The Thrill of Victory. The Agony of the Contract

Congratulations!  You were part of the winning team that was just awarded a government contract.  Now the prime contractor is asking you to sign a subcontract agreement formalizing your relationship.  Before you sign on the bottom a line, a few precautions should be taken to ensure the terms are as you expected and agreeable.  Although objectively evaluating a subcontract will be tainted by the parties’ perspective, it is not impossible to achieve a fair balance in the agreement if it ensures that certain issues are covered. The starting point for the subcontract should be the parties’ Teaming Agreement.   If there are any inconsistencies in the scope, obligations or limitations, the subcontractor should object and be wary. Once satisfied with the Teaming Agreement, the subcontractor must focus on the subcontract agreement.  Great care should be taken to ensure that the terms are clearly defined and expectations and liability acceptable, especially in the following areas: Scope of Work should be clearly defined.  If too broad, a subcontractor could be trapped into a losing business opportunity which requires more effort than originally contemplated.  If too narrow, a considerable amount of work may be considered a change and require additional compensation. In addition, if the subcontractor is responsible for all obligations which the prime has to the government, care should be taken to review the prime contract and understand the full implications of this blanket inclusion. Standards for Reviewing Subcontractor Performance should be addressed to make sure that the prime will not hold the subcontractor to different standards of performance than they are expected to follow-up under the prime contract.  Too often, subcontractors are left to the mercy of an overbearing prime who expects far more than the government does. Representations/Indemnification that the subcontractor should expect to comply with Truth in Negotiations and Defective Pricing prohibitions and indemnify the other party should defects be found to have occurred. Rights in Technical Data and Computer Software must be clearly defined to include the ownership and rights that any party may claim in any intellectual property used or developed during the contract.  The prime must pay particular attention to ensure that the subcontractor has the same obligations to the prime as the prime has with the government. Warranties must be addressed as well to ensure that the prime is not bound to provide something for which it cannot also look to the subcontractor for relief.  Generally, the government insists on warranties that all supplies or services are free from defects and will conform to all requirements of the contract. Changes including the method for pricing, the prime personnel having the sole authority to authorize changes in the work,  a requirement for the subcontractor to perform the additional work regardless of whether a price has been agreed in advance, the terms for payment for changes in the scope of the work, any time limits on making claims for changes, requirement that the change order be in writing (although in practice, this is frequently waived), government acknowledgment of the changes, and prosecution of any such change claims against the government. Insurance requirements for the project and any employees. Public Policy Compliance such as affirmative action, labor standards, security clearance and E-Verify Business Courtesy Policies to include, ethic obligations, no hire or limited hire policies between the prime and the subcontractor, assessment and reporting of any potential conflicts of interest, and requirements that the prime contractor is the only party in a position to communicate on contractual issues with the government. Payment Clauses must be reviewed paying particular attention to “paid if paid” and “paid when paid” clauses requiring payment after the government payment to the prime contractor and capture of interest for late payments. Audit Rights exist for the government to audit the prime contractor’s and subcontractor’s records in a variety of circumstances.  A prime contractor should ensure that either they have the right to conduct audits of their subcontractors or, to preserve the subcontractors’ propriety, that the subcontractors are subject to being audited by the government in these circumstances and reporting their findings to the prime contractor. Termination for Cause and Convenience clauses must be carefully reviewed to ensure that the prime contractor does not possess the ability to terminate a contractor unless the government is terminating the prime.  At a minimum, opportunities for notice and cure should be built into to make sure the subcontractor doesn’t find itself suddenly defending against a termination for unknown reasons.  The parties may also want a restriction against recovering certain types of damages in the event of delays caused by the other party. Disputes Clauses which address timing, personal jurisdiction and forum or venue.  Is arbitration a more appropriate dispute resolution forum?  What limitations will exist on the method of arbitration?  The disputes clause should address responsibility for disputes which are strictly between the prime and subcontractor and those which the prime may “sponsor” to the government on the subcontractor’s behalf.  These clauses should also address the costs associated with prosecuting the disputes including fees, interest and other costs.

Mandatory Flow Down Clauses

Subcontracts under federal government contract are a peculiar thing which often impose rights, responsibilities and obligations which are vastly different from those in the commercial market.  Often, drafting and understanding such a contract can be just as confusing for both parties and competent government contracts counsel is needed to sort through the competing interests.  Inartfully drafted agreements may subject the contractor to liability to the government for acts of its subcontractors without adequate recourse against those subcontractors.  Vigilance is needed by both parties and although negotiation may not always be possible, clarity and an understanding of the parties’ obligation is a must. In the previous article, we addressed clauses which are essential to every subcontract.  Those areas should not be confused with “mandatory flow-down clauses” which are clauses that the Government requires in every subcontract pursuant to the Federal Acquisition Regulations (FAR).  These clauses do not relate directly to the subcontractor’s performance but are required to be inserted into qualified subcontracts.  Typically such clauses in the prime contract contain language that contractually requires the prime to include the same clauses, either in substance or with identical language, in all of its subcontracts.  Mandatory flow-down clauses may depend on the threshold value of the subcontract and include the following:

Contract Cost and Accounting clauses such as the Audit clause (FAR 52.215-2) Equal Employment Opportunity clause, (FAR 52.222-26) Employee Notice under NLRA, including the right to organize or join a union, to bargain collectively, to discuss unionizing with coworkers and to take actions collectively to improve working conditions (29 CFR § 471, et seq) Contractor Code of Business Ethics (FAR 52.203-13) Audit and Records – Sealed Bidding (FAR 52.214-26) Anti-Kickback Procedures (FAR 52.203-7) Certification and Disclosure Regarding Payments to Influence Certain Federal Transactions (FAR 52. 203-11) Patent Rights–Retention by the Contractor (FAR 52. 227-11)

In addition to the limitation on flow down clauses for certain dollar threshold subcontracts, contracts for commercial items are subject to even fewer flow down requirements.  Commercial items are generally items customarily used by the public for non-governmental purposes.  “Subcontracts for Commercial Items,” FAR 52.244-6, generally requires the prime contractor to flow down no more than ten clauses:

52.203-13, “Contractor Code of Business Ethics and Conduct” 52.203-15, “Whistleblower Protections Under the American Recovery and Reinvestment Act of 2009” 52.219-8, “Utilization of Small Business Concerns” 52.222-26, “Equal Opportunity” 52.222-35, “Equal Opportunity for Special Disabled Veterans, Veterans of the Vietnam Era, and Other Eligible Veterans” 52.222-36, “Affirmative Action for Works with Disabilities” 52.222-39, “Notification of Employee Rights Concerning Payment of Union Dues or Fees” 52.222-50, “Combating Trafficking in Persons” 52.247-64, “Preference for Privately Owned U.S.-Flag Commercial Vessels”

In addition to the nine clauses above, FAR 52.244-6 also requires its own terms be flowed down in subcontracts awarded under the Prime’s contract.