FAR Subcontractor Flowdown Terms: Contract Negotiation Strategies - - PowerPoint PPT Presentation

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FAR Subcontractor Flowdown Terms: Contract Negotiation Strategies for Primes and Subs

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JANUARY 11, 2017

Holly A. Roth, Partner, Reed Smith, Washington, D.C. Stephen B. Shapiro, Partner, Holland & Knight, Washington, D.C.

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5

5

Subcontractor Flowdown Requirements in Government Contracts

Holly Roth Partner Reed Smith LLP 79 Tysons One Place Suite 500 McLean, VA hroth@reedsmith.com 703-641-4284 Stephen B. Shapiro Partner Holland & Knight LLP 800 17th Street, NW Suite 1100 Washington, DC stephen.shapiro@hklaw.com 202- 457-7032

6

6

Overview

 I. What is a Flowdown Provision?  II. Types of Subcontracts

– Considerations when deciding which type of

contract to enter

 III. The Christian Doctrine

7

7

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

8

8

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.

9

9

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

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10

Fixed Price Contracts – FAR 16.202

 Contract provides a firm price for the goods

• r services to be delivered.

 Price will not be adjusted except in the case

• f 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.

11

11

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

12

12

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

13

13

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

• f the work cannot be easily defined.

– i.e. Research & Development Contracts

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14

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

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15

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

• f 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

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16

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

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17

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

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18

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

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19

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

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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

21

21

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

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22

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

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23

The Christian Doctrine

 A mandatory contract clause that expresses

a significant tenant of public procurement policy is considered to be included in the contract by operation of law. G.L. Christian & Assoc. v. United States, 312 F.2d 418 (Ct.

• Cl. 1963).

 Only clauses that are both mandatory and

speak to public procurement policy are covered by the doctrine.

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24

The Christian Doctrine: Examples of Mandatory Provisions for Prime Contractors

 Termination for Convenience – FAR

52.249(1)-(7)

 Termination for Default – FAR 49.401  The Changes Clause – FAR 52.243(4)  The Payment Clause – FAR 52.232(1)-(7)  The Buy-American Act – FAR 52.225(1)-(4)  Equal Opportunity and Affirmative Action

Clauses

25

25

Examples of Non-Mandatory Provisions for Prime Contractors

 Clauses often required by contract but not

mandatory:

– The Government Property Clause – FAR 52.245 – Fast Payment Procedure – FAR 14.301 – Protest After Award – FAR 52.233-3 – Excusable Delay – FAR 52.249-14

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26

The Christian Doctrine and Subcontracts: Considerations

 Don’t assume that a mandatory provision will flowdown

automatically.

–

The Christian Doctrine does not apply to subcontracts

–

Exceptions for social policy:

 Notice of Requirement for Affirmative Action To Ensure Equal

Employment Opportunity for Construction- FAR 52.222-23

 Affirmative Action Compliance Requirements for

Construction- FAR 52.222-27

 Equal Opportunity for Special Disabled Veterans, Veterans of

the Vietnam Era, and Other Eligible Veterans- FAR 52.222- 35

 Affirmative Action for Workers With Disabilities- FAR 52.249-

36

27

27

“Mandatory vs. Discretionary”

28

28

“Flowdown” Clauses

 Clauses prescribed by the government that

a Prime Contractor incorporates into subcontracts.

– Subcontract clauses "flow down" responsibilities

• f the Prime Contractor to the subcontractor.

– Subcontract clauses frequently triggered by

subcontract dollar value threshold.

– Some, but not all, nonmandatory flowdown

clauses are negotiable.

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29

Mandatory Flowdown Clauses

 Prime contract clauses that specifically

require the inclusion of all or substantially all

• f their text in all subcontracts entered into

in support of the prime contract.

– “The Contractor shall include the substance of

this clause ... in all subcontracts with subcontractors... ”

– Mandatory flowdown clauses are not negotiable.

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Mandatory Flowdowns Imposed by Executive Order & Statute

–

Equal Employment Requirements:

 Prohibition of Segregated Facilities (APR 2015)  E.O. 11246, Equal Opportunity (APR 2015) (52.222-26) – Threshold

$10,000.

 38 U.S.C. 4212, Equal Opportunity for Veterans (OCT 2015)

(52.222-35) - Threshold $100,000.

