Best Practices for Government Flow-Down Clauses

Business InsightsGovernment Contracting

September 11, 2024

Deltek

In government contracting, a flow-down clause is a Federal Acquisition Regulation (FAR) that essentially stipulates that the subcontractor will be bound to the contractor in the same manner that the contractor is bound to the government. In some cases, flow-down clauses refer to other risk-shifting provisions that protect prime contractors in the event their subs make a mistake.

This blog will explain more about flow-down clauses and what both subcontractors and prime contractors need to understand.

Flow-Down Clauses in Federal Government Contracting

The federal contracting world is unique in the sense that primes are forced into strict positions and often lack the flexibility to negotiate. In most cases, what's in the original contract is regulatory mandated, and the prime is more or less bound by what the government says. Similarly, in the event a dispute arises, primes need to follow a distinct set of resolution procedures, which includes going to specific courts and following complex administrative processes.

A lot of the time, subs - who are used to working on commercial contracts or with smaller, local governments - aren't aware of all these provisions. Since the resolution process is different, more complicated and can take longer, it's important that everyone stays on the same page and knows what to expect. Due to these nuances in the federal government space, flow-down clauses are often a bit different, and likely more important, than they are in other lines of work.

Despite this, primes are often reluctant to negotiate with subs in the first place, for a variety of reasons. For starters, the last thing a prime wants is to hire a sub that ends up damaging their relationship with the government, leading to a loss of work. Even if a sub messes up, the prime is still on the hook because the government is contracted with them. What's more, in the event an issue arises in the subcontract, the prime doesn't want to be stuck in the middle, forced to fight both sides. Additionally, primes may worry about the potential consequences they'll face if their sub lies or commits fraud.

But it's not all smooth sailing for subs either, particularly those who are relatively new to federal government contracting and aren't used to its complexities. Oftentimes, subs are worried about what might happen if something were to go wrong while work is being completed. The sub won't be able to go to the government directly, and they likely won't want to endure the long process required to potentially get remedies.

First and foremost, mandatory flow downs are a no brainer. Any FAR provisions that outline where you need flow downs need to be adhered to. Keep in mind that mandatory flow downs aren't automatic; you still need to include specific language in your subcontract.

Beyond these requirements, primes need to be vigilant when it comes to making sure a sub is performing correctly. To this end, primes need to think about what protections they need to build in - including notice failures and clauses about disputes - to protect themselves.

For example, imagine the government terminates a prime for convenience. In such a scenario, nobody is at fault, but the government no longer needs the contract to be fulfilled. If the subcontract doesn't have language that reflects the subcontractor can be terminated for convenience, the prime may be on the hook for the remainder of that contract. Luckily, this scenario can easily be avoided by flowing down a convenience clause to the subcontract.

Flow-Down Clause Tips for Prime and Subcontractors

Ultimately, primes need to think through every possible contingency and scenario that might come up during the course of work. If any of these possibilities implicates the sub, it should be flowed down to the subcontract.

On the flip side, a sub might want to push back against a terminated for convenience clause being flowed down directly, which would mean that the prime could terminate their agreement for convenience. Instead, they can suggest language that indicates the sub can be terminated for convenience only in the event that the prime is terminated for convenience first.

The biggest mistake subs make is agreeing to nonspecific, vague flow-down clauses. When a stipulation is unclear - think: "All relevant and applicable provisions of the prime contract are incorporated by reference except that the owner should be changed to contractor and contractor shall be changed to subcontractor" - subs are essentially agreeing to something they don't have any idea about. If a sub has never seen the prime contract, there's no way to tell what they're getting into.

For the best outcomes, subs need to understand their exact obligations and responsibilities and only accept flow-down clauses that fit under that umbrella. Whenever possible, subs should never agree to catch-all flow-down clauses.

For more information on the best way to manage all aspects of government subcontracts, watch this webinar.

This content was adapted from a webinar presented by Maria Panichelli, partner and chair of the government contracting practice group at McCarter & English, LLP.

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