A subcontract under a Federal Government Contract can be a peculiar thing. It can contain numbered clauses from the Federal Acquisition Regulations without any stated text. It can say the Government prime contract takes priority over the subcontract without properly identifying the prime contract or incorporating some part of it in the subcontract. And sometimes, the subcontract is just a confused mess.
A subcontract between parties will often follow the execution of a teaming agreement. While a teaming agreement is a contract and enforceable in court, it is typically terminated upon the execution of a subcontract. Thus, the terms of a teaming agreement do not automatically transfer, but rather must be negotiated into the terms of the resulting subcontract. Parties should view the teaming agreement as a jumping off point that is there to guide them through the process of what to include in the subcontract.
Unless you are really on top of your game, often you need a government contracts attorney to sort out what you need, what you don’t need, and what you the subcontract needs to say. There can be competing interests. For example, the prime has commitments to the Government that have to be protected in the subcontract. But, the subcontractor does not always want to assume overly broad responsibilities flowing down from the prime contractor. So, evaluating a subcontract must begin by understanding your interest as a prime contractor or as a subcontractor. You want to be fair about the agreement, but you should make sure that certain issues are covered.
The first step is to read the subcontract word for word. Don’t skip over sections that might not be of concern to you. You can ask your lawyer to read it, but you should read it as well. Feel free to ask as many questions as you need to satisfy yourself about what each sentence says. What should you or your lawyer be looking for? Here are four areas that every federal government subcontract should cover:
- Type of Subcontract: Subcontracts do not always explicitly identify the type of contract the parties are creating. If this is a fixed price contract, it should say so explicitly. If it’s a time and materials contract or a labor hour contract, it should include rates and define how materials will be compensated (actual cost or with a mark-up?). If it’s a cost reimbursement contract, it should reference the specific type (fixed fee or award fee), and state that costs will be governed by the Cost Accounting Standards. If it’s an Indefinite Delivery/Indefinite Quantity contract (“ID/IQ”), there should be some mechanism for issuing task or delivery orders.
- Scope of Work: You cannot just sign the subcontract and hope to agree on the scope of work later. The subcontract may not be enforceable at all if there is no defined scope of work included. While the scope of work is a technical area that lawyers don’t often review, everyone needs to be satisfied that it’s clear enough to be followed and enforceable.
- Well-Defined Payment Provisions: Any subcontract should require the subcontractor to invoice regularly (usually monthly) and define when the prime contractor must pay the subcontractor. Most often the parties will agree on a “pay-when-paid” clause: the prime will pay the subcontractor’s invoice within 10 days of the prime receiving payment from the Government for the subcontractor’s work. Unless the prime is large enough to pay the receivable on a net 30-day basis, the subcontractor should expect some sort of variation on the “pay-when-paid” clause. For the subcontractor’s protection, the payment provision should require the prime contractor to submit the subcontractor’s invoice on a monthly basis.
- Other Critical (but not mandatory) Contract Clauses: Three other critical clauses in a federal government subcontract are (1) a Changes clause, (2) a Disputes clause, and (3) a Termination clause. A Changes clause should allow the prime to flow down any unilateral changes that Government might impose through the prime’s Changes clause. The Disputes clause should require the subcontractor to follow the prime contract’s Disputes clause for disputes involving the Government, but have a separate clause for disputes just between the prime and subcontractor (usually resolved in court or by arbitration). Primes should make sure the Disputes clause requires the subcontractor to continue work during a dispute. The Termination clause should establish the procedure for a termination for default that mirrors the prime’s default clause, but also a procedure to pass through to the subcontractor a termination for convenience imposed by the prime contract. The subcontractor should not allow the prime to have discretion to impose a termination for convenience unless the Government imposes it on the prime.
Don’t confuse these critical or important clauses with “mandatory flow-down clauses.” Mandatory flow-down clauses are those clauses that the Government requires the prime to include in every subcontract. The Changes clause, the Disputes clause, or Termination clause are not mandatory flow-down clauses, even though we recommend that they should be in every subcontract. Mandatory flow-down clauses include Contract Cost and Accounting clauses such as the Audit clause (FAR 52.215-2), labor clauses such as Equal Employment Opportunity clause, (FAR 52.222-26), Ethics clauses such as the Contractor Code of Business Ethics (FAR 52.203-13), and certain data rights clauses. They do not relate directly to the subcontractor’s performance but are required by regulation to be inserted into every subcontract of a certain value or duration. These can be listed by their clause number and incorporated by reference.
There are many more than these four important factors to consider before signing a subcontract under a federal government contract. Subcontractors should not just settle for whatever the prime contractor sends them, and primes must be vigilant in protecting their contractual rights and obligations. You may not always have leverage to negotiate changes, but if you can explain the basis for your proposed changes, usually the other contractor will be flexible enough to consider your changes. Finally, even if you are not negotiating changes in a prime or subcontract, it is always vitally important to fully understand your rights and obligations pursuant to that contract –otherwise, you could unknowingly not protect your rights and/or not meet your obligations.