Subcontracting – Flow Down Federal Government Terms and Conditions

When contracting with the federal government, a significant field of responsibility for a government contractor is contracting with vendors, specifically subcontracting with vendors.

What is a subcontract?

The contract the government issues to a contractor is known as the prime contract. When a prime contractor procures complex support from a manufacturer, vendor, or consultant, the legal agreement between the prime contractor and the service provider is a subcontract and the vendor is known as a subcontractor.

The Federal Acquisition Regulations, FAR, defines a subcontract in FAR 52-244-2 and FAR 3-100 to mean any contract, as defined in FAR  subpart  2.1, entered into by a subcontractor to furnish supplies or services for performance of the prime contract or a subcontract. It includes, but is not limited to, purchase orders, and changes and modifications to purchase orders.

Important to note is that contracts between the prime contractor and the subcontractor are private (i.e., commercial) contracts.  There is no privity of contract with the federal government. That is, the federal government is not a party in the contract between the prime and subcontractor. Rights and obligations agreed to in the prime contract are not automatically extended to the subcontractor. As such, state regulations govern the contract between the prime and the subcontractors.

Why flow down clauses?

For the prime contractor to comply with clauses in the prime contract with the government, the prime contractor must include clauses in the subcontract, that enables the prime contractor to fulfill obligations to the federal government. These terms and conditions require a subcontractor to meet similar requirements the federal government mandates. Thus, the term flow down clauses.

Clauses are flowed down to minimize the prime contractor’s cost and performance risk as well as obtaining required information.

What is a flow down?

Generically, a flow down clause is a contractual clause, a term or condition, that a contracting party includes in a subcontract to another party in this separate subcontract. A flow down to another party binds the subcontractor to the terms and conditions of the flow downs which are typically the same as the prime contract, but can be altered by the parties involved. Required flow downs that are altered must contain the substantive issues of the original clause. The flow downs need to have the parties named in the flow downs re-identified so that the prime contractor rather than the Government is identified as buyer.

What causes a clause to be flowed down? What clauses should be flowed down?

Multiple functions of the federal government are exercised through the government procurement process.   A few include assuring legislators that government agencies are fulfilling the government’s fiduciary duties to citizens, implementing laws, and ensuring the safety and security of the nation.  

Some of these goals are implemented by requiring the prime contractor to include them in subcontracts. These are known as mandatory flow downs. FAR 52.228-3, Workers’ Compensation Insurance (Defense Base Act), is an example of a mandatory flow down. It that requires contractors to purchase Workers’ Compensation insurance prior to performing on the contract.

Other clauses are known as discretionary flow downs. They are not required by FAR to be included in subcontracts, but it is in the best interest of the prime contractor to flow them down to fulfill terms in their prime contract. For example, FAR 52.232-22 Limitation of Funds, requires the prime contractor to notify the Contracting Officer when funds are expected to be spent within a given timeframe. If a large flexibly priced subcontract is awarded, the prime contractor should flow this clause down, as well as other critical flow down clauses needed to define financial reimbursement procedures, to ensure they can provide the information they are obligated to under the prime contract.

Flow down process:

The process of flowing down clauses includes reviewing the request for proposal (RFP), the subcontractor’s proposal, the prime contract, and creating a matrix of needs for each subcontractor.

Reviewing the RFP for the award provides insight into clauses to be included or excluded for subcontractor that would be part of the proposal. Key information such as type of award, dollar value, and type of procurement, i.e. sole source vs. competitive bids, teaming agreements, and intellectual property requirements can be gleaned to help formulate the flow down requirements. The RFP information provides requirements that a potential subcontractor might not be willing to accept.

Reviewing the subcontractors' proposals also provides insights for mandatory flow downs. They are based upon the dollar value of the subcontract. Knowing the amount proposed indicates which flow downs are necessary. The contract type expected to be awarded determines flow downs that are unique to fixed price, flexibly priced, and labor hour type contracts.

The obvious and key step in evaluating the extent of flow down requirements is reading the prime contract. Consideration is given to the dollar value, the type of procurement, e.g. was it sole sourced or competitively awarded, the contract type to be awarded (i.e. fixed price or flexibly priced cost type) what clauses cannot be flowed to the subcontractor due to privity of contract constraints, what type of subcontract evaluation has occurred, if the contract is Cost Accounting Standard, (CAS) covered, security and intellectual property provisions, and deliverables: hardware, software and data.

Prime contracts contain FAR and Government agency (e.g., Army) specific clauses included by reference, in full text, special provisions unique to the contract, and mingled within sections concerning payments, inspections, data and hardware deliverables. No page of the prime contract should remain unturned when gathering the population of terms, conditions, and clauses that may or may not be flowed down in a subcontract.

A matrix with the subcontracts, mandatory, and discretionary clauses and activities that need to be addressed that aren’t in flow downs will be useful in conveying all areas of risk and obligations the prime contractor can manage through subcontract terms and conditions.

Some prime contractors that do not have experienced contract administrators flow all the clauses in the prime contract down to the subcontractor. This is not a recommended procedure because it creates confusion with the subcontractor and leaves a large amount of discretion up to the subcontractor regarding what they have and don’t have to do.  This confusion is caused by many conditions that apply to the prime contract but do not apply to the subcontractor. This leaves the conditions subject to interpretation since it appears that the prime contractor did not understand what the clauses in the prime contract meant. A knowledgeable subcontract administrator would reject all the clauses they thought did not apply.

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