Aronie: Paying the subcontractors

As anyone who sells services to the government through a multiple-award schedule contract knows, General Services Administration officials are interested in prices, not costs. This price-centricity is driven, in part, by federal regulations that explicitly instruct GSA to avoid seeking cost information from schedule contractors except in rare circumstances. It also is driven by GSA's stated goal of making the schedule program as commercial as possible.

For subcontracted services, GSA's focus is no different. When a schedule holder subcontracts with a nonschedule holder for the performance of services, GSA expects to be billed at the company's published prices for those services, regardless of the cost to the company.

The contractor benefits if the subcontractor charges less than the schedule holder for the services. The government benefits if the subcontractor charges more.

Last year, however, this fundamental precept of the GSA schedule program came into question when leaders at the Defense Contract Audit Agency (DCAA) publicly advised field auditors about how they should review orders placed under schedule contracts.

DCAA officials said a schedule holder providing service to the government through a subcontractor may not charge the government more than the amount the schedule holder paid the subcontractor.

In other words, if a schedule holder manages to get a better deal with a subcontractor, it must pass the savings on to the government. If this sounds at odds with GSA's apparent understanding of its own schedule program, that's because it is.

The basis for DCAA's position is a clause found in many, if not most, schedule contracts. The specific language appears in the Payments Under Time-and-Materials and Labor-Hour Contracts clause, or FAR 52.232-7 for those of you who, like me, keep a well-worn copy of the Federal Acquisition Regulation by your bed. Unfortunately, the clause appears to say exactly what DCAA says it does. It also appears to give the agency certain rights to audit contractor compliance.

Not surprisingly, GSA officials disagree with DCAA's interpretation of the clause, at least in the context of the schedule program. And word has it that GSA officials have written to the agency expressing this disagreement. While those officials work out their differences — and proposed changes to the applicable regulation cross the desks of people who enjoy thinking about these matters — the rest of us are left to operate in an environment of conflicting regulatory guidance.

This is unfortunate. At the end of the day, of course, it is possible that the conflict between GSA and DCAA will turn out to be much ado about nothing.

So far, DCAA auditors in the field do not appear to be spending much time focusing on this issue. But as Jack Palance said in "City Slickers," "The day ain't over yet."

Aronie is a partner in the government contracts group of Sheppard, Mullin, Richter & Hampton in Washington, D.C., and co- author of "Multiple Award Schedule Contracting." He can be reached at jaronie@sheppardmullin.com or (202) 218-0039.