CHAPTER 5 SUBCONTRACTING

In view of the complex nature of some government procurements, a company may decide to take on subcontractors in order to complete the work. This chapter focuses on some of the considerations that subcontractors and prime contractors should take into account when entering into a subcontract agreement.

    Why should a company subcontract?

Subcontracting occurs because of several situations. A prime contractor could decide to use a subcontractor because it wants to go after a certain business opportunity and realizes it cannot do it alone because it doesn’t have the capability or the bandwidth. A subcontractor may decide to work with a prime contractor because it wants to pursue new business opportunities but needs the infrastructure, backing, or capability of a prime contractor. In addition, the government places requirements on federal prime contractors to subcontract out part of the contract work. By subcontracting work to small and small disadvantaged businesses, the prime contractor meets the government’s requirements.

    What should a prime contractor consider when determining whether to subcontract?

When a prime contractor is determining if it should subcontract some of its work, it explores a lot of data. Some factors that a prime contractor should consider when deciding whether to subcontract include

•   Capability analysis

•   Cost-effective solution

•   Contract risk/reward

•   Competitive position

•   Customer preference

•   Quantity discounts

•   Final analysis.

Capability Analysis

A company needs to assess its internal capabilities to determine if subcontracting is a necessary alternative. The company may not have the capabilities needed to conduct a program by itself. Sometimes the company may have the needed capabilities, but the skill level required by the customer is greater than what the company possesses. For example, a customer requires 25 programmers and a company has only ten. Another scenario is that the company has 25 programmers, but because of when the program will occur, the company will not be able to fulfill the customer’s requirements and meet the company’s commitments to existing customers. If any of these situations exist, the company should seriously consider a subcontractor relationship so that it can pursue a contract.

Another situation can exist as the government moves to consolidate many of its operations across agencies. For example, say the government has multiple locations with multiple contractors doing similar work and wants to consolidate the efforts into one regional facility. A small company that was the incumbent on one of the previous contracts may be asked by a larger company to partner. The small company brings a wealth of information and expertise from its previous client work, and the larger company has the infrastructure and bandwidth to handle the larger contract.

Cost-Effective Solution

Sometimes a company selects a subcontractor because the subcontractor can provide a more cost-effective solution to some of the contract requirements than the company can. For example, a contract has numerous requirements for training. The company cannot handle the requirements internally unless it pulls people from existing contracts that are generating revenue. The company decides to bring in a subcontractor to share the training requirements because the company was able to negotiate a rate with the subcontractor that is less expensive than using internal people and still secure a profit for the work performed. Because the company was able to work with a subcontractor, it could work on the contract without sacrificing profit potential on that contract or the other contracts it was working on.

Contract Risk/Reward

A subcontractor, by taking on some of the terms and conditions that the prime contractor must meet, shares some of the contract risk. As compensation for sharing the risk, the prime contractor shares some of the contract reward or profit with the subcontractor.

Contract risk/reward is an important analysis for a prime contractor to conduct because some customers’ contract terms and conditions could render a program not worthy of bidding on by a prime contractor. If a subcontractor is willing to accept the terms and conditions that the prime contractor cannot meet, then the prime contractor can bid the program because it knows if the subcontractor does not perform, the prime contractor has contractual remedies built into the subcontract.

As part of this analysis, a prime contractor will ascertain whether it retains enough of the contract business to make it worthwhile to bid. A contractor may find that if it subcontracts too much of the work out, it is left with a great deal of risk in managing so many subcontractors but not much of the profit. In this situation, It may not be worthwhile to assume the risk from a business perspective.

Competitive Position

Another analysis that the company should complete when deciding if it should work with a subcontractor is whether the subcontractor adds anything to the company’s competitive position. If the prospective subcontractor has an existing business relationship with the customer that the customer perceives as positive, then the subcontractor could bring competitive strength to the company’s team. In such a case, the subcontractor would also have a wealth of customer knowledge it can share with the team to help win the contract.

Typically, a subcontractor that is well positioned and can help improve a team’s competitive edge will have many teams pursuing it. When this is the case, the desirable subcontractor may play off one team against another to secure the best terms and conditions or it will enter into subcontract relationships with all the teams, knowing that at least one will win and the subcontractor will have the business regardless of who wins. If this is the case, the company will need to conduct further analysis to determine if the subcontractor’s improved terms and conditions or the fact that the subcontractor’s talents are no longer a discriminator because it is on every team outweigh the benefit it brings to the team.

Customer Preference

Sometimes a prime contractor chooses a subcontractor because the customer either directly or indirectly states a preference for a particular company. Sometimes the customer hints strongly about including certain subcontractors on the team because of their expertise, product line, or technical talent. Other times, a customer prefers a subcontractor because of the customer’s existing environment. For example, the customer may have a lot of the subcontractor’s products currently installed or the customer has worked with the subcontractor in the past. In such situations, the subcontractor may have a stronger say in the subcontract relationship than normally expected because the subcontractor has the inside track with the customer.

