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Subcontracting Tips in Government Contracting

May 21, 2022

Donald J. Walsh

Assuming that the subcontractor was fortunate enough to be on the winning team of a Government Contract, generally the next step is for the parties to enter into a subcontract agreement.  Before executing such an agreement, the subcontractor needs to be vigilant and well informed.  Even experienced contractors can find themselves in unfamiliar waters when delving for the first time in the world of government contracts.  

The starting point for drafting any subcontract should be the parties’ Teaming Agreement.   Traditionally, the Teaming Agreement will not be as comprehensive as the subcontract, but it should not be inconsistent with the subcontract either.  If there are any inconsistencies in the scope, obligations or limitations, the subcontractor should object and be wary.  Although 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.

Almost all subcontracts reference the prime contract.  If a clause seeks to hold the subcontractor responsible for all obligations the prime has to the government, care should be taken to review the prime contract and understand the full implications of this blanket inclusion.  This would hold the subcontractor responsible not only for fulfillment of the technical specifications and plans that are incorporated but also all of the prime contract general conditions.  The types of general contract clauses that typically are imposed on the subcontractor and should be reviewed include the following:

  • Type of Subcontract -- Is the subcontract a fixed price contract, time and materials contract where the parties are clearly defining the rates and how materials and other direct costs (ODC) will be compensated (actual cost or marked up), cost reimbursement contract, an Indefinite Delivery/Indefinite Quantity contract (“ID/IQ”) which includes the process for issuing task or delivery orders?
  • Scope of Work — All parties should ensure that this is clearly defined since it will form the basis for the work expected as well as the pricing of work performed.  If not appropriately drafted and it is 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.
  • Representations that the contractor will comply with Truth in Negotiations and Defective Pricing prohibitions and indemnify the other party should defects be found to have occurred.  The Truth in Negotiations Act requires a contractor to submit and certify the accuracy, currency and completeness of its cost or pricing data before the award of a prime contractor contract modification expected to exceed $650,000. The statute requires that the cost or pricing data be “accurate, complete, and current.” Should the government believe the contractor deliberately provided flawed or incomplete data, the matter may be referred for civil or criminal prosecution.
  • 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.  There are essentially three types of rights the government may obtain:  unlimited rights, where the government can do anything it pleases with the intellectual property including providing the data to a competitor, limited rights, which limit the government use for only certain specific government purposes, and government purpose rights, which are limited rights which turn into unlimited rights after a specified period of time.
  • 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, COVID protocols and E-Verify.
  • Business Ethic and Courtesy Policies to include, ethic obligations, no hire or limited hire policies between the prime and the subcontractor, quick 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.  More importantly, all government contractors and subcontractors are now required to disclose to the government instances when the company believes it or its subcontractor has violated certain federal criminal laws or the False Claims Act.  Failure to make such a disclosure can result in serious penalties for the contractor, including debarment. 
  • Payment Clauses paying particular attention to “paid if paid” and “paid when paid” clauses requiring payment within a certain number of days after government payment to the prime contractor and capture of interest for late payments.  Other essential clauses should include any specific invoicing requirements including the specific appearance and content as well as the timing of the invoices.
  • Audit Rights exist for the government to audit the prime contractor’s and subcontractor’s records in a variety of circumstances. The most common are pre-award audits of the proposed price or estimated costs, pre-award surveys of the prime contractor’s capability responsibility, reviews of systems such as purchasing and subcontracting systems, incurred cost audits, and defective pricing audits to enforce the Truth in Negotiations Act. 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 doesn’t 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 monetary 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 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.

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.  In addition, without enforceable incorporation by reference and/or flow down provisions, prime contractors may not be able to demand the same degree and type of performance from their subcontractors that the government may demand from them.  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.

When drafting or negotiating a subcontract agreement, it is advisable to consult an experienced government contracts law attorney. He/she will be able to walk you through the process and ensure your agreement covers exactly what it needs to.

If you have questions about Teaming Agreements or any other Government Contracting matter, please contact Don Walsh at dwalsh@RKWLawGroup.com  or (443) 379-4011.

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