Federal projects can be complicated – prime contractors must deal with often exacting government performance standards and obscure federal legal requirements.

Subcontracting on a federal project adds an increased level of complexity, as the subcontractor must not only meet the prime’s contractual requirements but also comply with many of these same federal clauses, which are duplicated or “flowed down” from the prime contract to the subcontract.

Navigating these clauses can be a challenge for even the most sophisticated contractors.

What Is a Flow-Down Clause?

Federal procurement contracts – whether for an embassy, a tank, or cloud storage – incorporate a set of standard contract clauses that are codified in Part 52 of the Federal Acquisition Regulation (FAR) and apply by law.¹

The specific clauses will vary based on the subcontract value and type of work – for example, construction contracts typically incorporate construction-specific clauses – but the text of each clause is largely consistent from contract-to-contract.

In most cases, the clause is simply listed by the clause number, title, and version date (e.g., “FAR 52.203-7 Anti-Kickback Procedures (Jun 2020)”), but the clause text is omitted.² A typical federal contract will incorporate upward of 100 clauses in this manner.

Certain of these FAR clauses include “mandatory” flow-down provisions, meaning that the prime contractor is required to include the clause in any subcontract issued as part of the project.

As only the prime contractor is in privity with the federal customer – and therefore ultimately responsible for performance of the work – it will often include additional FAR provisions that protect the prime’s interests.

In some cases, these non-mandatory provisions are reasonably related to the subcontractor’s performance, and help allocate performance uncertainties and risk. In other cases, the prime takes a “kitchen sink” approach and simply flows down every clause from the prime contract, regardless of whether the clause applies to a particular subcontractor or is appropriate for the work.

Can Subcontractors Negotiate Flow-down Clauses?

Yes, to an extent. Some primes may be receptive to arguments that a particular FAR clause doesn’t apply and agree to remove the clause.

A subcontractor could assert, for example, that its subcontract is below the “simplified acquisition threshold” (currently $250,000) and therefore exempt from a variety of requirements.

A subcontractor could also assert that a particular clause is not a mandatory flow-down clause or, simply, does not apply to a particular type of subcontract (e.g., by its terms, “FAR 52.229-8 Taxes-Foreign Cost-Reimbursement Contracts (March 1990)” would not apply to a fixed-price subcontract performed in Wisconsin).

One of the more compelling arguments a subcontractor can make is that its product or service qualifies as “commercial” and that the prime contractor is thereby prohibited by law from flowing down non-mandatory clauses.³ In light of recent regulatory changes, this argument may be particularly compelling for Department of Defense contracts.⁴

The success of this approach will depend on several factors, most notably the balance of power between the prime contractor and subcontractor. In many cases, large prime contractors will be in a position to dictate subcontract terms given their economic leverage, familiarity with government contracting, and access to the federal customer.

Often, prime contractors will refuse to share the prime contract with the subcontractor, meaning that the subcontractor has little transparency into the prime contractor’s actual legal obligations. In other situations, the prime contractor may be unwilling to deviate from their “standard” subcontract form, which will often include an appendix listing “required” FAR/DFARS clauses. A prime contractor might also tell a subcontractor that a particular provision doesn’t apply and is “self-deleting” (a dubious proposition).

A subcontractor may gain some traction by emphasizing the commercial nature of its product or service, as well as the potential delays and costs arising from complying with non-mandatory clauses.

Having an experienced government contracts attorney may also benefit the subcontractor in these negotiations.

Do Subcontractors Need to Comply with Flow-down Clauses?

While a subcontractor may be able to assert that a particular FAR or DFARS flow-clause is inapplicable to their subcontract, the most prudent course of action is, most often, to assume that all clauses apply.

As a first step – once negotiations are complete and the subcontract is finalized – the subcontractor should take stock of each flow-down clause and the associated compliance obligations. Outstanding requirements should be assigned to specific individuals within the organization with deadlines for meeting the requirements.

Small business subcontractors and companies that are new to government contracting, in particular, may need to take immediate steps to put in place the policies and systems necessary to comply with standard flow-down clauses, which cover a variety of topics including business ethics (FAR 52.203-13, Contractor Code of Business Ethics and Conduct (Nov. 2021)), intellectual property (FAR 52.227-14, Rights in Data-General (May 2014)), employment practices (FAR 52.222-26, Equal Opportunity (Sept. 2016)), and sourcing (FAR 52.225-1, Buy American-Supplies (Oct. 2022)), to name a few.

Subcontractors that receive certain “controlled” information – e.g., restricted prints provided under defense contracts – should pay particular attention to cybersecurity requirements, which have been the focus of recent Department of Defense policy and enforcement efforts.⁵

Construction firms should be aware of unique dispute provisions that are typically flowed down under federal projects. These include the FAR “Changes” clause, which grants the federal government broad rights to modify the requirements midstream.⁶

In addition, because the subcontractor lacks privity with the federal government and therefore cannot bring a claim directly against the government, the prime contractor may be asked to “pass through” a claim pursuant to the FAR “Disputes” clause.⁷ Such claims will typically be governed by federal procurement law (not the state law governing claims between the prime contractor and subcontractor) and must be appealed to specialized federal bodies.

Construction firms will also need to contend with the unique bonding and dispute provisions imposed by the Miller Act, including its strictly-construed notification requirements.⁸

Conclusion

The U.S. government spends upward of $750 billion annually through procurement contracts and, for companies that are positioned to win this work, it can serve as a reliable business partner.

Yet, these opportunities entail significant legal and performance risks, largely in the form of FAR and DFARS clauses. These circumstances can be particularly challenging for subcontractors, which must navigate both these flow-down clauses and the demands of a contractual intermediary. This balancing act often requires attention to detail, understanding of risk, and an appreciation of the bigger picture.

This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

Endnotes

¹ Individual federal agencies have FAR “supplements” with agency-specific contract clauses, most notably the Department of Defense’s Defense Federal Acquisition Regulation Supplement (DFARS).

2 FAR clauses are available on the acquisition.gov website. When flowing down FAR clauses, the prime contractor will typically note that, for purposes of interpreting the clause, the prime is to serve as the “Government” and the subcontractor as the “Contractor.”