Quantity Discounts

Another strategy that companies often employ is to work with one subcontractor on multiple contracts to secure quantity discounts. The prime contractor usually can negotiate a lower price with a subcontractor by offering it increased sales. This strategy also works well if the company needs to buy the subcontractor’s products and services for internal use, because it helps to solidify the relationship.

Final Analysis

Finally, a prime contractor must review all the factors to determine if working with a subcontractor is the right business decision. Often it is. However, remember that a subcontractor relationship could cause a winning team to lose the contract if the prime contractor does not conduct the analysis properly. For example, poor analysis could cause the contractor to miss learning about a subcontractor’s poor-performance track record or to miscalculate the subcontractor’s discount. These types of situations could cause the prime contractor to lose the contract or to win an unprofitable contract (because the profit ends up in legal fees needed to get the subcontractor to perform).

    What should a subcontractor consider when determining whether to subcontract?

Some companies find subcontractor relationships attractive because they allow companies to work on contracts that they might not have been able to work on alone. For example, if a company is small or if it provides a product that the government or a commercial entity would not typically release an entire contract for, working with another company allows the first company to work on larger programs and sell greater quantities. Other benefits to the subcontractor include the following:

•   Cost-competitive solution

•   Contract risk/reward

•   Learning opportunity

•   Capitalizing on an existing relationship

•   Program requirements

•   Competing on multiple contracts simultaneously.

Cost-Competitive Solution

When a company works alone, it is responsible for providing all components of a solution. A small company, or a company providing only one small piece of the overall solution, may not have the leverage to provide a cost-competitive solution like a large company that provides the bulk of the solution internally. In such cases, working with another company would allow the small company to provide greater quantities and work on contracts that it normally could not work on. Likewise, a large company may subcontract as a way of trying out new business lines without fully committing its resources.

Contract Risk/Reward

By subcontracting, a company shares the reward that it receives on the contract but it also mitigates some of its risk by sharing it with the prime contractor. The amount of risk and reward (or profit) a company gets by subcontracting depends on what each side negotiates.

Learning Opportunity

Subcontracting gives the subcontractor the ability to learn the details of the business in a relatively risk-free environment. By working with other companies, the subcontractor can learn new ways to conduct business from each new subcontracting opportunity. Because the subcontractor needs to worry only about the requirements, terms, and conditions in the subcontract, the subcontractor can take the time to observe the company with which it is working.

Capitalizing on an Existing Relationship

Subcontracting allows a well-performing subcontractor to capitalize on its existing relationships to grow its business. For example, a subcontractor works for a prime contractor on a commercial contract. The contract is up for re-compete. The subcontractor is courted by other contractors interested in the business. By entering into nonexclusive relationships with each of them (meaning that the subcontractor works with multiple prime contractors on the bidding process), the subcontractor improves its chances of winning the re-compete work with a minimum amount of additional effort.

This situation can also be triggered by the customer. The customer could tell a prime contractor to work with a particular subcontractor if the contractor wants to secure the business. This is known as a directed subcontract. Technically, the federal government cannot offer directed subcontracts; however, sometimes prime contractors get very strong “indications” from the government about working with a particular subcontractor. The government can direct a subcontract if there is a national crisis or emergency or if there is a compelling business reason to do so.

Program Requirements

A subcontractor may not be able to meet all the program requirements, but it may be able to provide a cost-effective solution. Often, a small company cannot take on the risk and exposure of meeting all the contractual obligations; if it did accept the risk and could not meet the contract requirements, the company could go out of business. Subcontracting gives companies the ability to provide a piece of the solution without having to meet all the requirements, terms, and conditions imposed by the customer contract.

Competing on Multiple Contracts Simultaneously

Depending on the subcontracts, a company may be able to sell its product through multiple contracts at one time. Obviously, spreading a company’s resources too thin doesn’t do either party any good. However, through careful planning and management, a company can increase its chances at business because it has increased the number of contracts being pursued. This works best in situations in which the subcontractor is selling its product to multiple prime contractors.

    How can a company find a prime contractor to work with?

Finding a company with which to bid can be a challenge for a subcontracting company. If the subcontracting company wishes to pursue this route, there are several things it can do to enhance its chances of locating a large company with which to do business.

The subcontracting company can begin by establishing itself as a reputable contractor on its existing contracts. Nothing speaks louder than a stellar track record of solid performance. The subcontractor’s contract performance may be in federal contracts or commercial business.

Next, the subcontracting company should understand its own capabilities and be able to clearly articulate them to a potential prime company. Often, a subcontracting company becomes enamored with the thought of becoming a contracting partner, but it cannot define the specifics of its own offering.

Finally, the subcontracting company must understand the marketplace and know which customers have money for the goods and services the company offers. By targeting specific customers and prime contractors, the subcontracting company can channel its resources to those opportunities that represent the biggest potential market.

