Government Contracts Monitor

FY2019 NDAA Seeks to Change Definition of "Subcontract"

May 10, 2018

By: Hopewell Darneille

On May 7th, the House Armed Services Committee (HASC) made public H.R. 5515, its version of the FY2019 National Defense Authorization Act (NDAA). One of the provisions that is already generating buzz is Section 832, which would create a “precise” definition of "subcontract" in title 41, United States Code, and incorporate the new definition in title 10, United States Code. As noted by the HASC, there are currently “multiple definitions of subcontract.” The Committee believes that “establishing a single definition for a subcontract would provide clarification, simplicity, and consistency for defense procurement actions.”

The proposed text, which would become the new 41 U.S.C. §115, provides that the term “subcontract”:

1. “means 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”;

2. “includes a transfer of a commercial product or commercial service between divisions, subsidiaries, or affiliates of a contractor or subcontractor”;

3. “does not include -- (1) a contract the costs of which are applied to general and administrative expenses or indirect costs; or (2) 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.’’

Some commentators see the proposed change as a positive development, noting that the express carve-outs for agreements that cannot be tied to a single prime contract will likely decrease the number of situations in which flow-down provisions and other “subcontract” requirements apply and, therefore, allow for the acquisition of these materials under standard industry terms. Such a change could reduce the reporting requirements and risks impacting prime contractors.

On the other hand, given that the FAR and DFARS currently include 27 distinct definitions of the term “subcontract,” making such a wholesale change could lead to unintended consequences in a wide variety of procurement contexts.

Only time will tell whether Section 832 will be included in the final NDAA and, if so, what the impact of the change will be. We’ll be monitoring and reporting on developments relating to this issue in the coming months.

 

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