Prime contractors that are bidding on government contracts often provide subcontracting opportunities to other businesses. However, there is some confusion whether a specific FAR contract flow down clause applies to subcontractors.
Problem: 43% of prime contractors are not clear as to which FAR clauses must apply to subcontractors and those that are discretionary. 68% percent of subcontractors simply sign their subcontracts without a basic understanding of what flow-down clauses actually mean.
Solution: Understand what the government’s risks could be when dealing with subcontractors and any violations of federal law. They become a clear indicator of what is important. Subcontractors should know what they can negotiate with primes and which clauses are non-negotiable.
It is important to both prime contractors, and subcontractors, to understand what are flow down subcontracting clauses and the value of having them in subcontractor agreements.
Prime contractors performing federal government projects must ensure that they have the proper flow-down provision. Failure to include the appropriate flow-down clauses can result in a termination for default to the government, without recourse to the subcontractor.
- The prime contract is with the federal government. As the prime contractor, you want to make sure that some of your contractual obligations flow down to the subcontractor.
- Federal Government Contracts are regulated by the Federal Acquisition Regulations, FAR, 48 C.F.R.)
- State law governs the subcontract and not federal contract law – exlcuding mandatory flow-down clauses.
If you are a government contracting prime, and you do not have proper flow-down clauses, then your subcontractor can make you default with your Government customer.
What is a FAR Contract Flow Down Clause?
A flow down clause is one taken from the prime contract with the federal government and included in the subcontract. This allows for consistency and liability for all parties performing on a federal project.
The FAR states that government contracting agencies shall require the prime “shall insert the substance of this clause in all subcontracts. Therefore, if you are the main contractor, you should not just put a clause in your subcontract that states “all clauses that are in the prime contract flow down to the subcontractor.
- You must include each subcontract clause individually.
- You should not be flowing down the exact words of the prime’s contract clauses.
- For the flow-down to be enforceable, it needs to be modified to fit your specific subcontract.
As a general practice, there are “mandatory” flow-down clauses and “discretionary” flow-down clauses.
List of Useful Flow Down Clauses
- The Default clause is a discretionary flow-down clause
- Option to exercise clause. This is also discretionary
- Rights in Technical Data Rights –discretionary
- Limitation of Funds or/Limitation of Costs –discretionary
- Service Contract Act Requirements. This contract flow down clause is mandatory
- Davis-Bacon Act Requirements — This is a mandatory flow-down clause
- Audit and Records Clause and Sealed Bidding and Negotiated Contracts — Mandatory
- Cost and Pricing Data — Mandatory
- Subcontracts for Commercial Items — This clause is Mandatory)
Tip for subcontractors: Many prime contractors, especially in construction contracts try to limit payment to their subcontractors by inserting a pay-when-paid clause in the subcontract. This is not a mandatory flow-down clause and should be reviewed with caution.
Many subcontractors find themselves at a great disadvantage when they complete work pursuant to the subcontract, and at the direction of the prime, only to find out that the government has a problem. When these situations arise, the issue becomes whether the subcontractor performed the work in accordance with the subcontract. The prime will attempt to withhold payment because the government has an issue with the work performed.
Subcontractors should develop documentation in their files to narrow any disputes. One way of doing this is to confirm specific directions from the prime and make sure that the prime’s directions are clearly followed. Simply because the prime got it wrong with the government doesn’t mean that the subcontractor should have to forego payment. Remember that there is no privity of contract between the subcontractor and the government. Therefore, the onus is on the subcontractor to valid the prime’s directions.