Federal government subcontracts are a hybrid between commercial contracts governed by state law (such as, for the sale of goods, the Uniform Commercial Code) and government contracts governed by the Federal Acquisition Regulation (FAR) and FAR agency supplemental clauses. A “subcontract” is broadly defined in FAR 44.101 as any contract “entered into by a subcontractor to furnish supplies or services for performance of a prime contract or subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.”
As a higher-tiered contractor, when drafting subcontracts or purchase order terms and conditions, it is important to understand which FAR and FAR agency supplemental clauses must be flowed down to the subcontractor, and which ones do not apply based on the type of subcontract awarded or the scope of work to be performed by the subcontractor. For example, some clauses must be flowed down by law (e.g., FAR clause 52.222-26, “Equal Opportunity”) while others a higher-tiered contractor should include in its subcontracts for business reasons to protect the higher-tiered contractor’s interests (e.g., FAR clause 52.249-2, “Termination for Convenience of the Government (Fixed-Price)”). Additionally, some clauses only apply to prime contractors and therefore should not be included in subcontracts (e.g., FAR clause 52.233-1, “Disputes”). Further, the higher-tiered contractor must ensure that the commercial terms in the subcontract relating to issues such as payment, warranty, indemnity, etc. are consistent with the requirements that the higher-tiered contractor has accepted in its contract with the U.S. Government or other customer.
As a subcontractor, it is important to understand which clauses can be negotiated and which clauses the higher-tiered contractor is required by law to include in the subcontract. The subcontractor needs to identify and negotiate out of the subcontract those clauses that are not mandatory flowdowns, do not cover a higher-tiered contractor’s legitimate risk, are overly burdensome to the subcontractor, or are just unfair. Also, there are some clauses a subcontractor will likely need to accept to cover the higher-tiered contractor’s legitimate business risks, such as termination and stop-work order clauses. Note that the subcontractor can limit the application of such FAR clauses by insisting that the higher-tiered contractor can only take the unilateral actions of terminating for convenience the contract or issuing a stop-work order when such actions are directed by the government. Otherwise, such actions need to be mutually agreed upon by the parties.