Monday, May 21, 2012

Lazy Sub-Contracting by Flow Down – Just Don’t Do It!

Okay, I know the title is a little self-righteous….  Who has the time to write beautiful and meaningful subcontracts when there are a million regulations that change every minute and contract requirements that change even faster?  Well, actually, the answer is …lawyers….(I luv lawyers!), but then, who has the money to pay lawyer fees in the time of austerity and the reign of DCAA and IG?  Having said that, do you remember what the Monty Python used to say?  ”Nobody expects the DCAA inquisition, but it is coming”… or something like that…

As you all know, I am all about figuring out simple solutions to blanket problems that affect all of us, contractors and grantees, and more specifically, make our Contracts and Grants people’s lives miserable.  So, I decided to write a post about the best contracting practices on a small budget, which will hopefully help some of our fellow smaller businesses and NGOs, who cannot afford the lawyers and also help larger businesses, who often do not follow what their lawyers say, because they cannot understand how to apply it practically in Papa New Guinea…

I mentioned before in my previous blogs, that my biggest annoyance is a poorly written “boiler plate” subcontract and that annoyance is more than esthetic…  I am always surprised to receive such subcontracts, because not only do they look like dog’s dinner, with contradictory terms and conditions, they are also very often a glaring example of disregard by the drafting party of the risks that they are committing themselves to, the risks that are so huge that I almost feel the moral obligation to warn them about….  I do mean "almost", because most of the time, those risks that they are undertaking afford more protection for me, the receiving party….
I also get rather unhappy when my own colleagues draft subcontracts, which could jeopardize our company and put it on the poor street in a DC minute, should they encounter someone on the other side actually reading what we send out….
It is more of a problem in our business of international development, than, say, in DOD contracting…  Our businesses do not have the ability to have a legal team of 50 to review every subcontract or draft an iron clad template which does not include any FAR clauses and still affords all the protections under a FAR based prime contract, a.k.a Lockheed Martin.

So here are the 6 principles to remember, which, I hope, will be a good start:
 1.      Do Not Flow Down “Section I” in its entirety….   Doh!
Here is why.  Let’s say USAID forgets to include Termination for Convenience (T4C) clause in your contract.  You then flow down your Section I “as is” to your subs and the T4C clause is now also missing from their subcontract.    Even though, USAID forgot to put that clause in, you are subject to that Termination for Convenience clause, because it is one of the “Christian Doctrine” clauses. 

Christian Doctrine is the principle that states that defaulting contractors will be fed to the lions…  :-)No, not really.  Christian Doctrine is the principle that tells us when a clause, having been omitted from the contract, might be “read into” the contract by operation of law – often to the great surprise of the prime contractor…

So now, USAID terminates you for convenience and you need to terminate your subcontractors, who do not have the T4C clause in their subcontracts, since all they have is your original flown down “Section I”.    Your contract with your subs is a commercial contract, it is not subject to the “Christian Doctrine”, so, your subcontractor can potentially sue you for the entire contract value, which you will not be able to recover from USAID under the T4C clause.   Voila!   You are broke.

Here is another one, which, if flown down as part of the “Section I boiler plate”, commits your company (“in lieu of US Government, read Prime Contractor”) to accept any third party liability law suits for any damage your program caused, even if it was due to program design by USAID – FAR 52.228-7 Liability to Third Persons… 

2.      Do not flow down only the clauses, which say they must be flown down to subs in the clause language

Here is why.  Some clauses are not a mandatory flow down.  For example: 52.203-3 Gratuities (or 52.249-4 Termination for Convenience of the Government, for that matter).  Although, it is not a mandatory flow down, if your subcontractor is discovered to have offered a bribe to a Government official to receive a contract, you would be held liable and your company could be fined, suspended and debarred…..  If you do not want to flow down verbatim, write a clause in your subcontract which can at least inform your subcontractor that they should not do it or, else, suffer consequences like non-payment and/or debarment.

You should pay particular attention to AIDAR clauses.  Most of them do not specifically say that they should be flown down to subs, but instead use language like this in 752.7032 International travel approval and notification, "Prior written approval by the Contracting Officer is required for all international travel directly and identifiably funded by USAID under this contract" (emphasis added).  This means all travel funded through your subs, which can be traced to USAID funding.

3.      Do not flow down clauses simply by FAR number reference with no tailoring.  Do not use, ”in lieu of US Government, read “Prime Contractor””, at least not for all clauses

Let’s say you include 52.216-7 Allowable Cost and Payment as a reference with “in lieu” language above.  You are now committing your company to allow small businesses to bill you every week or even more often than that and to allow your other subs to bill you every two weeks.  You are also committing to paying your subcontractors on the 30th day of receipt of their proper invoices and not necessarily within 30 days after you submit your invoice to the Government, which is what that clause allows you to do in your prime contract. 

