Watkins Meegan: Engaging a Subcontractor Requires Careful Steps
It might sound unlikely, in the difficult climate of government contracting today, but subcontractors are growing more powerful. Prime contractors should proceed with caution when engaging a sub.
That’s the message Rebecca Kehoe, head of the Government Contracting and Technology practice of Watkins Meegan, delivered at the govConNet 2011 Congressional Procurement Conference in Rockville, Maryland this week.
Rebecca Kehoe of Wakins Meegan discusses working with subcontractors.
“You simply cannot abuse your small business relationships anymore.”
“Congress is trying to give more power to small businesses,” she explained. “There is a bill currently working its way through Congress that would require, with any proposal, that every small business mentioned submit a statement of acknowledgment saying that they know they are in the proposal and they have agreed to do certain work if it is successful. The proposal would be noncompliant without these statements.”
The bill has emerged, she said, because “Some large companies have a huge database of small businesses, and they simply pull out some names to list in a proposal – but the small businesses may be unaware they’re even part of the proposal.”
“Remember,” she cautioned, “Right now a subcontracting plan is just a best guess. No one is held to it. But the government wants to take its small business requirements more seriously. You simply cannot abuse your small business relationships anymore.”
And, should anyone fail to take government oversight seriously, she says, a look back at last fall’s GTSI affair should remind them of what they are up against. The government found that GTSI was doing work designated for its small business partners, and “the company agreed, within 6 weeks, to remove more than half of their board of directors, to have a corporate monitor that they paid for installed at their company to monitor compliance, to institute a revised ethics policy, to remove project managers, to remove their CEO and their chief counsel.”
“The SBA has teeth. Be careful.”
Four Key Questions for Subcontractors
She advised prime contractors to consider four key questions before engaging in serious discussions with a potential subcontractor:
- Are they financially capable of performing the Scope of Work? — “You need to be sure they aren’t going to go under during performance of the contract, that they have financing.” She noted that Procurement Technical Assistance Centers can help small businesses obtain needed financing.
- Are they technically capable of performing the work?
- Are they capable of managing their workforce, and working well with other subcontractors?
- Are they capable of managing the size and complexity of their role? – This, she noted, means complying with requirements as well. “You need to look into their accounting and timekeeping systems, how they are managing direct and indirect costs, etc,” she explained. The type of contract matters. “This is especially true with cost plus contracts. If you aren’t sure your sub is capable of this, think about using them on a time and materials or firm, fixed-price contract.”
Documentation: From Beginning to End (and Beyond)
It’s vital, she said, that every step be documented. “Make sure, for audit, you have every communication on this in your file. Even if they gave you prices in an email, keep it for your files, and keep explanation of how you determined it was fair and reasonable,” she advised.
Documentation is particularly vital with individual subcontractors, Kehoe noted. “The IRS may be interested in whether you treated this person as a contractor, or an employee. “There are things you can do to protect yourself” she said. “Make sure that person is incorporated. If she’s an LLC, that helps prove she’s a consultant. If you’re providing her with a computer, an office, etc, that can mean you’re treating her like an employee. “
Another key step, she advised, is to give each consultant a scope of work, and require a written proposal from them explaining how they will complete it. “Without these things, the IRS may conclude that this person is an employee of your company that you are trying not to pay taxes on, not to pay benefits to.”
Even when the contract is complete, documentation responsibilities don’t end. “Keep your files for six years after closure of prime contract,” she cautioned. Closure, Kehoe noted, “is not when you send your final invoice. It’s usually a few months after that.”
After the contract is complete, she advises clients to take one final step, she said, though it’s nothing the government will ever see. “Do a performance evaluation for that sub,” she recommended. “That name is in your database, and they’re going to be considered for future work. It can help the next guy in your company who wants to use a sub, if there’s a record of how they performed.”
Additional Coverage from the 2011 Congressional Procurement Conference:
Sean Tucker covers the federal government and the contracting industry for GovWin.com, the network that helps government contractors win new business every day. He can be reached at seantucker@govwin.com.
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