Don’t Wait Until a Legal Dispute Arises to Then Worry About Whether Flow Down Clauses Will Protect You. It May be Too Late Then.

 

FAR List of Flowdown ClausesBy Theodore P. Watson, Esq. and Cheryl E. Adams, Esq.

Not all government contract clauses are mandatory Federal Acquisition Regulation (FAR) flow down clauses to subcontractors.  Prime contractors bidding on government contracts often provide subcontracting opportunities to other businesses.  However, there is some confusion whether specific FAR contract flow down clauses to subcontractors apply.  The reality is that different types of awarded contracts have varying prime flow down to provisions to subcontractors.

The reality is some contractors only realize the power and necessity of FAR flow down clauses when there is litigation.  Successful companies stay ahead of the game when they draft subcontracts involving federal projects.  The general rule is subcontracts are governed by state law.  However, a firm doing business with the federal government as a prime contractors (“Prime”) is contractually bound, and bound by federal procurement law and regulation to flow down to subcontractors various FAR and/or agency-specific clauses that are in the prime contractor’s government contract.

Problem

Many prime contractors are not clear as to which FAR clauses must be flowed down to subcontractors, and which ones are discretionary.  There are  subcontractors that simply sign their subcontracts without a basic understanding of what a “mandatory” flow down requirement actually means.

As a practical matter, mandatory means that no negotiation is possible with the government regarding whether the flow down clause is included the subcontract, and sometimes in lower tier subcontracts as well.  If the clause is mandatory, the FAR requires the Prime to include the clause in its subcontracts, as prescribed by FAR.  It is not clever for a subcontractor, during negotiations with the prime, to insist that the prime delete the clause from the subcontract.  The government will very likely require compliance from the prime anyway.  If the subcontractor does not want to, or cannot, comply with FAR mandatory flow down clauses, it the subcontractor should not accept the subcontracting opportunity.

Most Primes take compliance with flow-down requirements very seriously, for good reason.  A Prime which fails to include federally mandated subcontractor flow down clauses in its subcontracts can face severe penalties, including termination for default (or termination for cause).  A default termination can effectively end a firm’s career as a government contractor.

  • Penalties associated with a Prime’s non-compliance can affect subcontractors, and lower tier contractors.
  • This can cause a domino effect, where a prime’s problems with the government are passed on to its subcontractors, and in turn affect subcontractors’ relationships with lower tier contractors.

See FAR Termination for Default Clause in Government Contracts

Compliance issues can affect a Prime’s cash flow, and/or ability to proceed with the contract work.  Therefore, subcontractors at every tier would be wise to take seriously compliance with FAR flow down clauses from a Prime’s government contract, even though the subcontractor has no “privity of contract” (direct contracting relationship) with the government.

Solution

Subcontractors who plan to perform work under a prime’s government contract should expect to see FAR clauses, and possibly agency specific clauses, in their subcontracting agreements with prime government contractors.  Subcontractors should also expect to provide a level of compliance and be subject to levels of scrutiny by both the government and the prime contractor that are not usually expected or even desired in private sector contracting.

Subcontract Compliance With FAR Subcontractor Flow Down Clauses Often Begins Before Contract Award

The prime contractor may be discussing FAR flow down contractor clause compliance with potential subcontractors even before a contract is awarded.  Government solicitations often require prime government contractors to provide small business subcontracting plans, and may contain other provisions that require a prospective prime contractor to  as part of their offers to the government.  Often the contributions that a subcontractor will make during contract performance are evaluated and approved by the government during the preaward process, before the prime is even awarded a contract.

Often Primes will bring their subcontractors on board during the pre-award process.  Subcontractors should be aware that if the prime proposes to the government that the prime has certain subcontracting arrangements in place, and the prime’s proposal is evaluated based on that, the government may not allow the prime to change its subcontracting arrangements after the contract is awarded.

