A variety of industry groups are asking for a substantial rewrite of an interim rule recently issued by the Defense Department intending to protect the government against paying excessive pass through charges on subcontract work.  The rule follows allegations of profiteering from Hurricane Katrina and assertions that pass through charges under DOD time and material contracts are too high. The 2007 defense authorization bill directed DOD to issue regulations ensuring pass through charges (defined as overhead, profit or other costs added to the direct subcontract costs) were not excessive in relation to the cost of work performed by relevant contractors and subcontractors. The DOD rule includes a solicitation provision and a contract clause that prohibits “excess” pass through charges on fixed-price negotiated contracts (does not apply to fixed price contracts awarded on the basis of price competition or for commercial items) and requires offerors and contractors to identify the percentage of work that will be subcontracted. A 70 percent figure triggers the requirement for submission of further information such as indirect costs, profit and the value they add to the subcontracted work.

Though they emphasized different elements of the rule, all groups were unanimous in saying the 70 percent figure was not required from the Act and no rationale has been provided for its use. They also unanimously asserted that whether the pass through charges are excessive should be a one-time determination made by the contracting officer at the time of contract award, opposing any after-the-fact “look back determinations” by the CO.  Such look back provisions, most groups argued, would allow for continued post award audits with potential disallowances throughout the life of a contract and would unfairly give one party – the government – a unilateral chance to change a mutually agreed to price.  Rather the rule should be written “solely as a direction” to COs to deal with issues related to fairness and reasonableness and whether contractors and or subcontractors “add value” and should not focus on such items as contractor overhead rates, allocation of costs and accounting practices.

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