Recent contract announcements in The Washington Post or The Wall Street Journal are a potential avenue for subcontracting companies. Likewise, the company can review the classified employment section to determine what skills the winning contractor requires. A subcontracting company with a niche product offering can work with the prime contractor of an existing contract to add its product to the prime contract’s offering. Finally, marketing directly to the customer may generate a need for the subcontracting company’s product. In this situation, the customer may help the subcontracting company determine an appropriate contract vehicle through which to sell its products.

It is important to keep in mind the structure of a large company. Often the person running one major program in a company has no idea what another person running a different major program is doing or what needs they might have for subcontractors. Therefore, the up-front work that the subcontractor does can help to target the subcontractor at the right piece of prime contractor business. For example, a subcontractor should determine the programs the large company is pursuing, learn who is responsible for those programs, and assess how they might be able to help the team succeed.

In today’s competitive marketplace, a subcontractor may also consider other ways to secure work:

•   If an agency has just announced a major contract award, the subcontractor can contact that company directly to see if any needs are not being addressed that could be handled by the subcontractor.

•   Systems such as GovWin offer the ability for subcontractors to state their core capabilities in the system. Prime contractors look through the system when they are trying to find subcontractors for an existing piece of work. (Visit www.govwin.com.)

•   If a company has a GSA Schedule contract, it can create a contractor team arrangement with another company holding a schedule. (For more details on contractor team arrangements, including a sample agreement, visit www.gsa.gov/portal/content/200553.)

    What does a prime contractor need to consider before entering into a subcontractor relationship?

The prime contractor needs to review the following aspects of subcontractor management:

•   Amount of subcontractor involvement

•   Subcontractor prices

•   Revenue sharing

•   Company value

•   Other deals in the pipeline

•   Subcontractor involvement

•   Partners today, competitors tomorrow

•   Partners today, competitors today

•   Break out work among subcontractors

•   Effect of strategic alliances

•   Interrelationship of programs.

Amount of Subcontractor Involvement

The company acting as prime contractor has overall responsibility for all the steps in the review process. But like an orchestra conductor, the company must direct a team of internal and external sources to produce a solution that is harmonious with the customer’s environment. To do that, the company must decide how to achieve the delicate balance between prime contractor and subcontractor that leads to a winning performance, in this case, a contract. The balance is delicate because there is always more at stake than just winning the contract. Many subcontractors and prime contractors work together on future opportunities.

Subcontractor Prices

The company must determine how much of the business to keep for itself and how much to subcontract. Part of this decision is made using a make-or-buy analysis: If the company does not have the internal capability to provide the product or service, it must subcontract the work to another company. However, the company must realize that the price it can offer the customer for a subcontracted product or service may be higher than the price proposed by a company that provides the product or service internally.

Revenue Sharing

Another issue arising for the company is whether there is enough work that can be done internally to motivate the company to prime the deal. Marketing and proposal development can be expensive propositions. If the company must subcontract out a large portion of the contract, then the company must also give away a large part of its profit from the contract. There is a certain point at which the company may decide that the investment to prime the deal is not worth the contract risk or minimal revenue after award.

Company Value

The company has to be very clear about the value that it brings to the customer through the contract. A prime contractor that subcontracts out all the work and tacks on an exorbitant program-management fee just to run the contract will probably have to answer some customer questions about what the customer is getting in return for paying the program-management fee. Just as a prime contractor examines the value a subcontractor brings to the team, the customer is looking for the value the prime contractor brings to the team. A company acting as prime contractor must clearly articulate the products or the meaningful services it will provide on the contract. Otherwise, the customer may decide to contract directly with the subcontractor and write out the prime contractor altogether.

Other Deals in the Pipeline

The company is not making a decision to bid on a particular program in a vacuum. A company typically reviews multiple deals at any point in time. However, this does not mean that the company will always have many great contracts to bid on. The company may experience lean years in which it bids on contracts that it would never have considered during more prosperous times. Either way, the company must cultivate relationships with potential subcontractors early in the process in case the company decides to bid; however, do not string along the subcontractor if the company decides not to pursue a contract.

Subcontractor Involvement

The company must decide how much it wants a subcontractor to be involved in the marketing and proposal development process. Sometimes a subcontractor brings fresh ideas, innovative approaches, and genuinely better ways to do things. Other times, a subcontractor does not have the expertise that the company is looking for. Also, each subcontractor that the company uses will not typically have the same level of input on the prime contractor team. The company will determine each subcontractor’s level of involvement based on the subcontractor’s level of expertise.

Partners Today, Competitors Tomorrow

The reason a prime contractor has such a challenge in determining how much involvement it should allow the subcontractor to have is that a subcontractor could be working with you on a program today and competing against you on another program tomorrow. Some of the tasks that could be shared with the subcontractor could expose a great deal of information about the company’s business, which would be extremely useful to a competitor. The more areas that the subcontractor is involved in, the more of a chance it has to garner the company’s secrets, which it may (but shouldn’t because of the nondisclosure agreement) use in its own repertoire of competitive tools.