  • A subcontractor’s compliance with subcontractor flow down clauses from the government’s solicitation should be addressed before the prime’s proposal is sent to the government for evaluation.
  • The subcontractor should read the government’s solicitation documents with an eye toward compliance with FAR flow down clauses, if the subcontractor anticipates having a role in a prime contractor’s pre-award offer to the government.

All parties should understand what the government’s risks could be when dealing with subcontractors, and any violations of law.  They become a clear indicator of what is important.  Subcontractors should know which contractor clauses they can negotiate with primes, and which clauses are mandatory, or otherwise not negotiable.

It is important to both prime contractors, and government subcontractors, to understand what are FAR government flow down subcontractor clauses and the critical importance of having them in subcontractor agreements.

The Downside of Neglecting to Include Flow Down Clauses in Subcontracts

Prime contractors performing federal government projects must ensure that they have the proper prime flow down requirements.  Failure to include the appropriate FAR flow down clauses can result in a termination for default by the government.  In addition, a company can spend tens of thousands of dollars litigation disputes that could have been resolved by including the respective flowdown clauses in the contract. Without the proper subcontractor clauses in the subcontract, the prime might be without recourse to recover from the subcontractor in instances where the subcontractor’s non-compliance may have contributed to the prime’s default.

Key concepts of mandatory flow-down clauses government contracts:

  • The prime contract is with the federal government.  As a Prime, 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., as well as agency-specific regulations.
  • State law governs the subcontract, not federal contract law – excluding mandatory flow-down clauses.

Get information on Does Force Majeure Clauses Apply to Federal Government Contracts COVID 19.

What is the Christian Doctrine? 

How Does it Apply to Mandatory Flow Down Clause Requirements?

When companies attempt to claim that a mandatory flow down clause is not in the subcontract, because the clause was not written into the contract document, they can be in for a surprise.  Courts often use the Christian Doctrine to read the clause into the subcontract anyway, regardless of the written language in the subcontract.  The Christian Doctrine also can apply to prime contract, between the prime contractor and the government.  If the government Contracting officer leaves a required clause out of the prime contract, in many cases the law treats the contract as if the clause had been included.

The Christian Doctrine, in this context, does not refer to a religion.  It refers to a case, G. L. Christian & Associates, v. U.S., 312 F.2d 418, Ct. Cl, 1963, (“G.L. Christian) in which a U.S. Army Corps of Engineers contract to construct housing at Fort Polk was terminated.  The litigation involved interpretation of a terminated contract.

G.L. Christian is usually, and famously, cited to support the idea that a government contract clause, even if not actually written into a government contract, can be read into the contract if required by government procurement regulations.  This is what is known as the “Christian Doctrine.”

While in G.L. Christian the standard government Termination clause was not written in any contract between the subcontractor and the government, the court states, “We are not, and should not be, slow to find the standard termination article incorporated, as a matter of law, into plaintiff’s contract if the Regulations can fairly be read as permitting that interpretation.”  Using the Department of Defense’s acquisition regulations, Judge Davis set forth the rule for which this case is now famous:  If government regulation requires a clause to be in a government contract, the subcontractor clause can be present in the contract (by operation of law) even if the clause is not written into the contract.

The Christian Doctrine can be applied to mandatory FAR flow down clauses in government contracts.  If the government regulations require a clause to be present in the prime contract, and also flowed down to a subcontract, the clause can be read into both the prime contract AND the subcontract even if the parties left the clause out.  Prime contractors and subcontractors should be aware that this can happen, and not play games with excluding clauses that are required by government procurement regulation.

This case also includes some other interesting subcontracting issues. 

