How I Work: Subcontracts · A sample engagement
This is the infusion pump program from How I Work: Lean. The regional hospital network is part of a federal health system, and Fauxmed's contract is a task order: deliver, install, and train staff on new infusion pumps across 40 clinics in 18 months. Fauxmed is the prime. It does not build the equipment, run the installs, or teach the classes.
So everything Fauxmed promised the government now has to be promised by someone else.
The supplier has to meet the same quality bar, the same schedule, the same security and labor rules, and the same reporting. If any of them misses, the health system does not see the supplier. It sees Fauxmed.
Supplies the infusion pumps, delivered in three clinic waves.
$4.1MInstalls the pumps and connects them to each clinic's systems.
$1.2M ceilingTrains clinic staff. A small business.
$380KHow I Work: Lean fixed how long it takes to get a subcontract signed. This page shows what goes into each one, and what happens after, following all three subcontracts from selection to closeout.
At each stage I show the work product, the reasoning behind it, and the judgment call that mattered most: the point where the obvious answer was not the right one.
Fauxmed Supply Co., its customer, and every supplier are fictional. The methods are real. All figures are sample data.
Stage 01 · Pre-award
Three companies bid on the field services work. The cheapest bid was not the best value, and the best score still needed conditions before anyone set foot in a clinic.
What this shows
Best-value source selection with criteria set before proposals arrive, a supplier risk review with hard stops, and choosing the contract type that puts each risk where it belongs.
Otherwise the criteria quietly bend toward whichever bid someone already likes. Each bidder is rated 1 to 10 per criterion, then weighted.
| Bidder | Technical 30% | Past performance 25% | Price 25% | Risk 10% | Small business 10% | Score |
|---|---|---|---|---|---|---|
| Imaginary Field Services | 8 | 9 | 7 | 8 | 4 | 7.60 |
| Notreal Install Group | 7 | 6 | 9 | 6 | 10 | 7.45 |
| Placeholder Technical | 6 | 7 | 8 | 5 | 4 | 6.45 |
ChallengeNotreal was 9% cheaper and a small business. Choosing the higher price needs a reason that would survive an audit.
DecisionImaginary, on a written trade-off: its past performance was on multi-site rollouts of this size, and Notreal had never run more than 12 sites at once. Small business goals were met through the training subcontract instead.
First, is each supplier safe to award? Then, what could go wrong across the whole subcontract portfolio, and who is watching for it?
| Supplier | Main concern | Condition before award | Verdict |
|---|---|---|---|
| Sampleton Devices | The pumps' network module could contain prohibited telecommunications components | Component certification received and reviewed by Compliance | Green at award |
| Imaginary Field Services | Revenue concentration; no written safeguarding plan | Approved safeguarding plan before any clinic access | Conditional |
| Hypothetical Learning | A small business with limited cash reserves for an 18-month effort | Milestone payments and accelerated payment terms to protect its cash flow | Conditional |
Some checks are hard stops. Failing one means Hold, whatever the score. The rest decide between Green and Conditional.
Verdict
Award, but no technician enters a clinic until an approved safeguarding plan is on file. Financial health is re-checked each quarter, with a backup installer pre-qualified in case it slips.
Every condition has an owner and a date, so "Conditional" cannot quietly become "Green" by default.
Each risk is scored for likelihood and impact from 1 to 5. The product sets the order. Every risk has an owner, a mitigation already in place, and a trigger that says when to act.
