As part of a team formed to do business with the federal government, you may have divvied up your work responsibilities as prime contractor and subcontractor. But there is more sharing to do, starting with how many, and which, obligations of the prime in its contract with the federal government should “flow down” into the subcontract between the prime the sub to become obligations of the sub as well.
The prime will want the sub to join the prime in being liable for as much as possible, while the sub will want to limit such exposure. Under federal law, some clauses of the prime contract must flow down to the subcontract.
These include: the contractor code of business ethics and conduct; small business qualifications, where applicable; various socio-economic and equal opportunity policies of the government; anti-kickback provisions and provisions against human trafficking.
Other prime contract clauses must flow down by necessity to enable the prime to fulfill its contract obligations to the government. Examples of these would be: change-order provisions; technical data rights; the government’s right to audit the business; inspection rights and dispute-resolution.
Certain mandatory flow-down clauses, such as the government’s rights in the contract data, must be stated in the subcontract without alteration. Other necessary flow-downs, such as termination procedures, should be tailored to the prime-sub relationship because they may not be quite the same as those between the prime and the government.
For that reason, it is best to recite the applicable provisions, rather than incorporating the applicable Federal Acquisition Rule number, so as to ensure a proper fit into the particulars of the business relationship between the prime and the sub.
Certain flow-down provisions also create exceptions to what is otherwise a lack of “privity” between the sub and the government. That is, the contract with the government is between the government and the sub; the sub is not a party to it. Flow-downs and other exceptions to the lack of privity actually create direct dealings between the government and the sub – for example, the government’s to right intellectual property in the subcontract. (Exceptions to privity will be discussed in more detail in the next blog.)
For more information please contact Jay Merwin at 410-583-2400 or firstname.lastname@example.org.