A subcontractor was involved in performing the work at Fort Polk, and was unable to recover through the prime contractor because “Generally, when a prime contractor’s action against the Government is based on losses allegedly sustained by subcontractors, the possibility of recovery depends not only upon proof that the subcontractors actually sustained the alleged losses, but also upon proof that the prime contractor is liable to the subcontractors for the damages sustained by the latter.”  The court, in applying the Christian Doctrine, found that the prime was not liable to its subcontractor, in part because of the indemnity clause in the subcontract.  The prime was insulated from liability because the Agreement to Subcontract stated the subcontractor will ” ’at all times save harmless and keep indemnified the said G. L. Christian & Associates… against any and all claims, suits, actions, debts, damages, costs, charges and expenses,… and against all liability, losses and damages of every nature whatsoever’ arising in connection with the Fort Polk housing contract.”

The government terminated the prime contract, and as a result the subcontractor sustained damages from the termination.  Nonetheless, the subcontractor had a great deal of difficulty showing that it had a valid contract with the federal government.  The usual rule is subcontractors can only recover if the subcontractor first submits the claim to the prime, and then, as a next step, the prime “sponsors” the claim by submitting it to the government as if it were the prime’s claim.

This case contains a lengthy discussion of whether the subcontract was legally assigned to the government, or whether there were other ways to get around the usual almost inflexible rule that subcontractors cannot pursue claims directly against the government.  G.L. Christian is a highly unusual case in that the court allowed a subcontractor to recover a claim directly from the government without the prime sponsoring the claim.  As a practical matter, subcontractors can almost never submit claims directly to the government and expect to get results.  Instead subcontractors must almost always submit their claims to the government through the prime contractor.  It would not be very wise to expect that the G.L. Christian case can be used to support the idea that subcontractors can submit claims directly to the government without the prime’s involvement, because that part of the case is very unusual.

G.L. Christian is important because it represents an established principle of law in government contracting, the Christian Doctrine.  The case specifically found that “…it is both fitting and legally sound to read the termination article required by the Procurement Regulations as necessarily applicable to the present contract and therefore as incorporated into it by operation of law.”  While there is some debate over which clauses, in addition to a termination clause, might be included on a list of clauses subject to the Christian Doctrine, there is no question that the Christian Doctrine continues to be cited in current cases for the proposition that a required government contract clause can be included in a government contract by operation of law, even if the clause is not actually written into the contract.

Making A List

If you are a Prime, you should develop a list of mandatory FAR clauses that are based on your specific government contract that you routinely include in your subcontracts.  You should also have information accompanying each clause regarding the FAR rules regarding when the clause must be included in the subcontract.  This list should include information such as applicable subcontract dollar thresholds, place of performance requirements, and any other information you need to have to decide whether the flow down clause is applicable to the specific subcontract in question.  Also, a prime should have a working understanding of whether, and how, to tailor each flow down clause so that it is enforceable.  Some FAR clauses must be tailored, or changed slightly in accordance with FAR.  For other clauses, tailoring is expressly prohibited.

Is There a List of  FAR Mandatory Flow Down Clauses Required by Government Contracts?

First, it is important to understand that there is no one-size-fits-all list of flow down clauses, mandatory or otherwise.  The best way to understand which clauses flow down is to read your government contract, and simply create a list of clauses from your specific contract, that are required by FAR to be flowed down to subcontractors.  It helps to have a working understanding of the FAR.

A government contracts attorney experienced with mandatory flow down clause in a contract can save a Prime time and money by developing a “Playbook” that its subcontract negotiators can use as an aid in negotiating subcontracts which include required compliance with its federal government contracting requirements, and also do not include unnecessary and burdensome compliance that the government doesn’t even need.  Your government contracts attorney can also draft sample subcontract templates that can be provided to subcontractors, so that subcontractors can easily understand their compliance requirements.  Use of these tools can allow for consistency in compliance and reduce potential liability for all parties performing on a federal project.

Your list of FAR government mandatory flow down clause in a contract is taken from the prime contract and included in the subcontract.  As mentioned above:

– Which Government contract flow down clauses are included by the Contracting Officer in a government contract depend on the type of contract awarded, as well as some other factors such as dollar value, place of performance, and sometimes even what date the contract was awarded.

