Risk Mitigation and Subcontract Management

Transcription

1

2 Risk Mitigation and Subcontract Management Breakout Session # C13 Danielle Carr, MSM Program Acquisitions, HMS Technologies Stacey B. Dey-Foy Director Suspension & Debarment, EPA July 28, 4:00pm

3 Overview Risk Management Mitigation Strategies Corporate Governance Program Subcontract Managment Government s Oversight Flow Downs Subcontract Types, Letter Subcontracts & Authorizations to Proceed Monitoring Subcontractor Performance 3

4 What is Risk? Risk is a measure of future uncertainties in achieving program performance goals and objectives within defined cost, schedule and performance constraints. Identifying Risk Supplier capability Government Regulatory Requirements Information Management Technology Performance

5 Risk Mitigation Mitigation requires a systematic reduction in the extent of exposure to a risk and/or the likelihood of its occurrence. Mitigating Risk in Government Contracting Risk is borne by all parties: Government, Prime, Subcontractor The FAR is an example of the government managing some of the risk inherent in any endeavor. 5

6 Risk Mitigation Tools Strategic Plans and Policies for managing the process Process Design and Implementation Organization and Skills Information for Decision-Making and Control Methodologies and Tools (for analysis and reporting) Systems and Data

7 Internal Controls Diagram:

8 Finding Misconduct Hotline Cases Outstanding Debts/Tax Delinquencies Program Officials/Certification Divisions Problems Detected by Internal Controls EPLS searches

9 Mitigating the Risks Maintain a well designed and tested system of internal controls. Ensure all financial or other certifications and progress reports are adequately supported with appropriate documentation and evidence. Identify any potential conflicts of interest issues and disclose them for specific guidance and advice. Implement specific fraud prevention strategies including educating others (Programs) about the risks the more people are aware of the issues, the more they can help prevent problems or detect them as early as possible. 9

10 Administrative Agreements Only if in the best interest of the government Terms : 3 rd party auditor, compliance policies, compliance training, government auditing, internal inspections, improve compliance systems, non-retaliation and employee reporting requirements 1 0 8/15/2014

11 11

12 What is a subcontract? A subcontract is an agreement between two parties that are pursuing common goals. The subcontract maybe the biggest line of defense when mitigating risk during subcontract management. It should address all key issues and ways to remedy them. It should also establish penalties and draw backs for no following what has been established in the agreement for both parties. 12

13 13

14 Should companies Subcontract? 14

15 Reasons why companies should Subcontract Strengthen Strategic Advantage Strengthen capabilities of prime contractor Easier access into closed markets Creates greater value to the Government customer. To obtain projects outside of the companies region. It would be more expensive to do a design build in order to set up another location when a teaming partner is already there. To share financial risk. 15

16 Awards over $650,000 the government has placed requirements on primes to subcontract to small disadvantaged businesses. 16

17 Downsides of Subcontracting Although subcontracting is great. There are many risks involved. 17

18 Risks to the Government Prime oversight is not necessarily in the governments best interest. Lack of government oversight. The government does not have privity over subcontracts. Risk of breaching constraints. This would include cost overruns, inability to meet scheduled deliverables, and the technical quality is not great. 18

19 Risks to the Prime Contractor FAR Prime contractors are responsible for managing subcontract performance to include planning, placing and administering subcontracts. To ensure the lowest overall cost and technical risk to the government. As necessary to ensure: Prime is responsible for financial accountability. The primes performance assessment is dependent on subcontractors performance. The subcontractors lack of timely reporting of costs on cost reimbursement contracts. There is complex government oversight. Tier 2 subcontractors seeking relief through prime contractor. 19

20 Risks to the Subcontractor Subcontractors may have more experience but forced to do things the primes way. The subcontractors performance is not always reported to the government. Prime pressure regarding price, cost, and delivery. Prime uses that are not applicable. 20

21 Government Oversight 21

22 Government s Focus Public trust Fiduciary responsibly Implement public policy. Government s interest Assure contract performance 22

23 Government s Oversight Provisions The Guidance in Subpart 44 makes it clear that the basis of CPSR and Surveillance is to assess the efficiency and effectiveness with which the Contractor spends Government funds and complies with Government policy (FAR ) Approved systems protect the interests of the Government In the absence of an approved system, consent process protects the Government s interests 23

24 Fixed Priced Prime Contracts No oversight of subcontracting Except on unpriced contract actions (UCA) Cost Reimbursement Prime Contracts Advance Notification Consent System Surveillance CPSR 24

