Subject:  Subcontract agreements with small or potentially financially unstable organizations No.        89-14, Formerly 79-2
Date:    August 21, 1989

(Note: This Important Notice is being sent to Account Managers, Chairpersons, Deans and Chancellors. Please forward to others who have a need to know.)

       The University has, in the past, occasionally encountered financial problems resulting from subcontract agreements with small, financially unstable organizations.  Such problems arise not only when the University is engaged as a subcontractor but also when it issues a subcontract to another organization.  Typical problems include the following:

  1. Inability to collect funds due upon completion of a subcontract by the University -- Small organizations may encounter cash flow problems as a consequence of insufficient capital to meet their obligations.  This may result in late payment or non-reimbursement to the University for the work completed. 

  2. Inadequate financial records to meet audit requirements by organizations on a subcontract to the University - - Small organizations may not have sufficient capital to refund audit disallowances resulting from inadequate accounting of funds expended.  This problem has been encountered in spite of a "audit requirements" clause and a "prompt repayment of audit disallowance" clause in the subcontract agreement.

All future subcontract agreements will include the following condition so that the University will be protected against a recurrence of these problems:

As a part of any subcontract process, a review of the organization's financial history will be required.  An exception to this condition will be made for the following subcontracting organizations:

  1. Another university.
  2. A large or well-known organization.
  3. An organization with which we have had previous satisfactory dealings.