How to Recognize a Mandatory Flow Down Clause

A clause is recognizable as mandatory if the FAR contains language regarding use of that clause stating that the prime “shall insert the substance of this clause in all subcontracts.”  Often the language regarding applicability can be found right there in the text of the clause.

Not all clauses are mandatory.  Therefore, if you are a Prime, you should not use catchall subcontract language in your subcontract that states, “all clauses that are in the prime contract flow down to the subcontractor” or similar.

– You must include each subcontract clause individually, not through a catchall clause that provides for the whole prime contract to be included in the subcontract.

– You should not automatically flow down the exact words of the prime’s contract clauses.  Many FAR clauses do not make sense in a subcontract unless they are appropriately tailored.  Sometimes FAR actually requires the clause to be tailored to include certain information.  Again, often the tailoring instructions can easily be found in the text of the clause.

– Failure to tailor can cause a clause to be unenforceable.  Sometimes for a prime flow down clause to be enforceable, it must be modified, or tailored, to fit the specific subcontract.

How to Recognize and Know When to Use Discretionary Flow Down Clauses In a Subcontract

Not all FAR flow down clauses to subcontractors are mandatory in a contract.  There are also “discretionary” clauses.  FAR does not require a Prime to include discretionary clauses in subcontracts.  However, there are times when a Prime considers it either necessary or advantageous to include FAR clauses in a subcontract, even when not mandatory.  Discretionary clauses might be included in a subcontract, or not, in order to ensure subcontractor compliance, for convenience in administering the prime and/or subcontract, or to otherwise protect the prime’s interests and facilitate an amicable subcontracting relationship.

Inclusion of discretionary clauses in a subcontract, and the extent to which discretionary clauses must be flowed down to lower tier subcontractors, is in many cases negotiable between the subcontractor and the Prime.   If a Prime can reduce a subcontractor’s costs by, for example, not including an unnecessary reporting requirement in a subcontract, why wouldn’t the Prime save everyone time and money by leaving the clause out of the subcontract?

Savvy subcontractors can help reduce taxpayer and prime contractor costs by spotting unnecessary discretionary clauses, and negotiating with the prime to have them removed from the subcontract.

Common Government Contract Flow Down Clauses

Most FAR flow down clauses to subcontractors only are required in specific situations, for example they only apply when the subcontract is over a specific dollar value, or if the contract is a construction contract, or a service contract.  As a general rule, lower dollar value subcontracts have fewer flow down requirements.  That said, a prime contractor should be mindful of FAR prohibitions that do not allow cutting up larger procurements into smaller pieces in order to evade regulatory and legal requirements associated with higher dollar thresholds.  Prime contractors’ and also often subcontractors’ records are often subject to government audit in a variety of situations.

Prime contracts for Commercial Off the Shelf items (“COTS”) items, and also subcontracts for COTS items, are often subject to fewer flow-down requirements than contracts for supplies or services that are unique to the federal government.

Commonly Used Mandatory Flow Down Clauses in a contract– and When They Apply

Below is a list of some commonly used mandatory flow down clauses.  Mandatory does not mean “always include in all the subcontracts.”  Prime and subcontractors should be aware that their specific government contract might contain a list of mandatory clauses that is quite different from the list below.

Just as an example, here is an exploration of how flow-down for 52.244-6 works, if this particular clause happens to be in the prime contract.  The clause at FAR 52.244-6 is a classic clause situation where one can find clauses within clauses, and applicability is all over the map.

