FAR Subcontractor Flowdown Terms: Contract Negotiation...

FAR Subcontractor Flowdown Terms: Contract Negotiation Strategies for Primes and Subs

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TUESDAY, SEPTEMBER 23, 2014

Presenting a live 90-minute webinar with interactive Q&A

J. Catherine Kunz, Partner, Crowell & Moring, Washington, D.C.

Holly A. Roth, Partner, Kelley Drye & Warren, Washington, D.C.

Stephen B. Shapiro, Partner, Holland & Knight, Washington, D.C.

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5 5

Subcontractor Flowdown Requirements in Government Contracts

Holly Roth Partner Kelley Drye & Warren LLP 3050 K Street NW Washington, DC [email protected] 202-342-8478

Stephen B. Shapiro Partner Holland & Knight LLP 800 17th Street, NW Suite 1100 Washington, DC [email protected] 202- 457-7032

J. Catherine Kunz Partner Crowell & Moring LLP 1001 Pennsylvania Ave., NW Washington, DC [email protected] 202- 624-2957

mailto:[email protected]



6 6

Government Subcontracts - Overview

Stephen B. Shapiro Partner Holland & Knight LLP 800 17th Street, N.W. Suite 1100 Washington, DC 20006 Phone: (202) 457-7032 Fax: (202) 955-5564 New York: (212) 513-3451 [email protected]

7 7

Overview

I. What is a Flowdown Provision? II. Types of Subcontracts

– Considerations when deciding which type of contract to enter

III. The Christian Doctrine

8 8

What is a Flowdown Provision?

Clauses from a Prime Contractor’s contract with the Government which are included in the subcontract. – Included either by reference or in-text

Methods of incorporation: FAR 52.102 – Clauses requiring verbatim incorporation – Clauses that must be incorporated in substance – Clauses that are silent on incorporation

9 9

Types of Contracts

Fixed Price Cost Reimbursement Cost-Plus-Fixed-Fee Time & Materials Commercial Item GSA Schedule

10 10

Fixed Price Contracts – FAR 16.202

Contract provides a firm price for the goods or services to be delivered.

Price will not be adjusted except in the case of certain events anticipated by contract. – i.e. change in the scope of work to be performed

Typically used for tasks with a great deal of cost certainty, because contingencies must be included in bid.

11 11

Fixed Price Contracts: Considerations

Considerations for the Prime Contractor: – Provides cost certainty – Helps limit risk – Allows for price competition – Requires a well-defined scope of work – Limits flexibility

12 12

Fixed Price Contracts: Considerations

Considerations for the Subcontractor: – Requires accurate cost estimate – No profit ceiling; subcontractor keeps all profit

beyond the cost of performance – Fewer administrative costs – May not require disclosure of cost figures to the

Prime or Government – Subcontractor assumes all unexpected costs

13 13

Cost Reimbursement Contracts – FAR 16.301

Subcontractor is reimbursed for all allowable costs, as defined by contract.

Includes a total cost estimate and ceiling figure.

Typically used for contracts where specifications are incomplete or the scope of the work cannot be easily defined. – i.e. Research & Development Contracts

14 14

Cost Reimbursement Contracts: Considerations

Considerations for the Prime Contractor: – Provides flexibility and mitigates transaction costs in

contracts where frequent changes are anticipated – May be difficult to determine potential costs

– Subcontractor bears risk of exceeding the cost ceiling Considerations for the Subcontractor:

– Less risk in connection with cost overruns – Increased accounting requirements

– Added compliance issues

15 15

Cost-Plus-Fixed-Fee Contracts – FAR 16.306

A variant of a Cost Reimbursement Contract.

