubtedly be instructed by a new FAR provision to insert a new clause in every contract or order (unless already included in the underlying IDIQ document). 

The provision in the bill escaped most peoples’ notice because it was offered at the last minute as a floor amendment during debate. 

The timetable specified in the NDAA requires that the mandated measures and implementing regulation be incorporated into the FAR within 90 days of passage of the Bill.  It further makes the effective date of the provision 90 days after passage and appears to do so regardless of whether the changes have been made to the FAR. 

As far as whether this provision will survive the Conference committee and be part of the Bill the President signs, the NDAA passed the Senate on a unanimous vote and that will make it VERY hard for the Senate Conferees to agree to delete the measure in any Conference Committee compromise.  There is no corresponding provision in the House version of the Bill.

As far as long term consequences go, they could be VERY serious and it has nothing to do with the Senator’s targets.  The SeaPort-e program is a good example.  There are about 350 prime contracts in the program, but there are more than 3,000 subs. A high percentage of the orders placed on SeaPort-e vehicles are passed directly through (virtually 100%) to one of the subcontractor team members. Some estimates are that 75% or more of ALL SeaPort-e orders are passed through to a subcontractor team member by the prime.  This provision could effectively kill the program or least require a complete restructure.  This happens so often when Congress fiddles with the FAR it even has a name – The Law of Unintended Consequences.

Most provisions of this type provide for some sort of exception process – approval by the Head of the Procuring Activity or the like.  You will notice that this one does NOT.  It’s a flat requirement.  Unfortunately it plays to the ultra conservative  members of Congress because it purports to prevent “layer-cake contracting” whereby lower tier subs pass their costs up the prime/sub chain until a dollar of labor costs becomes five or six dollars of expense to the Government.  That doesn’t actually happen, but it sounds good from the stump and that’s what this provision is all about.

The bill passed 98-0; this is only the second time that has happened in 51 years and is expected to hit the President’s desk next week. 

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