FAR 52.244-6  Subcontracts for Commercial Items (2019)

Compliance Notes:  This clause has other clauses listed in it.  Flow down requirements vary depending on the subcontract:

– First, para. (b) requires the contractor and subcontractors at all tiers to incorporate commercial items or nondevelopmental items as components of items to be supplied under the prime contract, to the maximum extent possible.  There is no specific FAR clause for this, nonetheless, there is a mandatory flow down of this requirement.  The parties to the subcontracts are left to their own devices to draft their own clause.  Fortunately, drafting a suitable clause should be pretty simple.  Subcontractors at all tiers need to have something written in the subcontracts stating the requirement “to incorporate commercial items or nondevelopmental items as components of items to be supplied under the prime contract, to the maximum extent possible,”  and also stating the flow-down requirement must be included in all lower tier subcontractors.

– Second, para. (c)(1).  For subcontracts for commercial items only.  If it’s not a subcontract for commercial items, this list can be ignored, at least for the very limited purpose of complying with FAR 52.244-6(c)(1).  If it is a subcontract for commercial items, a list of twenty clauses must be flowed down.  Except, if you read the FAR flowdown requirements for each of the twenty clauses, not all of them apply in every commercial item subcontracting situation.  Let’s take a look at the first seven clauses, to get an idea of the variety of situations where the listed clauses may, or in many cases may NOT, need to be flowed down:

(i) FAR 52.203-13, Contractor Code of Business Ethics and Conduct (Oct 2015) (41 U.S.C. 3509)

NOTE:  No need to flow down if the subcontract is less than $5.5 million or has a performance period shorter than 120 days.  There is also a need to tailor the clause to identify the parties.

(ii) FAR 52.203-15, Whistleblower Protections Under the American Recovery and Reinvestment Act of 2009 (JUN 2010).  NOTE:  Only flow down if the subcontract is funded under the Recovery Act.

(iii) FAR 52.203-19, Prohibition on Requiring Certain Internal Confidentiality Agreements or Statements (JAN 2017).

(iv) 52.204-21, Basic Safeguarding of Covered Contractor Information Systems (JUN 2016),

NOTE:  The flowdown requirement only applies to subcontracts that are NOT for commercially available off-the-shelf items.  Also, no need to flow down unless FAR clause 52.204-21(c) requires it.  FAR 52.204-21(c) lets us know that flow down is only required if the subcontractor may have Federal contract information residing in or transiting through its information system.  Taking a deeper dive, we can see that “Federal contract information” is

– not intended for public release;

– either provided by the Government or generated under a Government contract; and

– does not include simple transactional information, such as payment processing information.

Clearly, there are a lot of commercial item subcontracts that don’t actually need to have 52.204-21 included.

(v) FAR 52.204-23, Prohibition on Contracting for Hardware, Software, and Services Developed or Provided by Kaspersky Lab and Other Covered Entities (JUL 2018) and

(vi) 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment. (AUG 2019).

NOTE:  Both FAR 52.204-23 and FAR 52.204-25 must be flowed down.  That said, most ordinary subcontractors will not find compliance very difficult.  The compliance requirements only kick in if there is some involvement with Kaspersky Lab or any of the other entities listed in the clauses.  For 5FR 2.204-25 if the subcontract does not involve surveillance, technology with export restrictions under ITARS, or nuclear proliferation and/or chemical and biological weapons, probably the clause won’t be too difficult for most subcontractors to comply with.

(vii) FAR 52.219-8, Utilization of Small Business Concerns (OCT 2018) only flows down “if the subcontract offers further subcontracting opportunities.”  Even then the subcontract does not flow down to subcontracts below the following dollar thresholds:

– $1.5 million for construction of any public facility; and

– $700,000 for everything else.

Also, there is no requirement to flow down 52.219-8 to “small business concern” subcontractors.

Commonly Used Discretionary Flow Down Clauses – and When They Apply

Below is a list of some common areas where discretionary flow down clauses would be advisable.  Again, Prime and subcontractors should be aware that their specific government contract might contain a list of clauses that is quite different from the list below.

