Negotiating Commercial Item Subcontracts

When doing business with the U.S. Government, regardless of whether at the prime contractor or subcontractor level, companies must comply with a myriad of laws and regulations that are in addition to the standard contract terms found in the commercial market.  Because a subcontractor lacks privity with the Government (i.e. there is no relationship directly between the two parties), the laws and regulations applicable to subcontracts are much less than those applicable to a prime contractor.  Prime contractors, however, often attempt to flow-down virtually all of the terms of their prime contract.  Subcontractors should carefully review proposed subcontracts and attempt to limit flow-down terms to those required by law or otherwise needed to address the Government’s right to modify the prime contract.

A subcontract for commercial items is subject to fewer required flow-down clauses than one for non-commercial items.  For commercial item subcontracts, the required flow-down clauses generally relate to the Government’s socio-economic programs (e.g. Equal Opportunity; Affirmative Action).  These clauses are listed in FAR ¶ 52.244-6.  A limited number of additional clauses may be applicable under agency specific supplements to the FAR. 

Of course nothing prevents a prime contractor from trying to flow-down additional provisions from its prime contract.  The “Subcontracts for Commercial Items” clause at FAR ¶ 52.244-6, encourages prime contractors to limit flow-down clauses to a minimal number necessary to satisfy its contract obligations.  As indicated by FAR ¶ 52.244-6, there are terms that, as a practical matter, may need to be included in a subcontract.  For instance, the “Changes” clause in the prime contract may need to be included if the subcontractor is providing something that may be subject to a change directed by the Government.

Even if a prime insists on including a non-required flow-down clause, the clause may be modified to make it more acceptable to the subcontractor.  For instance, a subcontractor should consider modifying any flow-down of a Termination for Convenience clause (See FAR ¶ 52.249-2) so that the prime contractor’s right to terminate for convenience is exercisable only to the extent the Government exercises its right to terminate.  This avoids the ability of the prime contractor to terminate or threaten termination, even though the Government has not terminated the prime contract.