Contract provides for the payment of cost of performance, plus a pre-determined profit. – Profit will not be reduced even if the actual cost

of performance is less than anticipated

Often used for contracts where the level of effort required is not yet known. – Contracts for research or preliminary exploration

16 16

Cost-Plus-Fixed-Fee Contracts: Considerations

Considerations for the Prime Contractor: – Fee certainty; will not swell with cost of performance – More efficiency incentive than cost reimbursement

contract, but still must supervise sub

Considerations for the Subcontractor: – Typically low profit, but guaranteed; little risk of loss – High administrative costs – Heightened audit risk

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Time & Materials Contract – FAR 16.601

Labor paid at fixed hourly rates – Reflecting wages, overhead and administrative

costs, and sometimes profit

Materials reimbursed at actual cost. Typically used when anticipating the time or

extent of work required is difficult to quantify. – Allows work to begin immediately with

reassessment at a later point

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Time & Materials Contract: Considerations

Considerations for the Prime Contractor: – Most of the performance risk is on the Prime – Must obligate Sub to extensive compliance requirements – Allows work of an uncertain duration or nature to begin

quickly

Considerations for the Subcontractor: – Prime contractor has most of the performance risk – Guaranteed profit included in rate – Potentially high administration costs

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Commercial Item Contract – FAR Part 12; FAR 44.400

A contract to purchase an item which is commonly used by non-governmental agencies. – “item” includes the installation, repair, and

support of a commercial item

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Commercial Item Contract: Considerations

Considerations for the Prime Contractor: – Fewer administrative costs – Requires more detailed consideration before including

non-required clauses

Considerations for the Subcontractor: – Simplified acquisition process

Many flowdown provisions are dispensed with – Slim profit margin – Other helpful procurement provisions removed

i.e. the notice and cure period for a Termination for Default

21 21

GSA Schedule Contract

Typically, an un-funded long-term contract listing the price the Government will pay for certain commercial items or services. – An order does not occur until an agency signs it

Can be renewed up to 3 times, for a 20-year total.

Involves a long negotiation process. Once approved, a supplier is placed on a list from which an agency may choose to order items or services.

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GSA Schedule Contract: Considerations

Considerations for the Prime Contractor: – Large contract and profit potential – Fewer transactional costs than several individual contracts

Considerations for the Subcontractor: – Extensive application and negotiation process – Uncertainty

Will an agency order? How much will the agency order?

– Need to flow down pricing obligations

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The Christian Doctrine

A mandatory contract clause that expresses a significant tenant of public procurement policy is considered to be included in the contract by operation of law. G.L. Christian & Assoc. v. United States, 312 F.2d 418 (Ct. Cl. 1963).

Only clauses that are both mandatory and speak to public procurement policy are covered by the doctrine.

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The Christian Doctrine: Examples of Mandatory Provisions for Prime Contractors

Termination for Convenience – FAR 52.249(1)-(7)

Termination for Default – FAR 49.401 The Changes Clause – FAR 52.243(4) The Payment Clause – FAR 52.232(1)-(7) The Buy-American Act – FAR 52.225(1)-(4) Equal Opportunity and Affirmative Action

Clauses

25 25

Examples of Non-Mandatory Provisions for Prime Contractors

Clauses often required by contract but not mandatory: – The Government Property Clause – FAR 52.245 – Fast Payment Procedure – FAR 14.301 – Protest After Award – FAR 52.233-3 – Excusable Delay – FAR 52.249-14

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The Christian Doctrine and Subcontracts: Considerations

Don’t assume that a mandatory provision will flowdown automatically. – The Christian Doctrine does not apply to subcontracts – Exceptions for social policy:

Notice of Requirement for Affirmative Action To Ensure Equal Employment Opportunity for Construction- FAR 52.222-23

Affirmative Action Compliance Requirements for Construction- FAR 52.222-27

Equal Opportunity for Special Disabled Veterans, Veterans of the Vietnam Era, and Other Eligible Veterans- FAR 52.222-35

Affirmative Action for Workers With Disabilities- FAR 52.249-36

“Mandatory vs. Discretionary”

Holly Roth Practice Group Chair Government Contracts Kelley Drye & Warren LLP [email protected] 202-342-8478

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“Flowdown” Clauses

Clauses prescribed by the government that a Prime Contractor incorporates into subcontracts.

Subcontract clauses "flow down" responsibilities of the Prime Contractor to the subcontractor.

Subcontract clauses frequently triggered by subcontract dollar value threshold.

