Pass-Through Charges

An excessive pass-through charge is indirect cost or profit that a contractor adds to subcontracted work for which it adds no or negligible value. FAR 52.215-22 and 52.215-23 apply when a contractor expects to subcontract more than 70 percent of the total cost of work. The contractor must then identify that fact and justify the value it adds.

The position of the government is straightforward. It will pay you to manage subcontractors. It will not pay you a full markup to forward an invoice.

The two clauses

FAR 52.215-22, Limitations on Pass-Through Charges — Identification of Subcontract Effort. This is a solicitation provision. An offeror that intends to subcontract more than 70 percent of the total cost of work must identify the subcontract effort and the amount. The offeror must also describe the value it will add as the prime.

FAR 52.215-23, Limitations on Pass-Through Charges. This is the contract clause. It makes excessive pass-through charges unallowable. It gives the contracting officer the right to review such charges and to recover them.

The requirement extends to lower tiers. A subcontractor that in turn subcontracts more than 70 percent of its own work holds the same position toward its higher-tier customer.

What counts as added value?

The regulatory test is whether the contractor performs subcontract management and oversight consistent with good business practice and its own responsibilities under the contract. In practice, the functions that support an added-value position include:

• Technical direction, integration, and system-level design decisions.
• Subcontract management — sourcing, negotiation, administration, invoicing and payment.
• Quality assurance and acceptance of subcontracted work.
• Schedule integration and risk management across suppliers.
• Configuration and data management across the delivered product.
• Contractual and compliance responsibility to the government for the whole scope.

Added value is not the fact that you hold the contract. It is work you actually perform. Name the people who perform it and the place where the cost volume prices those hours.

When does this appear in a bid?

At proposal time, in the cost volume, whenever your teaming structure puts most of the dollars with partners. It is common on integration contracts. It is common on staffing-heavy task orders where a small prime teams with a large partner. It is also common on set-aside work where the prime holds the socioeconomic status and a larger firm holds much of the technical depth.

The 70 percent pass-through rule is a pricing rule. It is legally distinct from the limitations on subcontracting under FAR 52.219-14 and 13 CFR 125.6. Those rules govern how much of a set-aside contract a small business prime must self-perform. The two regimes frequently apply to the same contract, and people often confuse them. A structure can satisfy one rule and violate the other.

The mistake that makes this term matter

Teaming decisions get made months before anyone opens the cost volume. A capture lead finds a partner with the past performance and the technical bench the requirement wants. The partner is happy to take the majority of the work, and the deal gets agreed on a call. On paper the team is strong, and by every measure that matters to the capture lead, it is.

The percentage only becomes visible when someone finally prices the team, which is usually the week the proposal is due. By then both companies have signed the teaming agreement, and the technical volume already assumes the partner. The only honest description of the prime role is that it holds the contract. Nobody intended a false representation. But the added-value exhibit has to say something, and the pressure at that moment runs in exactly one direction.

What goes wrong in practice

The team crosses the 70 percent line unnoticed. Someone counts subcontract dollars at the wrong level, excludes materials, or adds a partner late. The identification requirement then goes unmet.

The added-value narrative is generic, or it repeats a prior bid. "The prime provides overall program management" is what every prime writes. An added-value exhibit belongs to one teaming structure and one scope. A reused exhibit is how a company makes a false representation without intending one.

Markup applies uniformly to subcontract dollars. Full G&A (general and administrative) and fee on large pass-through amounts is the exact fact pattern the clause addresses. Your choice of a total cost input base or a value added base for G&A directly affects this exposure.

What to do

1. Compute the subcontracted percentage of total cost of work early, before you lock the team.
2. Recompute the percentage whenever the teaming structure changes.
3. If you exceed the threshold, write the added-value description against the functions you will actually perform.
4. Confirm that those functions appear in the technical volume.
5. Confirm that the cost volume staffs and prices those functions.
6. If you cannot describe real added value, change the teaming structure, not the narrative.

What this is not

The 70 percent threshold is not a prohibition. You may exceed it. The problem is a failure to identify that fact and to justify your role.

The clauses also do not apply universally. Coverage depends on contract type and value, and commercial acquisitions receive different treatment. Check the clause list of the solicitation in front of you rather than assume coverage.

Silas™ flags the pass-through position implied by a proposed teaming structure and surfaces it while the structure can still change.