Government contracts often include clauses, unique to federal contracting, that can impact a prime contractor’s ability to meet its obligations to subcontractors.  It can be beneficial for a prime to flow down to subcontractors, and possibly even lower tier subcontractors, these clauses either as-is or tailored so that the clauses make sense in the context of the subcontract.

Some examples might be:

Terminations clauses

Typically, government contracts contain termination for convenience, and termination for default clauses.  Both types of clauses allow the government to end performance of the prime contract.  Savvy prime contractors will protect both their own interests, and the interests of their subcontractors, by providing the subcontractor with notice of the existence of the clause in the prime contract, and also by ensuring that the prime can end the subcontract if the prime is terminated.

Not all prime contracts contain the same exact FAR terminations clauses.  For example, a fixed price supply or service prime might have FAR 52.249-8 Default (Fixed-Price Supply and Service (Apr 1984), while a fixed price construction contract might include FAR 52.249-10 Default (Fixed-Price Construction)(Apr 1984).  Another prime might have a cost-reimbursement contract, which would likely contain FAR 52.249-6 Termination (Cost-Reimbursement)(May 2004).

All of these clauses provide the government with the rights to default the prime contractor if the prime does not perform, but details in how exactly that works vary.  In general, the prime would mainly be interested in ensuring that its subcontractors are contractually obligated to help the prime meet its obligations to the government in the event of a termination.

Option clauses:  Some government contracts contain options.  FAR clauses providing for options include FAR 52.217-9 Option to Extend the Term of the Contract (Mar 2000) or FAR 52.217-6 Option for Increased Quantity (Mar 1989).  These option clauses allow the performance period of the contract to be extended, or they allow the government to increase the quantity of goods , but there can be other kinds of options as well.  The option clauses allow the Contracting Officer to write in details regarding the specific option in question.  Therefore, the same option clause, for example 52.217-16, as written in Prime Contract #1 might be slightly different from the 52.217-16 clause found in Prime Contract #2, depending on what information the Contracting Officer wrote into the clause.

The option clauses in the prime contract allow the government the exclusive right to unilaterally exercise the option, without the consent of the prime.  In most cases, the prime has no control over whether the government chooses to exercise the option.  If an option is exercised, the prime must perform.  A wise prime contractor will include options in its subcontracts that mirror the prime, to ensure that its subcontractors are also contractually obligated to perform if the option is exercised.  Conversely, if the government ends the prime contract without exercising the option, the prime contractor may need to also end the subcontract.  There is no FAR requirement for option clauses to be flowed down.  A Prime who fails to secure performance by the subcontractors it relies on could be in deep trouble if an option were exercised and the subcontractors were no longer obligated to perform.  A wise prime contractor would flow down options to subcontractors, and wise subcontractors would flow down the options to any lower tier subcontractors.

Rights in Technical Data:  It is very easy for a government contractor, or its subcontractors, to accidentally lose intellectual property rights such as copyright, or business sensitive, or trade secret data to the federal government through simple acts of neglect, such as failure to properly label protected information.  Prime government contracts often include FAR clauses affecting data rights, such as 52.227-14 Rights in Data-General (May 2014).

The clauses often contain specific procedures which can be simple for a prime or subcontractor to follow, but which if not followed destroy the contractors’ rights to their intellectual property.  For example, FAR 52.227-14 includes a specific “Limited Rights Notice (Dec 2007)” which must be affixed to certain data provided to the government by a prime, or subcontractor, if the prime or subcontractor would like the government to protect the data.  Also, any reproductions of the data must be marked. See the notice below:

Limited Rights Notice (Dec 2007)

“(a) These data are submitted with limited rights under Government Contract No. _____ (and subcontract ______, if appropriate). These data may be reproduced and used by the Government with the express limitation that they will not, without written permission of the Contractor, be used for purposes of manufacture nor disclosed outside the Government; except that the Government may disclose these data outside the Government for the following purposes, if any; provided that the Government makes such disclosure subject to prohibition against further use and disclosure: [Agencies may list additional purposes as set forth in 27.404-2(c)(1) or if none, so state.]”

