On February 11, 2011, the DCAA issued new guidance on Limitations on Pass-Through Charges per FAR 52.215-22, 52.215-23, 31.203(i):

As a part of forward pricing proposal audit, the Defense Contract Audit Agency (DCAA) is being instructed to evaluate proposals whose total subcontracted cost of work performed exceeds 70% of the total cost of work on a prime contract. Their evaluation will be to review the proposed support of the prime contractor to justify "added value" for these high subcontracted contracts, per the aforementioned FAR provisions.

During Incurred Cost Audits and evaluations of final vouchers, DCAA auditors will also perform procedures to test compliance with the FAR Provisions.

What does this mean to General Contractors (who act as Prime on a contract)?

This new guidance will have a pervasive effect on the Construction and Engineering industry and should be carefully considered prior to entering into new contracts.

Per FAR 52.215-23 - Indirect costs and associated profit, where the Government does not provide "added value" are considered excessive pass-through costs and are unallowable.

This means that if you sub-out over 70% of your work on a contract to subcontractors and are deemed by the DCAA to not provide "added value" to their work, your indirect cost and profit for that 70% could be excluded from Government payment.

What needs to be done?

Contractors need to establish a process to perform the calculation of Sub to Self performed work.

The calculation for Sub to Self performed work needs to be included within the proposal. Any overage of the 70% needs to be justified in writing to the Contracting Officer as "Added Value" work. Approval needs to be obtained for that proposed overage.

Actual overages, during the performance of the contract, need to be re-communicated to the Contracting Officer.

This new guidance will have a pervasive effect on the Construction and Engineering industry and should be carefully considered prior to entering into new contracts.