Bill Amendment Threatens Subcontracting Opportunities

An amendment to the Defense Authorization Bill could leave subcontractors cut out of deals, as prime contractors suddenly see their right to incorporate management expenses into contracts disappear.

The amendment, introduced by Sen. Carl Levin, would require prime contractors to "pass through" subcontractor rates to the government, with no allowance for risk or overhead, according to a letter sent to the U.S. Senate by the Information Technology Association of America (ITAA). The amendment would apply only to time and material contracts, which are used when outcomes are open-ended and therefore difficult to price accurately.

"It is extremely frustrating," says Olga Grkavac, executive vice president of the Enterprise Solutions Division at ITAA. "I don't think that Sen. Levin ever expected the unintended impact of his amendment would be to reduce subcontracting opportunities. But primes can't be expected to manage subcontractors with no profit margin, no management cost and no overhead allocation."

A memorandum from Sen. Levin's staffer, Peter Levine, stated that "the process of charging prime contractor rates for labor performed by subcontractors at lower costs is a common practice," and Department of Defense officials seek to require primes to charge the government only the actual cost of a subcontract.

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That requisite would not apply at the start of a contract; at that time, a prime would be able to fully fund the overhead, often through a blended rate that finds a compromise through the rates of the subcontractor and the prime.

"But most of these contracts are three to five years," Grkavac says. "A small business could go out of business in the sense that they're acquired, or there may be new technology that the prime believes would benefit the government. In such cases, the only way they could add subcontractors is at a loss. It totally undermines the concept."

Of note, Sen. Levin has agreed to modify the amendment by adding letters from interested organizations to the record, Grkavac says. Whether the next step is a cloture vote, which offers a time limit on consideration of a bill, remains to be seen; at a minimum, it would have to go to Congress, given that it's not in the House version of the Bill.

"We think that maybe Levin would retract the amendment and ask DoD to go forward with a DFAR [Defense Federal Aquisition Regulation] rule-making," Grkavac says. "That would be part of the regulatory process, at least, opening the door for comment before a final rule. But, on the other hand, if we then try to get a floor vote, the topic won't be a picnic. While we think our arguments are strong, we're not kidding ourselves."