FAR 52.215-23—Limitations on Pass-Through Charges.
Plain-English Summary
FAR 52.215-23, Limitations on Pass-Through Charges, is the clause that limits the Government’s exposure to charges added by contractors or subcontractors when they do little or no value-added work. It covers the definitions of added value, excessive pass-through charge, no or negligible value, subcontract, and subcontractor; the Government’s general rule that it will not pay excessive pass-through charges; the contractor’s reporting duty when subcontract effort exceeds 70 percent of total contract or subcontract cost; the remedy if excessive pass-through charges are found; the Government’s right to examine and audit records; and the requirement to flow the clause down into certain subcontracts. It also includes an alternate version used in some DoD procurements that changes the general rule when the contracting officer has already determined there will be no excessive pass-through charges if the contractor performs the disclosed value-added functions. In practice, this clause is aimed at preventing “middleman” charges where a prime or higher-tier subcontractor adds little beyond subcontract management, while still allowing reasonable compensation for legitimate management and oversight work. It matters because it can affect pricing, subcontracting strategy, recordkeeping, audit exposure, and whether a contractor must notify the contracting officer after award if its subcontracting mix changes significantly.
Key Rules
Added value is required
A contractor or subcontractor adds value when it performs subcontract management functions that benefit the Government, such as coordinating deliveries, managing multiple sources, maintaining inventory, processing orders, or performing quality assurance. If the contractor cannot show meaningful contribution to the work, the Government may treat the pass-through charge as excessive.
Excessive pass-through charges barred
The Government will not pay excessive pass-through charges. These are indirect costs or profit/fee charged on work performed by a subcontractor when the contractor or subcontractor adds no or negligible value, except for allowable charges tied to managing subcontracts and the related indirect costs and profit/fee on those management costs.
70 percent reporting trigger
The contractor must notify the contracting officer in writing if subcontract effort after award exceeds 70 percent of the total cost of work under the contract, task order, or delivery order. A subcontractor must do the same if lower-tier subcontract effort exceeds 70 percent of the total cost of work under its subcontract, and the notice must identify revised costs and verify added value.
Contracting officer makes the determination
The contracting officer is responsible for deciding whether excessive pass-through charges exist. That determination drives whether the charges are unallowable on non-fixed-price contracts or whether a price reduction applies on certain DoD fixed-price contracts.
Cost-type remedy is unallowability
For contracts other than fixed-price contracts, excessive pass-through charges are unallowable under FAR subpart 31.2. This means the Government can disallow those amounts in incurred cost, billing, or claim contexts.
DoD fixed-price remedy is price reduction
For applicable DoD fixed-price contracts identified in the prescription, the Government is entitled to a price reduction equal to the excessive pass-through charges included in the contract price. The remedy is built into the contract price rather than handled as an unallowable cost.
Audit and record access apply
The contracting officer or authorized representative may examine and audit the contractor’s records needed to determine whether excessive pass-through charges were proposed, billed, or claimed. For subcontracts covered by the flowdown requirement, the same access extends to the subcontractor’s records.
Flowdown is mandatory in covered subcontracts
The contractor must insert the substance of the clause, including the records-access paragraph, in covered subcontracts. The flowdown applies to cost-reimbursement subcontracts above the simplified acquisition threshold, and for DoD also to covered fixed-price subcontracts above the cost or pricing data threshold, subject to stated exceptions.
Alternate I changes the baseline
Alternate I replaces the basic paragraph (b) with a version stating that the Government will not pay excessive pass-through charges and that the contracting officer has determined there will be no excessive pass-through charges if the contractor performs the disclosed value-added functions. This alternate is used when prescribed and reflects a pre-award determination tied to disclosed value-added work.
Responsibilities
Contracting Officer
Determine whether excessive pass-through charges exist; evaluate whether the contractor or subcontractor has demonstrated added value; enforce the 70 percent reporting requirement; decide the applicable remedy; and authorize or conduct record examinations and audits as needed.
Contractor
Avoid proposing, billing, or claiming excessive pass-through charges; notify the contracting officer in writing when subcontract effort crosses the 70 percent threshold after award; identify revised subcontract costs; verify added value; maintain records supporting value-added work; and flow the clause down to required subcontracts.
Subcontractor
If its lower-tier subcontract effort exceeds the 70 percent threshold, notify the prime or relevant contracting officer as required by the clause flowdown; identify revised costs; verify added value for the lower-tier work; and maintain records subject to audit when the clause applies.
Government
Pay only allowable charges; seek disallowance or price reduction when excessive pass-through charges are found; and use audit and record access rights to verify whether charges are excessive.
Authorized Representative / Auditor
Examine and audit contractor and, where applicable, subcontractor records necessary to determine whether excessive pass-through charges were proposed, billed, or claimed.
Practical Implications
This clause is a major pricing and subcontracting control, especially for primes that rely heavily on subcontractors. If the prime is mostly brokering work, it must be ready to prove real management or integration value.
The 70 percent threshold is a reporting trigger, not a safe harbor. Crossing it does not automatically mean a violation, but it does require prompt written notice and a value-added explanation.
Contractors should document value-added functions early and continuously, not after an audit request. Typical support includes management plans, quality records, coordination logs, inventory controls, and evidence of integration or oversight.
Flowdown mistakes are common. If the clause is required in a subcontract and omitted, the prime may lose leverage to obtain records and may face compliance issues if excessive pass-through charges arise downstream.
The remedy depends on contract type. Cost-type contracts face cost disallowance, while certain DoD fixed-price contracts can face a price reduction, so pricing teams should understand which remedy applies before award and during performance.
Official Regulatory Text
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.