Growing Pains: The Art of Subcontract Management for Small Business

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2 Growing Pains: The Art of Subcontract Management for Small Business Breakout Session # B02 Jeffery A. White, C.P.M, President/CEO J.A. White & Associates, Inc. Date: March 17, 2016 Time: 2:00pm 3:15pm

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4 Overview 1) Role of Prime Contractor When Subcontracting 2) Government Oversight - CPSR - Advance Notification and Consent to Subcontracts 3) Statement of Work 4) Source Justification 5) Representations and Certifications 6) Negotiating Terms and Conditions 7) Price Analysis 8) Current Subcontracting Topics 3

5 Role of Prime Contractor Subcontract establishes relationship between the Prime Contractor and its Subcontractor(s) In terms of compliance management, the purpose of a subcontract is to establish a relationship between the Prime and Subcontractors which protects the rights and interests of the Government via incorporation of flow downs. 4

6 Contractual Relationships: Privity of Contract Government Contractor Subcontractor 5

7 Non-Disclosure Agreement (NDA) Q: Is a Non-Disclosure Agreement really important? Absolutely! As a legally binding agreement under which potential Parties exchange or disclose proprietary information, an NDA will protect Opportunity-Specific sensitive or proprietary company information of both Parties. Q: When is the correct timing to establish an NDA? An NDA should be established and executed Prior to discussions with another company where it may be necessary to submit or exchange Proprietary information, technical data, cost or pricing data, technical data or other information designated as proprietary. Obtaining an agreement between the two prospective Parties ensures proper handling of the data and prohibits public disclosure or use of proprietary information. Reference 18 U.S.C. 1905, Trade Secrets Act FAR Part , Limited Use of Data FAR (e), Restriction on disclosure and use of data 6

8 NDA: Key Elements of Negotiation **Established NDA s shall not violate the antitrust statues as set forth in 18 U.S.C. 1905, Trade Secrets Act or limit the Government s rights in FAR Part IP Rights Warranty Disclosure Governing Law Residuals clauses Export Language Third Part Inclusion Term of Protection Limitation of Liability Assignment and Transfer No Limitation of Liability Assignment of Personnel 7

9 Teaming Agreement (TA) A Teaming Agreement can be one of the most beneficial documents at pre-award but its true value is often underutilized. A formal written agreement, where a potential prime contractor and partner cooperatively pursue a single business opportunity for a competitive edge. Specifies the responsibilities of both Parties during the proposal period and prior to award of a subcontract. May indicate the type of work that will be awarded in the event a prime contract is awarded. Many small business partners don t want to make waves with larger companies. They don t ask for terms which could be critical advantages that would flow down to the actual awarded subcontract agreement. 8

10 Teaming Agreement Negotiation Elements Obligations of the Parties Party obligations should not be vaguely written but clearly stated. Agreement language should address exclusivity, prevention of OCIs and violations of the Procurement Integrity Act. Award of a Subcontract to Teammate Understanding the difference between shall and may during negotiations. These small words, carry significant weight. Although the TA is not the appropriate agreement for subcontract terms negotiation, there are a few that will benefit a partner if flowed down from the TA to the subcontract agreement. Hiring of Employees Most often, this language can be made mutual between both Parties. Awareness of the agreement terms and remedies can prevent violations. 9

11 Teaming Agreement Negotiation Elements Limitation of Liability Have you ever requested a liability cap? Was the request denied? For the small percentage where caps on liability are accepted, the limits are often very high. Dispute Resolution Depending on a prime s company policy, knowing and understanding all aspects of Binding Arbitration vs. Mediation. 10

12 Teaming Agreement Negotiation Elements Export Most export violations occur because of a lack of understanding of Export Administration Regulations of the U.S. Department of Commerce and the International Traffic in Arms Regulations of the U.S. Department of State. Termination for Convenience Although most often a prime will not remove this language, there is alternative language that can be inserted for a win-win to both Parties. Rights and Licenses Clearly state the nature of work. Elements to consider are: (a) Will data/information be created or delivered during performance of the agreement? (b) Is there an interest in being able to use this information again in the future and for purposes other than those related to this agreement? 11

