There seems to be a lot of questions and misconceptions about purchase orders and subcontracts. Is there a difference? When is it appropriate to issue either instrument?
What Does the FAR Say About Subcontracts or Subcontractors?
FAR subpart 2.1 definitions do not define a subcontract or subcontractor. While FAR 2.101 defines a “purchase order”, the definition relates to a purchase by the Government for supplies and services using simplified acquisition procedures. However, FAR 44.101 does define subcontract as “…any contract as defined in subpart 2.1 entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.” Essentially, under the Federal Acquisition Regulations (FAR), a subcontract and purchase order are the same. But are they? Subcontracts are not purchase orders, but a purchase order becomes a contract.
Bottom line up front – As far as the Government is concerned anything you buy and charge direct to a government contract is a subcontract. Regardless of what term industry uses to refer to the purchase, under a government contract at any level the terms and conditions (i.e., contractual language) must conform to the FAR requirements based on dollar value, fixed price vs cost type, etc.
So Why Does Industry Often Distinguish Between Purchase Orders and Subcontracts?
It is because the buyer evaluates what they actually intend to purchase, and the complexities associated with the purchase. No matter what term is used to refer to the purchase it must set all the business terms, payment schedules, deliverables, scope of work if required and associated flow downs from the prime contract.
Subcontracts spell out the responsibilities of each party. It details the statement of work for the products or service being sold, the agreed upon prices, and terms and conditions for a period of performance. It is appropriate to issue a subcontract if a specialized portion of your scope of work is intended to be performed by the subcontractor. This may include labor support, development of hardware/software to include travel and other direct costs to support the effort. The subcontractor may have specific deliverables, reporting requirements and be subject to security classifications. A subcontract is intended for a longer duration, may include option renewals, complex payment arrangements or metrics tailored to fee and performance.
On the other hand, a purchase order is generally used to order a product or for a single transaction. The single transaction may be for the purchase of materials by the unit, complete system, or service which maybe incidental to the scope of work. Generally speaking, purchase orders have shorter periods of performance and are less formal.
What About Flow Down Requirements?
Regardless of whether you are issuing a purchase order or a subcontract, you should pay attention to your business terms and conditions and required Federal Acquisition Regulations (FAR) or other agency supplemental clauses if the purchase is in direct support of a government contract. The FAR and agency supplemental clauses required to flow down to lower tier must be included in the instrument, regardless of the type of order.
How Important is my Selection?
Subcontracts and purchase orders may be used for separate acquisition scenarios; however, they are both part of your purchasing system. If you do not have a purchasing system in place, you are still required to meet the requirements under the FAR to support your purchases that are charged to a government contract. From an internal workflow process, focus on your immediate and future needs. From a compliance standpoint, it does not matter as the criteria for all purchases are the same.
Buyers should consider what the long-term needs are for the products and services. There are multiple contracting arrangements a buyer can put in place to attempt to expedite and streamline purchases; however, any vehicle requires thought and time to put in place. Finally, all purchases directly charged to government contracts should be documented sufficiently to support the applicable FAR criteria.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors from contract award to contract closeout. We would be happy assist you with questions and concerns. Our staff includes specialty areas of human resources, accounting, pricing, and contract administration to assist our clients in the contracting industry.