Subcontract Flowdown Best Practices from Both the Prime and Subcontractor Perspective

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2 Subcontract Flowdown Best Practices from Both the Prime and Subcontractor Perspective Breakout Session #: C16 Presented by: Philip R. Seckman Christopher W. Myers Date: July 22, 2013 Time: 4:00-5:15

3 Agenda Significance of flowdowns to primes and subcontractors Key concepts Flowdown drafting Example flowdowns Negotiation example Truth in Negotiations Act (TINA) 2

4 Presentation Goals Provide a framework for evaluating flowdown requirements Enable prime contractors to identify contract requirements that should be included in subcontracts Equip subcontractors with the information necessary effectively to negotiate Not intended to list all flowdowns 3

5 Why Do Flowdowns Matter? Prime Contractor Purchasing system approval Maximize cost recovery by ensuring cost reasonableness Manage/allocate performance uncertainties and risk Subcontractor Minimize exposure to prime contractor risks Ensure company can meet compliance obligations 4

6 What is a Subcontract? No definition in FAR Part 2 FAR contract entered into by a subcontractor to furnish supplies or services for performance of a prime contract or subcontract Including POs and changes and mods thereto Subcontractor = any supplier, distributor, vendor, or firm that furnishes supplies to or for a prime contractor or another subcontractor Not every agreement is a subcontract 5

7 What is a Flowdown? Prime contract clauses incorporated into a subcontract Subcontract clauses flow down responsibilities of prime to subcontractor Significantly can impact the obligations and risk of performing a subcontract Flowdowns can turn any company into a government contractor 6

8 What Clauses Should Be Flowed Down? Mandatory Flowdowns Specifically require the prime to include them in subcontracts Not negotiable Non-mandatory Flowdowns Prime contract does not explicitly require the prime to include these in subcontracts Prime must ensure subcontractor compliance to ensure compliance with the prime contract Special clauses FAR or non-far Can be mandatory on non-mandatory 7

9 Flowdown Requirements Depend On Subcontract Type And Value Type of goods or services Commercial items Prime contract and subcontract payment terms Fixed price Flexibly priced Cost reimbursement Time and materials Labor hour 8

10 Flowdown Drafting FAR addresses prime contract incorporation and is guidance for subcontract flowdowns Preference for incorporation by reference Permits reference to online documents Many contractors use standard documents T&C Flowdowns (tailored to contract types) 9

11 Flowdown Drafting Some clauses must be flowed down verbatim Contractor shall include this clause Contractor shall include the terms of this clause Some clauses can be modified Contractor shall include the requirements of this clause Contractor shall include the substance of this clause 10

12 What If A Mandatory Flowdown Is Left Out of the Subcontract? Christian Doctrine Certain mandatory clauses are incorporated into prime contracts even if they are not included Clauses that implement core procurement policy Has not historically applied to subcontracts Recent case applied Christian to a subcontract UPMC Braddock v. Seth D. Davis, Civ (D.D.C. Mar. 30, 2013) Incorporated DOL socioeconomic regulations 11

13 Mandatory Flowdowns Commercial Items Ten mandatory flowdowns in subcontracts for commercial items (FAR (c)(1)) Most triggered at specified value Prime can only flow down minimal number of additional clauses (FAR (c)(2)) 12

14 Example Mandatory Flowdown Commercial Items Code of Business Ethics and Conduct, FAR Subcontractor must have Written code of business ethics and conduct Business awareness and compliance program Internal control system Trigger: subcontract value in excess of $5M and performance of more than 120 days 13

15 Commercial Item Clauses vs. UCC Uniform Commercial Code Contractual presumptions for commercial transactions Party-neutral Federal Acquisition Regulation Mandatory terms for contracts between a private contractor and the government Favors the government FAR Part 12 Government Acquisition of Commercial Items Acknowledges that typical government contract methods are not effective for acquisition of commercial items Middle ground between traditional FAR and UCC 14

16 Mandatory Flowdowns Non-commercial Items Commercial item mandatory flowdowns are also mandatory for noncommercial items Additional clauses must be flowed down in non-commercial item subcontracts Most are triggered based on certain subcontract values and/or subcontract types 15

17 Example Mandatory Flowdowns Audit and Records Negotiation, FAR Trigger: flexibly priced subcontracts that exceed the simplified acquisition threshold Interpretation issue Does the prime have an audit right? Typically Government is replaced by Prime Contractor Clarify terminology usage in subcontract 16

18 Example Mandatory Flowdowns Service Contract Act of 1965, FAR Subcontractor must pay prevailing wages and benefits in Wage Determination Prime must process subcontractor REAs based on increased Wage Determination Prime liable for subcontractor violation 17

19 Example Mandatory Flowdowns Preventing Personal Conflicts of Interest, FAR Trigger: simplified acquisition threshold Included in subcontracts where sub will perform acquisition functions closely associated with inherently governmental functions Subcontractor must have procedures in place to screen for and prevent PCIs 18

20 Non-mandatory Flowdowns Organizational Conflicts of Interest (FAR Subpart 9.5) Subcontractor OCIs can disqualify prime There are no FAR OCI clauses special clauses or primes draft their own OCI Questionnaires / Disclosures Require that the sub maintain an OCI clearance process 19

21 Non-mandatory Flowdowns Termination for Convenience Clause (FAR X) Allows prime to terminate the subcontract should the government terminate the prime contract Changes Clause (FAR X) Allows prime to flow government changes to the subcontractor Disputes Clause (FAR ) Puts subcontractor on notice of disputes process Requires subcontractor to keep working pending a dispute 20

22 TINA Flowdown TINA creates risk for prime and sub Entitles government to prime price reduction based on defective subcontract cost or pricing data Most TINA clauses are not mandatory flowdowns 21

23 TINA Flowdown Prime Perspective Flowdown all TINA clauses FAR , Price Reduction for Defect Certified Cost or Pricing Data FAR , Subcontractor Certified Cost or Pricing Data FAR , Subcontractor Certified Cost or Pricing Data-Modifications Include TINA indemnity 22

24 TINA Flowdown Subcontractor Perspective Evaluate possible TINA exceptions Resist non-mandatory TINA clauses Resist TINA indemnity If prime demands additional clauses, limit coverage to government claims Limit price reduction to after prime contract reduction 23

25 Flowdown Best Practices Prime Contractor Read your contract! Create a flowdown matrix that identifies flowdown requirements specific to each contract Based on subcontract value and type Figure out which non-mandatory clauses are necessary to mitigate risk (termination, changes, etc.) When necessary, ensure that subcontractor is taking steps to comply with flowdowns (e.g., PCI, OCI, SCA) 24

26 Flowdown Best Practices - Subcontractor Know which flow-downs are mandatory; don t waste your time trying to negotiate those Potentially push back on non-mandatory flowdowns Beware onerous special clauses Beware language incorporating all prime requirements 25

27 Philip R. Seckman Questions? Christopher W. Myers