 29 U.S.C. 793, Equal Opportunity for Workers with Disabilities

(52.222-36) (JUL 2014) - Threshold $100,000.

 38 U.S.C. 4212, Employment Reports on Veterans (OCT 2015)

(52.222-37).

 E.O. 13673, Fair Pay and Safe Workplaces

–

Apply to all “subcontracts” even when omitted from subcontract terms and conditions.

–

Department of Labor audits compliance.

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Mandatory Flowdowns Imposed by Executive Order & Statute



Labor and Employment Requirements for Service Contracts (including Construction):

–

E.O. 11246, Equal Employment Opportunity (52.222-26)

–

E.O. 13495, Nondisplacement of Qualified Workers (MAY 2014) (52.222- 17) – Threshold $150,000.

–

E.O. 13502, Project Labor Agreement (MAY 2010) (52.222-34) - All large scale construction subcontracts.

–

E.O. 13496, Notification of Employee Rights under the National Labor Relations Act (DEC 2010) (FAR 52.222-40) - Threshold $10,000.

–

41 U.S.C. Chapt. 67, Service Contract Labor Standards (MAY 2014) (52.222-41) – Threshold $2,500.

–

40 U.S.C. Chapt 31, subchapter IV, Wage Rate Requirements (Construction) (MAY 2014) (52.222-6) – Threshold $2000.

–

18 U.S.C. 874 and 40 U.S.C. 3145), Copeland (Anti-Kickback) Act (SEP 2015) (52.222-10)

32

32

Mandatory Flowdowns Imposed by Executive Order & Statute



Labor and Employment Requirements for Service Contracts (including Construction):

–

40 U.S.C. Chapt. 37, Contract Work Hours and Safety Standards, (MAY 2014) (52.222-4).

–

E.O. 13658, Establishing a Minimum Wage for Contractors, (DEC 2015) (52.222-55) – All Service and Construction Contracts

–

Apprentices and Trainees (JUL 2005) (52.222-9)

–

Subcontracts (Labor Standards) (MAY 2014) (52.222-11)

–

E.O. 13673, Fair Pay and Safe Workplaces (52.222-59)

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33

E.O. 13673, Fair Pay and Safe Workplaces (52.222-59)

 Final Rule Issued October 25, 2016  Tiered compliance

Contractor Date Dollar Value Prime 1/1/2017 $50M Prime 4/25/2017 $500K Subcontractor 10/25/2017 $500K

34

34

E.O. 13673, Fair Pay and Safe Workplaces (52.222-59)

 Mandatory disclosure and assessment of

labor law compliance for all contractors (based on table in previous slide) under consideration for contracts (based on value equal or greater than amount in previous slide).

 Mandatory Disclosure enjoined by U.S. Dist.

• Ct. for the Eastern District of Texas

35

35

E.O. 13673, Paycheck Transparency (52.222-60)

 NOT enjoined  Requirements

– Wage statements and content

 nonexempt employees  Exempt employees

– Notice of independent contractor status – Flow down to all contracts greater than $500K

for other than commercially available off-the- shelf items.

36

36

Mandatory Flowdowns Imposed by Statute (Commercial Items) – Threshold Mandatory Flowdown Requirements



Commercial Items (FAR 2.201) – in general:

–

Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and—

–

(i) Has been sold, leased, or licensed to the general public; or

–

(ii) Has been offered for sale, lease, or license to the general public.



Commercial Service (FAR 2.201)

–

• ffered and cold competitively in substantial quantities in the commercial

marketplace based on established catalogue or market prices under standard commercial terms and conditions.

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Mandatory Flowdowns Imposed by Statute (Commercial Items)

 FAR 52.212-5, Contract Terms and Conditions

Required to Implement Statutes or Executive Orders—Commercial Items (DEC 2015):

–

(e)(1) Notwithstanding the requirements of the clauses in paragraphs (a), (b), (c), and (d) of this clause, the Contractor is not required to flow down any FAR clause, other than those in paragraphs (e)(1) of this paragraph in a subcontract for commercial items. Unless otherwise indicated below, the extent

• f the flow down shall be as required by the clause—

–

(e)(2) While not required, the contractor May include in its subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligations.

38

38

Mandatory Flowdowns Imposed by Statute (Commercial Items)

 FAR 52.244-6, Subcontracts for Commercial

Items (DEC 2015):

– Clause used in Prime Contracts for other than

“commercial items.”

