Prime Contractor’s Responsibility

In practice, most prime contractors and upper tier subcontractors rarely audit their subcontractors’ proposals. In recognition of this reality, the guidance stresses that even when the government audits a subcontractor, that “does not relieve the prime contractor of its responsibilities under the FAR.” The guidance alludes to FAR 15.404-3(b), Subcontractor pricing considerations and explains that it is the responsibility of the Prime to conduct appropriate cost or price analyses to establish the reasonableness of the proposed subcontract prices and include the results of that analyses in the Prime’s price proposal. The Prime is also responsible for ensuring the subcontractor’s proposal is adequate to support the Prime’s price or cost analysis as well as any examination conducted by DCAA or the ACO.

• Penalties for Failure to Conduct Price or Cost Analysis
  

The guidance states the Prime’s estimating system should include written policies and procedures in place to conduct the required cost or price analyses and provide the analyses to the government negotiator prior to negotiating the prime contract price. If due to time constraints or other factors the Prime cannot complete the required analyses before it submits its proposal, it should have written policies and procedures in place to ensure a plan is implemented to complete the analyses prior to the prime contract negotiation. No size threshold is mentioned in the guidance meaning the requirements apply to all contractors having proposed subcontract costs. Alluding to DFARS 215-407-570(d)(d)(ii), the guidance states that a contractor’s continued failure to perform subcontract price or cost analyses as required constitutes a significant estimating deficiency. The guidance instructs auditors to issue an estimating system flash report if the contractor fails to perform the required analyses. At major contractors, auditors are to take the additional step of conducting a limited scope internal control review to report as a significant internal control deficiency based on the evidence from the estimating system problem.

Though the guidance is clear about the responsibility of the Prime conducting price and cost analysis and potential penalties of not doing so, it is silent about the reasons why that function is not often taken nor how to do it. Whether it be subcontractors’ reluctance to provide sensitive cost data to companies it may be competing against later, lack of resources or reluctance to spend money and effort on auditing subcontract proposals when award is uncertain Primes do not commonly conduct reviews of subs’ proposals. Nonetheless they seem to have two options to avoid risk of not complying – either develop in-house capabilities where somehow there would be a firewall with the audit and proposal functions or utilize outside CPAs with experience conducting audits of contractors’ proposals who will provide either the Prime or government results of their reviews without divulging sensitive cost information to the Prime.

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