FAR 52.227-14 is an excellent example of a FAR clause which, if flowed down from a prime to a sub, might require tailoring in order to make sense or be enforceable.  The clause not only may require tailoring by the government Contracting Officer when she includes it in a solicitation or prime contract, it also should be tailored to include the prime contract number and also applicable subcontract identification information.

Failure to mark data can lead to ugly disputes if a subcontractor is not aware of what it needs to do to protect its intellectual property, and the prime has released its subcontractor’s unmarked data to the government.  Although FAR contains no requirement for flow down of 52.227-14, or most other clauses affecting data rights, an easy way to avoid intellectual property disputes is to simply flow the clause down to subcontractors at all tiers.

Tip: Also be aware that various government agencies have clauses that might need to be flowed down to subcontractors, pursuant to agency-specific acquisition regulations.  For example, the Department of Defense and any agency subject to the Defense Federal Acquisition Regulation Supplement (DFARS) might include DFAR clause 252.227-7013 Rights in Technical Data – Noncommercial Items (Feb 2014) in a prime contract.   This clause, at paragraph (4) calls for specifically negotiated license rights.  It might be important for a subcontractor to understand that licensing rights can be negotiated.  Also, depending on the situation, it might be important for subcontractors to be aware of the terms negotiated between the prime and the government.  All of this could be accomplished through flow down, and also by flowing down the terms of the prime-government negotiated licenses.

DFAR 252.227-7013 has other requirements that can affect subcontractors, in addition to the licensing rights discussed above.

Of course, there are many other FAR or agency-specific clauses which may appear in prime contracts, which have no mandatory flow down requirements.  However, as we can see above, absence of a FAR mandatory flow down requirement does not prevent a prime from including a FAR or agency clause in its subcontracts if it makes sense to include the clause.  Prime contractors and subcontractors will often find it beneficial or essential to flow down clauses that are not subject to mandatory flow down requirements.

A Useful Subcontract Flow-Down Clause That Is Not In FAR – Protecting the Subcontractor’s Right to Make Claims Against the Government. 

It is a basic concept in government contracting law that subcontractors have no rights to make claims against the government, because subcontractors almost always do not have privity of contract (a direct contracting relationship) with the government.  This situation can result in a prime contractor getting caught in the middle between the government, and a subcontractor that wants to make a claim against the government.

If a subcontractor wants to submit a claim to the government, normally the subcontractor has to prepare the claim, and submit it to the prime.  The prime then does what is legally called “sponsor” the claim.  That is, the prime takes the claim to the government and presents it to the government as if it were the prime’s claim.

Not all prime contractors like to to be caught in the middle between a sub and the government.  Or, if a prime is unable to pay a subcontractor, potentially for reasons unrelated to subcontractor performance such as a prime’s bankruptcy, it results in a subcontractor being unable to recover payment from the government, which can be very unfair to the subcontractor.

This contract clause allows the prime, on behalf of the subcontractor, to submit a claim to the government, along with the subcontract clause showing that the prime has agreed to sponsor subcontractor claims.    The exact language of the clause can vary as long as it includes the magic words stating that the prime agrees to “sponsor” subcontractor claims against the government.

Lower tier subcontractors also can be brought under the sponsorship umbrella, through flow down clauses, as long as the sponsorship clause is in every subcontracting agreement at higher level tiers above the subcontract in question.  Once a sponsorship clause is left out of a subcontract at any level, the chain is broken, and lower tiers would likely no longer have access, through the chain of subcontracting documents, to prime contractor sponsorship of claims.

Tips for subcontractors:

Understand the Impact of Pay-When-Paid Subcontract Clauses

– Many general contractors, especially in construction contracts, try to limit payment to their subcontractors by inserting a pay-when-paid clause in the subcontract.  A pay-when-paid clause is a clause that provides that the prime contractor does not have to pay the subcontractor until after the prime is paid by the government.  This type of clause benefits prime contractors, but can create serious cash flow problems for subcontractors, especially small business subcontractors.