| Risk | L | I | Score | Owner | Mitigation | Trigger |
|---|---|---|---|---|---|---|
| Older clinic buildings drive installation overrun | 4 | 4 | 16 | Subcontracts | Per-clinic not-to-exceed; site surveys before each wave | Forecast exceeds ceiling |
| An equipment wave ships late or incomplete | 3 | 4 | 12 | Program | Two-week buffer between delivery and install crews | Any shortage at receipt |
| Prohibited telecom component found in pumps | 2 | 5 | 10 | Compliance | Certification before award; clause flowed down | Any supplier disclosure |
| Patient data exposed during installation | 2 | 5 | 10 | Compliance | Safeguarding plan; privacy terms; supervised access | Any incident, reported immediately |
| Small business trainer strained for cash | 3 | 3 | 9 | Finance | Milestone and accelerated payments | Late invoice or staffing gap |
| Key installer personnel leave | 3 | 3 | 9 | Subcontracts | Key personnel clause; backup installer pre-qualified | Substitution notice received |
The register is reviewed monthly with Program and Finance. Scores move as conditions change, and a closed risk stays on the list with how it was closed.
The type decides who carries the cost if things take longer than expected. Each subcontract got the type that matched what could and could not be known up front.
| Subcontract | What is known | Type | Who carries cost risk |
|---|---|---|---|
| Equipment | Exact units, specifications, and delivery waves | Firm-fixed-price | Supplier |
| Installation | Number of clinics, but not each building's condition until crews arrive | Time and materials, with a ceiling | Fauxmed, up to the ceiling |
| Training | Curriculum, class count, and outcomes can be defined in advance | Fixed-price, paid on accepted milestones | Supplier |
ChallengeIf installs run long, the customer pays Fauxmed the same price, and Fauxmed pays the supplier more.
DecisionKeep time and materials, because forcing a fixed price on unknown site conditions would only buy a padded quote. Contain it instead: a hard ceiling, a not-to-exceed amount per clinic, and burn monitoring with triggers, shown in Stage 03.
Stage 02 · Award
Drafting decides what flows down, negotiation decides what it costs, and the milestone schedule decides what Fauxmed pays for and when.
What this shows
A flow-down matrix built clause by clause, a negotiation documented against an independent estimate, and milestones where payment follows proof.
What the prime has to verify or flow down for each subcontract, where the requirement comes from, and how it is checked. Several apply only above dollar thresholds that change over time, so thresholds are looked up at award, not memorized.
| FAR reference | Requirement | When it applies | How it is checked |
|---|---|---|---|
| 9.4 · 52.209-6 | Do not subcontract with debarred, suspended, or excluded parties | Subcontracts above the clause threshold | Exclusions search at proposal and again just before award |
| 9.104-4 | The prime determines its subcontractors' responsibility | Every subcontract | Documented review of capacity, integrity, and financial health |
| 15.404-3 | Prime performs price or cost analysis of subcontract proposals | Every negotiated subcontract | Negotiation memorandum with the basis for each price |
| 15.403-4 | Certified cost or pricing data, unless an exception applies | Above the threshold, without adequate competition | Threshold and exception check before negotiation |
| 44.2 · 52.244-2 | Advance notice and consent to subcontract | When the prime contract requires it, for example time and materials | Consent request filed and approved before award |
| 44.3 | Purchasing system that can pass a government review | When the prime's sales to the government are large enough to be reviewed | File built to the review standard from the start |
| 19.7 · 52.219-9 | Small business subcontracting plan and reporting | Large-business subcontracts above the threshold | Plan on file; reports filed on schedule |
| 52.232-40 | Accelerated payments to small business subcontractors | Where the prime contract includes the clause | Payment terms set in the subcontract |
| 4.21 · 52.204-25 | No prohibited telecommunications equipment or services | All subcontracts | Supplier certification; flowed down |
| 4.19 · 52.204-21 | Basic safeguarding of covered information systems | Suppliers that handle federal contract information | Safeguarding plan reviewed before access |
| 3.502 · 52.203-7 | Anti-kickback procedures | Subcontracts above the clause threshold | Flowed down; gifts and fees policy acknowledged |
| 22.8 · 52.222-26 22.17 · 52.222-50 | Equal opportunity; combating trafficking in persons | Subcontracts generally | Flowed down; certifications on file |
| 4.7 · 52.215-2 | Records retention and audit access | Where the prime clause requires it, including time and materials | Retention schedule set; audit clause flowed down |
References use the long-standing FAR numbering. The FAR is being rewritten through the Revolutionary FAR Overhaul, with class deviations already issued and further rules proposed in 2026, so every check is confirmed against current text and the agency's deviations at award.
