Understanding Categories of Subcontracts: An Example from Northrop Grumman

If you've been in the manufacturing or defense industry, chances are you've heard the term subcontract. But not all subcontracts are created equal. For small-to-mid-sized companies working with larger primes like Northrop Grumman, understanding the different categories of subcontracts can make the difference in managing expectations, costs, and compliance.

What Is a Subcontract?

A subcontract is a contractual agreement where a company (the subcontractor) agrees to provide certain products or services to a prime contractor, like Northrop Grumman, which is then responsible for delivering the final product to the government or end customer. Subcontracts help prime contractors manage complex projects by dividing work into manageable pieces.

Categories of Subcontracts: An Overview

Northrop Grumman, as a major defense contractor, categorizes subcontracts based on their scope, complexity, and cost. Recognizing these categories helps your business understand what’s involved and how to plan your work accordingly. Here are the main types:

1. Type of Work Based

• Material Subcontracts: These cover raw materials, components, or parts. They are usually straightforward; you are purchasing parts to be assembled into the main product.

• Manufacturing Subcontracts: Here, your company might produce specific components or assemblies that are integrated into the final product.

• Design Subcontracts: Sometimes, your expertise may be needed to design parts or systems, especially if it’s specialized work.

2. Type of Contract Based

Northrop typically uses these contract types, which influence how you get paid and manage risk:

• Cost-Reimbursement Subcontracts: The company is reimbursed for allowable costs plus an additional fee. Best suited for projects with high uncertainty or developing new technology.

• Fixed-Price Subcontracts: A set price for defined work. Your company bears more risk if costs increase but benefits from cost savings if work is cheaper than expected.

• Time and Materials (T&M) Subcontracts: A hybrid, paying for actual work hours plus materials. Common for undefined or evolving work scopes.

3. Size and Complexity

• Simple Subcontracts: Small value, straightforward work, often for routine parts or services.

• Complex Subcontracts: Larger dollar amount, involving technical compliance, schedule, and performance management. For example, producing a critical missile component.

Why Does This Matter to You?

Knowing which category your subcontract falls into can help you prepare properly. For example:

• If you’re working under a cost-reimbursement subcontract, you’ll need to maintain detailed records of costs.

• Fixed-price work requires accurate estimating early on, to avoid losing money.

• Complex subcontracts often involve stricter schedules and quality standards, which impact your planning.

Real-World Example from Northrop

Suppose Northrop is developing a new satellite. They might subcontract the design and manufacture of the payload sensors. This could fall under:

• Manufacturing Subcontract: If your company fabricates the sensors according to Northrop’s specs.

• Type: Likely a fixed-price contract if scope is understood, or cost-reimbursement if technology is still being developed.

Understanding this helps your team plan resource allocation, cash flow, and compliance requirements.

Final Tips

• Ask questions early: Clarify what category your subcontract falls into before starting work.

• Keep good records: Especially for cost-reimbursement projects.

• Stay compliant: Follow the terms, especially quality standards and reporting requirements.

By understanding the categories of subcontracts that prime contractors like Northrop Grumman use, your small business can operate more effectively and position itself for success in highly managed projects.

Learn More

For detailed guidance on subcontract types and managing compliance, check resources such as the Defense Federal Acquisition Regulation Supplement (DFARS) or consult your legal or contract management team.