– Requires contractors and subcontractors to

incorporate, and require subcontractors at all tiers to incorporate commercial items or nondevelopmental items as components of items to be supplied under this contract.

– Requires contractor and subcontractors to

incorporate this clause in subcontracts.

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39

Mandatory Flowdowns Imposed by Statute (Commercial Items)

–

• Pub. L. 110-252, Title VI, Chapter 1 (41 U.S.C. 251 note), Contractor

Code of Business Ethics and Conduct (OCT 2015) (52.203-13) - Threshold $5.5M and 120 days performance

–

15 U.S.C. 637(d)(2) and (3), Utilization of Small Business Concerns (OCT 2014) (52.219-9) - Threshold $700,000 for supplies or $1.5M for construction of any public facility with further subcontracting possibilities

–

Section 1553 of Pub. L. 111-5, Whistleblower Protections Under the American Recovery and Reinvestment Act of 2009 (JUN 2010) (52.203-15) – if the subcontract is funded under the Recovery Act

–

22 U.S.C. chapter 78 and E.O. 13627, Combating Trafficking in Persons (MAR 2015) (52.222050).

40

40

Mandatory Flowdowns Imposed by Statute (Commercial Items)

–

Section 862, as amended, of the National Defense Authorization Act for Fiscal Year 2008; 10 U.S.C. 2302 Note, Contractors Performing Private Security Functions Outside of the United States (JUL 2014) (52.225-26)

–

Promoting Excess Food Donation to Nonprofit Organizations. (MAY 2014) (42 U.S.C. 1792). Flow down required in accordance with paragraph (e) of FAR clause 52.226-6. (52.226-6).

–

Preference for Privately Owned U.S.-Flag Commercial Vessels (FEB 2006) (46 U.S.C. Appx 1241(b) and 10 U.S.C. 2631). Flow down required in accordance with paragraph (d) of FAR clause 52.247-64 (52.247-64).

41

41

Mandatory Flowdowns Imposed by Statute (Commercial Items)

–

41 U.S.C. Chapt 67, Exemption from Application of the Service Contract Labor Standards to Contracts for Maintenance, Calibration, or Repair of Certain Equipment—Requirements (MAY 2014) (52.222-51).

–

41 U.S.C. Chapt 67, Exemption from Application of the Service Contract Labor Standards to Contracts for Certain Services— Requirements (May 2014) (52.222-53).

–

E.O. 12989, Employment Eligibility Verification (OCT 2015) (52.222-54):

 Not applicable to contracts for COTS items

41

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Mandatory Flowdowns (Noncommercial Items) – Examples

–

Anti-Kickback Procedures, The Anti-Kickback Act of 1986 (41 U.S.C. 51-58), (52.203-7) (MAY 2014).

–

Limitation on Payments to Influence Certain Federal Transactions (52.203-12) (OCT 2010).

–

Audit and Records— Negotiation, (10 U.S.C. 2313, 41 U.S.C. 254d, and OMB Circular No. A-133), (52.215-2) (OCT 2010).

43

43

Mandatory Flowdowns: The American Recovery and Reinvestment Act



Whistleblower Protections (Section 1553 of Pub. L. 111-5), (52.203- 15) (JUN 2010).



FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders – Commercial Items (ALT II) (APR 2015) – applies to the use of funds appropriated or otherwise made available by the American Recovery and Reinvestment Acto of 2009 and permits GAO:

–

Audits of subcontractor records relating to transactions.

–

Interview executives and employees regarding transactions.

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44

Non-Mandatory Flowdown Clauses

 Prime contract clauses that should be

flowed down in a subcontract to ensure that the subcontractor will provide adequate assistance or cooperation to enable the Prime Contractor to meet its contractual requirements with the government.

45

45

Non-Mandatory Flowdown Clauses: Examples

 Acquisition of Supplies:

– The Buy American Act - Supplies (41 U.S.C. 10a

• 10d) (52.225-1) (MAY 2014).

– Buy American Act—Free Trade Agreements—

Israeli Trade Act (NOV 2012) (52.225-3).

– Trade Agreements (19 U.S.C. 2501, et seq.)

(NOV 2013) (52.225-5).

– Restrictions on Certain Foreign Purchases

(52.225-13) (JUN 2008).