A checklist depends on someone remembering to use it. A rule in the subcontract system runs every time, so the check cannot be skipped under deadline.
| Check | Runs when | Uses | If it fails |
|---|---|---|---|
| Exclusions and registration status | At proposal, at award, then monthly | The federal exclusions and registration records | Award blocked; active subcontract flagged to Subcontracts and Legal |
| Required clauses selected | When type, value, and supplier size are entered | A clause rules table kept by Compliance | Draft cannot be generated with a required clause missing |
| Threshold-driven requirements | When value changes, including by modification | Current FAR thresholds table | New requirement added to the task list before signature |
| Consent to subcontract | Before award, where the prime requires it | Prime contract terms | Award blocked until consent is recorded |
| Invoice coded to a funded line | Every invoice | CLIN and SLIN funding balances | Invoice held; Finance and Program notified |
| Burn and forecast triggers | Every time-and-materials invoice | Ceiling, plan, and site-mix forecast | Alerts at 75%, 85%, or forecast above ceiling |
| Reporting and evaluation due dates | Daily | Subcontract milestones and report schedules | Reminder, then escalation if overdue |
ChallengeA system that decides everything hides its reasoning, and the rules go stale when the FAR changes.
DecisionRules block, flag, and remind. People make the calls, like responsibility and price reasonableness. Compliance owns the rules tables and updates them whenever thresholds or clauses change.
Each clause is checked against each subcontract's type, value, and work. Illustrative only: real applicability depends on the prime contract, the subcontract's value, and the current FAR.
| Requirement | Equipment | Installation | Training | Why |
|---|---|---|---|---|
| Equal opportunity | Yes | Yes | Yes | Required in subcontracts generally |
| Combating trafficking in persons | Yes | Yes | Yes | Required in all subcontracts |
| Safeguarding contractor information systems | No | Yes | Yes | Installers and trainers handle federal contract information; the equipment supplier only ships |
| Small business subcontracting plan | Yes | Yes | No plan · counts toward goal | The two large suppliers exceed the FAR threshold and must have plans. Small businesses are exempt from submitting a plan (FAR 19.702(b)(1)), but Hypothetical Learning's dollars count toward Fauxmed's own small business goal and are reported |
| Service contract labor standards | No | Yes | Check | Applies to service work; depends on whether trainers are exempt professionals |
| Audit and records access | No | Yes | No | Hours billed on time and materials must be auditable |
| Customer privacy terms for health data | No | Yes | Check | Anyone who may see patient data; trainers only if live systems are used |
ChallengeClauses that do not apply invite redlines, slow negotiation, and push suppliers to price in risk they do not carry. Flow-downs were the second-largest source of redlines in the How I Work: Lean.
DecisionFlow down what is required, plus what this supplier's work actually touches, and document why each "No" is a no.
Targets came from two other quotes, past rates, and Fauxmed's own level-of-effort estimate: 40 clinics at about 275 hours each, roughly 11,000 hours.
| Term | Supplier opened | Fauxmed target | Settled | Basis |
|---|---|---|---|---|
| Blended labor rate | $112 / hr | $98 / hr | $101 / hr | Within the range of competing quotes and prior rates |
| Ceiling | $1.35M | $1.15M | $1.2M | 11,000 hours × $101, plus an 8% reserve |
| Per-clinic not-to-exceed | None | $32K | $35K | Anything over needs written approval before work continues |
| Liability cap | 1× contract value | 3× | 2× | Fallback 1 in the approved playbook, logged |
| Year 2 rate, support option | +5% a year | +2.5%, matched to the prime | +2.5%, same index and timing as the prime | Escalation Fauxmed cannot recover from its customer becomes a loss that compounds every year |
| Travel | Billed as incurred | Federal travel rates, at cost | Federal travel rates, at cost | Mirrors how the prime can be reimbursed |
Negotiation is decided mostly in preparation. Every point below was written down before the supplier saw a redline.
