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Recent guidance published by the Defense Contract Audit Agency may prevent Prime Contractors from charging their own rates, rather than the rates of their subcontractors, in GSA Contractor Teaming Agreements (“CTAs”).  Thus, Prime Contractors may not be able to recover profit or even overhead costs for managing subcontractors.

The DCAA has interpreted FAR § 52.232-7, Payments Under Time-and-Materials and Labor Hour Contracts, “as superseding any CTA or prime/subcontract arrangement in a given order under that contract.”  The clause, normally included in commercial services contracts, effectively provides that if the prime happens to get a better deal with the subcontractor below its own rates, it must pass that savings on to the government. 

The controversy has already caught several prime contractors who were ordered to refund funds to the government.  Several industry officials have expressed concern that the DCAA’s position will reduce the amount of subcontracting opportunities for small businesses, as well.

In light of the DCAA’s new focus, contractors should take great care in entering into CTAs, and review practices with regard to ongoing CTAs.