Certain large business prime government contracts include FAR 52.219-9 Small Business Subcontracting Plan.  Large business prime contractors often have obligations to comply with their government approved subcontracting plans. If FAR 52.219-9 is in the prime contract, then 52.242-5 Payments to Small Business Subcontractors will also be in the prime contract.

  • This is important information for small business subcontractors, because when a prime either fails to pay on time, or makes a reduced payment, the prime must notify the Contracting Officer, in writing.

“Untimely payment means a payment that is more than 90 days past due under the terms and conditions of a subcontract, for supplies and services for which the Government has paid the prime contractor.”  (FAR 52.242-5)  Contracting Officers who find that a prime habitually and without justification pay late or underpay their small business subcontractors can record that in the prime’s past performance data.  Prime contractors are usually interested in having positive past performance ratings because of the effect of past performance on a prime’s ability to successfully compete for future contracts.

Pay-when-paid clauses are not FAR flow down clauses, if a subcontract contains one, the subcontractor should review it with caution.

There are FAR clauses which address prime contractor obligations to pay subcontractors.  The clause at FAR 52.242-5 Payments to Small Business Subcontractors is not a mandatory flowdown clause – although prime contractors are required to comply with this clause, it will likely not be present in subcontracts.  FAR 52.219-8 Utilization of Small Business Concerns implements the policy that “prime contractors establish procedures to ensure the timely payment of amounts due pursuant to the terms of their subcontracts with small business concerns, veteran-owned small business concerns, service-disabled veteran-owned small business concerns, HUBZone small business concerns, small disadvantaged business concerns, and women-owned small business concerns.”

Mandatory Disclosure Rule

– Make sure that you comply with the FAR Mandatory Disclosure Rule.

Federal Government Subcontractors should develop documentation in their files to reduce or avoid disputes.

Following direction from the prime contractor:

Subcontractors often find themselves at a great disadvantage when they perform work pursuant to a subcontract.   The subcontractor performs work at the direction of the prime, only to find out that the government has a problem with what the subcontractor did.  When these situations arise, the issue becomes whether the subcontractor performed the work in accordance with the subcontract.

Following direction from government employees:

A similar problem arises when subcontractors perform work at the direction of government employees without the prime’s knowledge and/or agreement.  It is important in this situation for subcontractors to understand who has authority to direct subcontractor work, and who doesn’t.

Only the federal Contracting Officer has authority to direct changes to the Prime’s work.  The Contracting Officer Representative does not have authority to give directions to prime that would change the scope of work. Nor can he or she bind the federal government.

The Contracting Officer normally only has authority to direct the prime contractor’s work, not the subcontractor’s work.  The Prime is responsible for ensuring that its subcontractors are properly performing subcontracts, so only the prime contractor can direct the subcontractor.   If any government employee directs a subcontractor to do work that is somehow different from the work called for in the subcontract, before following the government’s instructions, the subcontractor should ask the Prime to confirm that subcontractor should follow the government’s directions.  The subcontractor should document both the government’s and the Prime’s instructions, as well as any other relevant details.

One way of handling this situation is to confirm specific directions from the Prime and make sure that the prime’s directions are clearly followed.  Simply because the Prime misunderstood, or got something wrong from the government does not mean that the subcontractor should have to forgo payment.  Remember that there is no privity of contract between the subcontractor and the government.  Therefore, the onus is on the subcontractor to validate the Prime’s directions.

Do You Have the Correct FAR Flow Down Clauses in Your Government Contract?

For help with FAR compliance requirement and help developing your list of FAR flow down clauses to subcontractors, call our government contract compliance lawyers at 1-866-601-5518.  FREE INITIAL CONSULTATION.

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