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First-Time Contractor's Guide to Subcontractors


Your first government contract can be a rewarding experience, but what happens when you find out you need extra help completing the job? Learn what you need to know about DCAA requirements regarding subcontractors to stay in compliance.

A Few Basics for the Contractor

Before you delve into the selection of subcontractors, you need to familiarize yourself with a few terms. As the primary contractor, you are referred to as the prime contractor. A subcontractor is defined by Federal Acquisition Regulation (FAR) 3.502-1 as:

Any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract and includes any person who offers to furnish or furnishes general supplies to the prime contract or a higher tier subcontractor.

A “higher tier subcontractor” is a subcontractor that also contracts subcontractors to perform services or provide supplies in order to complete work for the contracts they have entered into with prime contractors.

Under FAR 3.1001, a subcontractor is also “any supplier, distributor, vendor, or firm that furnished supplies or services to or for a prime contractor or another subcontractor.”

Subcontractors are not to be confused with consultants. Under FAR 31.205-33, consultant services are “rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. Examples include those services acquired by a contractor or subcontractor in order to enhance their legal, economic, financial, or technical positions. Professional and consultant services are generally acquired to obtain information, advice, opinions, alternatives, conclusions, recommendations, training or direct assistance, such as studies, analyses, evaluations, liaison with Government officials, or other forms or representation.”

These distinctions are important when charging labor hours and assigning to the correct accounts for allowable costs in your dcaa compliant accounting system. Subcontracts must be reported as part of the prime contractor’s annual incurred cost proposal.

The Process for Selecting a Subcontractor

You cannot assume that you are allowed to hire a subcontractor. You must first obtain consent to subcontract from your contracting officer. You will need to provide your contracting officer with the following as far in advance as possible: 

  • A description of the supplies or services to be subcontracted.
  • Identification of the type of subcontract to be used.
  • Identification of the proposed subcontractor.
  • The proposed subcontract price. (FAR 52.244-2) 

Under FAR 15.404-3, your request for consent must include copies of “(1) the subcontractor's proposal to the prime or higher-tier contractor, including a proposal cover sheet if FAR 15.408, Table 15-2 is used, and related cost or pricing data, and (2) the review package accomplished by the prime contractor and/or by the higher-tier subcontractor involved, including any cost and/or price analysis if available.”

If any of the following contracts will exceed the simple acquisition threshold, your contracting officer may need additional information in order to grant consent:

  • Letter Contracts
  • Fixed-Price Contracts
  • Time-and-Materials Contracts
  • Labor-Hour Contracts

The contracting officer will verify that you have an approved purchasing system if required. Then, the subcontract and terms will be assessed for acceptability and allowability of costs.

Prime Contractor Responsibilities

After you are granted consent, as the prime contractor, you are responsible for selecting and awarding subcontracts. Although you may have done much of the footwork prior to consent and may already have a specific subcontractor in mind, when possible, you should select subcontractors on a competitive basis. You will be responsible for monitoring the subcontractor’s technical and financial performance and payment for all work accomplished under subcontract terms.

To ensure compliance with FAR 52.216-7 (d)(2)(iii), complete Schedule J of your final indirect cost rate proposal on your annual incurred cost submission. Be sure to include: 

  • List of subcontracts you have awarded to companies
  • Prime and subcontract numbers
  • Subcontract value and award type
  • Amount claimed during the fiscal year
  • Subcontractor name, address, and point of contract information

Avoiding Deficiencies

Good communication and efficient accounting systems go a long way toward avoiding deficiencies. But remember that you are not only responsible for your own accounting procedures and performance but also those of your subcontractors. When choosing subcontractors, evaluate their accounting systems for compliance with contract terms and government regulations. Make it clear that you, your contracting officer and the auditors will need access to the subcontractor’s system at all times to stay in compliance with federal regulations. You will need to be able to monitor their accounting processes in order to ensure that billings are accurate.

Also double check that your forms and clauses are correct. Obtain an incurred cost submission from your subcontractor to verify costs and reconcile billings. If a subcontractor denies you access to their systems or reports, be sure to notify your contracting officer and request a denial of access. This will document that you are trying to follow procedures but were denied by the subcontractor.

When it comes to DCAA contracts, there are plenty of avenues for successful subcontracting relationships, so long as you ask for and receive consent to subcontract. Do your research and choose your subcontractors wisely. In the long run, you’ll be glad you did.

Learn more about accounting services for government contractors:

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