Why the alternative matters
A negotiator with no alternative is just accepting slowly.
Notreal scored within 0.15 points. That made the walk-away number real, and the supplier could tell.
Neither is a regulation. They are practices that keep price decisions consistent, explainable, and hard to drift.
Rule 1 · Reasonableness band
Every proposal is compared to Fauxmed's independent estimate before negotiating. Outside the band, we find out why first. Low bids get the same scrutiny as high ones.
Rule 2 · Authority band
From 3% to 10% over target, a manager approves and the reason goes in the negotiation memo. Past the walk-away, a director approves, or we walk.
| Proposal, blended rate | Rate | vs $99 estimate | What the review found |
|---|---|---|---|
| Imaginary Field Services | $112 | +13% | Travel time was priced into the labor rate. Moved to its own line at federal travel rates, then negotiated. |
| Notreal Install Group | $93 | −6% | Inside the band. No further review needed. |
| Placeholder Technical | $84 | −15% | Too low. Priced 8 hours per site survey against a 24-hour requirement. A misread scope, not a bargain. |
ChallengeThree dollars an hour sounds small. Across 11,000 hours it is $33,000. But "close enough" every time is how a portfolio overpays.
DecisionThe manager approved it on the record: the rate was still 2% above the estimate and inside the band, and Imaginary's multi-site past performance was the reason it won. Fauxmed's offers moved $95, $98, $100, $101, shrinking steps that signaled the limit without having to say it.
Each supplier ask was sorted before responding: terms Fauxmed must hold, terms it can trade, and risks it accepts but mitigates. Treating them all the same either gives away what cannot be given or fights over what does not matter.
Required by the prime contract or regulation. Explain why, offer flexibility in how it is met, and walk away if refused.
Use the approved playbook ladder, and never concede without getting something back.
Not worth the fight on paper. Reduce it in practice with insurance, buffers, or oversight.
RiskFauxmed could not support its own time-and-materials billing to the customer, and the clause is required.
NegotiateHold. Explain that it comes from the prime contract. Offer flexibility on how, not whether: records limited to this subcontract, reasonable notice, at the supplier's site.
If refusedWalk away to the second-ranked bidder. This is the one ask with no mitigation.
RiskFauxmed stays fully liable to the customer. A low cap downstream with no cap upstream leaves Fauxmed holding the gap, including for a data breach.
NegotiateTrade. Move to the playbook's 2× cap in return for faster payment, but keep data breach, bodily injury, IP, and gross negligence uncapped.
MitigateRequire cyber liability insurance naming Fauxmed, and supervised access to clinic systems.
RiskIf the customer terminates Fauxmed for convenience, Fauxmed generally does not recover profit on work never performed. Promising it downstream creates a loss Fauxmed cannot pass on.
NegotiateHold the principle, mirror the prime: costs incurred, reasonable profit on work done, and settlement costs.
GiveA longer notice period, which costs Fauxmed little and matters to the supplier's crews.
RiskThe project manager who won the evaluation could be swapped on day one, and the customer may have relied on that person too.
NegotiateTrade. Named key personnel, 15 days' notice, equal or better qualifications, and Fauxmed approval that will not be unreasonably withheld.
MitigateA backup installer pre-qualified before award.
RiskA program manager saying "while you're here" on site becomes billable scope with no modification and no funding.
NegotiateHold. Only the Subcontracts administrator can authorize changes, in writing.
MitigateBrief Program staff on the rule, and log every change request, even the ones declined.
RiskFauxmed's delivery dates to the customer would rest on dates nobody promised, with install crews waiting on pallets.
NegotiateTrade. Firm dates per wave, a 10-day cure period, and the right to buy elsewhere and charge the difference, in exchange for Sampleton choosing its carrier.
