Congress Looks to Redefine the 'Subcontract'.

• Author: Cassidy, Susan B.
• Position: Government Contracting Insights

If an agreement qualifies as a "subcontract" under a government contract, then it may be subject to certain flow-down, compliance and reporting requirements.

These requirements are intended to protect the government's interests, and have significant ramifications for contractors such as increasing transaction costs and expanding potential areas of exposure. These compliance obligations and risks can even deter some companies from performing under government contracts, especially those companies offering commercial items.

So what is a "subcontract?"

Currently, there is no uniform definition of subcontract in the applicable procurement regulations or in the procurement chapters under Titles 10 and 41 of the U.S. Code. Indeed, there are more than 20 varying definitions of subcontract in the Federal Acquisition Regulation and Defense Federal Acquisition Regulation Supplement, with many clauses failing to specify which definition applies.

Congress is looking to address this lack of uniformity.

The House version of the fiscal year 2019 National Defense Authorization Act, which passed on May 24, offers a single definition of subcontract that would be added to Chapter 1 of Title 41 and Chapters 137 and 140 of Title 10. Section 832 of the House NDAA generally defines a "subcontract" to mean "a contract entered into by a prime contractor or subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind under a prime contract. The term includes a transfer of a commercial product or commercial service between divisions, subsidiaries, or affiliates of a contractor or subcontractor."

More importantly, Section 832 excludes the following categories of agreements from the definition of subcontract: "a contract the costs of which are applied to general and administrative expenses or indirect costs; or an agreement entered into by a contractor or subcontractor for the supply of a commodity, a commercial product, or a commercial service that is intended for use in the performance of multiple contracts." (See Section 831 for the definitions of a "commercial product" and a "commercial service," which would replace the term "commercial item.")

The House Armed Services Committee report explains that a single definition of subcontract would provide "clarification, simplicity and consistency for defense procurement actions." The Section 809 Panel--an independent advisory board on streamlining Defense Department acquisition...