Some, but not all, nonmandatory flowdown clauses are negotiable.

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Mandatory Flowdown Clauses

Prime contract clauses that specifically require the inclusion of all or substantially all of their text in all subcontracts entered into in support of the prime contract.

“The Contractor shall include the substance of this clause ... in all subcontracts with subcontractors... ”

Mandatory flowdown clauses are not negotiable.

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Mandatory Flowdowns Imposed by Executive Order & Statute

Equal Opportunity Requirements: E.O. 11246, Equal Opportunity (MAR 2007) (52.222-26) –

Threshold $10,000.

38 U.S.C. 4212, Equal Opportunity for Veterans (JUL 2014) (52.222-35) - Theshold $100,000.

29 U.S.C. 793, Equal Opportunity for Workers with Disabilities (52.222-36) (JUL 2014) - Threshold $100,000.

38 U.S.C. 4212, Employment Reports on Veterans (JUL 2014) (52.222-37).

Apply to all “subcontracts” even when omitted from subcontract terms and conditions.

Department of Labor audits compliance.

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Mandatory Flowdowns Imposed by Executive Order & Statute E.O. 13502, Project Labor Agreement (MAY 2010) (52.222-34):

All large scale construction subcontracts.

E.O. 13496, Notification of Employe Rights under the National Labor Relations Act (DEC 2010) (FAR 52.222-40):

Threshold - $10,000.

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Mandatory Flowdowns Imposed by Statute (Commercial Items) – Threshold Mandatory Flowdown Requirements

Commercial Items (FAR 2.201) – in general: Any item, other than real property, that is of a type customarily

used by the general public or by non-governmental entities for purposes other than governmental purposes, and—

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public.

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Mandatory Flowdowns Imposed by Statute (Commercial Items)

FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders—Commercial Items (JUL 2014): (e)(1) Notwithstanding the requirements of the clauses in paragraphs

(a), (b), (c), and (d) of this clause, the Contractor is not required to flow down any FAR clause, other than those in paragraphs (e)(1) of this paragraph in a subcontract for commercial items. Unless otherwise indicated below, the extent of the flow down shall be as required by the clause—

(e)(2) While not required, the contractor May include in its subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligations.

33


FAR 52.244-6, Subcontracts for Commercial Items (JUL 2014):

Clause used in prime contracts for other than “commercial items.”

Requires contractors and subcontractors to incorporate, and require subcontractors at all tiers to incorporate commercial items or nondevelopmental items as components of items to be supplied under this contract.

Requires contractor and subcontractors to incorporate this clause in subcontracts.

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Mandatory Flowdowns Imposed by Statute (Commercial Items) Contractor Code of Business Ethics and Conduct (APR 2010)

(Pub. L. 110-252, Title VI, Chapter 1 (41 U.S.C. 251 note)), (52.203-13): Threshold: $5M and 120 days performance

Small Business Subcontracting Plan (JUL 2014) (15 U.S.C. 637(d)(2) and (3)): 52.219-9 threshold: $650,000 for supplies or $1.5M for construction

of any public facility with further subcontracting possibilities

35


Service Contract Act Labor Standards (MAY 2014 ) (41 U.S.C. 351, et seq.) (52.222-41).

Combating Trafficking in Persons (FEB 2009) (22 U.S.C. 7104(g)) (52.222-50).

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Exemption from Application of the Service Contract Act to Contracts for Maintenance, Calibration, or Repair of Certain Equipment—Requirements "(Nov 2007)" (41 U.S.C. 351, et seq.) (52.222-51).

Exemption from Application of the Service Contract Act Labor Standards to Contracts for Certain Services—Requirements (May 2014) (41 U.S.C. 351, et seq.) (52.222-53).

Employment Eligibility Verification (AUG 2013) (52.222-54):

Not applicable to contracts for COTS items

37


Contractors Performing Private Security Functions Outside the United States (JUL 2013) (52.225-26).

Promoting Excess Food Donation to Nonprofit Organizations. (MAY 2014) (42 U.S.C. 1792). Flow down required in accordance with paragraph (e) of FAR clause 52.226-6. (52.226-6).

