What exactly is a flow-down? In basic terms, a flow-down is a clause that your prime 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/AIDAR 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/AIDAR, 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, MEDEVAC insurance requirements, 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.
Government approval requirements are key to this type of risk flow-down. As an example, in USAID contracting, the contractor must request written approval from the Contracting Officer (CO) (or, if delegated, the Contracting Officer’s Representative [COR]) for any international travel before the contractor may incur costs associated with the trip. Given that most USAID subcontractors field personnel to the cooperating country, it stands to reason that the prime would flow down this requirement to its subcontractors. If they neglected to do so, and the subcontractor incurred costs associated with international travel without prior written USAID approval, the prime would be unable to contractually disallow these costs, and would also be unable to bill the subcontractor’s costs to the government. The disallowed costs would be paid for out of the prime’s net profit. As such, it is in the best interest of the prime to pass on approval requirements, and it is a responsible and good faith business practice on the part of a subcontractor to accept those requirements.
Another example of risk flow-down is in unilateral termination rights. This flow-down is perhaps the most commonly discussed in negotiations with companies who are new to government contracting. FAR 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.
Salary approvals are an excellent example of when such adjustments need to be made, depending on the prime contract. All of USAID’s prime contracts will contain salary approval requirements (and as discussed earlier, must be flowed down), but they may differ in stringency. Occasionally, COs will require salary approval for all salaries and very rarely, if ever, they will only require approval for salaries that exceed the USAID Contractor Salary Threshold (CST, also commonly referred to as AIDMax[1]). More likely, though, you’ll find something somewhere in the middle: the CO will require that the contractor request approval for any starting salary that exceeds the highest rate earned by the individual in the last three years. Or, they may require written approval if the rate for a cooperating country or third country national exceeds the local compensation plan ceiling. Suffice it to say that salary approval requirements likely will have a slightly different bent from one contract to another.
That said, primes may have boilerplate flow-down language which is more restrictive than what they’re held to in their prime, and with good reason: because each prime contract’s salary approval requirements will vary from one to the next, most primes will simplify their templates to account for the highest level of restriction. The problem for a subcontractor arises when they do not adjust the language to mirror the prime contract’s requirement. With this in mind, when reviewing your subcontract, it is worth asking if the requirement matches that which is in the prime. 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 writing and reviewing salary justifications if they do not need to submit them to their CO?
Another flow-down requirement which might be incorrectly applied to subcontractors is rights in data/intellectual property. In USAID contracting, intellectual property rights are subject to the FAR and AIDAR “Rights in Data – General” clauses (FAR 52.227-14 and AIDAR 752.227-14). At first glance, these clauses are complex but when you get to the essence of what is required, it is that the prime (and subcontractors) must grant “unlimited rights[2]” 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. The AIDAR clause further restricts the contractor, as follows: “the Contractor shall not release, reproduce, distribute, or publish such data without the written permission of the contracting officer”. 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, and require that the subcontractor maintain the same protections per the AIDAR clause. 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/AIDAR clauses. 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[3] 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/AIDAR citations in your subcontract. Many primes have an all-inclusive list of FAR/AIDAR 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/AIDAR clause you are reading and will state, “As prescribed in [FAR/AIDAR 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] You will find the CST/AIDMax restriction clearly laid out in AIDAR 752.7007 “Personnel Compensation”.
[2] 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.
[3] 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.”