FAR Flow-Downs Under Federal Government Subcontracts

A flow-down is a clause that your prime contractor has included in your subcontract because that same clause is included in your prime’s contract with the government.

What exactly is a FAR flow-down under Federal Government Subcontracts? In basic terms, a flow-down is a clause that your prime contractor has included in your subcontract because that same clause is included in your prime’s contract with the government.

Seasoned subcontractors have been in the game long enough to understand the importance of flow-downs and to distinguish when these flow-downs are non-negotiable and when they can be removed or adjusted.

Subcontractors who are new to the world of federal government acquisitions may balk upon reading their first government-funded subcontract. The sheer number of FAR references is enough to make one’s head spin, let alone trying to make heads or tails of what they mean and when they apply.

Rest assured that if you are a new subcontractor, you need not let these flow-downs deter you from moving forward with negotiations. With a little digging into your subcontract and the FAR, you can demonstrate to your prime that although you may be new to government contracting, you are in the know.

When Flow-Downs Are Non-Negotiable

The first and most obvious reason for a flow-down clause is that the prime contract explicitly states that the contractor must include the substance of the clause in all of its subcontracts. Sample language to this effect might read as: “The Contractor shall insert the substance of this special contract requirement, including this paragraph (d), in all subcontracts.” When you see this language in a clause, know that asking to remove the clause will be a fruitless effort. The government has determined the clause important enough that contractors at all tiers must comply with it. In fact, should you issue a second-tier subcontract under your subcontract, you too are required to flow down this clause. Employee whistleblower rights, preventing personal conflicts of interest, and Executive Orders on Terrorism Financing are all examples of non-negotiable flow-downs.

Prime Contractors Must Flow Down Risk

The second reason for a flow-down clause is that – while not explicitly required to be flowed-down – if the prime neglected to flow down the clause, they would be putting themselves at risk of prime contract non-compliance. Why? Because if the prime neglects to flow down the clause, and the subcontractor carries out an action that is non-compliant with the clause, the prime will be unable to hold its subcontractor responsible for the non-compliance. Such an oversight could be costly to the prime, possibly leading to a disallowance of costs, poor results on the prime’s Contract Performance Assessment Report (CPAR) or, at worst, termination for cause.

Perhaps the most commonly discussed of these types of flow-downs is subcontract termination rights, particularly in negotiations with companies who are new to government contracting. FAR 52.249 termination clauses grant the government the right to terminate the contract at any time for any reason; on the flip side, the prime contractor has no right to terminate. From the government’s perspective, to grant termination rights to the prime contractor could put public interests at risk and result in ineffective use of taxpayer dollars.

A business owner who has operated in the commercial market space might point out that a clause that grants no termination rights to the seller – even in cases of insolvency or breach of contract by the buyer – is an unfair term in any contract. In fact, in the commercial market space, it’s common for the seller to have unilateral termination rights or, if the buyer terminates, they do so at a price (take a look at your cable or cellular phone contracts and you’re likely to see something to this effect). But in the government acquisition space, public interest is paramount and, as such, prime contractors may not terminate their contracts and therefore will not allow their subcontractors the right to terminate, either.

A prime selects its subcontractors based on specific, often unique technical capabilities that may be difficult – if not impossible – to replace. If the prime were to grant their subs the right to terminate for convenience and the sub chose to invoke those rights, the prime’s performance in meeting project objectives would be put at risk and could potentially result in a termination for cause. You will be hard-pressed to find a prime who will agree to bilateral termination rights if the work you are conducting is technically imperative to the prime’s scope of work.

The exception to this rule may apply if your service/commodity meets the following criteria:

1) is commercial in nature and therefore easily replaced by another vendor in the marketplace AND

2) does not directly support the prime’s scope of work objectives/deliverables.

Example services where a prime might be willing to forego unilateral termination rights are: in-country internet service providers, office cleaning services, leases, transportation services agreements, etc. Such services are ancillary to the prime’s technical objectives and typically easily replaceable through the commercial market, and so may warrant more leniency in granting termination rights to the sub.

Is It A Flow-Down or Prime Template Language Masked As A Flow-Down?

Many large prime contractors will have an internal library of subcontract templates where they simply plug in the specifics of a subcontract’s scope of work, administrative details of the subcontractor, and pricing information, but leave the rest of the template’s language untouched. This practice makes sense on the surface but there are times that the prime may overlook certain nuances in their prime contract terms and conditions that can and should, on a case-by-case basis, result in altering their subcontract’s boilerplate language.

