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Wednesday, July 31st, 2019
Subcontractor “Flow-Downs” and Compliance

Prime contractors are responsible for incorporating the appropriate provisions of their prime contracts into the agreements with their subcontractor. Determining which clauses are applicable to subcontractors and how best to monitor subcontractor compliance needs to be a priority. The first step is identifying contract clauses that are required to be incorporated into the contractor’s subcontracts. These “mandatory flow-downs” are FAR, DFARS, and other contract clauses that, by their own terms, are required to be incorporated into subcontracts. Clauses that must be flowed down include FAR 52.203-13, Contractor Code of Business Ethics and Conduct, FAR 52.204-21, Basic Safeguarding of Covered Contractor Information Systems, and FAR 52.222-26, Equal Opportunity. Contractors must be diligent in reviewing the terms of their contracts to understand what clauses are required to be passed along to subcontractors.

In certain cases, flowing down the required clauses is only the first step. Ensuring and monitoring subcontractor compliance can be the real challenge. In a recent post, we discussed the Service Contract Act (SCA). The SCA clause at FAR 52.222-41 requires contractors to incorporate the clause into all applicable subcontracts. Contractors may be held financially responsible if their subcontractors fail to compensate their employees in compliance with the SCA. To avoid liability, prime contractors should have a subcontractor monitoring system in place that includes incorporating certain audit rights into the subcontract agreement.

Prime contractors must ensure mandatory clauses are correctly flowed down to subcontractors; however, that is not sufficient to protect a contractor’s interests. Important clauses, including the Changes clause, Termination for Convenience, and Limitations of Funds/Limitations of Costs are not required to be flowed down to subcontractors. Prime contractors should flow down these and other clauses to protect their own interests.

A note for the future:

Section 839 of the 2019 National Defense Authorization Act, directs the FAR Council to conduct an extensive review of federal laws and regulations applicable to the acquisition of commercial products, commercial services, and commercially available off-the-shelf items. The Act directs the Council to exempt all such contracts (including subcontracts) from these laws and regulations unless the Council determines there is a specific reason not to provide an exemption.

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