Partners Today, Competitors Today

Another problem that complicates the prime contractor-subcontractor relationship is that the subcontractor can be a supplier selling to the company and its competitors on the same deal. Although every prime contractor wants an exclusive subcontractor relationship to help its competitive position, sometimes a subcontractor works with multiple prime-contractor teams pursuing the same deal to improve its chances at winning. If a subcontractor is working with multiple prime contractors, the company acting as prime contractor must decide how involved it wants the subcontractor to be in the proposal process. The prime contractor needs to protect its own competitive position, so it may not be able to let the subcontractor get too involved in the program for fear that its strategy may be leaked to competitors.

Break Out Work Among Subcontractors

Another key issue for the company is to decide how work will be divided among subcontractors, particularly if two or more subcontractors can provide the same type of product or service. This decision can be difficult because each subcontractor is trying to get as much of the program as it can so it can grow its own business base. The best approach is for the company to define the roles and responsibilities early on in the relationships so that each party knows what it is responsible for providing. It also helps if the company does not make promises it cannot keep.

For example, on an indefinite delivery/indefinite quantity contract, a prime contractor should not promise 60 percent of the training work to one company and 40 percent to another when the customer has total flexibility with regard to when it wants classes scheduled. In such cases, the prime contractor wants to make sure its subcontractors are each prepared to provide training as soon as possible; that way, if one cannot provide the training, the other subcontractor will. It does not make sense to promise one subcontractor 60 percent of the training if it cannot provide the training at a particular time and the other company can. In addition, if the subcontractor that was promised 60 percent of the training repeatedly cannot deliver the training at designated customer times, it could potentially harm the relationship the prime contractor has with the customer.

Unfortunately, subcontractors push to get percentages from prime contractors as part of their contract to improve their internal business case. If the company’s subcontractor requires percentages, the company should mitigate its risks by including in its agreement alternative courses of action in the event that the subcontractor cannot meet the customer’s requirements.

Effect of Strategic Alliances

In today’s marketplace, companies frequently form strategic alliances for just about anything: product development, services, research, distribution, and marketing, to name just a few. These alliances are usually developed because they benefit both companies. However, sometimes strategic alliances force the company to do things “in the interest of good will in the alliance” instead of acting on what is best for the program that the company is working on. Strategic alliances tend to be rather all-encompassing, and the proposal team may be forced to work with the strategically aligned company even if it is not in the team’s best interest to do so.

Interrelationship of Programs

Another area that a prime contractor must consider when working with a subcontractor is the relationship the subcontractor has with the company on other programs. To help secure a solid competitive position, the prime contractor may merge the requirements from multiple programs and work with only one subcontractor for all the programs. In return for this larger business potential, the subcontractor should provide greater discounted prices or more advantageous terms and conditions.

    What should a prime contractor keep in mind when working with subcontractors?

A prime contractor should consider several key factors when working with subcontractors:

•   Time required

•   Commitments about subcontractors’ products or services

•   Level of subcontractor involvement

•   Short time frame for negotiations

•   Negotiation timing

•   Prime contractor: Single point of contact

•   Prime contractor: Single point of accountability

•   Small business utilization.

Time Required

A prime contractor needs to keep in mind how much time it takes to work with subcontractors. A great deal of time is involved in the marketing, discussion, negotiation, instruction, follow-up, and buy-in that the prime contractor must commit to each subcontractor. If a subcontractor is new to the business, the contractor will need to provide even more detailed instructions. Too often, a prime contractor assumes that a subcontractor does business in a similar fashion only to find out later that there are major discrepancies. The value of clear communication cannot be overstated. The contractor needs to communicate clear instructions to the subcontractor on how the customer or the company wants something done. If the subcontractor delivers an end product that does not satisfy the customer’s or company’s request, the company should consider the following explanations:

•   The instructions were not clear.

•   The instructions were given to someone who was not doing the work, and that person did not clearly communicate the instructions.

•   The subcontractor does things a certain way regardless of how others want the work done.

•   People doing the work are not familiar with the program requirements.

•   The subcontractor had other priorities so it could meet only the minimum requirement.

•   Multiple people on the proposal team are providing direction to multiple people on the subcontractor’s team.

•   The subcontractor made a strategic decision to support the program at a minimum level, believing the prime company gave it too much work to do on the program.

•   The usual problems occurred: human error, technology glitches, and personality conflicts.

Commitments About Subcontractors’ Products or Services

The prime contractor takes a great risk if it makes promises to the customer about the subcontractor’s product without verifying the information with the subcontractor. On the surface, this prospect seems odd: Why would a prime contractor commit on behalf of its subcontractor? However, this often happens when the prime contractor prepares for negotiations or final proposal revision and tries to do everything in its power to secure the contract. Time frames are tight, contract details are complex, and the subcontractor isn’t always available when the prime contractor needs it, so the prime contractor gets sloppy in good subcontract management techniques.

When this scenario occurs, the prime contractor risks having to perform the agreed-upon task for the customer. This could be a dire situation if the contractor does not have the capability to perform the task. In such cases, it needs the subcontractor. The subcontractor may comply with the new requirements at no extra cost; it may comply with the new requirements but charge the prime contractor a higher price; or it may be unable to comply with the new requirements.