MitigateA two-week buffer between delivery and install, and the corrective action process if a wave slips.
Every settled term is recorded in a negotiation memorandum with the basis for it, so anyone reviewing the file later can see why the number is reasonable, not just what it is.
Each milestone has acceptance criteria and the evidence that proves it, written into the subcontract before work starts.
| Milestone | Accepted when | Evidence | Payment |
|---|---|---|---|
| 1 · Training plan | Approved by Fauxmed's program manager | Signed approval | 10% |
| 2 · Curriculum and materials | Reviewed against the pumps' clinical workflows | Review checklist, final files | 20% |
| 3 · Wave 1, 14 clinics | Every scheduled session delivered | Attendance records, session sign-offs | 25% |
| 4 · Wave 2, 13 clinics | Same as wave 1 | Attendance records, session sign-offs | 20% |
| 5 · Wave 3, 13 clinics | Same as wave 1 | Attendance records, session sign-offs | 20% |
| 6 · Final report | At least 90% of staff pass the competency check | Competency results by clinic | 5% |
Everything a purchasing system review or a customer audit would ask for, in the file before the subcontract is issued.
ChallengeUnder deadline, it is tempting to issue the subcontract now and finish the paperwork later. Later rarely comes.
DecisionThe complete file is a gate. The subcontract cannot be issued until every item is checked, so the file is always audit-ready, not made audit-ready.
Stage 03 · Post-award
Most subcontract problems are visible months before they become expensive. The job is to build the views that show them, and the relationships that make raising them normal.
What this shows
Working across functions with clear ownership, forecasting time-and-materials burn instead of only tracking it, and grading suppliers against criteria they saw on day one.
R does the work, A owns the outcome, C is consulted, I is informed. One A per row.
| Activity | Program | Subcontracts | Finance | Legal | Quality |
|---|---|---|---|---|---|
| Statement of work and requirements | A | R | C | C | C |
| Source selection | R | A | R | I | C |
| Flow-downs and drafting | C | A | I | R | I |
| Negotiation | C | A | C | C | I |
| Milestone acceptance | A | R | I | I | R |
| Invoice approval | R | C | A | I | I |
| Modifications | R | A | C | C | I |
| Performance evaluation | R | A | C | I | R |
The task order is priced and funded by contract line item (CLIN) and subline (SLIN). Every subcontract dollar maps to one, and every invoice must cite the line it bills against. As of month 6.
| CLIN and SLINs | Type | Prime value | Subcontract | Sub value | Invoiced | Remaining |
|---|---|---|---|---|---|---|
| 0001 Infusion pumps0001AA to AC, one per wave | Fixed price | $4.65M | Sampleton Devices | $4.10M | $2.73M | $1.37M |
| 0002 Installation0002AA labor, AB travel, AC materials | Time and materials | $1.62M | Imaginary Field Services | $1.40M ceiling | $0.83M | $0.57M |
| 0003 Training0003AA to AF, one per milestone | Fixed price | $0.45M | Hypothetical Learning | $0.38M | $0.29M | $0.10M |
| 0004 Program management | Fixed price | $0.60M | Fauxmed staff, not subcontracted | n/a | n/a | n/a |
ChallengeOn fixed-price lines the customer generally pays for delivery, not for the supplier's costs. On time-and-materials lines, billed hours and rates are open to audit.
DecisionTrace every dollar either way. Fixed-price invoices tie to an accepted delivery or milestone on a funded SLIN. Time-and-materials invoices also tie to timesheets, negotiated rates, and receipts. No invoice is paid against a line without funds.
Installation spending against the $1.2M ceiling. The dashed line is the plan; the solid line is actual; the copper line is the forecast at completion.
ChallengePercent-spent triggers are lagging. They fire after the money is gone. Spend was outrunning progress: 69% of the money for 55% of the clinics.