Preference for Privately Owned U.S.-Flag Commercial Vessels (FEB 2006) (46 U.S.C. Appx 1241(b) and 10 U.S.C. 2631). Flow down required in accordance with paragraph (d) of FAR clause 52.247-64 (52.247-64).

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Mandatory Flowdowns (Commercial Services)

FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders – Commercial Items (ALT I) (MAY 2014) – Services, permits GAO: Audits of subcontractor records relating to transactions. Interview executives and employees regarding transactions.

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Mandatory Flowdowns (Noncommercial Items) – Examples

Anti-Kickback Procedures, The Anti-Kickback Act of 1986 (41 U.S.C. 51-58), (52.203-7) (MAY 2014).

Limitation on Payments to Influence Certain Federal Transactions (52.203-12) (OCT 2010).

Audit and Records— Negotiation, (10 U.S.C. 2313, 41 U.S.C. 254d, and OMB Circular No. A-133), (52.215-2) (OCT 2010).

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Mandatory Flowdowns: The American Recovery and Reinvestment Act

Whistleblower Protections (Section 1553 of Pub. L. 111-5), (52.203-15) (JUN 2010).

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Non-Mandatory Flowdown Clauses

Prime contract clauses that should be flowed down in a subcontract to ensure that the subcontractor will provide adequate assistance or cooperation to enable the Prime Contractor to meet its contractual requirements with the government.

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Non-Mandatory Flowdown Clauses: Examples

Acquisition of Supplies:

The Buy American Act - Supplies (41 U.S.C. 10a - 10d) (52.225-1) (MAY 2014).

Buy American Act—Free Trade Agreements—Israeli Trade Act (NOV 2012) (52.225-3).

Trade Agreements (19 U.S.C. 2501, et seq.) (NOV 2013) (52.225-5).

Restrictions on Certain Foreign Purchases (52.225-13) (JUN 2008).

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Non-Mandatory Flowdown Clauses: Examples

Acquisition of Commercial items: FAR 52.212-4, Contract Terms and Conditions – Commercial

Items (MAY 2014).

Acquisition of Commercial Services (T&M or Labor Hour) Termination Clauses for Other Than Commercial Items:

52.249-8, 9 and 10, Termination for Default. 52.249-1 through 6, Termination for Convenience.

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Offeror Representations and Certifications

Requires disclosure of information during the solicitation phase that the government will use to determine the fitness and integrity of a potential contractor.

Failure to accurately and completely answer any representation and certification could have unforeseen and potentially negative consequences.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2014)

General.

The Offeror shall complete only paragraph (b) of the representations and certifications if the Offeror has completed the annual representations and certification electronically via the System for Award Management (SAM) Web site accessed through http://www.acquisition.gov.

If the Offeror has not completed the annual representations and certifications electronically, the Offeror shall complete only paragraphs (c) through (p) of this provision.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2014) (Definitions)

Forced or indentured child labor means all work or service—

(1) Exacted from any person under the age of 18 under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily; or

(2) Performed by any person under the age of 18 pursuant to a contract the enforcement of which can be accomplished by process or penalties.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2014) (Definitions)

Inverted domestic corporation, as used in this section, means a foreign incorporated entity which is treated as an inverted domestic corporation under 6 U.S.C. 395(b), i.e., a corporation that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country, that meets the criteria specified in 6 U.S.C. 395(b), applied in accordance with the rules and definitions of 6 U.S.C. 395(c). An inverted domestic corporation as herein defined does not meet the definition of an inverted domestic corporation as defined by the Internal Revenue Code at 26 U.S.C. 7874.