If the subcontractor cannot comply, the prime contractor must either renegotiate with the customer (which is an unlikely scenario) or try to secure the products or services from another subcontractor.

Level of Subcontractor Involvement

Once again the prime contractor needs to decide how involved it wants its subcontractor to be. The subcontractor knows its product or service best and, therefore, it can demonstrate, negotiate, or market it better than anyone. However, during proposal-submission activities, the prime contractor and the subcontractor spend a great deal of time developing pricing strategies and negotiating, which involve revealing highly sensitive data. The prime contractor is in a vulnerable position because the subcontractor could be a competitor tomorrow, so the prime contractor may want to limit the subcontractor’s involvement.

Short Time Frame for Negotiations

There is typically a brief period for negotiations, usually two weeks from the time a call for final proposal revision is made until it is due. For a prime contractor working with many subcontractors, it must develop its strategies early and negotiate with each subcontractor quickly to ensure the final proposal revision is completed on time. A strategy that most companies use is to negotiate with the highest dollar value subcontractors first because price reductions here can greatly enhance the team’s competitive position.

Negotiation Timing

The best time to conduct negotiations differs for the prime contractor and the subcontractor. The best time for the prime contractor is before contract award so it knows its risk. When the prime contractor submits its final proposal revision, it may decide to trim its overall price to win the contract. To do this, the prime contractor must know exactly how much a subcontractor is willing to lower its prices so that the prime contractor knows exactly how low a price it can bid and how much support it will get from the subcontractor.

On the other hand, the best time for a subcontractor to negotiate, particularly one that is working on multiple prime contractor teams, is after contract award so that it has to negotiate with only the winning contractor. In addition, the subcontractor is in a better position after the prime contractor submits the final proposal revision because the prime contractor is basically committed to using the subcontractor on the program. Consequently, the subcontractor’s negotiation power is stronger after award. The solution that most prime contractors and subcontractors reach is to negotiate prices and price-affecting terms and conditions before final proposal revision submission and negotiate any other terms and conditions after award without changing prices.

Prime Contractor: Single Point of Contact

Before initial proposal submission, the company can initiate conversations with the customer. Once the initial proposal is submitted and during the after-submission activities, the prime contractor becomes the single point of contact with the customer for questions, live test demonstrations, discussions/negotiations, preaward visits, amendments, and the request for a final proposal revision. The prime contractor decides how much information it should share with the subcontractor. Any questions that the subcontractor has must go through the prime contractor. Basically, the prime contractor is the conduit of information because it must funnel information from the government customer or commercial customer to the subcontractor and from the subcontractor back to the customer. If the communication process breaks down, the program is in jeopardy.

Prime Contractor: Single Point of Accountability

The prime contractor is responsible for doing whatever it takes to win the program. Its company and its subcontractors are depending on it to do so. As the single point of accountability, the prime contractor must ensure that the decisions that it makes are for the good of the whole team. Similarly, it frequently must choose between its corporate interests and the goals of the procurement team. It also must ensure that any changes made to the program are communicated among the team members. Typically, any change has a “domino effect” within a program: one change necessitates several other changes throughout the process. The prime contractor must understand the program well enough to know who is affected by any changes and inform them so that they can take appropriate action.

Small Business Utilization

Sometimes the government places requirements in RFPs that the prime contractor use small businesses and small disadvantaged businesses as part of its offering. The agency uses the work thus contracted out to help meet the small business utilization requirements placed on it by the Small Business Administration. The percentages of contract work needing to be done by small businesses to meet those requirements have increased. A company needs a strategy for soliciting and managing small businesses on contract efforts to meet the government goals for small and small business utilization. If the prime contractor fails to meet the goals set forth by the RFP, it can be subjected to fines and penalties.

    What tasks do prime contractors and subcontractors work on during a proposal and subsequent contract effort?

The following list includes tasks that could be shared with subcontractors:

•   Writing proposal sections

•   Developing strategies

•   Reviewing the proposal

•   Sharing customer information

•   Sharing competitor information

•   Developing products

•   Integration

•   Technical or management services

•   Advertising

•   Marketing

•   Producing the proposal

•   Research and development

•   Independent test and validation

•   Involvement in other programs

•   Demonstrating the product

•   Oral proposals

•   Pricing strategy

•   Contract performance

•   Add-on business

•   Future program opportunities.

    What should a subcontractor consider when working with a prime contractor?

Subcontracting is a wonderful option for companies interested in getting into a business area without all the risk associated with being a prime contractor. However, subcontracting is not without its own set of challenges that must be carefully evaluated before a company decides to subcontract. Some of those considerations include the following:

•   Deciding how much the business is worth

•   Working on multiple prime contractor teams

•   Doing things the way the prime contractor wants them done.

