52.215-23 Limitations on Pass-Through Charges
Source: FAR 52.215-23 on acquisition.gov
Contractors must avoid charging the government for excessive pass-through costs when they add no or negligible value and must justify subcontracting levels exceeding 70% of contract value.
Overview
FAR 52.215-23, Limitations on Pass-Through Charges, restricts contractors and subcontractors from charging the government for excessive pass-through costs when they add no or negligible value to the contract. The clause defines key terms such as “added value,” “excessive pass-through charge,” and “no or negligible value.” Contractors must notify the Contracting Officer if subcontracted work exceeds 70% of the total cost, providing verification of added value. The government will not pay for excessive pass-through charges, and such costs are unallowable for cost-reimbursement contracts or subject to price reduction for certain DoD fixed-price contracts. The Contracting Officer has audit rights to examine records to determine if excessive charges were proposed or billed. Contractors must flow down this clause to applicable subcontracts exceeding the simplified acquisition threshold or, for DoD, the cost or pricing data threshold.
Key Rules
- Definitions and Scope
- Clarifies what constitutes added value, excessive pass-through charges, and when a contractor or subcontractor is considered to add no or negligible value.
- Notification Requirement
- Contractors must notify the Contracting Officer in writing if subcontracted effort exceeds 70% of the total cost, including verification of added value.
- Excessive Pass-Through Charges
- The government will not pay for excessive pass-through charges; such costs are unallowable or subject to price reduction.
- Audit Rights
- The Contracting Officer may audit contractor and subcontractor records to verify compliance.
- Flowdown Requirement
- The clause must be included in certain subcontracts exceeding specified thresholds.
Responsibilities
- Contracting Officers: Determine if excessive pass-through charges exist, enforce audit rights, and ensure clause flowdown.
- Contractors: Monitor subcontracting levels, notify the Contracting Officer as required, justify added value, and flow down the clause to applicable subcontracts.
- Agencies: Oversee compliance and recover unallowable costs or reduce contract prices as appropriate.
Practical Implications
- Ensures the government pays only for value-added work, discouraging layering of profit/fees without substantive contribution.
- Contractors must closely track subcontracting percentages and be prepared to demonstrate value added.
- Failure to comply can result in cost disallowance, price reductions, or audit findings.
As prescribed in 15.408(n)(2), use the following clause:
Limitations on Pass-Through Charges (Jun 2020)
(a) Definitions. As used in this clause-
Added value means that the Contractor performs subcontract management functions that the Contracting Officer determines are a benefit to the Government (e.g., processing orders of parts or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, performing quality assurance functions).
Excessive pass-through charge, with respect to a Contractor or subcontractor that adds no or negligible value to a contract or subcontract, means a charge to the Government by the Contractor or subcontractor that is for indirect costs or profit/fee on work performed by a subcontractor (other than charges for the costs of managing subcontracts and any applicable indirect costs and associated profit/fee based on such costs).
No or negligible value means the Contractor or subcontractor cannot demonstrate to the Contracting Officer that its effort added value to the contract or subcontract in accomplishing the work performed under the contract (including task or delivery orders).
Subcontract means any contract, as defined in Federal Acquisition Regulation (FAR)2.101, entered into by a subcontractor to furnish supplies or services for performance of the contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.
Subcontractor, as defined in FAR 44.101, means any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime Contractor or another subcontractor.
(b) General. The Government will not pay excessive pass-through charges. The Contracting Officer shall determine if excessive pass-through charges exist.
(c) Reporting. Required reporting of performance of work by the Contractor or a subcontractor. The Contractor shall notify the Contracting Officer in writing if-
(1) The Contractor changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of work to be performed under the contract, task order, or delivery order. The notification shall identify the revised cost of the subcontract effort and shall include verification that the Contractor will provide added value; or
(2) Any subcontractor changes the amount of lower-tier subcontractor effort after award such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract. The notification shall identify the revised cost of the subcontract effort and shall include verification that the subcontractor will provide added value as related to the work to be performed by the lower-tier subcontractor(s).
(d) Recovery of excessive pass-through charges. If the Contracting Officer determines that excessive pass-through charges exist;
(1) For other than fixed-price contracts, the excessive pass-through charges are unallowable in accordance with the provisions in FAR subpart 31.2; and
(2) For applicable DoD fixed-price contracts, as identified in 15.408(n)(2)(i)(B), the Government shall be entitled to a price reduction for the amount of excessive pass-through charges included in the contract price.
(e) Access to records.
(1) The Contracting Officer, or authorized representative, shall have the right to examine and audit all the Contractor’s records (as defined at FAR 52.215-2(a)) necessary to determine whether the Contractor proposed, billed, or claimed excessive pass-through charges.
(2) For those subcontracts to which paragraph (f) of this clause applies, the Contracting Officer, or authorized representative, shall have the right to examine and audit all the subcontractor’s records (as defined at FAR 52.215-2(a)) necessary to determine whether the subcontractor proposed, billed, or claimed excessive pass-through charges.
(f) Subcontracts. The Contractor shall insert the substance of this clause, including this paragraph (f), in all cost-reimbursement subcontracts under this contract that exceed the simplified acquisition threshold, as defined in FAR 2.101 on the date of subcontract award, except if the contract is with DoD, then insert in all cost-reimbursement subcontracts and fixed-price subcontracts, except those identified in FAR 15.408(n)(2)(i)(B)(2), that exceed the threshold for obtaining cost or pricing data in FAR 15.403-4 on the date of subcontract award.
(End of clause)
Alternate I (Oct 2009). As prescribed in 15.408 (n)(2)(iii), substitute the following paragraph (b) for paragraph (b) of the basic clause:
(b) General. The Government will not pay excessive pass-through charges. The Contracting Officer has determined that there will be no excessive pass-through charges, provided the Contractor performs the disclosed value-added functions.