Three Key Considerations When Negotiating/Drafting Subcontracts for Use on Federal Government Contracts

Federal government contracting can be very complicated.  The complex web of rules and regulations governing these contracts can be difficult to navigate.  Sometimes, subcontracting can be even more confusing because contractors – whether prime or sub – don’t know what they don’t know.  A successful subcontracting relationship on a federal project is a balancing act that requires attention to detail, strategic problem solving, and an informed understanding of the bigger picture.  This includes all the governing regulations and all of the related moving pieces.  Accordingly, when contemplating entering into a subcontracting relationship on a federal project, it is critically important to seek legal advice from an attorney who has experience relating to government contracting in particular.  Nonetheless, it is helpful to have some starting points for a discussion with your lawyer before you begin.  To that end, below are three of the most important topics to cover with your attorney, and be sure to address in your subcontract.

Flow-Down Clauses and Risk-Shifting Provisions

Flow-down clauses are FAR clauses in a prime contractor’s contract with the Government, which the prime contractor then places in its subcontract(s) with its subcontractor(s).  Some flow-down clauses are mandatory – if they are in the prime contract, the prime contractor must flow them down to any subcontract it enters into on the job.  Other clauses are just advisable, or recommended. 

So how can you tell what should go into the subcontract?  Whether you are a prime or a sub, this is a critically important issue.  As a prime, your goals are always going to be: (1) fulfilling obligations under your own prime contract; and (2) limiting risk.  Primes, therefore, must have a thorough understanding of how to accomplish these goals.  It is just as important for subcontractors to understand these concepts, though; if a subcontractor understands what the prime is thinking – and where that prime does and does not have wiggle room, under the regulations – the subcontractor will better understand the bounds within which it can negotiate for more advantageous subcontract terms.

The drafting of the subcontract should begin with the mandatory flow-down clauses.  Usually, one can tell what is “mandatory” by consulting the FAR clause itself.   If you have received prime contracts from the federal government before, you will remember that your contract included a number of FAR clauses that were incorporated in full text, as well as a lengthy list of clauses incorporated by reference.  It is your responsibility as a prime contractor to read each one of the clauses in your contract (Yes, that includes searching out the full text for those clauses only incorporated by reference).  You must ascertain – based on the text of the clause – whether that clause must be flowed-down, and how; you must ensure that you have incorporated each clause that you are obligated to incorporate into your subcontracts.   

In addition to mandatory flow-down clauses, there are clauses that primes are not required to, but should, flow down, in order to protect themselves.  Similarly, there are certain concepts or ideas that primes should incorporate into their subcontracts in order to shift or manage risk.  One place a prime contractor does not want to be is stuck between a rock and a hard place – simultaneously involved in disputes with both the government and its subcontractor.  As a prime, you should sit down with your lawyer, and talk through issues such as termination, changes, notice requirements, continuation of work, delays, etc., to see how a subcontractor’s actions might impact your performance, cause a default, or force non-compliance.  You must draft the subcontract to avoid those issues or, at a minimum, protect yourself and mitigate damage if something goes wrong. 

On the other hand, from a subcontractor’s point of view, it is helpful to understand exactly what risks the prime is trying to protect themselves against.  For example, you might not be able to convince your prime to remove a flowed-down terminations clause. That would leave them in an untenable position should they themselves be terminated by the government.  But you might be able to negotiate for a more limited, narrow application of the clause, which would put you in a better position than a broad terminations clause.  Similarly, the prime might not have much wiggle room on passing down notice requirements, but you might be able to negotiate for longer notice periods, or better pass-through claim protections in exchange for fulfilling your notice requirements.

Issues Attributable to the Owner and Pass-Through Claims

            Speaking of pass-through claims, that is another big-ticket item that you will want to address in your subcontract.  Because subcontractors do not have privity of contract with the government, and therefore are not subject to a waiver of sovereign immunity, they cannot file claims directly against the government.  This is true even if the prime and sub both agree that the issue forming the basis of the claim was the fault of the government.  In these situations, the subcontractor must rely on the prime to sponsor or “pass through” its claim. 

Not surprisingly, this is a big source of tension between prime and subcontractors.  Subcontractors fear that they will be left without a remedy if the prime refuses to sponsor their claim.  Primes fear what will happen if they sponsor something that does not meet the rigorous standards governing government claims.  Neither party wants to be stuck in a situation where they spend more time fighting with each other about how to submit a claim than they do working together to collect on the claim.  

An experienced government contracting attorney can help you craft a “Disputes Against the Owner” clause that assuages primes’ fears about submitting insufficient or fraudulent claims on behalf of its sub, while simultaneously protecting the subcontractor’s rights and remedies.  The parties should also discuss realistic timelines for CDA litigation, and reach an understanding concerning the parties’ relationship and conduct while such claims are pending.

Prime/Sub Disputes

            The third critical topic relating to subcontracting is prime/sub disputes.  Disputes like this, between the prime and subcontractor, should be handled differently than pass-through claims and disputes against the government.  Ideally, the parties should work with their attorneys to draft dispute clause provisions that distinguish between claims against the owner, and prime/sub disputes (and proscribe a process for determining which category a claim falls into, if the parties cannot agree).  

            Because many prime/sub disputes actually arise from how the pass-through claims against the owner are being handled, the subcontract should address this issue head-on.  From a prime’s point of view, you want to push for a limitation on the subcontractor’s ability to sue you while the upstream claim is in process.  From a subcontractor’s point of view, you want to try and keep as many options open as possible to preserve your claim rights and maintain some leverage if litigation is not going as anticipated.  How can you draft a contract that accomplishes both goals? There is no one-size-fits-all answer for this question.  It will depend on the parties, their “must-haves” and their “deal-breakers,” and what they are willing to compromise on.  An experienced government contracting attorney can help you reach the best resolution for your company.

While this is by no means an exclusive list of everything the parties must consider when subcontracting on federal projects, it is certainly a great place to start.  If you need assistance negotiating or drafting a federal subcontract, you can contact the author, Maria L. Panichelli, directly.  In the meantime, for more on this topic, sign up for our upcoming Summit Insight webinar featuring Maria, entitled “Federal Subcontracting for Success.”

Meet the Author: Maria Panichelli, Partner and Chair of the Government Contracting Practice Group.

Maria is a partner and the chair of the Government Contracting department at the law firm of Obermayer Rebmann Maxwell and Hippel. She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their federal contracts.  Maria has represented her clients before numerous federal agencies, the Government Accountability Office (GAO), the Contract Boards of Appeals, the Court of Federal Claims and the United States Court of Appeals for the Federal Circuit, and other state and federal courts. Her primary practice areas include: Bid Protest Litigation (both asserting and defending/intervening); REAs, Claims and Claim Appeal Litigation; Performance and Compliance Counseling; Federal Subcontracting (including the negotiation and drafting of FAR-compliant subcontracts, sub/prime dispute resolution, pass-through claims and liquidating agreements); and Small Business Procurement (including eligibility and certification issues, size/status protests, teaming, JVs and the mentor protégé programs).  Maria’s clients include prime contractors and subcontractors of various sizes, located across the country and abroad, doing business with a number of federal agencies, across a variety of industries.  A frequent lecturer and author on federal procurement and small business-related topics, Maria is thrilled to be partnering with Summit Insight again to deliver quality educational content to federal contractors. Connect with her here.

 

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