DecisionForecast by site mix, not by average. Older clinics cost twice as much, and only 3 remain. The overrun came from unforeseen site conditions, so Fauxmed requested an adjustment from the customer, and raised the subcontract ceiling to $1.4M only after the prime modification was signed.
Never obligate a supplier beyond what the prime contract funds.
The monthly subcontract report carries the same view for all three suppliers: spend against plan, forecast at completion, milestones accepted, open modifications, and small business reporting status.
Undocumented changes are how scope creeps, invoices get disputed, and a supplier ends up working beyond what the prime contract funds.
By the supplier, Program, or the customer, in writing.
Cost, schedule, flow-downs, and whether the prime contract covers it.
If it is new scope, the prime modification comes first.
Signed by both parties, then work begins.
Choosing a large installer over a small one in Stage 01 put the small business goal at risk. Tracking it monthly showed the training subcontract alone would keep it on target.
The supplier's grade mirrors how the federal customer grades Fauxmed: quality, schedule, cost control, management, and compliance. If a supplier's work drags Fauxmed's rating down, the supplier's own scorecard should show it first.
| Schedule score | What earns it |
|---|---|
| 5 · Exceptional | Every milestone on time or early, with no Fauxmed intervention |
| 4 · Very good | All milestones on time; minor slips recovered within the same month |
| 3 · Satisfactory | Up to 10% of milestones late, each with an accepted recovery plan |
| 2 · Marginal | More than 10% late, or a recovery plan missed |
| 1 · Unsatisfactory | A late milestone delayed the prime contract's delivery to the customer |
Every factor has a rubric like this one, tied to evidence anyone can check, so two reviewers grading the same supplier land on the same score.
| Supplier, quarter 2 | Quality | Schedule | Cost control | Management | Compliance | Overall |
|---|---|---|---|---|---|---|
| Sampleton Devices | 5 | 4 | 5 | 4 | 4 | 4.4 |
| Imaginary Field Services | 4 | 4 | 2 | 4 | 4 | 3.6 |
| Hypothetical Learning | 5 | 5 | 5 | 4 | 5 | 4.8 |
Imaginary's cost score reflects the burn overrun, even though the cause was outside its control. The score records what happened; the written comments record why. Both go into the review.
Program and supplier leads. Schedule, blockers, next two weeks.
Burn, forecast, invoices, modifications, compliance items.
Scorecard reviewed with supplier leadership before it is final.
A set path with time limits, so no issue waits on a calendar.
Each step is documented, so if a relationship does end, the record shows it was handled fairly.
Used once: Sampleton's second wave shipped without mounting kits for four clinics. The corrective action request was closed in three weeks with a packing check added at its warehouse, and its schedule score of 4 reflects a slip that was caught and recovered.
No surprises in the scorecard. Suppliers see the grading criteria at award and their draft score before it is final. A grade they can predict is a grade they can improve.
Stage 04 · Closeout
If nobody defines "done" until the work is over, closeout turns into months of chasing signatures and reconciling invoices from memory. Every item below was in the subcontract from day one.
What this shows
A closeout built into the subcontract at award, with an owner and evidence for each item, and extra checks where time-and-materials billing creates extra risk.
All subcontracts need the checked items. Time-and-materials subcontracts also need the items marked with a plus.
ChallengeWaiting to close all three together felt efficient. It would have left the training subcontract open for nine extra months, with funds tied up and records going stale.
DecisionTraining closed within 60 days of its final milestone, and its unused funds went back to the prime contract to help cover the installation adjustment.
One screen for a VP, at month 14: is the subcontract portfolio on track, on budget, and compliant?
Three suppliers. Forty clinics. One set of promises, kept by people who never signed the prime contract.
That is subcontract management: choosing well, writing it down precisely, watching early, grading fairly, and closing cleanly. The paperwork is how the trust holds up.
Fauxmed Supply Co. is fictional. The methods are real. See How I Work: Lean for how I improve a process end to end.
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intelligent direction, skillful execution and the vision to see obstacles as opportunities."
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