Limitation on Pass-Through Charges (FAR Case 2008-031)

FAC 2005-47 includes as final, with changes, the interim rule amending the Federal Acquisition Regulation (FAR) to implement section 866 of the Duncan Hunter National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2009, which applies to executive agencies other than DoD. DoD is subject to section 852 of the John Warner NDAA for FY 2007, which is also implemented in this final rule. Section 866 requires the Councils to amend the FAR, and section 852 requires the Secretary of Defense to prescribe regulations to minimize excessive pass-through charges by contractors from subcontractors, or from tiers of subcontractors, that add no or negligible value, and to ensure that neither a contractor nor a subcontractor receives indirect costs or profit/fee (i.e., pass-through charges) on work performed by a lower-tier subcontractor to which the higher-tier contractor or subcontractor adds no or negligible value.

Background:

DoD, GSA, and NASA published an interim rule in the Federal Register at 74 FR 52853, October 14, 2009, to implement section 866 of the Duncan Hunter NDAA for FY 2009 (Pub. L. 110-417) as well as section 852 of the John Warner NDAA for FY 2007 (Pub. L. 109-364). These acts required the Councils to amend the FAR to minimize excessive pass-through charges by contractors from subcontractors, or from tiers of subcontractors, that add no or negligible value, and to ensure that neither a contractor nor a higher-tier subcontractor receives indirect costs or profit/fee (i.e., pass-through charges) on work performed by a lower-tier subcontractor to which the contractor or higher-tier subcontractor adds no or negligible value.

To enable agencies to ensure that pass-through charges are not excessive, the interim rule included a solicitation provision and a contract clause requiring offerors and contractors to identify the percentage of work that will be subcontracted, and when subcontract costs will exceed 70 percent of the total cost of work to be performed, to provide information on indirect costs and profit/fee and value added with regard to the subcontract work. Seventy percent was selected as the threshold for this information reporting requirement, because it represents a substantial amount of subcontracting.

To ensure that the Government can make a determination as to whether or not pass-through charges are excessive, the interim rule incorporated a reporting threshold that affords the contracting officer the ability to understand what functions the contractor will perform (e.g., consistent with the contractor's disclosed practice) and thus will provide added value, whether it be before award, or if the contractor subsequently decides to subcontract substantially all of the effort. The rule provides a recovery mechanism for the excessive pass-through charges for those situations in which a contractor subcontracts all, or substantially all, of the performance of the contract, and does not perform the subcontract management functions, or other value-added functions, that were charged to the Government through indirect costs and related profit/fee.

The final rule adopts the interim rule with a minor change involving the addition of two types of fixed-price incentive contracts to the list of contracts at FAR 15.408(n)(2)(i)(B)(2) for DoD that are not subject to the limitation on pass-through charges clauses. These additions are fixed-price incentive contracts awarded on the basis of adequate price competition and fixed-price incentive contracts for the acquisition of a commercial item. Section 852 of the John Warner NDAA for FY 2007 (Pub. L. 109-364) is clear that DoD contracts awarded on the basis of adequate price competition, and DoD contracts for the acquisition of a commercial item are not subject to the limitation on pass-through charges.

The FAR Secretariat received five responses to the interim rule. These responses included a total of 31 comments on 23 issues. Each issue is discussed here.

The Effective Date for this final rule is 12 January 2011.

Click here to read the entire Federal Register notice for this rule.

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