Most government spending goes to subcontractors, outside of agency supervision

Most contracting occurs where government lacks privity

By Michael P. Fischetti, Executive Director of the National Contract Management Association (NCMA)
Federal    January 28, 2015

Of the over $500 billion per year spent contracting for everything from computers to carriers, the vast majority of money ultimately awarded and performed by contractors happened without a contract directly from the government. Therefore, there is usually no business relationship (privity) between the government and the contractor doing work for its benefit.

How that can be? What’s going on? In fact, while the government awards a prime contract for products and services, most often many of the prime’s deliverables from that contract will be subcontracted out to one or many large and small business firms.

This is done for a variety of business reasons, among them:

  • cost;
  • quality;
  • flexibility
  • expertise and skill sets
  • strategy;
  • market knowledge
  • government requirements and acquisition strategy; or
  • familiarity with government contracting rules and process.

The Federal Acquisition Regulation (FAR) defines a subcontract as “any contract … entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract.” It’s still governed by government procurement laws and regulations, as the FAR still governs the parties’ subcontracting rights and obligations regarding award/administration, but subcontracts might also be governed by state law, the Uniform Commercial Code, common law, etc.

The government holds the prime responsible for managing subcontract performance as necessary to ensure lowest overall cost and technical risk to the government. If there’s a problem, the sub can’t sue the government, because its contract is with the prime. Government agencies manage through various contract provisions, reviewing plans submitted by the prime and oversight via audits and contractor purchasing system reviews (CPSRs).

The prime contractor’s purchasing agents or buyers (and/or supply chain professionals) must manage and stay aware of countless activities, including: supplier competition, make or buy plans, Truth in Negotiation Act submittals, competition in subcontracting requirements, advance notification and consent to subcontracts, CPSRs, small business subcontracting plans, and other government-mandated socioeconomic requirements, mandatory FAR and supplement flow‐down provisions, technical reviews, inspections, cost, labor, and pay audits, equal opportunity employment/affirmative action, global financial and economic pressures and disruptions, and detailed government requirements and oversight.

Today’s supply-chain community must learn and manage best practices such as performance‐based supplier contracts, price‐benchmarking clauses, market research, expanding commercial item acquisitions, improving supplier relationships, strategic sourcing and vendor management, spend analysis, professional development, understanding customer needs and prime contract requirements, enhancing cash flow and financial management of suppliers, etc. In other words, many of the same techniques and skills used to describe improvement to the government’s contracting manager skills, plus a few unique to the prime/subcontracting relationship.

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For help with Government Contracting: contact your nearest Procurement Technical Assistance Center (PTAC). Funded through Cooperative Agreements between the U.S. Department of Defense and state and local governments/institutions, PTACs provide free and low-cost assistance in virtually all areas of government contracting.