Why You Might Want to Rethink your Government Contracting “Middle Man” Strategy

"The ‘Middle Man’ Strategy: The gap between the alluring promise of easy contracting profits and the harsh reality of regulatory obligations, highlighting the perils new contractors face when oversimplifying complex processes."

I’ve noticed a deceptive narrative in the government contracting social media space targeted at newcomers to the industry, presumably with hopes of selling some sort of coaching or mentorship program: that is, the idea that you can win a federal contract, sub out all of the work, and simply collect a check as a “Middle Man”. While the strategy exists in theory, the regulatory reality is an obstacle that most “gurus” conveniently ignore. From the oft-overlooked “Added Value” requirements of FAR 52.215-23, to the all-important responsibility determination, here is exactly what it takes to stay compliant and be award-worthy.

The "Value Added" Test: Navigating Limitations on Pass-Through Charges

There are two pesky clauses that you likely will have to contend with if you are considering a middle man approach. Specifically, they are FAR 52.215-22 “Limitations on Pass-Through Charges – Identification of Subcontract Effort” and 52.215-23 “Limitations on Pass-Through Charges”. The former applies at the proposal phase, while the latter applies during implementation. What these clauses tell us is that if you plan to subcontract “more than 70 percent of the total cost of work to be performed under the contract”, then you must be prepared to demonstrate how you – as the prime – add value to the contract. That is to say, why should the government pay you for effectively funneling money between the government and your subs, all while collecting indirects and fee/profit? Similarly, if your subcontractor is subbing out more than 70% of their work, they must also justify their value. FAR 52.215-23 provides the following definitions to help you and your subs determine if you are indeed adding value within that 30% allotment:

• “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).”

• “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).”

FAR 52.215-22 requires you to 1) outline in your proposal your added value when you sub out 70%+ of the total cost and 2) identify the amount of indirect costs and profit you are applying to your subs’ work. The contracting officer (CO) then makes the determination whether or not you have adequately justified your role so that amounts paid to you are not considered excessive pass-through charges (i.e. “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”)). If you adequately substantiate your role, the CO will include FAR 52.215-23 with its Alternate I in your contract, which essentially says the CO agrees that you add value and that no excessive pass-through charges exist, provided you perform your disclosed functions as promised.

FAR 52.215-23 (without its alternate) invokes the same 70% rule as FAR 52.215-22. However, it applies in situations where your original proposal did not trigger FAR 52.215-22 – instead, changes to your subcontracting approach during implementation that trigger the 70% rule require an added value justification. At that point, you must report to the CO that you will be subbing out 70%+ of the work and how you add value in your reduced role.

FAR clauses 52.215-22 and 23 are mandatory for:

1. Civilian agency purchases that exceed the simplified acquisition threshold and which are cost reimbursement awards; and

2. DOD purchases that exceed the threshold for obtaining cost or pricing data, and for any contract type except - 

   1. "A firm-fixed-price contract awarded on the basis of adequate price competition;

   2. A fixed-price contract with economic price adjustment awarded on the basis of adequate price competition;

   3. A firm-fixed-price contract for the acquisition of a commercial product or commercial service;

   4. A fixed-price contract with economic price adjustment, for the acquisition of a commercial product or commercial service; or

   5. A fixed-price incentive contract awarded on the basis of adequate price competition.”

That said, FAR Part 15 gives the CO broad discretion to apply the limitations on pass-through charges clauses to any contract type at any price point, if they deem it appropriate to do so. So make sure to review RFPs carefully – even those that appear to meet the exceptions.

Pausing here for a moment, does this mean that as long as these clauses are absent from the RFP you're analyzing, that you’re free and clear to apply a Middle Man strategy?

Not so fast…

While there may be no regulations explicitly barring you from this strategy, your hands-off approach is unlikely to pass muster with the CO.

FAR Part 9 and the Responsibility Determination

Even when these clauses don’t apply, the government is still going to evaluate your offer and if you are truly not adding value – even without FARs 52.215-22 and 23 holding you to account – then your chances of winning the award are likely nil.

This is because – no matter the value of the contract or the contract type – FAR Part 9 applies. FAR Part 9 invokes the requirement that the Contracting Officer must evaluate the offeror’s responsibility per the standards in FAR 9.104-1. I’ve previously written about the importance of these responsibility determinations, but of particular note here is that – at the end of the day – you as the prime contractor are ultimately responsible to the USG for successful performance and you must be able to demonstrate during the proposal phase that you can meet the contract requirements; perform according to schedule; front the capital until you start receiving payment; and have the necessary organizational, accounting, and technical skills to oversee the work, coordinate subs, provide quality control, and draft and submit reports. Do those look familiar? (They should – just reread the Added Value definition from 52.215-23 above.)

And as someone who’s made their career in compliance, I would be remiss if I overlooked the complexity involved in making sure you abide by the myriad FAR clauses and agency supplemental clauses you’ll be reading, building policies, systems and practices to comply with, and flowing down to your subs, as a prime. Getting into this business and doing it the right way will always require a deep respect for and compliance with the regulations.

So while it may seem that you’d be in the clear without FARs 52.215-22 or 52.215-23 in your RFP/contract, in practice, it does not mean that you can sit back and rest on your laurels while your subs do all the work.

There is no “easy” button for breaking into and making money in government contracting, no matter what the online gurus may want you to think.