25 Ethics and Compliance FAR (a), says, Government contractors must conduct themselves with the highest degree of integrity and honesty. Despite the governments lack of privity over subcontracts the government continues to have oversight indirectly. The government has created a contract with the prime that consists of terms and conditions along with regulations that also apply to subcontractors. It is the primes responsibility to ensure the governments oversight by flowing down applicable regulations to the subcontractor. 25

26 The federal government ethics and compliance requirements significantly impact the subcontracting process. These requirements can vary from basic to complex and be required to be flowed down to many tiers. The end result is the prime contractor must not only ensure compliance in its own organization but ensure that the subcontractors are also conducting themselves with the highest level of integrity and honesty. 26

27 If the prime contractor fails to do this effectively the consequences fall back on the prime. The consequences even include Suspension and Debarment. A prime contractor could find his/her company receiving a T4D or T4C. The worst case the company could be placed on the Excluded Parties List. 27

28 Sources of the Subcontracting Ethics and Compliance Requirements Sources of the FAR ethics and compliance requirements: FAR Part 3 Improper Business Practices and Personal Conflicts of Interest. FAR Part 52 clauses that implement FAR Part 3 policy. Many of the requirements deal solely with the behavior of government or prime contractor personnel. 28

29 The clauses that involve the subcontractors have emphasis on: When the requirement appears in the prime contract What the prime and subcontractor must do When the requirement must be flowed down 29

30 What are Flow Downs? 30

31 Flow downs are clauses from a Government prime contract that have been inserted into a subcontract or Purchase Orders for goods or services to be executed during the prime contracts performance period. Flow downs are usually incorporated based on the dollar value of the subcontract, subcontract type and off set risk. It is the Prime Contractor s responsibility to flowdown subcontract clauses to the subcontractor. 31

32 Flow Downs Magic Book 32

33 Many professionals new to subcontracting are continuously seeking for flow down guides. Unfortunately, no magic book of flow downs exist. However, flowing down clauses, terms and conditions becomes easier the more you do it. In the recent years NCMA has put a lot of focus into the subcontract management training seminars. However, more emphasis should be placed on training the subcontract management work force. 33

34 34

35 Section H in a prime contract will list the Government s Special provisions. Section I list the governments Scope of Work. Is the subcontract below $500,000 or above? If yes check to see if the below is in your prime contract: TINA: Truth In Negotiations Act - $700, (flow down to subs) Executive Compensation: Cost Accounting Standards: $700, (does not flow down to small businesses) Cost or Pricing Data: $700, (flow down to subs) 35

36 Primes Beware 36

37 Do not Flow Down all Clauses Novice SCA s do this. Flowing down all clauses could create major internal conflicts and possible render the subcontract incoherent. No reasonable subcontractor would/should accept it all clause flow-down this could cause relationship issues between prime and sub. The subcontractor could obtain rights that they should not have or you don t want them to have(e.g., limitation on subcontracting, unaltered disputes clause, payments clause, and others). 37

38 Subcontractors use Caution 38

39 Many Flow Downs are not applicable to subcontractors! 39

40 Subcontractors be mindful of boiler plate flow downs. Many risks are involved if a novice SCA handles this transaction. Many prime contractors tend include a generic list of flow downs into subcontracts along with standard T s and C s. Pay attention to indemnity/insurance clauses? If it is not applicable do not agree to it. If you have not seen the prime contract how do you know that is accurate? If you are a Small Business would you accept a CAS flow down? 40

41 Subcontract types Prime Contractors are not required to award the same types of subcontracts as their prime contract. 41

42 FFP - Firm Fixed Price FPAF - Fixed Price Award Fee FPIF - Fixed Price Incentive Fee Cost Reimbursable - T & M - L & H - IDIQ - BPA - 42

43 Subcontract Types and Associated Risk Fixed Price: Negotiated at fixed prices. The scope of work has been clearly defined. If the completed work does not meet the defined standards or any other quantifiable measurements, damages are borne by the seller. (Subcontractor has the highest risk.) Firm Fixed Price: Fee is fixed for the products or services. No incentives are given while cost over runs are borne by the subcontractor. Subcontractor has the highest risk. Scope of work has to be clearly defined. 43