13 Teaming Agreement Negotiation Elements Indemnification A mutual benefit to both Parties. Governing Law Why a prime is unable to accept certain states during negotiation. Exhibit A Statement of Work (SOW) The SOW should detail the type of work to be performed by the teammate in the event an award and subsequent subcontract is issued. In most cases, using the prime contract SOW is not sufficient, as those terms are written specifically for the prime contractor and are too broad in scope for a teammate. The SOW should be tailored by the prime to describe only the requirements that would be required from the specific partner. 12

14 Milestones Period of Performance Performance Location Security/ DD 254 Contract Type (FFP, T&M, CPFF) Deliverables / Reports SOW Background/ Purpose Government Furnished Equipment (GFE) Progress Reports Travel Material ODC Subcontractor Scope/ Requirements 13

15 Statement of Work: Key Contract Elements Tailor the SOW to reflect the Subcontractor s specific efforts. Provide a brief statement of (a) why the work is required and (b) the overall objectives. This can include any background that you feel is important. Identify all of the tasks and work elements to be accomplished. List any deliverables (end products), such as a final report, training, technical items, or documentation. Identify which party is going to perform each task. This is important if both parties are doing tasks or if one party is depending on the other party to provide something before a task can be accomplished. State any specifications/standards that must be followed. Identify where the work will be done. When the work is to be done. 14

16 Request for Proposal (RFP) Representations and Certifications New awards and annual submission. Insurance Certificate New awards and annual submission. Why this requirement should never be waived. Wage Determination (if applicable) If Prime Contract stipulates, this requirement must be flowed to the subcontractor. Company Data Documentation New awards and per internal policy. Used to update records or set up as a new subcontractor Statement of Work: Containing all subcontractor tasks and requirements. Cost Proposal: Labor Categories, Labor rates, Travel, Material and ODC s. Technical Summary/Resumes: Brief description of how a company will accomplish the SOW. Draft Subcontract: To include prime contract Flow Downs. Organizational Conflict of Interest (OCI): When applicable, conflict of interest certification. 15

17 Single/Sole Source Justification Required in accordance with: FAR The Contractor shall select subcontractors (including suppliers) on a competitive basis to the maximum practical extent consistent with the objectives and requirements of the contract. Must be signed and dated by requestor prior to award. 16

18 Non-Competitive Sourcing Rationale Only One Known Responsible Source Customer Directed Engineering and Management Directed Unusual & Compelling Circumstance Industrial Mobilization Research and Development International Agreements Authorized or Required by Statute National Security Not in the Public Interest Follow-on Procurement Financial Considerations Logistical Reasons 17

19 Source Justification Issues The existence of a Teaming Agreement does not justify lack of competition. Lack of Competition does not mean that price is fair and reasonable. Source Justifications need to be written by requesting community, but reviewed by Procurement function. Market Research must form the basis for noncompetitive source selections. 18

20 Non-Competitive Documentation Develop a Standard Form! File Justifications and Documentation for NOT Competing must include sufficient FACTS and RATIONALE and supported by Market Research. What exception to competition is being used and why? Anticipated cost of the procurement. Anticipated injury to the Government if competition was sought. Market Research showing efforts made to identify as many potential subcontractors as practicable. Listing of companies that have expressed an interest. Statement of actions to remove barriers for future procurements. 19

21 Standards for Competition What is Competition? FAR (c)(1) standards for competition are: 1. Two or more responsible offerors, competing independently, submit priced offers that satisfy the Government's expressed requirement and if 20

22 Standards for Competition Award will be made to the offeror whose proposal represents the best value (see FAR 2.101) where price is a substantial factor in source selection; and There is no finding that the price of the otherwise successful offeror is unreasonable. 21

23 Why Perform Price Analyses? Contracting Officers (buyers) shall purchase supplies and services from responsible sources at fair and reasonable prices (FAR ). Price Analysis tools assist in the determination of the FAIR and REASONABLENESS of costs and prices. 22

24 Price Analysis - Comparison Process Select Price for Comparison Identify Factors that Affect Comparability Determine Effect of Identified Factors Adjust Prices for Comparison Compare Offered Prices with Adjusted Prices Prices for Comparison Other Proposed Prices Commercial Prices Previously-Proposed Prices Subcontract Prices Parametric Estimates Independent Estimates Quantitative Techniques to Adjust Prices Index Numbers Trend Analysis Price-Volume Analysis Graphic Analysis Learning Curve 23