Deciding How Much the Business Is Worth

Just as the prime contractor must decide how much involvement it wishes to have from the subcontractor, the subcontractor needs to decide if it is willing to provide the level of support requested by the prime contractor. For example, a subcontractor may be working with a prime contractor that just wants generic product descriptions and prices or the contractor may want the subcontractor to be intimately involved every step of the way. In the first case, the cost of sale is minimal; in the second case, the cost of sale is much greater. To determine if the cost of sale is too great to even be considered, a company should conduct return-on-investment and opportunity-cost analyses. After these analyses are performed, the company can decide if this is the best opportunity for it to participate at that particular time.

Working on Multiple Prime Contractor Teams

Another issue a company needs to address arises when a subcontractor is involved in multiple prime contractor teams pursuing the same customer opportunity. These relationships can get tricky if they are not managed well. One method of managing the relationship is to ask the subcontractor to sign a nondisclosure agreement, which prohibits the subcontractor from sharing information from one prime contractor with another prime contractor. A subcontractor that has or is perceived to have shared inappropriate information with a competitor will probably be kicked off the team or, at a minimum, not be asked to pursue future business opportunities with the offended prime contractor.

To help segregate efforts on a prospective proposal, a subcontractor may have different people working on each team the subcontractor works with so that there is no perceived or real conflict of interest. Or the subcontractor may elect to offer the same products, terms, conditions, and prices to each prime contractor team to simplify the relationships. However, this approach does not bode well for prime contractors that are trying to differentiate themselves from their competitors.

Doing Things the Way the Prime Contractor Wants Them Done

A subcontractor is often used by the prime contractor to supplement some of the skills the prime contractor is deficient in. The opposite situation can exist as well: The subcontractor could have a great deal more experience in developing business opportunities or proposals, so the prime contractor stands to gain the most from the subcontract relationship. The bottom line, however, remains the same: The subcontractor must abide by the way the prime contractor wants to run the program. Some prime contractors need a lot of help and they are willing accept their subcontractor’s help; some prime contractors don’t need or want any help from their subcontractors. This can present a frustrating experience for the subcontractor, particularly if the subcontractor has more experience than the prime contractor.

    What does the subcontractor need to provide to the prime contractor?

The subcontractor must provide certain information to the prime contractor for the prime contractor to be able to submit a proposal to the customer:

•   Technical solution proposal section

•   Prices

•   Integration support

•   Draft subcontract revisions

•   Representations and certifications

•   Résumés

•   Past performance citations

•   Willingness to answer the customer’s questions.

Technical Solution Proposal Section

The subcontractor must provide the prime contractor with information about the technical solution that the subcontractor is proposing. This information can be submitted as a formal proposal or in a less formal manner. The prime contractor needs the technical solution to develop its proposal to the customer. The prime contractor will normally want something in writing, as opposed to a verbal submission, in case there is an issue after contract award about the subcontractor’s performance.

Prices

The subcontractor must provide its price for providing its services or providing the product. These prices may be based on commercial list prices or General Services Administration schedule prices, or may be developed based solely on the terms and conditions of the program. Prices typically are given for the life of the contract unless other provisions have been made. Prices are given per product, service, or labor hour for each year of the contract and include any necessary escalations or discounts granted. For commercial contracts, the final price is all that is required. For government contracts, price buildup (e.g., cost, general and administrative, overhead, profit, fee) and supporting documentation may be required.

Integration Support

If the contract requires products to work together, the subcontractor may be asked to help develop a solution with the prime contractor. The subcontractor must do this because it best understands how the product works and how the service is supposed to be provided. Solution-development support could take the form of remote or local access to systems or technical expertise. The subcontractor may need to provide demo products or gratis licenses to products to ensure that all of the subcontractor’s products work together as intended.

Draft Subcontract Revisions

A subcontract is not typically signed until after the prime contract has been negotiated. However, during the early stages of the process when the prime contractor submits a proposal to the customer, the prime contractor still needs a commitment from the subcontractor that it will provide the products and/or services as required. The subcontractor must demonstrate its willingness to accept the customer’s requirements, and a draft subcontract is one way to do this.

A draft subcontract outlines all the terms, conditions, and requirements that the prime contractor wants the subcontractor to accept during contract performance. The subcontractor reviews the draft and indicates any revisions by marking up the document. The subcontractor submits its prices at about this time. Once this is done, the two can begin negotiations and either reach agreement in a subcontract that is ready to be signed or reach an impasse and have a list of open, non-agreed-upon issues. If they are not significant, these issues will be resolved after contract award. If they are significant, either one or both of the parties may decide to back out of the relationship.

Representations and Certifications

Representations and certifications are used by the customer to require the prime contractor to claim as true certain facts about itself. The prime contractor cannot make many of these representations and certifications unless it imposes the same requirements on its subcontractors. Representations are predominantly used in government contracts and seldom used in commercial contracts. Following are some typical representations and certifications that the prime contractor and the subcontractor may need to make:

•   Has a drug-free workplace

•   Is an equal opportunity employer

•   Has procurement integrity

•   Has small business certification

•   Has 8(a) or small and disadvantaged business certification

•   Abides by Buy America Act provisions

•   Adheres to industry standards (e.g., ISO 9000, Software Engineering Institute Software Capability Maturity Model level).

