Over the past decade, Congress has focused on eliminating excessive “pass-through” charges—charges defined as overhead costs or profits passed to the Government by contractors adding negligible value over work done by lower-tier contractors.  The efforts began with the Post-Katrina Emergency Management Reform Act of 2006, which introduced limitations on tiered subcontracts after allegations that the Government grossly overpaid for goods and services provided largely by lower-tier subcontractors in the reconstruction following Hurricane Katrina.  However, until the passage of the instant rule to be implemented in FAR 15.404-1(h) effective June 8, 2015, such efforts have had little impact on agencies’ procurement processes.  This latest rule has the potential to significantly reduce the appetite for such contracts, and impact proposal and bid protest strategies.

Prior to the passage of the rule, contracting officers had little formal limitations or guidance prohibiting the acceptance of pass-through charges.  In addition to the Post-Katrina Act, the National Defense Authorization Acts (“NDAA”) of 2007 and 2009 also contained provisions regarding excessive pass-through charges, but did not fundamentally alter agencies’ procurement processes.  The Federal Acquisition Regulation (“FAR”) implemented these provisions through FAR 52.215-22—a clause requiring offerors to inform the contracting officer when they intend to subcontract greater than 70 percent of the total cost of the work, and describe the “added value” they provide in such circumstances.  Thus, in the past, so long as offerors provided necessary additional information in their proposals, contracting officers were not restricted in awarding prime contracts even when the offeror proposed subcontracting greater than 70 percent of the work.

Section 802 of the NDAA of 2013 spurred the latest change to the FAR.  The NDAA and the new rule mandate that when contracting officers are informed of a disclosure under FAR 52.215-22, they must (1) consider the availability of alternative contract vehicles and the feasibility of contracting directly with a subcontractor or subcontractors that will perform the bulk of the work; (2) make a written determination that the contracting approach is in the best interest of the Government; and (3) document the basis for this determination.  The rule does not apply to small business set asides.

Efforts may soon be underway to implement the rule.  The Government Accountability Office recently criticized the Department of Defense (“DOD”), the State Department, and USAID for failing to issue meaningful guidance to contracting officers to implement the NDAA of 2013, and in response, DOD has indicated it will issue more guidance.  In the meantime, contractors intending to propose significant subcontracting should consider the changing legal landscape in formulating bid proposal strategies.  Indeed, even if the contracting officer decides to formally justify an award to an offeror proposing to subcontract greater than 70 percent of the work, potential competitors may now seek to challenge such justifications in protests, significantly increasing risks associated with these types of offers.

Tags: bid protests, Department of Defense, DoD, FAR, Federal Acquisition Regulation, National Defense Authorization Act, NDAA, Pass-through, Regulations, Rulemaking, Subcontracting
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Photo of Susan B. Cassidy Susan B. Cassidy

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors…

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors on compliance with FAR and DFARS requirements, with a special expertise in supply chain, cybersecurity and FedRAMP requirements. She has an active investigations practice and advises contractors when faced with cyber incidents involving government information, as well as representing contractors facing allegations of cyber fraud under the False Claims Act. Susan relies on her expertise and experience with the Defense Department and the Intelligence Community to help her clients navigate the complex regulatory intersection of cybersecurity, national security, and government contracts. She is Chambers rated in both Government Contracts and Government Contracts Cybersecurity. In 2023, Chambers USA quoted sources stating that “Susan’s in-house experience coupled with her deep understanding of the regulatory requirements is the perfect balance to navigate legal and commercial matters.”

Her clients range from new entrants into the federal procurement market to well established defense contractors and she provides compliance advices across a broad spectrum of procurement issues. Susan consistently remains at the forefront of legislative and regulatory changes in the procurement area, and in 2018, the National Law Review selected her as a “Go-to Thought Leader” on the topic of Cybersecurity for Government Contractors.

In her work with global, national, and start-up contractors, Susan advises companies on all aspects of government supply chain issues including:

  • Government cybersecurity requirements, including the Cybersecurity Maturity Model Certification (CMMC), DFARS 7012, and NIST SP 800-171 requirements,
  • Evolving sourcing issues such as Section 889, counterfeit part requirements, Section 5949 and limitations on sourcing from China
  • Federal Acquisition Security Council (FASC) regulations and product exclusions,
  • Controlled unclassified information (CUI) obligations, and
  • M&A government cybersecurity due diligence.

Susan has an active internal investigations practice that assists clients when allegations of non-compliance arise with procurement requirements, such as in the following areas:

  • Procurement fraud and FAR mandatory disclosure requirements,
  • Cyber incidents and data spills involving sensitive government information,
  • Allegations of violations of national security requirements, and
  • Compliance with MIL-SPEC requirements, the Qualified Products List, and other sourcing obligations.

In addition to her counseling and investigatory practice, Susan has considerable litigation experience and has represented clients in bid protests, prime-subcontractor disputes, Administrative Procedure Act cases, and product liability litigation before federal courts, state courts, and administrative agencies.

Susan is a former Public Contract Law Procurement Division Co-Chair, former Co-Chair and current Vice-Chair of the ABA PCL Cybersecurity, Privacy and Emerging Technology Committee.

Prior to joining Covington, Susan served as in-house senior counsel at Northrop Grumman Corporation and Motorola Incorporated.

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