FAR 43.202(e)(2) provides prime contractors are responsible for managing subcontracts. The law's first rule of interpretation is look to the plain meaning. Manage subcontracts means administer, guide, exercise control over. It does not mean conduct audit of or indemnify the government for unallowable subcontract costs. Guess what? DCAA, always willing to be the outlier and foil for the entire procurement system (and play lawyer the live long day), has decided manage means audit and primes are required to audit subs (because DCAA is too busy).
FAR 42.202 and DFARS 252.244-7001 make no reference to prime contractors having to audit subcontracts. In fact, the only possible support for DCAA's position is found in, FAR 52.216, 7(d)(5) which provides: “The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request”. Scant support for DCAA mandating prime contractor responsibility for expensive, time consuming audits and indemnification of the government. DCAA has said if primes do not discharge this duty, it will disallow all subcontract costs. What? That's illegal.
DCAA does not have the power to unilaterally impose a new regulatory requirement. Even more importantly DCAA has no right to disallow costs arbitrarily and without the approval of the contracting officer.
We recommend that a contractor facing this issue seek declaratory relief that DCAA does not have this power and any disallowance resulting from a failure to audit is null and void.
bill@spriggslawgroup.com