A great example is prime contractors unwittingly flowing down FAR clauses that don't pertain to the subcontract mechanism. Let's assume a prime contractor has a cost-reimbursable contract, requiring the inclusion of FAR 52.216-7 "Allowable Cost and Payment" which outlines what costs they may be invoice and be reimbursed for. A prime contractor's template may include this as a standard flow-down, but if the subcontract is firm-fixed-price, then this clause is moot, as no actual costs are being invoiced and paid under firm-fixed-price mechanisms.

The problem for a subcontractor arises when they do not adjust the language to align with their subcontract mechanism, resulting in potentially unnecessary administrative burdens. With this in mind, when reviewing your subcontract, it is worth asking if the requirement aligns with your subcontract mechanism. It is best to couch this negotiation in terms of reducing unnecessary costs and administrative burden on both parties. After all, why would the prime want their staff and subcontractors to spend unnecessary costs and time reviewing itemized invoices when it isn't contractually necessary?

Another flow-down requirement which might be incorrectly applied to subcontractors is rights in data/intellectual property. In services contracting, intellectual property rights are subject to the FAR 52.227-14 “Rights in Data – General”. At first glance, this clause is complex, but when you get to the essence of what is required, it is that the prime (and subcontractors) must grant “unlimited rights[1]” in data to the government for any works first produced under the contract/subcontract, as well as a “paid-up, non-exclusive, irrevocable, worldwide license” to exercise unlimited rights in any data to which the contractor/subcontractor claims copyright per the FAR clause. Because the prime is required to grant such rights to the government and maintain protection of all data first produced under the contract, they must require their subcontractors to grant the prime these rights in data the subcontractor first produces under the subcontract. The prime may then “flow up” the unlimited rights to the government.

Some contractors will draft their own clauses rather than flow-down the FAR clause. Rights in Data is often misconstrued to mean “ownership” of data. Subcontractors should keep an eye out for language which states that the subcontractor grant to the prime ownership of all data first produced by the subcontractor under the agreement. A subcontractor should push back on this language because the prime can meet its obligations to the government simply by requiring that the subcontractor grant to the prime the same unlimited rights in data and license in copyrighted material that the government requests of the contractor in FAR 52.227-14. By doing so, the subcontractor maintains ownership of the data. If you run into trouble negotiating these clauses, it is important to cite paragraph (h) of FAR 52.227-14[2] which only requires that the prime obtain the aforementioned rights in order to meet its obligations to the government.

When Flow-Downs Are Mistakenly Included in Your Subcontract

Lastly, there is the issue of finding clauses in your subcontract that simply do not apply to your subcontract. You will likely find a long list of FAR citations in your subcontract. Many primes have an all-inclusive list of FAR citations in their templates that they include in their subcontracts. This is where many new subcontractors quickly become overwhelmed during negotiations. The recommended practice here is to sift through these clauses and determine if they are truly applicable. If they are not, you may request that your prime remove those that do not apply.

To determine applicability, first check to see if there is any mandatory flow-down language in the clause. If you find that there is, then make note that you are responsible for compliance with the clause.

If there is none, you will next need to read the “prescriptive language”. The prescriptive language is referenced in the first paragraph of the FAR clause you are reading and will state, “As prescribed in [FAR clause X], insert the following clause”. Read the referenced prescriptive language and you may find that the clause does not apply to your subcontract, usually due to the mechanism you are being awarded or your subcontract’s value. If, per the prescriptive language, you find that the clause does not apply to your subcontract, by all means, ask the prime to remove it.

As an example, if your prime issues you a firm-fixed-price subcontract and you find FAR 52.242-1 “Notice of Intent to Disallow Costs” in your subcontract, you should push to have this clause removed, as the prescriptive language (FAR 42.802) only requires the clause be included in cost-reimbursement and fixed-price incentive contracts, and contracts with price redetermination. This clause is not applicable to a firm-fixed-price mechanism because you are not billing the prime for actual costs incurred, but instead for fixed-price deliverables.

In summary, flow-downs can be tricky to navigate and the above discussion does not account for every eventuality that may arise during negotiations, and every business relationship is different. As such, it is important to always keep in mind the context in which the work is being performed, client relationships, and good business sense when determining which of your subcontract’s terms and conditions warrant negotiating.

[1] Unlimited rights means the rights of the Government to use, disclose, reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly, in any manner and for any purpose, and to have or permit others to do so.

[2] Paragraph (h) states the following: “(h)Subcontracting. The Contractor shall obtain from its subcontractors all data and rights therein necessary to fulfill the Contractor's obligations to the Government under this contract. If a subcontractor refuses to accept terms affording the Government those rights, the Contractor shall promptly notify the Contracting Officer of the refusal and shall not proceed with the subcontract award without authorization in writing from the Contracting Officer.”