Résumés

The subcontractor may be required to submit résumés of key individuals who will work on the program after award. Also, if the prime contractor flows down a key personnel clause to the subcontractor that requires that the customer approve a résumé before the individual begins work, the subcontractor needs to comply. If the clause also requires the key individuals to work on the contract for some period of time (e.g., 90 to 180 days), the subcontractor and the prime contractor are bound by this requirement.

Past Performance Citations

Customers that request past performance contract citations typically want them from the subcontractors as well. If the subcontractor has performed well on past contracts, this will not be a problem. However, if the subcontractor has not performed well, there is a great possibility that the subcontractor could lose the program for the prime contractor. To ensure that the subcontractor does not cause problems on a proposal, it should always provide excellent service on existing contracts. Consistent good work will also ensure the subcontractor future contracts.

Willingness to Answer the Customer’s Questions

As discussions between the prime contract and the customer begin, there may be issues about the subcontractor’s portion of the work. The prime contractor is in no position to make commitments on behalf of the subcontractor unless it is authorized by the subcontractor to do so. Therefore, the subcontractor must be willing to help the prime contractor answer any of the customer’s questions about its offering and to help in any way it can to win the procurement.

    What should a subcontractor keep in mind when working with prime contractors?

There are some aspects of contracting that a subcontractor should be aware of as it works with prime contractors:

•   Statement of work clearly reflects the subcontractor’s work

•   All the products and services the subcontractor is selling appear in the statement of work

•   Ability to negotiate for additional products and services after contract award

•   Impact on prices.

Statement of Work Clearly Reflects the Subcontractor’s Work

Both the prime contractor and the subcontractor should ensure that the subcontract statement of work continues to reflect the actual work that will be provided by the subcontractor. What sometimes happens is that the prime contractor and subcontractor develop an original statement of work that covers the work that the subcontractor will perform but then as proposal updates, amendments, and negotiations occur, the work that the subcontractor will do changes. Problems can occur when those changes are not reflected in an updated subcontract statement of work.

All the Products and Services the Subcontractor Is Selling Appear in the Statement of Work

The subcontractor also must ensure that the subcontract document reflects the actual products and services it believes it will sell under the contract. Ideally, the subcontractor would like to verify that the prime contractor’s proposal contains descriptions of the products and services that the subcontractor will provide under the contract. Several issues can arise.

The sales discussions between the two companies don’t mean anything until they are actually documented in the subcontract. The prime contractor could tell the subcontractor that many of its products will be proposed, but unless they are documented in the subcontract schedule, they are not covered by the subcontract. Similarly, the only products that the government can buy on a prime contract are those that are listed in the prime contract. If the subcontractor’s products are not listed by name, they are not being proposed, and the only way the government could actually order them is for the prime contractor to go through a contract modification process after award. For a prime contractor to go through a modification, it must ensure that the government wants the modification, the government must find funding for the modification, and the modification must be negotiated before the government can buy the subcontractor’s additional products or services. There are many points along this process that can result in a “No Go,” with the initiative dropped and the subcontractor’s products not added to the contract or purchase.

A certain amount of trust and business cooperation has to occur. Ideally, the subcontractor would like all of its products and services listed in the prime contract proposal. Unfortunately, this is not realistic because it would take the prime contractor’s proposal out of the competitive range and nobody would get any revenue from the effort. The prime contractor has the ultimate decision authority (if the subcontractor wishes to stay on the team), and it may need to negotiate items out of the subcontract and resulting prime contract to lower the overall contract price. The point is to make sure that the subcontract and prime contract reflect the actual negotiations that have occurred between the prime contractor and subcontractor.

Ability to Negotiate for Additional Products and Services After Contract Award

Also important is how changes will be approached after contract award. First, the subcontractor must be aware that the prime contract must allow changes to be made to the contract through a changes clause in the prime contract. If the prime contract does not contain this clause, changes cannot be implemented throughout the life of the contract unless they are later negotiated into the prime contract. Typical change clauses grant product changes due to obsolescence or technology refreshment. The clauses typically carry the stipulation that the new product must be at the same or a lower price than those previously proposed to meet the requirement. The products proposed under these clauses must also comply with all the other prime contract terms and conditions unless new terms and conditions are negotiated and agreed upon.

As a subcontractor, you want to ensure that the prime contract has a changes clause and that the prime contractor will make every reasonable attempt to help you add new products and services to the prime contract. You want that agreement documented in your subcontract to protect yourself in the future. For example, clauses should provide for the right to swap out old, no longer manufactured products for newer products or to add products with new technology capabilities to the contract throughout its life. In addition, you want to ensure that competitors’ products are not added to the contract without some sort of competition that you are eligible to participate in.

Prices

The prime contractor is under a lot of pressure to lower the contract price to remain competitive. A subcontractor must decide how competitively it can price its product to help the prime contractor win the business as well as to make a reasonable profit performing under the contract after award. As a basic rule of thumb and due to the competitive nature of government business, prices for the same products tend to be lower on government contracts than they would be on commercial contracts. If a company wants to retain high profit margins on its products and services, government contracting may not be a reasonable business strategy. If, however, a company wants a solid revenue stream from a customer who will pay its bills, the government business may be a reasonable business strategy. Some of the other considerations that the subcontractor must make include the following:

•   Future sales. What is the value of future sales? How realistic are those future sales? If the subcontractor has a niche product and the future looks bright, it may be more willing to maintain its price at initial submission and then lower it as more competitors enter the field. A subcontractor who has a “me too” solution may need to lower its price to help the prime contractor even get the business.

•   Future relationships. The subcontractor may also consider future business relationships with the prime contractor to help determine how it should price its products. If future revenue streams look promising, the subcontractor may be more willing to cut its prices for each particular contract.

•   Ability to perform at the lower prices. The subcontractor, regardless of any other considerations, must be willing and able to perform the contract with the product and services prices it negotiates. It doesn’t do anyone any good for the subcontractor to come in with super low prices and the prime contractor to win the program only to find out that the subcontractor cannot operate at the prices quoted and must either default on the contract or go out of business. Therefore, the subcontractor must understand how much it actually costs to produce a product or provide a service, including its overhead and general and administrative costs, before it can determine a price that it can live with over the duration of the contract.

Do not assume that prices can be modified after contract award. This is particularly true on government business, but applies to commercial business as well. When a customer awards a contract, it usually does so based on some sort of competitive process. What incentive does the customer actually have to allow a prime contractor (and its subcontractors) to raise their prices after contract award? It doesn’t make good business sense to do so. There is a contract with the stated prices and unless a case can be made that changes to the prime contract that result in higher prices actually produce some tangible benefit to the customer, the customer would not see any business value for allowing the change to occur. Yet, too often, prime contractors and subcontractors get into this very mindset: Go in with low prices now, win the business, and we’ll deal with the low price issue after award.

    How does a subcontractor determine if it is worth working as a subcontractor?

A subcontractor should consider return on investment and opportunity cost to determine if it is worth working as a subcontractor.

Return on Investment Analysis

A return on investment analysis consists of reviewing how much money the company will have to spend to get the business versus how much money the company can realistically expect to earn if the company and the prime contractor win the contract. When deciding how much money will be needed to win the program, the company should analyze its involvement in each stage of the process and look at how many people will be needed to do the work plus their salaries for that period of time. People that the company may need to consider include representatives from technical, management, business, legal, and other support organizations. Expenses for any travel, proposal duplication, producing the product, providing technical support, and other costs associated with turning in a proposal to the prime contractor and conducting the after-proposal submission activities must be included in the analysis.

The company then needs to compare these expenses with how much it can reasonably hope to make on the program. The company does this by analyzing the revenue, expenses, profit, contract type, prime contractor’s business case, and subcontract terms and conditions. It then factors that number by a win factor—the percentage the company assigns to the win probability.

For example, if the prime contractor is the incumbent, has a great relationship with the customer because of stellar contract performance, and is typically the low-cost provider, the company might assign a win probability factor of 90 percent (i.e., the company is 90 percent sure that it will win the contract). However, if the prime contractor is trying to get its first contract with the customer and entered the marketplace within the last few years, the company would set its win probability at a much lower percentage.

After the company figures out how much it will cost to bid the program and how much it can reasonably expect to make, the company needs to assess factors other than financial ones:

•   How will the deal help the company’s overall marketplace growth?

•   How will this subcontract relationship affect the other subcontract relationships the company has with the prime contractor?

•   Are the company’s employees currently fully used? If they are not and the company is paying them anyway, the company should take advantage of the opportunity to work on the program.

•   How does the program help the company meet its other goals and objectives?

Opportunity Cost Assessment

Another part of the equation is the opportunity cost assessment. An opportunity cost is basically an analysis that answers the question: If I wasn’t pursuing this opportunity, what opportunity would I be pursuing and which opportunity has the greatest benefit to me? To answer this question, the company compares the return on investment analyses for multiple deals to determine which deal has the greatest payoff in terms of financial and strategic benefits.

Another factor that should be considered in the opportunity cost assessment is how much training the company needs in the marketplace. When a subcontractor is heavily involved in helping a prime contractor with a program, the subcontractor

•   Makes customer contacts

•   Makes prime contractor contacts, from which it learns processes and procedures and technical strategies

•   Meets other subcontractors, which provide it with more program contacts, and learns processes and procedures and technical strategies at the subcontractor level

•   Acquires a detailed understanding of how the program will run after contract award

•   Learns competitor information.

The company can use the information it learns to pursue future business opportunities. In addition, a proposal effort can help get the company’s team members up to speed quickly on contracting and the marketplace at minimal expense. Finally, if the company demonstrates strong abilities through its greater program involvement, it can gain other business opportunities. The key is to decide if the benefits outweigh the risks.

Subcontracting is an excellent way for companies to work together to meet the government’s requirements and share the contract risks and rewards. By paying careful attention to the issues discussed in this chapter, the two companies can increase their potential for a fruitful relationship.