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Performance Based Payments and Subcontractors

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My company is a subcontractor negotiating with a prime who has indicated that they have both 252.232-7012 and 52.232-32 in their prime contract.  My company is offering a commercial item for which we are requesting milestone payments.  The prime has agreed to provide performance based payments in the subcontract but are also asserting that we are required to report cost incurred to date to the prime just as they are required to report to the government per 252.232-7012.  They are also asserting that 52.232-32 and 252.232-7012 are mandatory flow downs.  I can find nothing to support either assertion.  If they are correct in their assertion can someone please direct me to the proper citation?

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Mandatory flow down clauses are those that by their terms are required to be inserted in subcontracts.  See for example, FAR 52.215-2.  Neither of the cited clauses has a requirement for the clause to be inserted in a subcontract.

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If you want to know why the prime contractor is doing what it is doing, you must ask the prime contractor.

There is no mandatory connection or correlation between the contract type negotiated between the Government and the prime contractor and the contract type negotiated between the prime contractor and any subcontractor.

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Thanks to you both.  You have confirmed what Ive repeatedly stated to the Prime.  I asked for the reason behind their position and they answered that they see it as a regulatory requiremenr. I've also asked for specific language in the FAR or DFARS and the response is that it is merely their interpretation for what's needed for regulatory compliance but identified no specific language.

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In my prime contract experience, 52.232-32, suitably modified, is a mandatory prime contract business flow to subcontractors. If not that clause, something so substantially similar, that it would be best to just flow the clause in order to administer the bases for payment. If siwilliams' company has a different proposed term and conditions for performance based payments, it should offer them to the prime. Arguing about whether it is mandatory in its language or "mandatory" from the point of view of the prime, is not fruitful to me. Ditto for DFARS 252.232-7012. 

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It may be mandatory based on the Prime's company policy.  But from what I can tell, to say it is a regulatory requirement imposed by tbe govenment isn't true.  That is the Prime's argument as they are requesting we share incurred costs with our invoice.  That's not somethimg we are willing to do.

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The DFARS clause above requires that the prime submit total costs incurred to date. It would be nice if some of the finance types here weigh in on this. it seems to me that if payment to your company was based only on deliverable items, and there was no performance based payment, the prime financial records would reflect that payment for a deliverable item as its cost. However, since payment to your company is not based on that, perhaps the thinking is that the mere negotiated value of the performance payment is not sufficient for the prime to meet its obligation to the Government to disclose total costs incurred to date, and that the subcontractors costs are to be included, because interim negotiated performance payment is not a cost. If such disclosure is your only objection, I suggest you get finance types together to understand the rationale for the prime's request and whether the prime rationale is reasonable and necessary. Failing that, as I previously indicated, your company may need to give up the performance payments and resubmit a proposal with higher fee to reflect added risk.      

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Neil, note that SI's company is proposing to provide a commercial item.  What the prime is asking for is inappropriate for such a subcontract.  If the prime is serious about regulatory requirements, it should be reading FAR 32.2, particularly 32.001 and 32.202-2.  However, as we have said before, the FAR does not apply to contractors and does not generally govern the relationship between primes and subs.  This is generally a matter of negotiation.  If the prime's policy is to include inappropriate clauses in subcontracts, the sub should either refuse to accept the clauses and walk away from the deal if the prime insists or roll over and accept the inappropriate clauses.

As for costs, what the prime pays its subs is a cost to the prime.  I see nothing in DFAR 252.232.7012 that requires the prime to include costs incurred by subcontractors. 

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Retread, we seem to have different views about FAR. To me, It has a huge impact on the relationship between a prime and its subs. Many FAR clauses, because they are obligations the prime owes to the Government, wind up being business flowdowns in the subcontract in order for the prime to comply with its obligations and/or are adopted as the model for subcontract language even when it is not required to comply with a prime contract obligation to the Government. It is understandable that a company under a firm fixed price contract does not want to disclose actuals. However, the prime is still responsible for ensuring itself that the subcontractor is financially sound before making an interim payment not supported by what it contracted for, a deliverable product. Many commercial financial institutions take liens and so forth on inventory/accounts receivable to protect its loan. Perhaps financial stability assurances could be provided by a financial statement signed off by a 3rd party accounting firm. What I don't hear from siwilliams' company are any counteroffers. Also disappointing, is the apparent lack of reasonable explanation by the prime contractor, other than "it's required," as to why it needs to have actuals. Perhaps the prime needs to select a different supplier and/or the supplier needs a diffferent prime.          

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Neil, what you are describing concerning flow down clauses are contractual requirements, not regulatory requirements.  There are very few mandatory flow down clauses, i.e., clauses that by their terms are to be included in subcontracts.  Other clauses that are required for the prime to carry out its obligations under the prime contract may be included in subcontracts as necessary flow down clauses.  However, as discussed in this forum before, when a contractor is acquiring commercial items from a subcontractor, the only clauses that are required to be included in subcontracts are those listed in FAR 52.244-6, which include "a minimal number of additional clauses necessary to satisfy [the contractor's] contractual obligations."  By implication, these additional clauses would be limited to those that are suitable for use when acquiring commercial items.

I don't understand this statement that you made "the prime is still responsible for ensuring itself that the subcontractor is financially sound before making an interim payment not supported by what it contracted for, a deliverable product."   I don't see any such requirement anywhere.  At the prime level, the government is required to obtain "adequate security," which may be the contractor's financial conditions, as a condition for providing government financing.  However, that is a contract formation issue. 

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Our company is publicly traded, so there's is a degree of financial transparency there.  With regards to counter offers and counter proposals, there were a number of issues we backed off of including the number and size of the pbp payments.  Walking away is absolutely and option.  However, it's my belief that the Prime is going to be hard pressed to find a commercial item supplier willing to share cost data.  I wanted to be sure I wasnt missing a regulatory requirement to supply the data.  It appears that the prime considers the two clauses to be business flow downs they are making a business decision to include versus a regulatory requirement they NEED to include for compliance.

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Unless someone can identify a mandatory regulatory requirement or law that the prime must provide pbp, they may agree to do so when and if they want under whatever terms they wish. In my experience, prime contractors do not make interim payments without adequate safeguards. It is bad business to do so and requires costly financial oversight. What those safeguards are, can vary and may be negotiable. My comments are based on my experience and expertise and are just offered as business guidance for whatever it is worth to anyone, since the majority view seems to be there are no regulatory requirements, the prime's business judgement is all that remains. I think I have now moved on and I thank all those involved for these discussions.

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