Mandatory Flowdowns to subcontractors

[jeff4757]

Many of our prime contracts do not indicate what clauses are required to be flowed down.

Is there a list of flowdown-required clauses that are standard for all Government contracts?

Many thanks for any feedback!

[Guest Vern Edwards]

There is no standard list for all government contracts. Flow down requirements vary from contract to contract based on several factors.

If you have a government prime contract, flowdown instructions are inserted in the clauses that you must flow down. For example, see FAR 52.215-12, Subcontractor Certified Cost or Pricing Data (OCT 2010), which contains the following flowdown instruction:

( c ) In each subcontract that exceeds the threshold for submission of certified cost or pricing data at FAR 15.403-4, when entered into, the Contractor shall insert either—

(1) The substance of this clause, including this paragraph ( c ), if paragraph (a) of this clause requires submission of certified cost or pricing data for the subcontract; or

(2) The substance of the clause at FAR 52.215-13, Subcontractor Certified Cost or Pricing Data—Modifications.

In order to know which clauses you must flow down, you must read each and every clause in your prime contract.

In addition to the mandatory flowdown clauses, there are necessary flowdown clauses, which are clauses that the government does not require you to flow down, but that you had better flow down in order to protect yourself, such as the Changes clause and the Termination for Convenience clause.

[jeff4757]

Thank you, Vern! As always, great guidance!

[Cajuncharlie]

There is a third type of not-quite-flowdown clauses that you should also be aware of. These are clauses that you cannot directly flow down, but cover subject matter that you must cover in your subcontracts, or to phrase it differently, give you risks, rights, or remedies that you may want or need to flow down to your subcontractors.

One example is the Disputes clause at FAR 52.233-1, which you can't flow down directly because a sub has no privity to file a claim with the Government, but you and your attorneys need a clause that deals with disputes. Do you want a clause that deals only with disputes between prime and sub, or do you want also to provide for sponsoring a sub's claim to the Government at the sub's cost, with the Government's decision as final? Complex issues here require careful decisions based on careful legal advice, and careful legal writing.

Another example is the Prompt Payment for Construction Contracts clause at FAR 52.232-27, again not a direct flowdown (?), but a close reading of the clause finds that paragraph ( c ) requires you to include in each subcontract a clause that provides for your prompt payment to your sub and interest penalty if you don't, plus further flowdown to all tiers. Some companies simply flow the thing down as is and trust that the context will make the meaning of the clause clear if push comes to shove, but to me that has never seemed a good way to do business, and almost as bad as flowing down all of H and I, or as some primes do, the whole prime contract with a few caveats. IMHO this situation deserves a carefully crafted clause, particularly in view of the complexities involving subcontract retainage that's kept for general purposes, funds withheld from subcontractor payments for specific performance issues, and what can happen to the prime if subcontract payments, retainage, and withholding are not carefully coordinated with prime contract billing.

The main point is to read all of your prime contract clauses carefully (RTFC: in polite language, Read The Full Contract) and make sure your subcontracts cover all the subject matter in an appropriate way that protects your company.

You do not have the Christian Doctrine to incorporate anything into your subcontract that you may have forgotten. If you miss something, your company as prime may have obligations to the Government that you cannot look to your subcontractor to fulfill. Also, legal issues between prime and sub are generally subject to state law, not federal, so your subcontracts need just as much attention as the prime contract.

[joel hoffman]

There is a third type of not-quite-flowdown clauses that you should also be aware of. These are clauses that you cannot directly flow down, but cover subject matter that you must cover in your subcontracts, or to phrase it differently, give you risks, rights, or remedies that you may want or need to flow down to your subcontractors.

...IMHO this situation deserves a carefully crafted clause, particularly in view of the complexities involving subcontract retainage that's kept for general purposes, funds withheld from subcontractor payments for specific performance issues, and what can happen to the prime if subcontract payments, retainage, and withholding are not carefully coordinated with prime contract billing...

Charlie, be careful when advising how to craft subcontract clauses concerning subcontract payment and retainages. Since the Prompt Payment Act Amendments of 1988, the prime contractor is no longer allowed to retain progress payments received from the federal government for retainage for general purposes or for withholding due to performance issues. In essence, the federal government is to retain such monies from progress payments made to the prime per the PP and payment clauses in the prime contract. This is applicable at least on construction contract progress payments.

The prime may still "withhold" progress payments to the sub - which should be addressesd as you advised above - but must not ask the government for payment of those monies that will be retained or withheld from payments to its subs or suppliers. However, it appeared to me that you were suggesting that the prime contractor holds these funds from progress payments received from the government. There is a distinction.

I will be in the woods today, so will not be available for response to this post until this evening...

[Guest Vern Edwards]

Cajuncharlie:

FAR 52.232-27, the prompt payment clause for construction contracts, is a mandatory flowdown clause. I don't know why you want to put it in a third category. Mandatory flowdown is not necessarily verbatim or entire. It can be substantive and partial.

As for a disputes clause, I agree that it is a good idea to have clauses that address disputes and other issues that might arise between the prime and its subs, such as payment and inspection. But "flow down" means to insert in a subcontract all or some part of a term or condition that is in the prime contract, either because the prime contract requires it or because it is necessary in order to fulfill the prime contract. Clauses that merely deal with the same kinds of issues that can arise between the government and a prime, but do not pass on some term or condition, are not "flowed down" in any meaningful sense.

As for the Christian doctrine, a federal court just used it to incorporate into a subcontract a mandatory flowdown from the prime contract that had been improperly omitted. See UPMC Braddock, et al. v. Harris, No. 09-1210 (PLF), 2013 WL 1290939 (D.D.C., Mar. 30, 2013). The plaintiff has notified the district court of its intention to appeal. Hopefully, that decision will be overruled, but who knows.

[Cajuncharlie]

Joel, points well taken. I did read the current FAR clauses before I wrote, and 52.232-27 ( d ) does permit the prime to retain a routine general amount or withhold a specific payment from the sub, but you are absolutely correct that anything retained or withheld from a payment to the sub cannot be billed through to the Government, or as Robocop said, there will be trouble. I should have added the same caveat as I did for the Disputes clause, that this requires careful decisions based on careful legal advice, and careful legal writing.

My main points were RTFC and make sure you are covered for the subject matter of every clause.

[Cajuncharlie]

Cajuncharlie:

FAR 52.232-27, the prompt payment clause for construction contracts, is a mandatory flowdown clause. I don't know why you want to put it in a third category. Mandatory flowdown is not necessarily verbatim or entire. It can be substantive and partial.

More points well taken. Most people think a mandatory flowdown clause is simply to be copied and pasted into the subcontract. My intention was to point out that this is not always the case, and that certain clauses require more thought.