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Offeror Representations and Certifications Commercial Items – 52.212-3 (NOV 2014) (sample clauses)

The offeror represents that either—

(A) It [ ] is, [ ] is not certified by the Small Business Administration as a small disadvantaged business concern and identified, on the date of this representation, as a certified small disadvantaged business concern in the database maintained by the Small Business Administration (PRO-Net), and that no material change in disadvantaged ownership and control has occurred since its certification, and, where the concern is owned by one or more individuals claiming disadvantaged status, the net worth of each individual upon whom the certification is based does not exceed $750,000 after taking into account the applicable exclusions set forth at 13 CFR 124.104(c)(2); or

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Offeror Representations and Certifications Commercial Items – 52.212-3 (sample clauses)

(B) It [ ] has, [ ] has not submitted a completed application to the Small Business Administration or a Private Certifier to be certified as a small disadvantaged business concern in accordance with 13 CFR 124, Subpart B, and a decision on that application is pending, and that no material change in disadvantaged ownership and control has occurred since its application was submitted.

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(f) Buy American Act Certificate. (Applies only if the clause at Federal Acquisition Regulation (FAR) 52.225-1, Buy American Act—Supplies, is included in this solicitation.)

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(1) The offeror certifies that each end product, except those listed in paragraph (f)(2) of this provision, is a domestic end product and that for other than COTS items, the offeror has considered components of unknown origin to have been mined, produced, or manufactured outside the United States. The offeror shall list as foreign end products those end products manufactured in the United States that do not qualify as domestic end products, i.e., an end product that is not a COTS item and does not meet the component test in paragraph (2) of the definition of "domestic end product." The terms "commercially available off-the-shelf (COTS) item," "component," "domestic end product," "end product," "foreign end product," and "United States" are defined in the clause of this solicitation entitled "Buy American Act—Supplies."

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(h) Certification Regarding Responsibility Matters (Executive Order 12689). (Applies only if the contract value is expected to exceed the simplified acquisition threshold.) The offeror certifies, to the best of its knowledge and belief, that the offeror and/or any of its principals—

(1) [ ] Are, [ ] are not presently debarred, suspended, proposed for debarment, or declared ineligible for the award of contracts by any Federal agency;

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(2) [ ] Have, [ ] have not, within a three-year period preceding this offer, been convicted of or had a civil judgment rendered against them for: Commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a Federal, state or local government contract or subcontract; violation of Federal or state antitrust statutes relating to the submission of offers; or Commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violating Federal criminal tax laws, or receiving stolen property;

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(3) [ ] Are, [ ] are not presently indicted for, or otherwise criminally or civilly charged by a Government entity with, commission of any of these offenses enumerated in paragraph (h) (2) of this clause;

(4) [ ] Have, [ ] have not, within a three-year period preceding this offer, been notified of any delinquent Federal taxes in an amount that exceeds $3,000 for which the liability remains unsatisfied.

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Flowdown Clause Obligations from the Prime Contractor’s Perspective

J. Catherine Kunz, Esq. Crowell & Moring LP 1001 Pennsylvania Ave., NW Washington, DC 20004 Phone: (202) 624-2957 Fax: (202) 628-5116 [email protected]

57 57

Analysis for Flowdown Clause Compliance

Multi-step analysis – What is considered a subcontract? – Which clauses are required to be flowed down? – When must required clauses be flowed down? – Is the commercial item clause included in the

prime contract, and does the subcontract involve the purchase of a commercial item?

– Which clauses should a prime consider flowing down, in addition to mandatory clauses?

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What Qualifies as a Subcontract?

Necessary to the performance of one or more government contracts. E.g., – specifically required by the prime contract – substantially or directly related to performance

of the prime contract – directly charged to the prime contract

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Typically not a government subcontract: – Purchases of goods and services necessary for

the management and administration of the company as a whole E.g., general usage supplies or services (paper,

computer toner, telephone service, etc.).

– Purchases of standard inventory items E.g., standard parts used in many or all of the

company’s products, for both government and commercial projects.

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Likely a government subcontract: – Purchases of goods and services substantially or

directly related to the performance of the government contract Products or services unique to the end product Products or services customized for inclusion in the

end product

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Which Clauses are Required to be Flowed Down?

Is the clause required to be flowed down to subcontracts?

Generally, this is not a difficult determination

Requires substantive review of each clause incorporated into the prime contract

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Which Clauses are Required to be Flowed Down?

