Limitations on Pass-Through Charges
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.