Presenting a live 90-minute webinar with interactive Q&A FAR Subcontractor Flowdown Terms: Contract Negotiation Strategies for Primes and Subs WEDNESDAY, JANUARY 11, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Holly A. Roth, Partner, Reed Smith , Washington, D.C. Stephen B. Shapiro, Partner, Holland & Knight , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Subcontractor Flowdown Requirements in Government Contracts Holly Roth Stephen B. Shapiro Partner Partner Reed Smith LLP Holland & Knight LLP 79 Tysons One Place 800 17th Street, NW Suite 500 Suite 1100 McLean, VA Washington, DC hroth@reedsmith.com stephen.shapiro@hklaw.com 703-641-4284 202- 457-7032 5 5
Overview I. What is a Flowdown Provision? II. Types of Subcontracts – Considerations when deciding which type of contract to enter III. The Christian Doctrine 6 6
What is a Flowdown Provision? Clauses prescribed by the Government that: Prime Contractor incorporates into subcontracts; – Subcontractor incorporates into lower-tier subcontracts; – and are incorporated either by reference or in-text – Methods of incorporation: FAR 52.102 Clauses requiring verbatim incorporation – Clauses that must be incorporated in substance – Clauses that are silent on incorporation – 7 7
What is a Flowdown Provision? DoD “covered” contracts require Prime Contractors establish and maintain policies and procedures to ensure that mandatory and applicable flowdown clauses are contained in: Subcontracts and – Purchase Orders – The term “covered contract” means a contract that is subject to the Cost Accounting Standards. 8 8
Types of Contracts Fixed Price Cost Reimbursement Incentive Contracts IDIQ Time & Materials, Labor Hour and Letter Contracts Combinations/Hybrids – Commercial Item – GSA (VA) Federal Supply Schedule 9 9
Fixed Price Contracts – FAR 16.202 Contract provides a firm price for the goods or services to be delivered. Price will not be adjusted except in the case of certain events anticipated by contract. – i.e. change in the scope of work to be performed Typically used for tasks with a great deal of cost certainty, because contingencies must be included in bid. 10 10
Fixed Price Contracts: Considerations Considerations for the Prime Contractor: – Provides cost certainty – Helps limit risk – Allows for price competition – Requires a well-defined scope of work – Limits flexibility 11 11
Fixed Price Contracts: Considerations Considerations for the Subcontractor: – Requires accurate cost estimate – No profit ceiling; subcontractor keeps all profit beyond the cost of performance – Fewer administrative costs – May not require disclosure of cost figures to the Prime or Government – Subcontractor assumes all unexpected costs 12 12
Cost Reimbursement Contracts – FAR 16.301 Subcontractor is reimbursed for all allowable costs, as defined by contract. Includes a total cost estimate and ceiling figure. Typically used for contracts where specifications are incomplete or the scope of the work cannot be easily defined. – i.e. Research & Development Contracts 13 13
Cost Reimbursement Contracts: Considerations Considerations for the Prime Contractor: Provides flexibility and mitigates transaction costs in – contracts where frequent changes are anticipated May be difficult to determine potential costs – Subcontractor bears risk of exceeding the cost ceiling – Considerations for the Subcontractor: Less risk in connection with cost overruns – Increased accounting requirements – Added compliance issues – 14 14
Cost-Plus-Fixed-Fee Contracts – FAR 16.306 A variant of a Cost Reimbursement Contract. Contract provides for the payment of cost of performance, plus a pre-determined profit. – Profit will not be reduced even if the actual cost of performance is less than anticipated Often used for contracts where the level of effort required is not yet known. – Contracts for research or preliminary exploration 15 15
Cost-Plus-Fixed-Fee Contracts: Considerations Considerations for the Prime Contractor: Fee certainty; will not swell with cost of performance – More efficiency incentive than cost reimbursement – contract, but still must supervise subcontractor Considerations for the Subcontractor: Typically low profit, but guaranteed; little risk of loss – High administrative costs – Heightened audit risk – 16 16
Time & Materials Contract – FAR 16.601 Labor paid at fixed hourly rates – Reflecting wages, overhead and administrative costs, and sometimes profit Materials reimbursed at actual cost. Typically used when anticipating the time or extent of work required is difficult to quantify. – Allows work to begin immediately with reassessment at a later point 17 17
Time & Materials Contract: Considerations Considerations for the Prime Contractor: Most of the performance risk is on the Prime – Must obligate Subcontractor to extensive compliance – requirements Allows work of an uncertain duration or nature to begin – quickly Considerations for the Subcontractor: Prime contractor has most of the performance risk – Guaranteed profit included in rate – Potentially high administration costs – 18 18
Commercial Item Contract – FAR Part 12; FAR 44.400 A contract to purchase an item or a service which is commonly used by non- governmental agencies. – “item” includes the installation, repair, and support of a commercial item – “item” includes services of a type offered and sold competitively and in substantial quantities to the commercial (non-government) marketplace 19 19
Commercial Item Contract: Considerations Considerations for the Prime Contractor: Fewer administrative costs – Requires more detailed consideration before including – non-required clauses Considerations for the Subcontractor: Simplified acquisition process – Many flowdown provisions are dispensed with Slim profit margin – Other helpful procurement provisions removed – i.e. the notice and cure period for a Termination for Default 20 20
FSS Schedule Contract IDIQ contract for commercial items and/or services with prices deemed to be the result of full and open competition. Requires accurate disclosure of Commercial Sales Practices and lengthy negotiation process. GSA: 5 year base with 3 five year option periods. VA: 5 year base with 1 five year option period. Approved “Ordering Activities” place orders under the contract 21 21
FSS Contract: Considerations Considerations for the Prime Contractor: Large contract and profit potential – Fewer transactional costs than several individual contracts – Extensive application and negotiation process – Compliance with Trade Agreements Act Country of Origin – Requirements Considerations for the Subcontractor: Uncertainty – Will an agency order? How much will the agency order? Need to flow down pricing obligations – Accurate disclosure of country of origin – 22 22
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