SUBCONTRACT ADMINISTRATOR: Small Business Subcontractor Accounting
Did you know that, when your company hires a subcontractor, your company – not your customer (or the federal government) – is obligated to verify the Accounting System and (if applicable) the cost proposal of that subcontractor?
A subcontract is a purchase, chosen by your company – not by your customer. Your company has the oversight responsibility to justify the source (A firm owned by your sister-in-law?) and the price (Twice the market rate?). Which subcontracts are audit targets? Future customer reviews and audits are likely to evaluate each subcontract with a price of about ten percent (10%) or more of all direct (Cost of Goods and Services Sold) Subcontract costs to your (buying) company, on any single (sales) contract. …So should you!
Your company verifies price reasonableness, when the subcontractor’s cost proposal for a sole- or single-source is based on (documented support, or) cost or pricing data. Your company also verifies reasonableness, for a cost-reimbursable subcontract based on a cost proposal. The reimbursable costs negotiated for a significant-dollars, direct subcontract obligates your company (the immediate buyer) to perform an Accounting System Review. How else can you justify that the subcontractor’s cost proposal is allocable, allowable, and reasonable?
Do you know what the Government specifically means by each question on the SF 1408? Do you know the difference between a pre-award and a post-award Accounting System Review? Think you don’t care?
Don’t award any cost-reimbursable subcontracts? …But wait! There’s more.
Contracts and major subcontracts funded by the federal government contain Terms and Conditions that allow for a Termination for Convenience (T for C). What happens after you terminate a Fixed Price subcontract? Oops! All incurred but unpaid costs (with no profit) are payable for undelivered items (i.e., Work In Progress). This effectively converts the remaining T for C subcontract into a cost-reimbursable contract. You awarded Fixed Price subcontracts, so you wouldn’t have to jump through all these justification hoops. Nah-uh!
Is your company a Small Business, focused on delivering goods and services that exceed your customer’s expectations? Don’t care to learn how to justify (new-award or T for C) supplier cost-proposals? Don’t care to divert resources to perform an Accounting System Review of your subcontractors?
Outsource! A consulting firm that focuses on accounting and cost-auditing in the GovCon market, already, can be more efficient and much less expensive. Your company’s Accounting or Finance Department has a full workload. Don’t underestimate the expertise or time-consumption of these Subcontract-related obligations. The evaluations (of your company’s evaluations) by your customers, especially the Contracting Officer, won’t underestimate them.