25 Key Elements of Subcontract Negotiations Price/Cost Payment Terms Subcontract Type (FFP, T&M or CPFF) Key Personnel Period of Performance and Option(s) Terms and Conditions Travel and Other Direct Costs (ODC s) Scope of Work Reporting and Milestones (if applicable) Invoicing and Payment Delivery Close Out Disclosure Export Control Indemnity 24

26 Key Elements of Subcontract Negotiations Insurance Limitation of Liability Governing Law Disputes Order of Precedence Warranty Prime Contract Flow Downs Privity of Contract with Client Inspection and Acceptance Non-Solicitation of Employees Supplemental Provisions Termination 25

27 Representations and Certifications Required immediately PRIOR to award and MUST BE NON THE FACE of a PO/Subcontract: Debarment Payment to Influence Consider Annual Certifications for: Previous Contract and Compliance Reports Affirmative Action Small Business Size Status Combating Trafficking in Persons Business System Questionnaires Stand-Alone Certifications: Certificate of Current Cost or Pricing Data Organizational Conflicts of Interest 26

28 Seller Debarment, Suspension, and Ineligibility SAM at your fingertips Applies to all solicitations and procurements awarded under Government prime contracts or subcontracts. Per a company s internal Procurement policy, an Buyer/SCA shall not award procurements against a Government contract/subcontract to a seller that has been debarred, suspended, or proposed for debarment unless there are compelling reasons to do so. (Written Senior Management and company Legal approval required). REFERENCE FAR Subpart 9.4, Debarment, Suspension, and Ineligibility FAR Clause , Protecting the U.S. Government s Interest When Subcontracting with Subcontractors Debarred, Suspended, or Proposed for Debarment GSA Publication, List of Parties Excluded from Federal Procurement or Non-Procurement Programs Internet Address: 27

29 Advance Notification/Consent Consent is REQUIRED under FAR Part 44 and FAR Part Check specific prime contract requirements for consent and/or notification guidance Issue Notification PRIOR to award Obtain Consent PRIOR to award 28

30 Contracting Purchasing System Review (CPSR) A compliance review of the purchasing/subcontracting systems, processes, and practices. It does not apply to competitively awarded FFP, competitively awarded FP/Economic Price Adjustments, and sales of commercial items pursuant to FAR Part 12. The CPSR provides the ACO with the insight required to determine if a Contractor s Purchasing System approval should be Granted, Withheld or Withdrawn. 29

31 Scope of CPSR Policy and Procedures Processes and Practices Enterprise System File Reviews Assessment of Management Assessment of Procurement Personnel Other Functions Involved: - Finance and Accounting - Engineering - IT - Property - Security - Contracts - Human Resources 30

32 CPSR Process (DFARS ) Risk Assessment to Contractor Contractor Selected for Review Pre-CPSR Data Request sent to Contractor CPSR Team On-Site for 1-2 weeks CPSR Report is Issued to ACO ACO makes Final Determination of System Status Contractor Responds to Initial Determination ACO makes Final Determination Contractor Reassessed Every 3 Years 31

33 CPSR/DCMA Oversight Environment CPSR's can trigger and/or influence other audits: Earned Value Management System Material Management Accounting System Property System Estimating Systems Accounting/Billing Systems DCAA Audits Inspector General Audits 32

34 Impact of an Unsuccessful CPSR on Contractors: Losing The Competitive Marketing Advantage! Source Selection Implications Negative Impact on Competitive Acquisitions Past Performance Implications Losing a Competitive Proposal Loss of Revenue 33

35 Impact of an Unsuccessful CPSR on Contractors: Procedural Burdens with Project Management Increase Administrative Contracting Officer Surveillance ACO WILL NOT waive ACO Consent to Subcontract Delay in Placing Orders Increase Administrative Expenses Delayed Billings & Collections 34

36 Documentation Tips The Key to Compliance is Documentation! Documentation! Documentation! Provide Objective Evidence ( OE ) in the file to Support statements and determinations made 35

37 For Additional Information Jeffery A. White, C.P.M., President & C.E.O. J.A. White & Associates, Inc Garner Lane, Suite 104 Columbia, SC Office: (803) For more information: 36