46

46

Non-Mandatory Flowdown Clauses: Examples

 Acquisition of Commercial items: – FAR 52.212-4, Contract Terms and Conditions –

Commercial Items (MAY 2014).

 Acquisition of Commercial Services (T&M or Labor

Hour)

 Termination Clauses for Other Than Commercial

Items:

– 52.249-8, 9 and 10, Termination for Default. – 52.249-1 through 6, Termination for

Convenience.

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47

Offeror Representations and Certifications



Requires disclosure of information during the solicitation phase that the government will use to determine the fitness and integrity of a potential contractor.



Failure to accurately and completely answer any representation and certification could have unforeseen and potentially negative consequences.



Can be submitted electronically on the System for Award Management (www.sam.gov).

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48

Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2015)

– General.

 The Offeror shall complete only paragraph (b) of the

representations and certifications if the Offeror has completed the annual representations and certification electronically via the System for Award Management (SAM) Web site accessed through http://www.acquisition.gov.

 If the Offeror has not completed the annual

representations and certifications electronically, the Offeror shall complete only paragraphs (c) through (p)

• f this provision.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2015) (Definitions)

 Forced or indentured child labor means all

work or service—

– (1) Exacted from any person under the age of 18

under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily; or

– (2) Performed by any person under the age of 18

pursuant to a contract the enforcement of which can be accomplished by process or penalties.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2015) (Definitions)



Inverted domestic corporation, as used in this section, means a foreign incorporated entity which is treated as an inverted domestic corporation under 6 U.S.C. 395(b), i.e., a corporation that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country, that meets the criteria specified in 6 U.S.C. 395(b), applied in accordance with the rules and definitions of 6 U.S.C. 395(c). An inverted domestic corporation as herein defined does not meet the definition of an inverted domestic corporation as defined by the Internal Revenue Code at 26 U.S.C. 7874.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2015) (sample clauses)



The offeror represents that either—



(A) It [ ] is, [ ] is not certified by the Small Business Administration as a small disadvantaged business concern and identified, on the date

• f this representation, as a certified small disadvantaged business

concern in the database maintained by the Small Business Administration (PRO-Net), and that no material change in disadvantaged ownership and control has occurred since its certification, and, where the concern is owned by one or more individuals claiming disadvantaged status, the net worth of each individual upon whom the certification is based does not exceed $750,000 after taking into account the applicable exclusions set forth at 13 CFR 124.104(c)(2); or

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

–

(B) It [ ] has, [ ] has not submitted a completed application to the Small Business Administration or a Private Certifier to be certified as a small disadvantaged business concern in accordance with 13 CFR 124, Subpart B, and a decision on that application is pending, and that no material change in disadvantaged

• wnership and control has occurred since its application was

submitted.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

–

(f) Buy American Act Certificate. (Applies only if the clause at Federal Acquisition Regulation (FAR) 52.225-1, Buy American Act—Supplies, is included in this solicitation.)

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

–

(1) The offeror certifies that each end product, except those listed in paragraph (f)(2) of this provision, is a domestic end product and that for other than COTS items, the offeror has considered components of unknown origin to have been mined, produced, or manufactured outside the United States. The offeror shall list as foreign end products those end products manufactured in the United States that do not qualify as domestic end products, i.e., an end product that is not a COTS item and does not meet the component test in paragraph (2) of the definition of "domestic end product." The terms "commercially available off-the-shelf (COTS) item," "component," "domestic end product," "end product," "foreign end product," and "United States" are defined in the clause of this solicitation entitled "Buy American Act— Supplies."

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

–

(h) Certification Regarding Responsibility Matters (Executive Order 12689). (Applies only if the contract value is expected to exceed the simplified acquisition threshold.) The offeror certifies, to the best of its knowledge and belief, that the offeror and/or any

• f its principals—

–

(1) [ ] Are, [ ] are not presently debarred, suspended, proposed for debarment, or declared ineligible for the award of contracts by any Federal agency;

56

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

–

(2) [ ] Have, [ ] have not, within a three-year period preceding this

• ffer, been convicted of or had a civil judgment rendered against

them for: Commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a Federal, state or local government contract or subcontract; violation of Federal or state antitrust statutes relating to the submission of

• ffers; or Commission of embezzlement, theft, forgery, bribery,

falsification or destruction of records, making false statements, tax evasion, violating Federal criminal tax laws, or receiving stolen property;

57

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

–

(3) [ ] Are, [ ] are not presently indicted for, or otherwise criminally

• r civilly charged by a Government entity with, commission of any
• f these offenses enumerated in paragraph (h) (2) of this clause;

–

(4) [ ] Have, [ ] have not, within a three-year period preceding this

• ffer, been notified of any delinquent Federal taxes in an amount

that exceeds $3,000 for which the liability remains unsatisfied.