44 Subcontract Types and the Associated Risk cont d. Fixed Price Incentive Fee (FPIF): Incentives are given to the sub in case the pre defined performance targets are met or exceeded. The performance targets and financial incentives are decided before the POP. In order to protect subs interest, a price ceiling is also decided. Anything above the ceiling is absorbed by the sub. FPIF s motivate subcontractors to try and get the incentives by over performing. Fixed Price with Economic Price Adjustment (FP-EA): These contracts are signed where the project duration covers several years. This protects the interests of the prime and subcontractor against external conditions beyond their control. 44

45 Subcontract Types and the Associated Risk cont d. Cost Reimbursable: Aimed at preventing risk from sub cost point of view when the scope of work is not clearly defined but can also change. Subs are paid the actual cost incurred to accomplish the work along with the subs profit. (Prime is at the higher risk) 45

46 3 Types of Cost Reimbursable Cost Plus Fixed Fee (CPFF): Subcontractor is reimbursed the actual cost of performing the work and a fixed fee. The fee is calculated as a percentage of the initial estimated cost. Fixed fee does not change with the cost. Cost Plus Incentive Fee (CPIF): Subcontractor is reimbursed the actual cost of performing and the incentive fee. Fee is based upon performance of the Sub. Cost Plus Award Fee (CPAF): All cost of performing the work is reimbursed plus the incentive is given to the Sub based upon performance. Subjective evaluation is done for sellers performance. 46

47 Time & Material Time & Material (T&M): These are mix of cost reimbursable and fixed price contracts. The projects are usually longer, scope of work is not clearly known at the start date. Resembles costreimbursable a little because the actual cost is not known in advance and resembles fixed price in the sense that unit rate for the labor and/or material is agreed upon at the start of work. (Through cost break down in proposal) 47

48 Special agreements for specials situations 48

49 Authorization to Proceed ATP s are good to use when you are unable to definitive the subcontract. Subcontractors are able to begin work without risk but they are not paid until the subcontract has been completed. Primes can initiate a ATP without a PR but it is best practice to have one in place. It is best practice to only allow up to 20% of the subcontract award value. 49

50 Subcontractor s should insist on knowing exactly what is needed to be done during the ATP period. Some subcontractors are not mindful of the end date and continue working without payment. 50

51 Letter Subcontracts Letter subcontracts are legally binding. These are also used in case where a prime is unable to definitive a subcontract before a project needs to start. Huge risk are involved because there are cases where subcontractors are working while being paid but terms and conditions have not been finalized. 51

52 correct It is critical to choose the correct subcontract and to ensure accurate 52 flow downs..

53 Reasons to get your subcontract type right! You are in the position of Contracting Officer. Have a thorough understanding of your prime contract. Choose the contract type that is going to be in your companies/agencies best interest. Think about price control. (Which method is more feasible to control cost?) Think about management. 53

54 Monitoring Subcontractor Performance Performance Surveillance Techniques. (Site Visits) Periodic program/project reviews or progress review meetings. Inspection and acceptance. (Detail this in the SOW). Subcontractor status reports. Collect this on a monthly basis. Account for costs and measuring actual performance against plans. Price/Cost Analysis is critical here. 54

55 Know what your suppliers are doing? Keep communication with the program team If the subcontractor has the expertise include the subcontract that the prime needs to be included on all communication. Develop well written milestones which include reliable due dates that have been agreed upon with the supplier Do not pay invoices until the deliverables have been met based upon the milestone report. (Critical for T&M s and Cost Reimbursable contracts). 55

56 Technical Strategies to follow during Subcontracting Keep detailed documented records of everything 56

57 Technical Strategies Establish fair and reasonable pricing during the pre-award phase. SCA s should have received cost proposal and conducted a detail price/cost analysis before proceeding. Escalation rates should be lower than 3%. (GSA Schedules, Govwin, and DOL labor rates are good tools to use) All modifications and changes should be documented. The changes should relate back to the articles in the subcontract. Any purchases over $3,000 including modifications should be accompanied with a price/cost analysis. Have a clearly defined Statement of Work which is mapped to deliverables and due dates. Ensure that subcontractor is cognizant of this. 57

58 Corporate Strategies Maintain a well designed and tested system of internal controls. Ensure all financial or other certifications and progress reports are adequately supported with appropriate documentation and evidence. Identify any potential conflicts of interest issues and disclose them for specific guidance and advice Implement specific fraud prevention strategies including educating others (Programs) about the risks the more people are aware of the issues, the more they can help prevent problems or detect them as early as possible. 58

59 Take Aways