Intermediaries in Government Contracting

Navigating the Role of Intermediaries in Government Contracting: Adding Value While Staying Compliant with the FAR

In the complex landscape of government contracting, the role of intermediaries—commonly called middlemen—is often crucial yet can be misunderstood. Though middleman might sound unprofessional, these entities serve essential functions that go beyond mere resale, adding tangible value to the procurement process when done right. However, intermediaries must carefully navigate Federal Acquisition Regulation (FAR) requirements to ensure their involvement is both legal and beneficial to the government. This article explores the functions of professional intermediaries in government contracts, the types of added value they can provide, and how to align with FAR compliance standards.

1. Defining the Role: From Middleman to Value-Adding Integrator

In government contracting, intermediaries are more than passive resellers; they often serve as integrators, consultants, prime contractors, or solution providers who coordinate resources, manage logistics, or deliver specialized expertise. These entities play a valuable role by connecting suppliers with government agencies, especially when sourcing complex or hard-to-access services. Unlike a traditional middleman, who merely transfers goods, these intermediaries contribute by adding logistical support, risk management, or technical expertise.

Prime Contractor vs. Subcontractor

In many cases, intermediaries serve as prime contractors who hold the main contract with the government and subcontract portions to specialized providers. This structure enables them to manage various aspects of large-scale projects, ensuring that each subcontractor’s contribution aligns with the overarching goals of the government agency. FAR Part 9.6 (Contractor Team Arrangements) allows for this type of coordination as long as the prime contractor is accountable and capable of managing the project’s scope, cost, and timelines effectively.

2. Complying with FAR Standards: What Makes an Intermediary Legal?

Under the FAR, intermediaries can be fully compliant if they add value that justifies their involvement. However, the government emphasizes cost-effectiveness, competition, and transparency, which can be at odds with unnecessary middle layers that add costs without corresponding benefits. Key FAR standards relevant to intermediaries include:

- Reasonable and Allowable Costs (FAR Part 31): Costs must be reasonable, necessary for contract performance, and not merely “pass-through” expenses. Intermediaries must provide value that offsets their markup, such as reducing risks or adding logistical efficiency.

- Competition Requirements (FAR Part 6): Competition in contracting is fundamental to the FAR. Intermediaries must not monopolize supply chains or prevent fair competition, ensuring that subcontractors and suppliers are chosen based on merit, value, and compliance with government needs.

- Transparency and Accountability (FAR Part 9.1 - Responsible Prospective Contractors): Prime contractors must demonstrate integrity, reliability, and the ability to perform the contract. An intermediary’s added value—like logistics or technical expertise—should be documented, ensuring they are more than just a markup layer.

3. Types of Value-Added Functions Intermediaries Can Provide

To meet FAR standards and justify their involvement, intermediaries must offer measurable benefits. Here are some examples of how intermediaries can add value in government contracts:

Logistical Support

Effective logistics are often essential to government contracts. Intermediaries that offer logistical support might manage warehousing, transportation, and delivery coordination. For example, an intermediary providing military equipment across multiple locations may consolidate shipments, streamline customs processes, and oversee storage, reducing lead times and risks.

Risk Management

Government contracts can involve various risks, from fluctuating prices to supply chain vulnerabilities. An intermediary offering risk management takes on the responsibility of ensuring a consistent supply or shielding the government from market instability. This may include locking in prices, maintaining backup suppliers, or managing compliance with regulatory requirements, adding layers of security to the contract.

Technical Expertise and Quality Assurance

Intermediaries with industry-specific knowledge can serve as consultants or integrators, overseeing complex technical requirements. This might involve verifying supplier qualifications, managing compliance with federal regulations, or conducting quality control checks. For instance, an intermediary managing cybersecurity for government agencies would vet subcontractors, verify standards, and ensure compliance with FAR Part 39 (Acquisition of Information Technology).

4. Avoiding Pass-Through Costs and Maintaining FAR Compliance

The FAR discourages "pass-through" entities that add costs without value, as this goes against the principle of cost-effectiveness. The Government Accountability Office (GAO) and Defense Contract Audit Agency (DCAA) regularly scrutinize contract pricing to ensure intermediaries meet cost and value expectations. Intermediaries should clearly document their contributions, showing how they lower risks, improve efficiencies, or ensure higher quality.

Key Compliance Tips:

- Documentation: Clearly outline your value-adding functions, such as logistical coordination or technical oversight. This documentation not only justifies your role but also prepares you for audits.

- Transparency: Communicate with both the government agency and subcontractors about pricing, roles, and responsibilities. Transparency builds trust and ensures compliance with FAR Part 15 (Contracting by Negotiation), which emphasizes fair pricing.

- Competitive Subcontracting: Choose subcontractors based on fair competition and value, not personal connections. FAR Part 44.2 (Consent to Subcontracts) requires that prime contractors make responsible subcontracting decisions.

5. Structuring Roles for Compliance and Added Value

To legally and effectively serve as an intermediary, your role should be structured to enhance the overall contract performance, not inflate costs. Consider adopting formal roles, such as:

- Prime Contractor: As the main contract holder, a prime contractor should directly manage all aspects of the contract, providing oversight and bearing ultimate accountability.

- Project Management Firm: If your role primarily involves coordinating multiple vendors and ensuring project timelines, branding yourself as a project management firm underscores your value in oversight and organization.

- Integrator: An integrator combines various resources, equipment, or services into a single solution, particularly useful in contracts involving complex technology or diverse service requirements.

Conclusion: The FAR-Compliant Intermediary

In government contracting, acting as an intermediary isn’t inherently illegal or against regulations. The key to compliance lies in demonstrating value—whether through logistical coordination, risk management, or technical expertise—and ensuring that this value aligns with FAR’s focus on fairness, accountability, and reasonable costs. By positioning yourself as a solution provider, integrator, or project manager, and aligning with FAR’s standards, you can play a critical, professional role in supporting government missions effectively and ethically.

Intermediaries who meet these criteria provide a win-win solution, benefiting both government agencies and the suppliers they connect, enhancing performance, reducing risks, and ultimately achieving the government’s goal of best value.