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Flowdown Clause Obligations from the Prime Contractor’s Perspective

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59

Analysis for Flowdown Clause Compliance

 Multi-step analysis

– What is considered a subcontract? – Which clauses are required to be flowed down? – When must required clauses be flowed down? – Is the commercial item clause included in the

prime contract, and does the subcontract involve the purchase of a commercial item?

– Which clauses should a prime consider flowing

down, in addition to mandatory clauses?

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60

What Qualifies as a Subcontract?

 Necessary to the performance of one or

more government contracts. E.g.,

– specifically required by the prime contract – substantially or directly related to performance of

the prime contract

– directly charged to the prime contract

61

61

What Qualifies as a Subcontract?

 Typically not a government subcontract:

– Purchases of goods and services necessary for

the management and administration of the company as a whole

 E.g., general usage supplies or services (paper,

computer toner, telephone service, etc.).

– Purchases of standard inventory items

 E.g., standard parts used in many or all of the

company’s products, for both government and commercial projects.

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62

What Qualifies as a Subcontract?

 Likely a government subcontract:

– Purchases of goods and services substantially or

directly related to the performance of the government contract

 Products or services unique to the end product  Products or services customized for inclusion in the

end product

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Which Clauses are Required to be Flowed Down?

 Is the clause required to be flowed down to

subcontracts?

 Generally, this is not a difficult determination  Requires substantive review of each clause

incorporated into the prime contract

64

64

When must Required Clauses be Flowed Down?

 Not all clauses with flowdown language

must be flowed down in every instance

 The text of the clause will indicate when the

clause is required to be flowed down to a subcontract

 Sometimes the prime contractor’s best

judgment will need to be applied

– projected value of the subcontract – whether the subcontract will involve certain

activities

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When must Required Clauses be Flowed Down?

Example:

FAR 52.203-6 Restrictions on Subcontractor Sales to the Government “(c) The Contractor agrees to incorporate the substance of this clause, including this paragraph (c), in all subcontracts under this contract which exceed the simplified acquisition threshold [$100,000].”

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Does the Subcontract Involve the Purchase

• f a Commercial Item?

 Does the prime contract include a clause

limiting the number of clauses to be flowed down to a subcontract for commercial items?

– Required flowdown clauses for commercial item

subcontracts are largely socio-economic clauses with which most companies already comply

 Minimizes the compliance burden placed on the

subcontractor

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Clauses to Consider Flowing Down

 For the prime contractor’s protection, the following

clauses can be flowed down

–

Termination for convenience clause

 Will provide the prime the ability to terminate the

subcontractor should the Government terminate the prime

–

Changes clause

 Will provide the prime the ability to make changes of the

subcontractor’s requirements should the Government make changes to the prime’s requirements

–

Definitions clause

 Will ensure a standard set of definitions is applicable

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Clauses to Consider Flowing Down

 For the prime contractor’s protection, the

following clauses can be flowed down

– Protest After Award clause

 Will allow the prime to issue a stop work order to the

subcontractor

– Disputes clause

 Will put the sub on notice of the disputes process,

including the requirement to submit a certification of a claim

– Other clauses

 Specific to the nature of the prime contract

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Implementing Flowdown Obligations

 Approaches to meet flowdown clause

• bligations

–

Craft a unique document that incorporates the applicable flowdown clauses for each subcontracting opportunity

–

Attach an addendum with applicable flowdown clauses to a standard purchase order or commercial subcontract form

–

For commercial item purchases, include a provision in standard purchase order or commercial subcontract form requiring compliance with flowdown clauses when applicable

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Challenging Issues Regarding Flowdown Clauses

 Assertion from prime that clause is “self-deleting”  Refusal from sub to accept required flowdown

clause(s)

 Incorporation of entire prime contract into

subcontract

 Implementation of process by new government

contractors to identify which vendors qualify as subcontractors and ensure flowdown of clauses