Independent Contractor Agreements & Government Prime Subcontractor Agreement Approaches

Be aware of the various legal nuances that can cost you the contract.

Independent Government Contractor agreements in federal contracting have vastly different legal issues. Not only do the parties have to very careful at the bidding stages; they also have regulated approaches to subcontracts during the performance stage.Government contracts should be designed to allow contractors to work according to their prime and subcontractor agreements and to apply each other’s legal rights accordingly.

The main consideration is to understand that an independent subcontractor does not have privity of contract with the owner. Also, there are mandatory flow down clauses that must pass through to the subcontractor.

What is an Independent Subcontractor? 

Parties to an independent contractor agreement typically have no control over each other. The prime contractor usually hires the subcontractor / independent contractor to perform a specific task. The independent contractor is still responsible to the prime contractor for performing the terms and conditions of the contract.  Read about Getting 8a Sole Source Contracts With the Government.

What are Independent Contractor Agreements?

Independent contractor agreements are contracts issued to a third party for products or services from someone that is not an employee. The relationship is shown through a 1099. The agreements set forth the duties, scope of work and relationship between the third party and the owner.  

A prime contractor agreement is a written agreement that states the expressed contract terms and conditions between the customer and the contractors.  This is somewhat different than an employment agreement where an employer has direct control over the employee.

In government contracting, prime contractors hire independent contractors or subcontractors to perform various services. See more information about contract privity.

• The independent contractor agreement will have payment terms, the types of services provided and damages in the event of a breach of contract.
• Agreements are usually governed by state law.

The main focus is to avoid affiliation. An independent government contractor agreement in federal contracting can pose hardships to the parties if not drafted correctly. Although with government contracts small business requirements situations cannot be foreseen, drafting prime subcontractor agreements can very important basic clauses. There are various approaches that can reduce litigation and disputes. The main issues include:

Foreseeing problems with prime contractor agreements: Unlike most commercial contracts, an independent subcontractor agreement in government contracting must consider various legal nuances that parties must be aware of.  A common approach is to use an independent agreement is when using it in conjunction with teaming agreements.  See information on whether your teaming agreement is enforceable in court.

The subcontract should have clear terms and conditions. When there is a breach, the agreement should have the types of damages expected. In government contracting, the prime is still liable to the owner for problems caused by the independent contractor.

• Always address potential disputes that are common in the specific industry.
• Make sure that flow-down clauses are incorporated into the independent subcontractor agreement.

The SBA rules governing independent subcontractors suggest in 13 CFR 125.6(e)(3) that performance by an independent contractor is considered a subcontract, and may qualify as a similarly situated entity if the contractor meets the relevant criteria. The Small Business Act allows small businesses to team together on a bundled contract and requires the agency to consider the capabilities of subcontractors on the team, and exempt those team members from affiliation. 15 U.S.C. 644(e)(4). See also Limitations on Subcontracting and Small Businesses

If a contract contains a reserve, it is suitable for award to a small business, and thus the contract is not bundled and the SBTA would not apply. See SBA OHA Affiliation Decision Defeats Contractor Argument that Subcontractor Was Similarly Situated.

Avoid Affiliation: An important approach to drafting prime subcontractor agreements in federal contracting is to avoid the issue of affiliation. This governs undue reliance of the prime contractor on the subcontractor to perform the vital aspects of the contract. Although the agreement is governed by state law, the agreement can be used in a small business size protest to take away the awarded contract in the event of a violation of SBA affiliation rules.

See How We Can Help With Size Protest Litigation

If you are contemplating using an independent contractor agreement in government contracting, call our government contracts attorneys at 1-866-601-5518 for a FREE Initial Consultation.