In accordance with Federal Acquisition Regulations (FAR) 52.215-23, any indirect costs and associated profit applicable to subcontract costs where the contractor does not provide "added value" (e.g., subcontract management functions) are considered excessive pass-through costs which are unallowable.

As part of a forward pricing proposal audit, auditors will perform procedures to evaluate a contractor's proposed support to demonstrate its added value when the proposed subcontracts are expected to exceed 70 percent of the total costs of work to be performed.

During incurred cost audits and evaluations of final vouchers, auditors will also perform procedures to test compliance with the subject FAR provisions. 

The FAR provision, is applicable to DoD and civilian agencies.

Some Background and Explanation 

Section 866 Duncan Hunter National Defense Authorization Act required that the FAR be amended to minimize excessive pass-through charges by contractors (or lower-tier subcontractors) that add no or negligible value to the subcontracted work.  This resulted in the final rule, effective January 12, 2011, that amended FAR 15.408(n) and created FAR 52.215-22 and 52.215-23 clauses. The final rule also added fixed-price incentive contract types to the list of excepted contracts.

FAR 15.408(n) as amended, requires the Contracting Officer to include FAR 52.215-22 Limitation on Pass-Through Charges-Identification of Subcontract Effort, and FAR 52.215-23 Limitations on Pass-Through Charges in solicitations and contracts as follows:

·         For Civilian agencies when the estimated contract value or order value exceeds the simplified acquisition threshold and the contemplated contract type is expected to be a cost-reimbursement type.

·         For DoD when the total estimated contract or order value exceeds the threshold for obtaining certified cost or pricing data and the expected contract type is any contract type except- o Fixed-price with economic price adjustment, Firm-fixed-price or fixed-price incentive contract awarded on the basis of adequate price competition; or

·         Fixed-price with economic price adjustment, Firm-fixed price or fixed-price incentive contract for the acquisition of a commercial item.

Additionally, FAR 31.203 Indirect Costs was amended to include the provision "Indirect costs that meet the definition of excessive pass-through charges in 52.215-23, are unallowable".

****These requirements flow down to all levels of subcontracts.

GUIDANCE

FAR 52.215-22 requires the contractor to identify in its proposal the total cost of work to be performed by the offeror, and by each subcontractor. When more than 70 percent of the total cost of work to be performed is subcontracted, this clause also requires the contractor to (1) identify its indirect costs and profit applicable to the work to be performed by the subcontractor, and (2) provide a description of the "added value" it will provide related to the work performed by the subcontractor(s).

FAR 52.215-23 defines "added value" to be subcontract management functions (either direct or indirect) that are a benefit to the Government (e.g., processing orders of part or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, performing quality assurance functions).

Further, the clause provides that the Government will not pay indirect costs or profit/fee (i.e., pass-through charges) on work performed by a lower tier subcontractor to which the higher tier contractor cannot provide sufficient evidence that it provides "added value."

follow this link for the complete details of the DCAA Memorandum on Guidance Provided Auditors

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