Example: FAR 52.225-13 Restrictions on Certain Foreign

Purchases “. . . (c) The Contractor shall insert this clause,

including this paragraph (c), in all subcontracts.”

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When must Required Clauses be Flowed Down?

Not all clauses with flowdown language must be flowed down in every instance

The text of the clause will indicate when the clause is required to be flowed down to a subcontract

Sometimes the prime contractor’s best judgment will need to be applied – projected value of the subcontract – whether the subcontract will involve certain

activities

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Example:

FAR 52.203-6 Restrictions on Subcontractor Sales to the Government

“(c) The Contractor agrees to incorporate the substance of this clause, including this paragraph (c), in all subcontracts under this contract which exceed the simplified acquisition threshold [$100,000].”

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Example:

FAR 52.219-9 Small Business Subcontracting Plan

“. . . the offeror will include [FAR 52.218 Utilization of Small Business Concerns] in all subcontracts that offer further subcontracting opportunities . . . .”

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Does the Subcontract Involve the Purchase of a Commercial Item?

Does the prime contract include a clause limiting the number of clauses to be flowed down to a subcontract for commercial items? – Required flowdown clauses for commercial item

subcontracts are largely socio-economic clauses with which most companies already comply Minimizes the compliance burden placed on the

subcontractor

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Look for: – FAR 52.212-5 (“. . . The Contractor is not

required to flow down any FAR clause, other than those in paragraphs (e)(1) of this paragraph in a subcontract for commercial items.”)

– FAR 52.244-6 (“The Contractor shall insert the following clauses in subcontracts for commercial items . . . .”)

– or similar language

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Definition of Commercial Item (FAR 2.101): (1) Any item that is of a type customarily used by the general

public or by non-governmental entities for purposes other than governmental purposes and has been sold, leased, or licensed or offered for sale, lease, or license to the general public.

(2) Any item evolved from (1) through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in time to satisfy the delivery requirements under a government solicitation.

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Definition of Commercial Item

Definition of Commercial Item, cont’d: (3) Any item meeting the criterion of (1) or (2) but for

modifications of a type customarily available in the commercial marketplace, or minor modifications of a type not customarily available in the commercial marketplace made to meet federal government requirements.

(4) Any combination of items meeting the requirements of (1), (2), or (3) that are of a type customarily combined and sold in combination to the general public.

(5) A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple state and local governments.

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Definition of Commercial Item

Definition of Commercial Item, cont’d: (6) Installation, maintenance, repair, training, and other

services if such services are procured for support of an item referenced in (1) through (4) above and the source of such services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the federal government.

(7) Services of a type offered and sold competitively in substantial quantities in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions.

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Clauses to Consider Flowing Down

For the prime contractor’s protection, the following clauses can be flowed down – Termination for convenience clause

Will provide the prime the ability to terminate the subcontractor should the Government terminate the prime

– Changes clause Will provide the prime the ability to make changes of the

subcontractor’s requirements should the Government make changes to the prime’s requirements

– Definitions clause Will ensure a standard set of definitions is applicable

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Clauses to Consider Flowing Down

For the prime contractor’s protection, the following clauses can be flowed down – Protest After Award clause

Will allow the prime to issue a stop work order to the subcontractor

– Disputes clause Will put the sub on notice of the disputes process,

including the requirement to submit a certification of a claim

– Other clauses Specific to the nature of the prime contract

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Implementing Flowdown Obligations

Approaches to meet flowdown clause obligations – Craft a unique document that incorporates the applicable

flowdown clauses for each subcontracting opportunity

– Attach an addendum with applicable flowdown clauses to a standard purchase order or commercial subcontract form

– For commercial item purchases, include a provision in standard purchase order or commercial subcontract form requiring compliance with flowdown clauses when applicable

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Challenging Issues Regarding Flowdown Clauses

Assertion from prime that clause is “self-deleting” Refusal from sub to accept required flowdown

clause(s) Incorporation of entire prime contract into

subcontract Implementation of process by new government

contractors to identify which vendors qualify as subcontractors and ensure flowdown of clauses

FAR Subcontractor Flowdown Terms: Contract Negotiation...

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