Obscure FAR clause sows confusion

Defense auditors' interpretation could squeeze profits

Companies that hold General Services Administration schedule contracts could find their bottom lines affected by audit guidance that appears to restrict their ability to charge their own rates for services their subcontractors provide. The guidance could prevent contractors from charging more than the subcontractors' standard rates for services.

The Defense Contract Audit Agency (DCAA) issued the guidance in April 2004 to address possible confusion about pricing under some schedule contracts. Now industry groups want DCAA, GSA and lawmakers to clarify the memo.

GSA schedule contracts generally permit vendors that form a Contractor Teaming Agreement (CTA) to bill for services at the contractors' own rates. The schedules also allow a prime contractor to bill at its rate in a prime/subcontractor arrangement.

But some GSA schedule contracts also contain a Federal Acquisition Regulation (FAR) clause that specifically limits the amount a prime contractor can charge beyond the subcontractor's rate, and that has been a source of confusion.

Schedule contracts historically have been used for acquiring commercial goods. Government officials incorporate that clause, FAR 52.232-7, so that agencies can use schedule contracts when they buy commercial services.

The clause has created uncertainty among auditors and contractors about the allowable rates for reimbursing a prime contractor for subcontractors' work.

"The existence of this clause in a GSA schedule contract could be seen as superseding any CTA or prime/subcontract arrangement in a given order under that contract," according to DCAA's interpretation.

But it also is unclear whether DCAA is permitted to audit GSA schedule contract orders. The acquisition of commercial goods is not subject to the contract performance cost audits that DCAA typically performs.

The rules, however, allow contracting officers to add nonschedule items to orders placed under schedules. The FAR clause also provides certain audit rights.

The memo asks DCAA auditors to determine, line by line, which elements of a task order issued under a schedule contract are part of the schedule and which are not. DCAA auditors should audit those latter items under normal audit procedures, the memo states.

"It doesn't really solve the problem, but the clear implication is that the DCAA is going to enforce the time-and-materials clause" in the FAR, said Jonathan Aronie, a partner in the Washington, D.C., office of the law firm Sheppard, Mullin, Richter and Hampton and a Federal Computer Week columnist.

"The government's answer is that the prime contractor's rate is a cap," said Alan Chvotkin, senior vice president and counsel at the Professional Services Council. "We're just asking for clarity."

DCAA auditors ordered funds withheld from SRA International and IBM after evaluating contracts those companies hold, Chvotkin said. Neither company offered a comment or confirmation.

Industry officials say they are concerned that large contractors will have less incentive to use subcontractors if they cannot add something for themselves to the subcontractors' rates.

"To the extent that it makes it more difficult for prime contractors, they may not use [subcontractors] at all," Chvotkin said.

Other industry officials say that DCAA officials are misunderstanding the FAR.

"It's really a misinterpretation of the way the FAR reads," said Valerie Perlowitz, president and chief executive officer of Reliable Integration Services. "I understand the DCAA's role is to make sure the government isn't taken advantage of. They are the government's auditors, and I recognize that's a very important role. But when it comes to interpreting legal language, there is the chance of not interpreting [it] the way it was intended to be."

The FAR clause was meant to deal with materials, Perlowitz said, not "hours and bodies."

The memo's overall effect could be a cooling of companies' desire to hire subcontractors, she said. Companies are getting mixed messages from government, which is essentially saying, " 'We want you to be responsive and work with small businesses, but we're not going to pay you for that,' " she said.

Prime contractors should be able to add their own costs or charges to the rates their subcontractors charge because they have more responsibility, said Olga Grkavac, executive vice president of the Enterprise Solutions Division at the IT Association of America.

"When you go to a department store and order wall-to-wall carpeting, the installers are probably not employees of the carpeting store," she said. "But if you're not satisfied, you don't go back to the installers, you go back to the store."

Like other organizations, ITAA is trying to get a better understanding of the audit agency's intent, Grkavac said.

"It's something that ITAA has been concerned about for a couple of months," she said. "Right now, we're still not sure of all the answers."

Drew Crockett, spokesman for the House Government Reform Committee, said committee staffers are monitoring the situation, but are not now planning to take any action.

Alliant has become latest focus of FAR controversy

The draft solicitation for the Alliant governmentwide acquisition contract originally contained a provision that would limit the rates prime contractors could charge for services they provide through subcontractors. Agencies using the contract would have paid only the subcontractors' rates for time-and-materials or labor-hour orders.

GSA officials temporarily removed the language in the draft Alliant solicitation, basing their decision on early feedback from industry leaders, GSA spokeswoman Viki Reath said.

"GSA is discussing the provision internally, and prior to issuance of the final RFP, GSA will make a decision on whether or not the provision is included in the solicitation," Reath said.

— Michael Hardy

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