ASBCA Repudiates DCAA Legal Theory for Prime Contractor Management of Subcontracts

In the recently published ASBCA Nos 59508 and 59509, the ASBCA agreed with the contractor and dismissed the government claim (final decision) which had disallowed $116,789,631 (subcontractor costs as components of direct costs claimed by the prime contractor).   The premise for the (failed) final decision was DCAA’s assertion that the prime contractor had breached its contractual duty to “manage” the prime contractor’s subcontracts and subcontractors.   The reference is FAR 42.202(e)(2) which states that the prime contractor is responsible for managing its subcontracts. In context, that clause makes it clear that the government (Contracting Officer) is only responsible for administering the prime contract. In contrast, and only by implication and a legal theory created by a DCAA auditor, the prime contractor assumes certain FAR Part 42 responsibilities for subcontracts.

Absent any contractual clause, which incorporates FAR Part 42, the ASBCA wholly disagreed with DCAA and the government assertions and cost disallowance.

Legal Theory

Particularly noteworthy in the ASBCA decision, FAR Part 42.202 is not a contractual clause nor is it incorporated by reference into a contractual clause. The contract does include FAR 52.232-7; Payments under time & material contracts, and the government never took issue with the contractor’s compliance with 52.232-7.   The contractor went to great lengths to explain its policies and procedures for compliance with FAR 52.232-7, specifically the section regarding the prime contractor program management oversight of all subcontractors (page 12 of the ASBCA decision).   DCAA’s disregard for relevant facts was unfortunate for the contractor (and ultimately the taxpayer) who paid for wasted audit time, wasted contractor time responding to flawed audits, and government legal services and costs to prosecute a claim based upon a “non-existent legal theory, originated by an auditor”.

Clarification of Policy

To be fair to the particular DCAA auditor, he/she was not the original author of the legal theory. The field auditor merely relied on DCAA’s audit policy, one of many which embellishes the FAR through interpretations or additional requirements; in this case the following embellishments of FAR 42.202:

• That the (prime contractor’s) responsibility to manage subcontracts includes negotiating access to the contractor’s specific audit results that pertain to the prime contractor’s ability to settle the claim with the government,
• The prime contractor did not provide any records demonstrating that they attempted to cause the subcontractor to prepare an adequate indirect submission (indirect cost rate proposal) or any requests to the Government for assistance if the subcontractor refused
• A literal interpretation of FAR 42.202 requires the prime contractor to act on behalf of the government and serve as both the CO and the CAO (Contracting Administration Office); this includes the requirement for the prime contractor to audit their subcontracts or request audit assistance from the involved DCAA office. The government could not compel the subcontractors to comply with the requirements set forth in their contract with the prime contractor.

And There’s More….

As the issue evolved, some of the subcontractor costs were disallowed based upon Assist audits, both self-initiated and performed by DCAA. On a particular task order, DCAA questioned $18,545,038 based upon assist audits (of subcontract costs) and $83,749,853 at the prime level (the balance which had not been questioned by assist audits was summarily questioned because the prime allegedly failed to comply with 42.202). Although the prime contractor had no access to the assist audits (the subcontractors would typically not allow DCAA to disclose any competitive sensitive details to the prime contractor), DCAA apparently expected the prime contractor to blindly accept DCAA’s assist audit. In responding to the prime contractor’s assertion that it can’t possibly accept $18,545,038 in disallowances without any details, DCAA asserted that the prime contractor should have negotiated access to specific audit results, ignoring the reality that very few subcontractors ever agree to such access.   The moral to this part of the story (as authored by DCAA) is that the prime contractor did not manage its subcontractor by failing to negotiate access to future potential audits which might be performed by DCAA or an undisclosed audit agency or company (absurdly categorized by DCAA as “specific audits” which couldn’t be identified at the point of negotiating a subcontract).

Unfortunately, DCAA’s and the Government’s failed attempt to succeed on a non-existent contractual requirement based upon a legal theory originated by an auditor is but the tip of the iceberg of issues involving millions in questioned subcontract costs. Many more of these are visible (in summary fashion) in Appendix H of the DoD-IG Semi-Annual Report to Congress. This theory was also in play within a DOD-IG report (2015-061) which concluded that there was no contractual basis for DCAA to apply a 20% decrement to total subcontract costs based upon (DCAA) allegations that a prime contractor was deficient in managing subcontracts during a particular fiscal year.

The Bottom Line:

If DCAA were an ethical organization, they would rescind every open audit report based upon DCAA’s flawed belief that prime contractors are required to manage subcontractors, including requiring and auditing (or coordinating an audit of) subcontractor indirect cost rate proposals.   As with other published decisions, it is far more likely that DCAA will pretend either that this one never happened, or that DCAA and the Government would have prevailed, except for the opinion of the pesky Administrative Judge who won’t subscribe to non-contractual legal theories originated by an auditor.