Worse, when you also flow down 52-232.25 Prompt Payment /Alternative I clause and commit your company to paying interest on invoices not paid within 30 days….

4.      Modify the FAR clauses to read as part of your subcontract and include them in text
This is important, especially for foreign subcontractors.  It is fundamentally unfair to local subcontractors, who will sign anything you put in front of them, to commit them to some obscure FAR references, which they are not likely to read or understand.  Not only it is unfair, it defeats the purpose of why you are flowing down these clauses in first place – to ultimately protect your company in cases where your subs violate a clause for which you are responsible to the Government.

Let’s take Combating Trafficking in Persons – 52.222-50 or 52.222-19 Child Labor or Terrorist Financing.  We all work in some areas where these things happen.  If the subcontractors do not understand the gravity of the violation of these clauses, they may not report nor even think of these as an impediment to providing services or products under your subcontracts.  The penalty for you is debarment.  The penalty for them is non-payment and also possible debarment.  Flowing down those clauses in text will not prevent this from happening – as with any other flown down clauses.  However, making an effort to write those clauses out in a simple understandable way and possibly conducting training to explain to local subcontractors what those clauses mean and the remedies that they afford to you and US Government, may mitigate the action that USAID will take in case your subs fail to comply and you are found responsible.

In this same group - FAR Disputes Clause 52.233-1, which makes NO SENSE, if it is flown down as a reference with “in lieu..” language.  It commits you to allowing your subs to file claims under the Disputes Act against you or USAID, which they won’t be able to do.  In fact, any subcontract awarded by a prime contractor, which includes any clauses allowing the subcontractor to file direct claims against USAID, will never recieve consent since it is expressly prohibited by FAR Subpart 44.203 (c) Consent Limitations….

5.      Do not flow down if not applicable to the type of Subcontract or Subcontract Value

Commercial Items subcontracts must carry commercial item clauses in 52.244-6 plus a hand full of additional clauses which you need to protect yourself (Terrorist Financing, better Termination Terms).  Some clauses only apply to US contractors or for work performed only in the US (Equal Opportunity, Affirmative Action, and Employment Eligibility Verification).  Some clauses only apply to contracts over a certain threshold (Contractor Code of Business Ethics and Conduct – applicable to subcontracts of $5MIL or more and longer than 120 days). 

6.      Do not have conflicting terms or have an order of precedence

If your general company template has a "disputes", "termination" or "changes" clause, then do not use the FAR clauses as well, unless there is an order of precedence which shows the subcontractor which ones prevail.    Better yet, use one or the other – you can modify them any way you like to include things that are important to you in addition to what FAR provides.

There are of course, many more fun facts and principles, which involve reading and rejecting certain conditions that prime contractors often “flow down”, but we will leave that for the next time….

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  1. Great article
    I would add- Do not flow down if not applicable to the type of instituion receiving the award, and do not flow down contract type specific clauses if you are changing the contract type modality (e.g. from CR to FP).

  2. Dear Tzarina,

    I have a question regarding ADS Chapter 308. For Program Contributions for a CAT 1 PIO, would we be subject to any mandatory USAID provisions? 308.3.11, section b. mentions that in the case of program contributions, "...disbursements accomplish a significant purpose of the grant, the Agency's policies and procedures no longer apply post-disbursement". Would 308mab (even though this is pertaining to cost type awards) and 303mab still have to be considered?
    We also have small subawards utilizing funds from the program contribution award and would be grateful for clarification on whether provisions are mandatory for those subawards.

    Thank you!!!!

    1. I am not very familiar with the PIO awards, but quick reading of ADS 308, I would says that only cost-type awards require compliance with the mandatory provisions and program/general contribution funds do not carry such compliance responsibilities. I would clarify with the awarding officer to be sure.

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  4. If you have a consultant supporting a government contract as an advisor and they are not contributing to the overall requirements in the SOW, is it necessary to include any FAR or prime flow-down clauses in their Consultant Agreement?

    1. If a consultant is hired to do any part of the work or contributes to the performance as specified in a prime contract, then the consultant is a subcontractor under that contract. A consultant hired to provide general advice to the prime that does not constitute performance of any part of the contract work is not a subcontractor.

      Subcontract” means any contract as defined in Subpart 2.1 entered into by a subcontractor to furnish supplies or services FOR PERFORMANCE of a prime contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders.