Helping companies and
universities navigate subcontracting issues.
UIDP Federal
Flow-Down Project
Reference Guide
UIDP Federal Flow-Down
Project Reference Guide
2
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
About this guide
This reference guide was prepared by the University-Industry Demonstration Partnership (UIDP-uidp.org) Federal
Flow-down Working Group, whose members represent a diverse set of universities, companies and non-profits
organizations. The reference guide was created to increase awareness and clarity of government flow-down
clauses that are problematic for subcontractors during negotiations and provide strategies for dealing with them.
Additionally, the reference guide can be a vehicle used to engage the U.S. federal government in discussions
regarding these contracting issues.
We would like to thank all the contributors, those listed below and others not listed, for their dedication and hard
work in developing this guide.
Working Group Leads
•
•
•
•
•
Susan Burkett, UIDP Associate (and formerly Carnegie-Mellon University)
Robert Hardy, Council on Governmental Relations (COGR)
David Mayo, California Institute of Technology
Jinny Meade, Intel Corporation
Susan Sedwick, University of Texas at Austin
Project Contributors:
Jennifer Barron - John Hopkins University
Elaine Brock - Contracts, Compliance, and Conflict of
Interest Authority LLC
Mary Jane Buckland - West Virginia University
Roberta Burke - Georgia Institute of Technology
Nancy Carr - University of New Mexico
Bojan Cukic - West Virginia University
Tina Cunningham - Mississippi State University
Johannes Dapprich - Generation Biotech
Jilda Garton - Georgia Institute of Technology
Linda Hansen - University of Oregon
Robert Hardy - Council on Governmental Relations (COGR)
Wayne Johnson - California Institute of Technology
Susan Jones - Cornell University
Paul Lowe - Kansas State University
Mark Peters - Oregon Health & Science University [OHSU]
Carlos Rey Romero - University of New Mexico
Katie Small - Kansas State University
Terry Stout - Georgia Institute of Technology
Sarah White - Georgia Regents University
The University-Industry Demonstration Partnership (UIDP) operates as a semi-autonomous activity convened
by the National Academies and its Government-University-Industry Research Roundtable (GUIRR). Views
expressed herein are not necessarily those of the UIDP member institutions, the National Academies or GUIRR.
Responsibility for the content of this publication rests entirely with the authors. This guide is for informational
purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain
advice with respect to any particular issue or problem. Use of and access to this guide does not create an
attorney-client relationship between you and UIDP or between you and of the authors, co-chairs, or contributors.
Table of Contents
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
1.0 Introduction7
2.0 Accounting Rules and Regulations8
2.1 Problem Statement8
2.2 Definitions/Discussion8
2.3 Time and Effort Reporting
10
2.3.1 Educational Institutions10
Personnel Costs - Strategies10
2.3.2 Commercial (For-Profit) Companies11
2.4 Travel11
2.4.1 Federal Travel Regulations (FTR)
11
Travel - Strategies12
2.5 Requesting Appropriate Contractual Instruments
12
2.5.1 Problem Statement12
2.5.2 Cost Reimbursement Contracts12
2.5.3 Fixed Price Contracts
12
2.5.4 Time and Materials Contracts
13
2.5.5 Other Transaction Authority13
Contractual Instruments - Strategies
13
3.0 Intellectual Property14
3.1 Definitions14
3.2 Inventions14
3.3 Technical Data and Software15
3.4 Copyrights and Data16
3.5 Subcontractor Intellectual Property Rights
16
3.5.1 Primary Intellectual Property Clauses
17
3.6 Grants and Cooperative Agreements
17
3.6.1 Patent Rights17
3.6.2 Data Rights18
3.7 Infringement Indemnification18
3.8 Defense, Energy and NASA Contracts
18
Intellectual Property - Strategies19
4.0 National Security Clauses20
4.1 Definitions20
4.2 Problem Statement21
4.3 Publication Restrictions22
4
Publication Clauses - Strategies
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
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TABLE OF CONTENTS
Foreign Nationals - Strategies23
4.5 Intellectual Property Restrictions Affecting Export Controls
Intellectual Property and Fundamental Research - Strategies24
4.6 Export Controls
Export Controls - Strategies24
23
24
4.7 Confidentiality24
Confidentiality and Fundamental Research - Strategies25
5.0 Liabilities and Indemnification25
5.1 Liability25
5.2 Indemnification25
5.2.1 Problem Statement25
Indemnification - Strategies26
5.3 Warranties26
5.3.1 Definition26
5.3.2 Problem Statement26
Warranties - Strategies27
5.4 Liquidated Damages28
5.4.1 Definition28
5.4.2 Problem Statement28
Liquidated Damages - Strategies28
6.0 Choice of Law29
6.1 Definition29
6.2 Problem Statement29
Choice of Law - Strategies29
7.0 Contractual Relationships: Privity of Contract29
7.1 Definition29
7.2 Problem Statement30
Contractual Relationship and Privity - Strategies30
8.0 Order of Precedence31
9.0 Termination Clauses31
9.1 Definitions31
9.2 Problem Statement31
Termination - Strategies32
10.0 Wage Rate Contract Requirements33
TABLE OF CONTENTS
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
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10.1 Definitions33
10.2 Problem Statement33
10.3 Davis-Bacon Act
34
10.4 Walsh-Healy Act
34
10.5 The Service Contract Act34
Wage Rate Contract - Strategies35
11.0 Small Business Innovation Research (SBIR),
Small Business Technology Transfer Research (STTR)
Small Business - Strategies36
GLOSSARY
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UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
7
Federal
Flow-Down Project
Reference Guide
1.0 INTRODUCTION
Prime contractor grants and contracts with the U.S. Government can frequently have unanticipated impacts
on subcontractors from what are known as federal flow-down clauses.1 Considering flow down clauses from
the start of a grant or contract relationship could facilitate both the contract and subcontract negotiation
process, resulting in agreements that are optimized for the prime and the subcontractor(s).
Universities are often subcontractors to industry Prime Contractors, although the roles can also be reversed.
This guide generally deals with situations in which the industry party is the Prime Contractor (prime) and
the university is the subcontractor (subcontractor) although a party in either role may benefit from the
description of clauses and strategies discussed below.
The University-Industry Demonstration Partnership (UIDP) Federal Flow-Down Project has developed
this reference guide to increase awareness of those government flow-down clauses that are potentially
problematic to subcontractors, identify alternative approaches when possible, and provide strategies for
understanding and dealing with flow-down clauses between a prime contractor and its subcontractors.
Additionally, the reference guide can be used to engage the government in discussions regarding the most
troublesome issues.
The scope of this first version of the Reference Guide is focused on agreements (Assistance) and contracts
(Procurement) for Research and Development (R&D) projects. The guide is structured primarily to address
contentious issues in these major categories:
•Accounting Rules and Regulations
•Intellectual Property
•National Security Clauses: Restrictions, Publications, Foreign Nationals, Export Controls
A federal flow-down clause is a provision in a subcontract in which a prime contractor imposes on the subcontractor the
rights and duties contained in its contract with the government.
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UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
•Liabilities and Indemnification
•Choice of Law, Contractual Relationships, Order of Precedence, Termination, Wage Contract Requirements
•Small Business Innovation Research
During UIDP discussions about flow-down clauses it became clear that a communications gap often occurs
between the parties. Therefore, the guide attempts to define terms and describe the issues and clauses in
enough detail so that discussions about them will be productive.
The Reference Guide will focus on mandatory clauses. Mandatory flow-down clauses contractually can
require the prime to include the actual language of specific clauses, or only a paraphrased version that
conveys the substantive obligations imposed by the clause , in all subcontracts issued by the prime
under the federal project contract. Some clauses such as Termination for Convenience, Changes, and
Stop Work clauses that are included in the Prime Contract are part of every federal contract under the
“Christian Doctrine,” whether specifically included or not and would be a flow-down to subcontractors.
The Christian Doctrine is a principle that evolved from a court case that claimed that mandatory contract
clauses addressing “deeply ingrained public procurement policy” are incorporated into the federal contract
as a matter of law. These mandatory clauses are considered as included in every prime contract even if
inadvertently omitted by the government contracting officer, and therefore, in most cases will be mandatory
in related subcontracts.
2.0 ACCOUNTING RULES AND REGULATIONS
2.1 Problem Statement
Accounting regulations are mandatory flow-downs in government grants and contracts. The Cost Principles
(Federal Acquisition Regulations [FAR] Part 31) and Cost Accounting System policies vary by type of entity. It
is important to be aware of the differences when contracting with an entity different from yours so that the
accounting regulations appropriate for the subcontracting entity are included in the flow-downs; for example,
if a for-profit company is the prime contractor subcontracting to a university, the company should include FAR
31.3 in a subcontract to a university rather than FAR 31.2.
2.2 Definitions/Discussion
Cost Principles: Found in FAR Part 31, Cost Principles govern budget development, expenditures and audit
requirements for government contracting. They cover costs charged to the government by various entities,
either directly or indirectly. The regulations that govern cost principles by contracting entity are:
FAR 31.2: For-Profit Companies
FAR 31.3: Universities (See also OMB Circular A-21)
FAR 31.7: Non-Profits (See also OMB Circular A-122)
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
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Cost Accounting Standards (CAS) are a set of standards and rules promulgated by the government for
use in determining costs on negotiated procurements. The purpose of the CAS is to make sure that each
contractor’s practices in accumulating and reporting costs are consistent with established cost accounting
practices. Full coverage of the federal cost accounting regulations involves 19 standards that have been
applicable since the 1970’s to commercial and nonprofit organizations, including educational institutions
that meet the $25 million threshold in terms of government contracts. Cost accounting provisions have
been incorporated into OMB Circular A-21 and “for greater consistency and uniformity” have been extended
to all awards—contracts and grants—in excess of $500,000 made to major recipients of federal research funds.
Standard Title
401
Consistency in Estimating, Accumulating and Reporting Costs
402
Consistency in Allocating Costs Incurred for the Same Purpose
403
Allocation of Home Office Expenses to Segments
404
Capitalization of Tangible Assets
405
Accounting for Unallowable Costs
406
Cost Accounting Period
407
Use of Standard Costs for Direct Material and Direct Labor
408
Accounting for Costs of Compensated Personal Absence
409
Depreciation of Tangible Capital Assets
410
Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
411
Accounting for Acquisition Costs of Material
412
Composition and Measurement of Pension Costs
413
Adjustment and Allocation of Pension Cost
414
Cost of Money as an Element of the Cost of Facilities Capital
415
Accounting for the Cost of Deferred Compensation
416
Accounting for Insurance Cost
417
Cost of Money as an Element of the Cost of Capital Assets Under Construction
418
Allocation of Direct and Indirect Costs
419Unused
420
Accounting for Independent Research and Development Costs and Bid and Proposal Costs (IR&D and B&P)
Only four cost accounting standards, substantially equivalent to 401, 402, 405, and 406 apply to
universities: 48 CFR 9905.501–9905.506-63. Briefly, these four cost accounting standards require:
Consistency in estimating, accumulating, and reporting costs
Consistency in allocating costs incurred in like circumstances for the same purposes
Identification and exclusion of specifically identifiable unallowable costs
Consistency in the selection and use of a cost accounting period.
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UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
2.3 Time and Effort Reporting
2.3.1 Educational Institutions
Effort reporting for educational institutions is governed by OMB Circular A-21; it generally allows
educational institutions a greater degree of flexibility than other government contractors in tracking
personnel effort. OMB A-21 states that, “[a] precise assessment of factors that contributes to costs is
not always flexible, nor is it expected. Reliance, therefore, is placed on estimates in which a degree of
tolerance is appropriate.”2 3 Further, A-21 recognizes that “[p]ractices vary among institutions and within
institutions as to the activity constituting a full workload.” Therefore, the payroll distribution system may
reflect categories of activities expressed as a percentage distribution of total activities. The allocation
of effort on a government project for educational institutions is considered reasonable if it approximates
the time actually spent on the federal project as a percentage of total professional time of an individual
employee. Furthermore, universities are audited periodically by the government to ensure that their
accounting and other management systems continue to meet federal standards. Three brief definitions
are helpful in understanding the concept of effort reporting:
Effort Reporting: a proportional distribution of 100% of an employee’s university effort across
categories of activity for a stated time period. Certification of reported effort is required by the
government (OMB Circular A-21).
Effort: the expenditure of physical and mental energy to perform and/or support objectives of the
university’s mission.
Effort Certification: a self-attestation of an employee’s university activities for a stated time period.
Appropriately certified effort provides auditable documentation to demonstrate to the university’s
sponsoring partners that the sponsor did in fact receive the level of effort negotiated and agreed to
through the award process.
For professors, assistant professors and professional staff who receive at least a portion of their
salary from federal sources, certification of effort spent on activities within the scope of their university
employment is required every 6-12 months, depending on the effort reporting policies of the university. In
most cases, the employee is required to review and sign her/his own effort certification report. Universities
have internal policies and processes to implement effort reporting or other time-keeping systems but
these processes vary, depending on the university. Variations also occur within a university, particularly for
those in which some faculty appointments are based on an academic year (e.g., September 1 to May 31).
Internal controls to assure compliance with effort reporting may include policies that prohibit retroactive
cost transfers to or from accounts involving federal funds and that require prior approval and justification for
retroactive changes in certified effort.
Personnel Costs - Strategies
Universities should demonstrate clarity on how they estimate personnel costs. If costs for faculty or staff,
who are required to certify effort, are included the university should notify the company that an hourly
OMB Circular A-21, Appendix A, Section J(10)(b)(1)(c)
As of this writing, the government has proposed changes to Circular A-21 that would substantially modify the effort reporting
requirements. It also has proposed eliminating the CAS requirements for federal financial assistance.
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UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
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conversion of effort for a calendar year, e.g., 2080 person hours assuming 40 hour workweek, may be used
for budget estimation but will not be auditable in that way.
2.3.2 Commercial (For-Profit) Companies
Even though the FAR gives no special instructions to for-profit companies regarding time and effort reporting,
for-profit companies are often subject to the administrative regulations in OMB Circular A-110 or granting
agency rules that allow the government to audit the company’s records to assure that personnel time and
effort spent on a project is consistent with the negotiated and agreed to effort in the contract. Principles for
time and effort reporting for commercial companies typically include:
•Daily reporting of time by each employee working on a federally supported project, accounting for total time
worked on all activities whether billable to the federal project or not.
•Recording total hours even if more than 8-hours/day.
•Certification for accuracy of time sheets by employees and their supervisors.
2.4 Travel
2.4.1 Federal Travel Regulations (FTR)
Federal Travel Regulations (FTR) implement statutory requirements for travel by federal civilian employees
and others authorized to travel at Government expense. These regulations are contained in 41 Code of
Federal Regulations (CFR), Chapters 300 through 304 and can be found at: www.gsa.gov/ftr.
Allowability of travel costs on government awards is governed by the relevant cost principles.
For-profit entities are subject to the cost principles at Part 31.2 of the FAR. FAR 31.205-46(a)(2) states,
“costs incurred for lodging, meals, and incidental expense . . . shall be considered to be reasonable and
allowable only to the extent that they do not exceed on a daily basis the maximum per diem rates in effect
at the time of travel as set forth in the FTR.”
Educational institutions are governed by the cost principle in OMB Circular A-21 (referenced at FAR Part
31.3). Section J.53.a states that “[c]osts incurred by employees and officers for travel, including costs of
lodging, other subsistence, and incidental expenses shall be considered reasonable and allowable only to
the extent such costs do not exceed charges normally allowed by the institution in its regular operations as
the result of the institution’s written travel policy. In the absence of such a policy, the rates and amounts
established under the FTR shall apply.”
The result: commercial entities must follow the FTR and educational institutions must follow their
institutional policies. When commercial entities subcontract to educational institutions due diligence could
be fulfilled by obtaining a written certification from the university stating that the latter has a written travel
policy. The company should keep a copy of the educational institution’s certification in its procurement file.
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UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
Travel - Strategies
For-profit companies should be aware that universities are not subject to FTR and should ensure that
university subcontracts include a reference to OMB Circular A-21 for reimbursing travel expenses.
2.5 Requesting Appropriate Contractual Instruments
2.5.1 Problem Statement
Although the FAR includes many contractual mechanisms, universities typically prefer Cost Reimbursement
contracts, but some will accept Fixed Price contracts under certain circumstances. Universities generally do
not accept Time and Materials Agreements since many of the required flow-down clauses do not align with
university research and contracting practices.
2.5.2 Cost Reimbursement Contracts
As defined in FAR Part 16.3 [t], Cost Reimbursement contracts establish an estimate of total cost for the
purpose of obligating government funds and establishing a ceiling that the contractor may not exceed
(except at its own risk) without the approval of the contracting officer. This contractual instrument is
generally chosen when a contract has performance uncertainties, which is often the case with research
and development contracts that require the contractor to use reasonable effort rather than to provide
performance-based deliverables. Cost Reimbursement contracts include an estimate of the cost of the
contract and a limit on the costs the contractor may incur. Budgeted costs include direct and indirect
costs incurred in the conduct of the research. The contractor is paid for allowable expenses incurred in the
performance of the contract up to that limit.
Cost Reimbursement agreements are best suited to basic research when the resulting deliverables are
reports or where the scope of work is subject to some uncertainty and cannot be specifically described.
Cost Reimbursement budgets represent good faith estimates and as such do not guarantee completion of
the project within the estimated budget. Under Cost Reimbursement mechanisms the prime contractor and
its subcontractors are not obligated to incur costs in excess of the budget nor is the government obligated
to pay such costs. Cost Reimbursement contracts should stipulate that the subcontracting party should
promptly notify the prime of any anticipated funding deficiencies, including an estimate of the additional
funds required. The government may, in its discretion, provide all or part of such additional costs.
2.5.3 Fixed Price Contracts
Some entities that undertake federal contracting do not have accounting systems that would satisfy
Government Cost Accounting Standards (CAS). Because accounting standards are mandatory flow-downs
to subcontractors for cost reimbursement projects issued under a government project, entities without
such accounting systems lack the ability to comply with a government cost reimbursement-type contract
or agreement. An entity without the ability to meet the government accounting standards, can often opt to
participate in a government project by performing a Fixed Price subcontract.
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
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As defined in FAR Part 16.2, a Fixed Price contract provides for a price that is not subject to any
adjustment up or down. This contract type imposes maximum incentives to control costs, but with
minimum administrative burden. On the other hand, since payments are tied to deliverables and
various associated FAR clauses such as “Termination for Default” are included, this contract type is not
necessarily attractive to all recipients. Additionally, if the research costs exceed the budget, the recipient
is responsible for any cost overruns.
2.5.4 Time and Materials Contracts
As defined in FAR Part 16.6, Time and Materials (T&M) contracts are appropriate when the government
determines that it is not possible, at the time of contract award, to accurately estimate the extent or
duration of the work, or to reasonably anticipate costs. T&M agreements offer flexibility that can be useful
for industry but are generally problematic for university partners. These agreements are based on budgets
that include direct labor hours at specified fixed hourly rates, often for a category of personnel rather than
a specific individual, that include wages, overhead, profit, along with general and administrative expenses
and actual material costs. Universities estimate, expense and bill labor and materials based upon actual
costs, not on pre-negotiated rates. As a result, unless the university’s accounting system is flexible enough
to handle T&M contracting, it will violate Cost Accounting Standards by accepting a T&M contract. This is
because the T&M billing process would conflict with its cost-reimbursement accounting, invoking a violation
of the CAS. Most universities therefore cannot accept T&M contracts.
2.5.5 Other Transaction Authority
An Other Transaction (OT) is a special instrument used by some specifically authorized federal agencies
for obtaining or advancing research and development (R&D) or prototypes. An OT is not a contract, grant
or cooperative agreement and there is no statutory or regulatory definition of Other Transaction. Thus,
only those agencies that have been provided OT authority generally may engage in other transactions. The
government’s need to obtain leading-edge R&D and prototypes from commercial sources was the motivation
for OTs, because some companies were unwilling or unable to comply with government procurement
regulations, such as compliance with CAS. A particular concern of contractors was government license and
march-in rights under the Bayh-Dole Act (see section 3.2). Government procurement regulations and certain
procurement statues, as well as the Bayh-Dole Act, do not apply to OTs. OT authority does give agencies the
flexibility necessary to develop agreements tailored to a particular project. The Competition in Contracting
Act (CICA), Contract Disputes Act, and Procurement Integrity Act are examples of three procurement statutes
that do not apply to OTs.4
Contractual Instruments - Strategies
Universities will generally seek a cost-reimbursement contract in preference to fixed-price or T&M. If a
university agrees to accept the T&M, it should explain that its accounting system is not designed to handle
T&M accounting. Alternatively, the university should make sure that the unit responsible for the project is
able to make necessary adjustments to comply with the contract provisions. The university can point to the
approved CAS Disclosure Statement (DS-2) as the source of its inability to accept a T&M contract.
For a discussion of OTs, see L. Elaine Halchin, “Other Transaction (OT) Authority,” CRS Report for Congress, prepared for
Members and Committees of Congress, (Congressional Research Service, July 15, 2011) 7-5700. www.crs.gov.
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3.0 INTELLECTUAL PROPERTY
3.1 Definitions
Invention: any idea, design, concept, technique, invention, discovery or improvement that is or may or may
not be patentable or otherwise protectable under title 35 of the U.S. Code, or any variety of plant that is or
may be protectable under the Plant Variety Protection Act.
Subject Invention: any invention of the awardee or sub-awardees made in the performance of work
under a federally funded award.
Patent: a right granted by the U.S. Patent and Trademark Office to exclude others from making, using,
offering for sale, or selling an invention.
Copyright: a form of protection granted by law for original works of authorship fixed in a tangible
medium of expression. Copyrights cover both published and unpublished works.
Data: recorded information, regardless of form or the media on which it is recorded. The term
includes technical data and computer software. It does not include information incidental to contract
administration, such as financial, administrative, cost or pricing, or management information.
Software: computer programs, computer program changes, derivative works, and/or computer program
enhancements, and/or any documentation related to such computer programs, changes, derivative
works, and/or enhancements.
Patent Infringement: the making, using, offering for sale or selling of an invention without approval of
the patent holder.
March-in: a form of compulsory licensing that gives the government the right to require the contractor
to grant licenses (or to grant licenses itself). Both the government’s rights and the rights and
obligations of the recipient flow-down throughout the award chain as a matter of law, even if the terms
are not included in a subcontract. FAR clause 52.227-11 Patent Rights—Ownership by the Contractor
implements federal policy. This clause must be a flow-down to subcontractors (52.227-11(k)).
Patent Infringement Indemnification: where one party agrees to protect a second party from legal
action that may be brought by a patent holder against the second party’s infringement of the patent
holder’s invention.
Technical Data: recorded information, regardless of the form or method of recording, of a scientific or
technical nature (including computer software documentation). The term does not include computer
software or data incidental to contract administration, such as financial and/or management
information.
3.2 Inventions
The Bayh-Dole Act (35 USC Section 200-212) provides a uniform federal regime for rights to inventions
under federally funded awards. Recipients may elect to obtain title to inventions they have developed under
federal grants, cooperative agreements, and contracts—provided they fulfill certain obligations and are
UIDP FEDERAL FLOW-DOWN PROJECT REFERENCE GUIDE
15
subject to certain government rights, including the right of the government to practice, or have practiced,
the invention on its behalf. Another condition of ownership is the right of the government to march-in if the
contractor fails to take effective steps to achieve practical application of the invention or to meet health and
safety needs or public use requirements.
3.3 Technical Data and Software
Unlike rights to inventions, there is no controlling statutory authority for rights to technical data and
computer software resulting from federal awards. In fact, the federal data rules and regulations that govern
contracts (i.e., the FAR) are, to some extent, inconsistent with the approach to invention rights under BayhDole. Generally, under federal research contracts the government receives unlimited rights to technical
data, as opposed to the far more limited “government use” license to inventions. There is an anomalous
situation with regard to rights to computer software. For several decades the patentability of some elements
of computer software has been well established legally. This implies that at least with respect to those
potentially patentable elements, normal Bayh-Dole invention rights should apply. However, the FAR treats
computer software only as technical data, making no allowance for the fact that a computer program may
be patentable as well as copyrightable. (Although universities often tend not to patent software programs
and the U.S. Patent and Trademark Office may from time to time invoke more rigorous standards for the
patenting of computer software, understanding the apparent inconsistency between government rights in
software patents and software copyrights is important to the ultimate disposition of software developed with
federal funds).
The definitions in Section 3.1 are contained in the FAR; however, industry contracts may include additional
definitions in order to clarify points and ensure consistency in subcontractor terms and conditions. The
following is an example of an expanded definition related to software:
Software means computer programs, computer program changes, derivative works, and/or computer
program enhancements, and/or any documentation related to such computer programs, changes,
derivative works, and/or enhancements. Software may or may not be a Developed Work or Pre-existing
Material depending on how such Software is defined in this Agreement. Software does not include
Commercial Software.
Commercial Software is software that is commercially sold, offered for sale, and/or distributed by a
buyer or subsidiaries or agents of a buyer. No rights or licenses are granted for Commercial Software
under this agreement.
There may be situations where the government receives lesser rights to technical data and software, such
as when the contract deliverables incorporate or require the use of non-government funded data or software
in order for government use of the deliverables. In such cases, the contractor is required to identify to the
government, usually at the proposal stage, any deliverables in which the government will have lesser rights.
This requirement to disclose lesser rights is usually flowed-down through the procurement chain.
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3.4 Copyrights and Data
In general, the contractor must request permission from the Government Contracting Officer in order to
establish copyright to any data first produced in performance of a government-supported contract and
subcontracts issued. In situations where data will be published in academic, technical or professional
journals, the contractor may establish copyright without the contracting officer’s approval. These principles
are described at FAR 27.404 and are implemented in government contracts via clause FAR 52.227-14.
Alternate IV of this clause allows the contractor to establish a copyright for any data first produced under the
contract, and it is prescribed for use with educational institutions performing basic or applied research. Note
that the clause cannot be used if organizations besides educational institutions are involved in performance
of the contract, such as in joint university-industry partnerships. Since Alternate IV would not be included in
a prime industry contract, the prime contractor would have to request Alternate IV on behalf of its University
Subcontractor.
3.5 Subcontractor Intellectual Property Rights
Intellectual property rights clauses provided in a government contract not only apply to the prime contractor
but flow-down to all subcontractors as well. A subcontractor must understand how its intellectual
property rights will be affected under the terms of the prime contract with the government in order to not
unintentionally “give away” intellectual property rights. A subcontractor should review any contract clauses
addressing ownership of the subcontractor’s intellectual property used or developed in connection with the
prime or subcontract before executing the subcontract.
Subcontractors should be aware of the terms and conditions in the prime award. In the case of government
contracts, a prime contractor cannot demand outright ownership of a subcontractor’s patent rights as a
condition of awarding the subcontract, although the subcontractor could choose to give up those rights.
Although a subcontractor under a government contract generally has no direct contractual relationship with
the government, FAR Part 27 indicates that the government views itself as having privity with subcontractors
with respect to rights in Subject Inventions. This means that the subcontractor has the right to go back to
the government with regard to rights to a Subject Invention. Subcontractors also have the right to sue the
government directly for allowing patent infringement if another company—usually the prime contractor or
a successor contractor—uses the subcontractor’s patent rights without authorization. Regardless of who
has title, the government retains its rights and subcontractors must agree to the government’s rights as a
condition of accepting the award.
Subcontractors do not have the same level of protection for trademarks, trade secrets and rights in data
and software, including copyrights in general, that they have for Subject Inventions. The subcontractor must
therefore ensure it negotiates with its prime to include subcontract provisions preserving the subcontractor’s
rights in these areas. In contrast to the protection of the subcontractor’s rights in Subject Inventions, the
prime contractor is required under the general rights in data clause (FAR 52.227-14) “. . . to 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 such rights, the
Contractor shall promptly bring such refusal to the attention of the Contracting Officer and not proceed with
the subcontract award without further authorization.”
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The scope of government rights in a contractor’s intellectual property depends primarily on the type of
intellectual property at issue, i.e., a patent or patentable intellectual property, copyright material, or rights in
technical data or computer software. Companies and universities should not shy away from business and
collaborative opportunities with the government out of fear they will lose valuable intellectual property rights.
However, it is critical that a company or a university seeking to do business with the government, either as a
prime or subcontractor, understand the rights they have regarding intellectual property that results from the
contract, as well as how any pre-existing rights they have could be affected by the contract.
3.5.1 Primary Intellectual Property Clauses
The primary FAR contract clauses related to intellectual property are generally found at FAR Part 52.227.
Significant clauses relating to patent, copyright and data rights include:
•52.227-11 and 52.227-12: incorporating the statutory provisions of 35 U.S.C. §§ 200-212 discussed above and granting title in subject inventions to the contractor, subject to several conditions. The
contracting officer will use either 52.227-11 (short form) or 52.227-12 (long form) as appropriate.
•52.227-13: Patent Rights-Ownership by the government, which is rarely used but if applied, requires the
contractor to assign patent rights in Subject Inventions to the government. Normally agencies must make
a formal “Determination of Exceptional Circumstances” to provide contractors with other than usual
ownership rights.
•52.227-14: main contract rights in data clause outlining the respective rights of the contractor and the
government in data and software that precedes the performance of contract work, and also outlining the
rights in data and software created during the performance of the contract. It contains several alternate
clauses.
Defense Federal Acquisition Regulation Supplement (DFARS)
•252.227-7038 - Patents Rights – Ownership by the Contractor (Large Business)
•252.227-7039 - Patents – Reporting of Subject Inventions
•Subpart 227.3 - Patent Rights under Government Contracts)
•Subpart 227.4 - Rights in Data and Copyrights
•Subpart 227.70 - Infringement Claims, Licenses, and Assignments
•Subpart 227.71 - Rights in Technical Data
•Subpart 227.72 - Rights in Computer Software and Computer Software Documentation
Note: In addition, DFARS Subpart 252.227 contains alternative provisions and clauses defining government
rights in intellectual property for use in solicitations and contracts.
3.6 Grants and Cooperative Agreements
3.6.1 Patent Rights
Bayh-Dole regulations apply to Grants and Cooperative Agreements as well as contracts issued under the
FAR. Refer to Section 3.2 Inventions.
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3.6.2 Data Rights
The approach to rights in technical data under federal assistance awards (grants and agreements) is far
different from what applies to federal contracts. Generally, recipients of federal assistance awards own
rights (including copyright) to any data or other work developed under the award, with the government
receiving a license right more akin to the license right received under Bayh-Dole (which is applicable to
assistance awards with regard to invention rights). Absent, for the most part, are the detailed definitions of
technical data and provisions regarding rights and deliverables.
Most agency grant regulations or policies require that an awardee broadly disseminate the sponsored
program’s results and materials. Some agencies incorporate other language into grants or cooperative
agreements. In essence however, all federal agencies must adhere to the intellectual property policy stated
in 2 CFR 215.36 (OMB Circular A-110, Section 36, Intangible Property), which includes data and copyrights.
2 CFR 215.365 gives institutions of higher education and other nonprofit federal grant recipients the
right to copyright any work developed under the award and provides the government with a license right
(215.36(a)). The provision states “[t]he recipient may copyright any work that is subject to copyright and
was developed, or for which ownership was purchased, under an award. The Federal awarding agency(ies)
reserve a royalty-free, nonexclusive and irrevocable right to reproduce, publish, or otherwise use the work for
Federal purposes, and to authorize others to do so.” 2 CFR 214.36 applies to all agencies unless different
provisions are required by statute or approved by OMB.
3.7 Infringement Indemnification
In general, the government will conditionally indemnify the contractor for infringement of U.S.-covered
patents, as implemented via FAR 52.227-1, “Authorization and Consent.” Alternate I to the clause provides
unconditional indemnification when the contract is for research and development. On the other hand,
the government will expect the contractor to indemnify it for patent infringement when the government is
contracting for commercial items. This is implemented in the contract via FAR 52.227-3 “Patent Indemnity.”
This is of limited relevance to universities but should be noted and declined by a university subcontractor if
presented in a proposed subcontract.
3.8 Defense, Energy and NASA Contracts
With regard to rights in inventions, all federal agencies follow the Bayh-Dole regime. However, unlike the
civilian agency FAR that determines rights according to data first produced or used in performance of
a research contract, the Defense Federal Acquisition Regulation Supplement (DFARS) allocates rights
and responsibilities for the use and protection of data produced under Department of Defense (DoD)
contracts according to the source of funds used for data development. For this purpose, the DoD uses the
modified term “technical data” meaning, “. . . recorded information, regardless of the form or method of
the recording, of a scientific or technical nature (including computer software documentation). The term
does not include computer software or data incidental to contract administration, such as financial and/or
management information.”6 If developed exclusively with government funds, the government is entitled to
unlimited rights to the technical data similar to the approach under the FAR. All DoD contractors acquire the
same data rights and responsibilities; the DFARS makes no special provision for educational institutions.
Like the FAR clause, the basic DFARS clause (252.227-7013) flows down to subcontractors.
5
6
See http://www.whitehouse.gov/omb/circulars/a110/a110.html
See DFARS 252.227-7013(a)(14), 252.227-7015(a)(4), and 252.227-7018(a)(19).
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The Department of Energy (DOE) Acquisition Regulations distinguish legal rights in data under the FAR from
DOE’s “contract rights.” Where DOE acquires contract rights to data, it requires DOE permission to claim
copyright for any computer software produced under the contract. The National Aeronautics and Space
Administration (NASA) has a restriction similar to DOE for computer software. Without the right to claim a
copyright, a non-patented computer program falls into the public domain unless the copyright is claimed
by the federal sponsor. (Note however, that the government cannot hold the domestic copyright to works
created by government employees; that prohibition does not apply to copyrights provided to the government
in the works of others.) Also note that with regard to assistance awards, all three agencies follow the
provisions of 2 CFR.215.36.
Intellectual Property - Strategies
In general, universities expect to retain title to the intellectual property they create, and federal policy as
it applies to federal funding supports their ability to do so provided they otherwise meet their federally
imposed obligations. This expectation is based on the fundamental principle that a university needs to
be able to control the intellectual property it generates in order to fulfill its mission, i.e., to advance and
disseminate knowledge and to promote public welfare.
A university will seek out funding from non-profit, for-profit and government entities in order to help support
its research activities, but will generally not accept awards that restrict its ability to fulfill its missions.
Accepting an award that restricts its ability to use the intellectual property it generates frustrates the
university’s mission to make the results of its research available for the public benefit and impedes the
researcher’s ability to publish, or pass the results on to their students or collaborators. (Also see UIDP
Contract Accords 5 and 6: Background and Foreground Intellectual Property.)
Even though a government-funded project does not automatically grant a prime rights to a subcontractor’s
intellectual property, a prime and a subcontractor can negotiate to provide the prime with license rights to
a subcontractor’s inventions (both patented and not patented) and copyrightable material such as software
and documentation. This is done under a subcontractor agreement. A prime collaborating in a government
project may require the use of subcontractor intellectual property beyond the project, in future products
or services, and may negotiate with the subcontractor for those rights. Typically, terms might include that
jointly developed IP will be jointly owned and that IP developed solely by a party under an agreement may be
licensed to the other party with or without royalties or other payments.
rb
If obtaining rights in the intellectual property developed by a subcontractor is critical to a prime, and a
subcontractor is unwilling to license its solely-developed IP under the prime’s terms, the prime could
request that the subcontractor decline to elect title to the inventions under the Bayh-Dole provisions of
the subcontract and publish all research results at the expiration or termination of the Agreement. (This is
more appropriately a strategy for projects that are considered fundamental research.) A caveat is that even
if the subcontractor chooses not to elect title, it still must report the Subject Invention to the government;
the government could then elect title pursuant to the Bayh-Dole Act. In addition, for any solely developed
copyrightable material that a subcontractor is unwilling to license under an agreement, the prime could
request the subcontractor to either distribute the copyrightable material under at least one open source
license mutually acceptable to the parties or not bring any copyrightable material into the project.
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The discussion under Subcontractor’s Rights above describes general strategies. As noted, the rights of
subcontractors with regard to inventions and patents are fairly well-established, and should not require
extensive negotiations. However, the situation with regard to rights to data and software may be more
difficult. Prime contracts may contain other than the standard FAR data rights clause (52.227-14) or its
Alternate IV for universities. An example is the Rights in Data—Special Works clause (52.227-17). This
clause contains publication and copyright restrictions as well as indemnification requirements and is
typically not acceptable to universities. Universities may seek to substitute Alternative IV of the standard
FAR clause instead. One possibility is to distinguish work to be performed by the university under the
subcontract from the work to be done by the prime under the Special Works clause to which the prime
is subject and have Alternative IV apply to the work apportioned to the subcontractor. Where possible,
identification of respective rights at the proposal stage helps to facilitate subsequent negotiations. Both the
prime and the subcontractor should consult the prescription clause that is referenced at the beginning of
most FARs to determine if a clause that they find objectionable is required or is appropriately applicable for
the project being funded. If the prescription clause indicates the objectionable clause is not appropriately
included, the prime should discuss the situation with the federal contracting officer.
With regard to infringement indemnification, this practice is common in the commercial sector in which
a vendor includes in its prices the costs of deferred liabilities such as warranty and infringement
indemnification. However, universities are non-profit entities that propose and bill at cost. Since they
do not provide their research and development services commercially, they do not include the costs of
infringement indemnification in cost proposals. Thus, universities do not have the financial resources to
provide infringement indemnification and will usually refuse to accept such a requirement. The government
recognizes this in its contracting policies and does not include infringement indemnification requirements in
research and development awards it issues to universities.
4.0 NATIONAL SECURITY CLAUSES
4.1 Definitions
The Export Administration Regulations (EAR) is found at Title 15, sections 730-774, of the Code of Federal
Regulations (CFR). These regulations, implemented by the Department of Commerce, control the export of
goods and services identified on the Commodity Control List (CCL), Title 15 CFR 774, Supp. 1. Goods and
services on the CCL are not inherently military in nature; they are primarily commercial. Note: The EAR
also regulates items designated potentially for commercial purposes that may have military applications
(“dual use”).
The International Traffic in Arms Regulations (ITAR), found at 22 CFR, sections 120-130, implement
Section 38 of the Arms Export Control Act (22 USC 2778). These regulations implemented by the
Department of State control the export of articles, services and related technical data that are inherently
military in nature, as determined by the State Department. These “defense articles,” “defense services”
and related “technical data” are listed on the Munitions List (USML), 22 CFR 121.7
The White House currently is implementing an export control reform initiative. In the short run many U.S. Munitions List
(USML) items will be moved to the Commerce Control List (CCL). Ultimately the objective is to have one control list.
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Fundamental Research, as defined by National Security Decision Directive NSDD 1898 , is: “[b]asic and
applied research in science and engineering, the results of which are ordinarily published and shared
broadly within the scientific community, as distinguished from proprietary research and from industrial
development, design, production, and product utilization, the results of which ordinarily are restricted for
proprietary or national security reasons.”
The Fundamental Research Exclusion (FRE) applies to information (but not to export-controlled physical
items or software) resulting from “basic and applied research in science and engineering” conducted at
an “accredited institution of higher education” (EAR) or “higher learning” (ITAR) “located in the United
States” that is “ordinarily published and shared broadly within the scientific community” and that is not
“restricted for proprietary reasons or specific national security reasons” (EAR) or subject to “specific U.S.
Government access and dissemination controls” (ITAR). Under certain conditions, industry may have the
FRE under EAR for basic research only; however this does not apply to projects or data whose results are
not going to be in the public domain.
Restrictive Clauses are contract clauses that limit the conduct of research, access to technical
information or the dissemination of research results for national security purposes.
4.2 Problem Statement
Contract clauses imposing restrictions on the conduct of research, access to technical information,
or the dissemination of research results are problematic for universities even if a university will allow
export control work on campus or by their faculty. Such restrictions will almost always cause delays in the
negotiation of contracts unless addressed from the beginning of discussions between the parties. The
best way to avoid such delays is to identify requirements upfront as the relationship is under negotiation:
universities should be clear when submitting a proposal if the work anticipated is considered fundamental
research and industry sponsors should disclose upfront any restrictions on access or dissemination
contained in the prime contract.
DoD recognizes the benefit of protecting fundamental research when appropriate and has mandated that
contracting officers remove restrictions on publication and dissemination when research is fundamental.
Early in the Obama administration, Under Secretary of Defense Ashton Carter issued a memorandum
to defense agencies reiterating that the publication of fundamental research results should remain
unrestricted. The document reinforces and expands upon guidance originally issued in 2008 by thenUnder Secretary John Young and reaffirms the commitment of DoD leaders to compliance with NSD 189.
The memo states that “DoD must not place restrictions on subcontracted unclassified research that
has been scoped, negotiated, and determined to be fundamental research within the definition of NSDD
189.”9
National Security Decision Direction (NSDD) 189 was originally issued in September 1985 during the Reagan administration
and reaffirmed in all subsequent administrations.
9
The memo is available at http://www.aau.edu/publications/reports.aspx?id6900.
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4.3 Publication Restrictions
In general, educational institutions and other non-profits will not accept award terms that allow the
sponsor to determine whether, what, or when the awardee can publish results of a federally funded
project. Such restrictions, if accepted, impinge on academic freedom, one of the cornerstones of
academia and violate the public benefit mission of the university. Furthermore, acceptance of publication
restrictions can endanger an institution’s ability to claim the fundamental research exclusion (FRE) and
subject the university to difficult compliance requirements under export control regulations.
The restriction most frequently encountered by universities (either as a subcontractor or as the prime)
is Defense Federal Acquisition Regulation Supplement (DFARS) Clause 252.204-7000 - Disclosure of
Information. DFAR 252.204-7000 requires that a government contracting officer approve the release of
any unclassified information pertaining to a contract and that the clause be included in all subcontracts.
The result of the approval requirement is that universities will no longer be eligible for the FRE and export
licensing may be necessary for foreign national participation in research. In most cases, DoD policy can
be invoked to remove/neutralize DFAR 252,204-7000 if funded by 6.1 funds (Basic Research or 6.2
funds (Applied Research) at universities.
Publication Clauses - Strategies
Many institutions may be willing to accept a requirement to submit publications for the sponsor’s timelimited period for review and comment in advance of publication. This review is usually to allow the
sponsor an opportunity to identify the sponsor’s intellectual property or proprietary information that
may have been inadvertently included in the proposed publication. The institution may even be willing to
accept a modest delay in publication, at the sponsor’s request, in order to allow time to submit a patent
application or otherwise protect the identified intellectual property. Such delay is normally no more than
60-90 days, although this is dependent upon institutional policy. These are not considered publication
restrictions for the purposes of this requirement as they are relatively standard among non-profit
institutions. (Note: Commerce dual use export regulations (15CFR734.8) permit a reasonable delay in
publication for sponsor review of intellectual property or proprietary data). However, acceptance of a term
that allows for the sponsor to approve publications, or which allows for excessive delays in publication
would be considered a publication restriction for purposes of this requirement.
Different universities use a variety of strategies for dealing with DFAR 252.204-7000 in flow-downs,
including obtaining of waiver of approval for university fundamental research, satisfying the clause with
the contracting officer’s prior written authorization, or negotiating a local deviation; or in the case where
a university is a subcontractor, setting up a separate contract direct from the government without the
clause. Universities and industry often work collaboratively to craft a university Statement of Work that
will clearly qualify for the FRE, and work with the government to ensure restrictive clauses do not flowdown to the university.
4.4 Foreign National Restrictions
Many universities will not accept awards that limit participation on a project based on the person’s
citizenship because their policies prohibit discrimination against an individual on the basis of a number
of personal factors, including but not limited to race, gender, ethnicity, age. These prohibitions against
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discrimination also apply to the selection of participants in research projects. Universities expect to
select their researchers for project participation on the basis of merit and the ability to contribute
to the research. Additionally, acceptance of restrictions on access to contracts based on a person’s
citizenship or nationality may also jeopardize the fundamental research exclusion under the export control
regulations.
There are no foreign national restrictions or approval clauses in the FAR or DFAR. Classified contracts
must comply with National Industry Security Policy Operating Manual DOD 5220.22-M. However, there can
be flow-down problems (1) when a government agency or a prime contractor crafts local clauses requiring
pre-approval for participation of foreign nationals or prohibits participation of foreign nationals or (2) if
FAR 52.204-2 Security Requirements is included in an agreement. FAR 52.204-2 warns of a potential
change in classification level during the conduct of a contract. This potential change could result in a
foreign national restriction for the contract. The clause has an approved alternative (Alt 1) for institutions
of higher education. Alt 1 allows for termination of the contract if the government determines the work
becomes classified after initiation of the work under the contract.
Foreign Nationals - Strategies
Primes and subcontractors should carefully review the prime agreement and the related subcontract
for foreign national clauses. Sometimes what looks like a foreign national restriction clause is just an
employment verification clause or a provision only allowing traineeship or similar funding to be used to
support U.S. citizens. Some universities object to employment verification clauses such as background
checks to ensure employment eligibility10 that implement amended Executive Order 12989. If the contract,
however, does require approval of foreign nationals for performance on the contract universities could
consider the following strategies:
•Request removal of the clause because such approvals might nullify the FRE.
•Negotiate a waiver of the prime contract clause to the university’s portion of the work making clear the
fundamental nature of the university’s effort.
•Refer to the UIDP Export Control Contract Accord for additional strategies.
4.5 Intellectual Property Restrictions Affecting Export Controls11
Some agencies include intellectual property restrictions in their awards to universities. Such restrictions
not only harm a university’s basic mission of ensuring the open exchanges of ideas and public access
to research results, but they prevent universities from claiming the FRE from export controls. If a
university is unable to reserve rights to the products of its research, its ability to publish results might
be limited. This, in turn, can prevent the university from using the FRE. As a result, assigning ownership
of intellectual property may require institutions to secure export licenses from the State Department or
Commerce Department.
Some funding agencies (see Section 3.6.4) are unwilling to follow the standard FAR prescription for
the use of Alternative IV to FAR 52.227-14 when engaging with universities. Alternate IV allows the
However, government provisions under e-Verify are mandatory flow-downs (FAR case 2007-013, Employment Eligibility Verification)
11
Refer to the UIDP Export Control Contract Accord for additional strategies.
10
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universities to assert copyright in any data first produced in the performance of the contract. Without
Alternative IV, universities cannot automatically claim copyright and must obtain permission from the
contracting officer to disseminate the work product. In other cases, a federal agency may require the
university to assign ownership in software to the agency when software is the main deliverable under the
contract. In such a circumstance, a university that publishes a paper in a journal may not be able to claim
the FRE since results can only be considered “normally publishable” if the software also is released.
Without the copyright, the university would not be able to do so. There are also instances where the
sponsor uses the FAR (52.227-17) or DFARS (252.227-7020) Special Works clause, or the prime contract
includes “work-made-for-hire” language, both of which require assignment of ownership of university
created intellectual property to the government.
Intellectual Property and Fundamental Research - Strategies
To preserve the FRE, universities should request Alt. IV to FAR 52.227-14, for software or removal or
modification of special works clauses that require universities to assign intellectual property to other
parties.
4.6 Export Controls
Universities have seen a marked increase in the number of award terms that mention export controls.
The issue with many of these clauses as pointed out in the report Restrictions on Research Awards:
Troublesome Clauses 2007/200812 is that the “generality of the provisions can cause difficulty for both
companies and universities in knowing how the provisions apply and specific implications of the terms.”13
Such clauses often put universities and companies on notice that they are subject to export control
laws, but often do not highlight that the anticipated research is fundamental, and therefore, would not
be controlled by the regulations. Other clauses put universities on notice that they must identify any
restricted deliverables even when the proposed research is fundamental. The end result is the creation of
an environment of uncertainty—and if such clauses are accepted, universities must take additional steps
to ensure compliance with the clauses, such as putting technology control plans in place.
Export Controls - Strategies
If export clauses are included in the contract, a good approach is to agree that the parties will comply
with the applicable provisions of the EAR and ITAR, and as such, observe that Fundamental Research
as defined in the regulations is excluded from the EAR/ITAR scope. For example, the parties might use
language similar to the following:
<Parties> agree to comply with the EAR and ITAR as applicable to their activities under <contract
name>. In accordance with 15 CFR 734.8(b) and/or 22 CFR 120.11(a)(8), fundamental research is
not subject to EAR and ITAR.
4.7 Confidentiality
The FRE is not available for proprietary or confidential information that is subject to an agreement
restricting the recipient’s ability to disclose that information. In addition, some, but not all, such
information may require compliance with export laws.
Restrictions on Research Awards: Troublesome Clauses 2007/2008, A Report of the Council on Government Relations
(COGR) and the Association of American Universities (AAU) July 2008.
13
Id, p14
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Confidentiality and Fundamental Research - Strategies
If proprietary or confidential information is accepted, universities must work with their researchers to keep
the proprietary and confidential information as separate as possible from their research project. In order
to maintain the FRE, the universities should consult with their export compliance office and their counsel
to ensure that the information is sufficiently tangential so that it will be possible to exclude any reference
to it in the publication of research results and others can work on the project without having access to the
confidential information.
5.0 LIABILITIES AND INDEMNIFICATION
5.1 Liability
A liability is the condition of being subject to a legal obligation to make good on any loss or damage that
results from a transaction or during the course of business operations. Liability is a comprehensive term
that includes a legal responsibility for one’s acts or omissions and addresses the failure to perform or
deliver or breach terms of an obligation. Federally sponsored subcontracts include many terms that may
affect a party’s liability, including but not limited to, Indemnification, Choice of Law, Warranty, Liquidated
Damages, and Termination.
5.2 Indemnification
In an indemnity clause, one party promises to protect another party from the legal or financial
consequences of a contractually specified event. It includes a requirement to make a party to a contract
“whole” again should that contractually-specified event occur. A typical indemnification clause could include
protection from (a) subcontractor’s performance products; (b) claim by a third party that the subcontractor’s
work infringes on the third party’s intellectual property; (c) subcontractor’s violation of law; and (d) any
breach of subcontract terms. Often the indemnification clause will require the indemnitor (the party providing
the indemnification) to pay the legal fees of the indemnitee (the party being indemnified).
If the indemnification clause contains a “hold harmless” provision, it relieves the indemnitee of all liability
arising out of the triggered event. The indemnitee is in effect relieved from all obligations with respect to a
risk or loss, even if it is partially responsible. Often indemnify and hold harmless clauses are considered
synonymous, but hold harmless places all responsibility on the indemnitor. Some courts suggest that
“hold harmless” is broader than indemnify because it prevents a seller, for example, from holding a buyer
responsible for claims arising out of a buyer’s own negligence. Therefore it is advisable to remove hold
harmless terms from any indemnification clause and to seek legal counsel to determine the effect of these
provisions on the parties.
5.2.1 Problem Statement
Most public (state) universities are prohibited from providing an indemnification for several reasons. First,
indemnification provisions may violate the state constitution prohibition against pledges of the state’s
credit. Second, indemnification provisions may violate the prohibition against gratuities by the state, which
prohibits state entities from granting any gratuity to a third party or forgiving any debt owed to the public.
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Third, indemnification provisions are considered an unauthorized attempt to contractually waive the state’s
sovereign immunity, wherein a suit may not be maintained in the courts against a state entity without the
express consent of the state.
While private universities are not necessarily subject to the same legal constraints, most also will not
agree to provide indemnification in order to protect the financial integrity of the institution. The nature and
extent of what a university may agree to or require depends significantly on the nature of the collaboration
and the responsibilities of the parties. Generally, if a university agrees to indemnify the other party, it
would be limited to actual costs based on their own negligent acts or omissions, and would require prompt
notice, reasonable cooperation and use of their own legal counsel. (Refer to the UIDP Contract Accords for
additional information.]
Indemnification - Strategies
•If the indemnity clause cannot be negotiated out of the contract, an alternative approach for a public
university is to insert this phrase, “only in a manner and to the extent permitted by (Fill in State) state law”
at the end of each indemnity clause/statement.
•To limit the university liability, consider the use of a Limitation of Liability clause to limit the university’s
financial risk. The Limitation of Liability clause could be linked to the insurance requirements of the
contract, compensation received from the buyer, the total contract value, or some other logical amount.
•Include a clause that specifically excludes liability for indirect consequential and special damages. For
example: In no event shall either party be liable to the other for any punitive, exemplary, special, indirect,
incidental or consequential damages (including, but not limited to, lost profits, lost revenues, lost business
opportunities, and loss of use or equipment down time), regardless of the legal theory under which such
damages are sought, and even if the parties have been advised of the possibility of such damages or loss.
5.3 Warranties
5.3.1 Definition
A warranty is a promise or affirmation given by the contractor to the government regarding the nature,
usefulness, or condition of the supplies or performance of the services furnished under the contract.
5.3.2 Problem Statement
In accordance with FAR 46.702 (a), the principal purposes of a warranty in a government contract are to (i)
delineate the rights and obligations of the contractor and the government for defective items and services
and (ii) to foster quality performance. Generally, a warranty should provide for the government’s contractual
right for the correction of defects notwithstanding any other requirement of the contract pertaining to
acceptance of the supplies or services by the government, and a stated period of time by the government
to assert a contractual right for the correction of defects. In accordance with FAR 46.705, with noted
exceptions, warranties shall not be used in cost reimbursement contracts.
Inspection clauses generally provide for the government’s acceptance of the supplies or services and
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the contractor’s re-performance if the government determines the supplies or services do not conform to
contractual requirements. Should any of the services not meet contractual requirements, the government
may require the contractor to perform the services again, in conformity with contract requirements at no
increase in contract price (Fixed-Priced) or with no increase in fee (Cost Plus Fixed Fee). FAR 52.246-9,
Inspection Research and Development Short Form, is preferred by many Subcontractors since it does not
include a re-performance requirement.
Warranty and re-performance requirements are standard in the commercial sector where goods and services
are being sold by and are intended to be used for commercial purposes. The prices charged by commercial
entities include the costs of deferred liabilities such as warranty and re-performance. In addition,
commercial entities charge a fee (profit) on top of the price of goods/services sold which can be used, if
necessary, to cover these deferred costs. When the government procures commercial goods and services,
it expects these costs, and this expectation is expressed in the FAR. On the other hand, universities and
other non-profits perform their services at cost, they do not compete commercially, and they do not charge
fees. It is unacceptable to use warranty clauses and most inspection clauses in research contracts and
subcontracts with universities. Research, by its nature, is experimental and therefore the results cannot
be guaranteed. Furthermore, use of the warranty clause in contracts with public institutions violates the
prohibition against pledges of the state’s credit because state funding may have to be used to honor the
warranty. Universities simply don’t have the financial capacity to provide warranties and re-performance
guarantees. As a result, most universities will not accept warranty or re-performance clauses.
With respect to primes and subcontractors, industry generally will take the approach that any software,
other copyrightab le materials, designs, specifications, know-how, procedures, processes, prototypes, data,
information, inventions and any other Deliverables and Services performed under an agreement by either
party, are provided as is, without warranty of any kind, express or implied. Each party specifically disclaims
the implied warranties of merchantability and fitness for a particular purpose, and any warranty of noninfringement of patents, copyrights, or any other intellectual property right.
Each party also specifically disclaims any warranty regarding completion of the Deliverables and Services
under any statement of work, or that any prototype[s] that may be developed pursuant to an agreement will
meet any development objectives, or any requirements of either party.
Neither party will be liable for any consequential damage, lost profits, lost savings, loss of anticipated
revenue, or any exemplary, punitive, special or indirect damages, even if advised of their possibility.
Warranties - Strategies
The parties might consider using language stating that the subcontractor is responsible for exercising the
degree of skill and care required by customarily accepted good professional practices and procedures
used in scientific and engineering fields. For university subcontractors, this concept can be expressed by
asserting the subcontractor will use the skill and care consistent with academic practices and procedures in
university research. The parties might also consider including a disclaimer wherein the subcontractor rejects
any and all warranties, both express and implied, with respect to the services performed and any deliverable
that result. See the following example:
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DISCLAIMER: The Parties make no express or implied warranty as to the conditions of the research,
inventions, technical data, or products exchanged, made, or developed under this Agreement, or the
ownership, merchantability, or fitness for a particular purpose, technical feasibility, or freedom from
infringement of intellectual property rights of the research, inventions, technical data, or products. Neither
Party shall be liable for lost profits, lost savings, special, consequential, incidental, or other indirect
damages, even if such Party is made aware of the possibility thereof.
FAR 52.246-5 - Inspection of Services – Cost Reimbursement, and FAR 52.246-8 - Inspection of Research
and Development – Cost Reimbursement allow the government to terminate for default and therefore
should not be accepted by universities, and cannot be accepted by public universities. Universities prefer
FAR Clause 52.246-9, Inspection of Research and Development-Short Form, since it does not include
a Termination for Default provision. Warranty clauses should not be included in a cost reimbursement
subcontract even if it is included in the prime contract.
5.4 Liquidated Damages
5.4.1 Definition
Liquidated Damages are used to compensate the government for probable damages. FAR 52.211-11,
Liquidated Damages—Supplies, Services or Research and Development, may be used in fixed priced
solicitation and contracts (including R&D).
5.4.2 Problem Statement
Liquidated Damages are not punitive and therefore the rate must be a reasonable forecast of just
compensation for the harm that is caused by late delivery or untimely performance of the contract.
Liquidated Damages, including other indirect or incidental type damages, include expenses directly
attributable to a breach. State universities are prohibited from accepting Liquidated Damages and
incidental/indirect damages clauses because payment would be a violation of a state’s constitutional
gratuities clause. Note that often consequential/specialty damages (i.e., loss profits) are explicitly excluded
from any liability, with terms to reflect that the university shall not be liable for any business expense,
machine down time, loss of profits, special, exemplary or consequential damages, or any claims or demands
relating to an Agreement.
Typically, prime contractors would not seek Liquidated Damages nor would agree to them for a R&D project.
Liquidated Damages - Strategies
Delete Liquidated/Incidental Damages clauses and use specific language that the university is not
responsible for Consequential Damages (i.e., loss profits.)
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6.0 CHOICE OF LAW
6.1 Definition
Choice of Law is term of a contract in which the parties specify that any dispute arising under the contract
shall be determined in accordance with the law of a particular jurisdiction.
6.2 Problem Statement
The legal/litigation system represents significant risk and exposure to liability; therefore, establishing the
proper Choice of Law terms is important to reduce this risk. Courts will generally honor the choice of law
agreed to by the parties in their contract as long as the chosen state has a substantial relationship to the
parties, and the law of the chosen state is not contrary to fundamental policy of a state that has a materially
greater interest than the chosen state in the determination of a particular issue. The Choice of Law clause
should also apply to arbitration/mediation actions. State law provides that the Attorney General has exclusive
authority over all litigation matters involving state agencies. As a result, state universities cannot accept the
governing laws of another state. Contracts with state entities are generally governed by the laws of the state
in which the public university resides. Private universities also prefer this approach.
Venue/jurisdiction, a related but separate legal concept, refers to the state in which a lawsuit must be filed.
Private and public universities are reluctant to agree on venues outside of their home state because of (i)
the need to hire outside counsel, (ii) the increased inconvenience, and (iii) the lack of control of expenses.
Primes typically prefer to have the choice of law in the state where their corporate headquarters are located
or where they are incorporated but generally agree to the law in which the university is located due to State
university policy.
Choice of Law - Strategies
The clause should include language that specifies which state’s laws will be used to govern, interpret,
and enforce all of the rights and duties of the parties arising from the contract. The jurisdiction should be
specified to show that any dispute, claim, action or suit arising out of the agreement may only be brought in
a court of competent jurisdiction in the specified state. However, the venue/jurisdiction does not necessarily
have to follow Choice of Law principles of the state in which the suit is brought or adjudicated. A subcontract
can be silent on both choice of law and venue/jurisdiction or specify a particular state for one or the other, or
both, or the contract can say that the parties will decide on a mutually agreeable location should a dispute
arise. One solution that is intended to discourage litigation is for the contract to say that the law and venue
of the state in which the defendant is located will apply. Generally, a neutral location is preferable to the
home state of the other party.
7.0 CONTRACTUAL RELATIONSHIPS: PRIVITY OF CONTRACT
7.1 Definition
Privity of Contract: a legal doctrine whereby only the parties to a contract are bound by and can enforce its
terms and conditions. The contract cannot confer rights or impose obligations to any party other the parties
to the contract.
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7.2 Problem Statement
When the government issues a contract, Privity of Contract (“privity”) applies between the government and
the prime contractor. Similarly, when the prime contractor issues a subcontract, there is privity between the
prime contractor and its subcontractor. However, generally there is no privity between the government and the
subcontractor. In practice this means that the government cannot directly contact a subcontractor without
first asking the prime’s permission (and relative to issues pertinent to the prime contract), nor may the
subcontractor directly contact the government, without first obtaining permission from the prime.
Exceptions to privity exist within the FAR. For example, the government has reach-through rights to intellectual
property based in statute (Bayh-Dole Act), which gives the government certain rights to Subject Inventions
developed with federal dollars. These rights follow the federal dollars all the way down the procurement
chain, and the government can assert its rights directly with the applicable Subcontractor. Part 27 of the FAR
indicates that the government views itself as having privity with subcontractors with regard to invention rights.
(See Section 3.5).
Several other FAR clauses address the issue of privity, including:
•Post Award Orientation (FAR 42.505) — Post award Subcontractor Conferences: Requires government
representatives to recognize privity between a prime and its subcontractor.
•Consent to Subcontracts (FAR 44.203)—Consent Limitations: prohibits the contracting officer from
approving subcontracts where the contracting officer must deal directly with the subcontractor.
•Termination Settlement—Settlement of Subcontract Settlement Proposals (FAR 49.108-1) —Subcontractor’s
Rights: states that a subcontractor has no contractual rights against the government in a situation where
the government terminates a prime contract.
•Disputes (FAR 52.233-1) states that only the prime may appeal directly to the government.
Contractual Relationship and Privity - Strategies
During the discussion of the terms and conditions, make sure the terms include a clear delineation of the
government roles in various post award activities. Problematic issues include:
•Government Approval of Deliverables. Subcontract terms should not include language that states the
government has authority to approve the university’s (acting as a subcontractor) deliverables; only the prime
has this contractual right.
•Payment of Subcontractor Invoices. Payment of invoices for costs incurred or work performed ideally should
not depend on the prime’s receipt of payment from the government. Should the government not pay the
prime, the subcontractor would have no legal recourse against the government (due to lack of privity of
contract) or the prime (relieved of the requirement to pay).
•Prime contractors, small businesses especially, will often include a condition that they do not have to pay
the subcontractor until paid by the government.
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8.0 ORDER OF PRECEDENCE
When incorporating flow-down terms in a subcontract, it is important to include an order of precedence
clause. If there is no order of precedence indicated in the subcontract, all documents incorporated into
the contract by reference or as attachments or exhibits have the same priority as the Schedule (Part
I, Sections A-K of the Uniform Contract Format, FAR 15.204-2). In the event of a conflict, for example
between the terms negotiated by the parties and the FAR clauses incorporated by reference, the matter
would be decided in accordance with the disputes clause. Keep in mind that an order of precedence
clause only protects against conflicting terms; it does not affect additional terms contained in one part of
the contract but not in another. Therefore, any topics addressed only in an exhibit and not in the Schedule
would still be binding.
Note that FAR 52.215-8, Order of Precedence – Uniform Contract Format, provides the order of
precedence only for government contracts. If included in the flow-downs, it would only apply to the
Prime Contract Terms and Conditions and would not resolve conflict between the flow-downs and the
Subcontract Schedule.
9.0 TERMINATION CLAUSES
9.1 Definitions
Termination for Convenience is the exercise of the government’s rights to completely or partially terminate
the performance of work under a contract when it is in the government’s best Interest.
Termination for Default is the exercise of the government’s right to completely or partially terminate a
contract because of the contractor’s actual or anticipated failure to perform its contractual obligations.
Christian Doctrine is the principle that mandatory contract clauses addressing “deeply ingrained public
procurement policy” are incorporated into the contract as a matter of law. These mandatory clauses
are considered as being included in every contract, even if inadvertently omitted by the government
contracting officer. The doctrine was first established in a case involving a government termination for
convenience.
9.2 Problem Statement
The FAR includes several versions of termination clauses, covering a wide spectrum of contracting
activities. Proper termination clauses consider the purpose of the contract (e.g., R&D, supply, service),
the nature of the contractor (e.g., for-profit, not-for-profit, educational institution, state) and the method
of contract financing (e.g., fixed-price, cost reimbursement, time and materials). Government contract
recipients should carefully review the specific government termination clauses contained in government
contracts for appropriateness, in light of exposure to potential liability and from an overall risk
management view.
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In the event of a Termination for Convenience, the primary liability for the contractor is recovery of its
costs or termination expenses. Recoverable costs include the cost of preparing the termination proposal,
settlement of subcontracts, disposition of Contractor Acquired Property or Government Furnished Property,
employee severance, etc.
In the event of a Termination for Default, the contractor liabilities are extremely significant. The
Termination for Default clause contains substantial penalties in the event the government determines
that a default event has occurred. The government is not liable for the contractor’s costs on undelivered
work and is entitled to the repayment of advance and progress payments. Also, the contractor is liable to
the government for damages and any excess costs incurred by the government should it re-procure the
supplies and services similar to those terminated for default.
Universities, due to statutory and/or financial structure issues, do not have the capability or authority to
establish contingency funds for the purposes of payment of damages, re-procurement costs, or other such
unfunded liabilities created by the requirements contained in most government termination clauses. State
universities in particular do not have statutory authority to commit the resources of the respective state
government since such a commitment would violate the prohibition against pledges of the state’s credit.
Termination - Strategies
In accordance with FAR 49.502(d), FAR 52.249-5 (Termination for Convenience of the Government
Educational and Other Nonprofit Institution) is the appropriate termination clause for R&D work with an
educational or non-profit on a no-profit basis. FAR 52.249-5 is the preferable termination clause that
should be passed down to educational and other non-profit organizations performing R&D work. Most
organizations falling into this category will accept only this clause as the governing termination provision
applicable for any R&D contract or agreement issued with the university as a prime contractor or a
Subcontractor.
In lieu of a Termination for Default clause, consider using a general termination clause, which requires
the government or the prime to reimburse the university subcontractor for all costs that it has accrued or
encumbered up to the actual date of termination.
Prime contractors routinely will include a protective provision that the prime can terminate the subcontract
if the government terminates the prime contract for convenience. Additionally, the prime may also insert
a criteria in the termination for convenience clause that allows termination if it deems a subcontractor’s
work to be no longer necessary. Keep in mind that regardless of whether or not a Termination for
Convenience clause is expressly included in the prime contract, it is imputed in every government
contract.
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10.0 WAGE RATE CONTRACT REQUIREMENTS
10.1 Definitions
Davis-Bacon Act: requires all contractors and subcontractors performing work on federal construction
contracts in excess of $2000 to pay laborers and mechanics not less than the prevailing wage rates
and fringe benefits for corresponding classes of laborers and mechanics employed on similar projects
in the area. Davis-Bacon prevailing wage provisions also apply to approximately 60 related federal laws
(e.g. Federal Highway Act, Water Pollution Control Act) under which federal agencies assist construction
projects through grants, loans, loan guarantees or insurance.
Walsh-Healey Public Contracts Act: requires contractors engaged in the manufacturing or furnishing
of materials, supplies or equipment to the government under contracts exceeding $10,000 to pay
employees the federal minimum wage for all hours worked plus time and a half for hours worked over 40
in a workweek.
Service Contracts Act: applies to contracts for services in excess of $2500. It requires that service
employees be paid no less than the prevailing wage rates and fringe benefits in the locality (or a
predecessor contractor’s collective bargaining agreement). Minimum wage requirements apply to
contracts under $2500.
Contracts Work Hours and Safety Standards Act: requires contractors to pay laborers and mechanics
at least one and a half times their basic rates of pay for all hours worked over 40 in a workweek (and
prohibits unsanitary, hazardous, or dangerous working conditions).
Copeland “Anti-Kickback” Act: prohibits inducing an employee to give up any part of his/her compensation
to which he/she is entitled under a contract of employment.
10.2 Problem Statement
A number of statutory requirements require payment of prevailing wage rates under federal contracts. All
require that the wage rate requirements be passed down to subcontractors. They are administered and
enforced by the Wage and Hour Division of the U.S. Department of Labor (DOL). All have recordkeeping
and reporting requirements.
The three statutory requirements most frequently encountered by contractors are the Davis-Bacon Act,
which applies to construction projects; the Walsh-Healey Public Contracts Act, which applies to contracts
for manufacture of materials, supplies, or equipment; and the Service Contract Act, which applies to
contracts to provide services to the U.S. Government. In addition, two other statutory requirements may
apply: (For further information see www.dol.gov/dol/topic/wages/govt.contract.htm).
The wage rate requirements are implemented in Part 29 of the CFR. Contract requirements are
implemented in Section 22 of the Federal Acquisition Regulations (FAR). The FAR emphasizes the
importance of maintaining sound labor relations. It encourages contractors to cooperate with the federal
and state agencies responsible for enforcing labor requirements including those dealing with wages and
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hours. It defines a workweek as generally 40 hours and discourages use of overtime. It cites the statutes
noted above and the responsibility of the Department of Labor (DOL) for wage rate determinations, and
the procedures for requesting wage rate determinations. Contracting officers are instructed to incorporate
the appropriate wage determinations and designate the work in which they apply. Modifications,
notifications and appeals of wage determinations also are addressed. Agencies are responsible
for enforcement of labor standards and compliance reviews. Violations may result in withholding or
suspension of contract payments with appeals to DOL.
As indicated, federal contract provisions regarding wage rates are based on statutory requirements.
While differences in interpretation of the applicability of specific wage rates can arise, the requirements
cannot be waived. In addition to contractual remedies, violations may result in significant fines and
penalties.
10.3 Davis-Bacon Act
The Davis-Bacon Act is addressed in FAR 22.404 and implemented by FAR contract clause FAR 52.2226. Compliance is addressed in FAR 52.222-13. FAR 52.222-11 contains the flow-down requirements.
Universities rarely serve as prime contractors for federal construction contracts. However, some building
construction, alteration or repair occasionally may occur under federal research awards or sub-awards to
universities. In such cases universities must apply the Davis-Bacon wage rate provisions to contractors
that perform such work.
10.4 Walsh-Healy Act
FAR 22.6 contains the Walsh-Healey Public Contract Act prescriptions, which are implemented by
FAR 52.222-20. Universities rarely manufacture or furnish materials, supplies or equipment to the
government. Therefore the Walsh-Healy requirements seldom are applicable to universities.
10.5 The Service Contract Act
The Service Contract Act prescriptions contained in FAR 22.10 discuss a number of statutory exemptions
(e.g., works covered by other Acts, transportation and public utilities) as well as exemptions made by
the Department of Labor (e.g., contracts for maintenance of certain types of equipment, conference
services.). The FAR also has examples of covered services (such as motor pool operation, custodial
services, snow and trash removal). It distinguishes equipment repair from remanufacture (which is
covered by Walsh-Healey). FAR 52.222-41 implements the Service Contract Act. The Copeland Act
is addressed in FAR 22.403-2 and implemented by clause 52.222-10. The Work Hours and Safety
Standards Act prescription is at FAR 22.403-3 and implemented by clause FAR 52.222-4.
Universities may perform covered services that fall under the Service Act requirements, although the
performance of these services may only be incidental to the contract’s purpose. The Act may not apply
in such cases. Typically universities are already in compliance with most Service Act requirements, e.g.,
minimum wage, safe working environment, three year records retention, collective bargaining agreement
provisions. However, university payroll systems may not be set up to comply with the prevailing wage
standards of the Act. Acceptance of these requirements may result in administrative burdens to assure
compliance. When encountering these requirements in a flow-down, universities may need to assess
compliance on a case-by-case basis.
FOR THE INDUSTRIAL RESEARCHER
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Wage Rate Contract - Strategies
If universities receive these requirements in a federal flow-down, they may seek to negotiate these
provisions out of the contract (although they also may be viewed as self-deleting). Check the prescription
for each clause and negotiate out if it is not appropriate for the contract type (i.e., R&D versus
construction).
11.0 SMALL BUSINESS INNOVATION RESEARCH (SBIR), SMALL BUSINESS TECHNOLOGY
TRANSFER RESEARCH (STTR)
The Small Business Innovation Research (SBIR) program is a highly competitive program that encourages
domestic small businesses to engage in Federal Research/Research and Development (R/R&D) that
has the potential for commercialization. Through a competitive awards-based program, SBIR enables
small businesses to explore their technological potential and provides the incentive to profit from its
commercialization.
The Small Business Technology Transfer Research (STTR) program provides joint venture opportunities
between small businesses and nonprofit research institutions. The STTR program requires the applicant
small business to formally collaborate with a research institution in Phases I and II. STTRs are intended
to bridge the gap between the performance of basic science and commercialization of resulting
innovations. Only small for-profit businesses located in the U.S. are eligible to apply to these programs.
Both programs support research that may lead to a commercial product as compared to theoretical or
basic research.
There are, however, key differences between these programs. The SBIR program allows subcontracts
within specific limits described in the solicitations (33% in Phase I and 50% Phase II) while the STTR
program specifies a minimum distribution of funding between the small business (at least 40%) and an
eligible research institution such as a university, (30%) with the remainder distributed as required for the
particular project.
The principal investigator must be primarily employed by the small business (at least 51%) in the SBIR
program, while the primary employment of the principal investigator for the STTR program may be with the
small business or the research institution depending on the federal agency providing the funding.
Various federal agencies set aside funds for the SBIR/STTR programs. Most provide either grants or
contracts though HHS and ED issue both grants and contracts:
•Department of Agriculture, SBIR, grants only
•Department of Commerce, SBIR, contracts only
•Department of Defense, SBIR/STTR, contracts only
•Department of Education, SBIR, grants and contracts
•Department of Energy, SBIR/STTR, grants only
•Department of Health and Human Services, SBIR/STTR, grants and contracts
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•Department of Homeland Security, SBIR, contracts only
•Department of Transportation, SBIR, contracts only
•Environmental Protection Agency, SBIR, contracts only
•National Aeronautics and Space Administration, SBIR/STTR, contracts only
•National Science Foundation, SBIR/STTR, grants only
With few exceptions, the provisions discussed throughout this document also apply to grants or contracts
issued under the SBIR or STTR programs. The programs present interesting challenges for intellectual
property negotiation and often for conflict of interest management particularly in situations in which
the small business is a spin-off from a university or a licensee of university-developed technology and
requires the assistance of the university where the technology originated to perform the SBIR or STTR
award.
Generally the small business may elect to retain title to subject inventions made in performance of
awards under these programs. However, this does not override the rights of the university sub-awardee
under the Bayh-Dole Act. Negotiation between the small business and the university sub-awardee is
required to assure that legal and regulatory requirements are met while providing the small business
sufficient rights in intellectual property made by the university to enable the small business to achieve
the commercialization objectives of these programs. It should be noted that the STTR program requires
a written agreement between the small business and the university that describes the allocation of
intellectual property rights between the parties.
Small Business - Strategies
Companies should seek assistance from the many sources available to them such as the Small Business
Administration in order to thoroughly understand the regulatory and other obligations they are undertaking
when accepting an SBIR or STTR grant or contract. Universities should remember that small businesses
may be inexperienced in federal awards and should provide advice and assistance to the small business
as needed and fully comply with applicable provisions of their sub-award.
If the proposed arrangement between the small business and the university presents a conflict of
interest, the university should be prepared to disclose the conflict and provide appropriate management
under applicable federal regulations and policies.
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GLOSSARY
Bayh-Dole Act: 1980 legislation giving universities, small businesses and non-profits intellectual property
control over inventions and other intellectual property resulting from government funding. In 1983 that
coverage was extended to all Government-funded projects.
Christian Doctrine: a 1963 United States Federal Acquisition Regulation (FAR) case that has become
known as the Christian Doctrine. The case held that standard clauses established by regulations must be
considered as being in every federal contract. Because the FAR is the law, and government contractors
are presumed to be familiar with the FAR, the standard clauses are treated as included in every contract,
even if inadvertently omitted by the government contracting officer.
Code of Federal Regulations (CFR): is an annual codification of the general and permanent rules published
in the Federal Register by the executive departments and agencies of the federal government. The
purpose of the CFR is to present the official and complete text of agency regulations in one organized
publication and to provide a comprehensive and convenient reference for all those who may need to know
the text of general and permanent federal regulations. The CFR is keyed to and kept up-to-date by the
daily Federal Register. These two publications must be used together to determine the latest version of
any given rule A full set of the CFR consists of approximately 200 volumes.
Commercial Cost Principles (FAR Part 31.2): establishes principles for determining allowability costs
applicable to federal contracts with industry.
Copyright: a form of protection granted by law for original works of authorship fixed in a tangible medium
of expression. Copyright covers published and unpublished works.
Cost Accounting Standards (CAS): federal regulations designed to achieve uniformity and consistency in
the accounting principles followed federal contractors. There are 19 standards that apply to industry, and
four standards that apply to universities.
Cost Reimbursement Contract: a contract that provides for payment of allowable incurred costs, to the
extent prescribed in the contract. These contracts establish an estimate of the total cost for the purpose
of obligating funds and establishing a ceiling that the contractor may not exceed without approval of the
sponsor. Cost reimbursement contracts are suitable for use only when uncertainties involved in contract
performance do not permit costs to be estimated with sufficient accuracy to use any type of fixedprice contract, such as for research and development work, and particularly with nonprofit educational
institutions or other nonprofit organizations.
Data: recorded information, regardless of form or the media on which it may be recorded. The term
includes technical data and computer software. The term does not include information incidental to
contract administration, such as financial, administrative, cost or pricing, or management information.
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Davis-Bacon Act: requires all contractors and subcontractors performing work on federal construction
contracts in excess of $2000 to pay laborers and mechanics not less than the prevailing wage rates and
fringe benefits for corresponding classes of laborers and mechanics employed on similar projects in the
area. Davis-Bacon prevailing wage provisions also apply to approximately 60 related federal laws (e.g.
Federal Highway Act, Water Pollution Control Act) in which federal agencies assist construction projects
through grants, loans, loan guarantees or insurance.
Federal Travel Regulation (FTR): establishes the travel and relocation policy for federal employees. The
FTR may be applied to federal contractors via a specific contract clause.
Fixed-Price Contract: a contract that provides for a price that is not subject to any adjustment on the
basis of the contractor’s cost experience in performing the contract. This contract type places upon
the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides
maximum incentive for the contractor to control costs and perform effectively and imposes a minimum
administrative burden upon the contracting parties. A firm-fixed-price contract is suitable for acquiring
commercial items or for acquiring other supplies or services on the basis of reasonably definite functional
or detailed specifications (see Part 11) when the contracting officer can establish fair and reasonable
prices at the outset, such as when there is adequate price competition.
Indemnification: to guarantee against any loss which another might suffer. For example, two parties settle
a dispute over a contract, and one of them may agree to pay any claims arising from the contract, holding
the other harmless.
Inspection Clause: generally provides for the government’s “acceptance” of the supplies or services and
the contractor’s “re-performance” if the government determines the supplies or services do not conform
to contractual requirements.
Invention: any invention or discovery that is or may be patentable or otherwise protectable under title 35
of the U.S. Code, or any variety of plant that is or may be protectable under the Plant Variety Protection
Act.
OMB Circular A-21 “Cost Principles for Educational Institutions”: establishes principles for determining
the allowability of costs applicable to federal grants, contracts and other agreements with educational
institutions.
Patent: a right granted by the U.S. Patent and Trademark Office to exclude others from making, using,
offering for sale, or selling an invention.
Patent Infringement: the making, using, offering for sale or selling of an invention without approval of the
patent holder.
Patent Infringement Indemnification: where one party agrees to protect a second party from legal action
that may be brought by a patent holder against the second party’s infringement of the patent holder’s
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invention. It is common practice in the commercial sector for a vendor to indemnify the buyer from patent
infringement that may arise from the buyer’s use of the vendor’s goods or services.
Privity of Contract: a legal doctrine whereby only the parties to a contract are bound by and can enforce its
terms and conditions so that only the parties and no third parties can sue or be sued under the terms of
the contract.
Service Contracts Act: applies to contracts for services in excess of $2500. It requires that service
employees be paid no less than the prevailing wage rates and fringe benefits in the locality (or a
predecessor contractor’s collective bargaining agreement). Minimum wage requirements apply to
contracts under $2500.
Technical Data: recorded information, regardless of the form or method of recording, of a scientific or
technical nature (including computer software documentation). The term does not include computer
software or data incidental to contract administration, such as financial and/or management information.
Termination for Convenience: a termination clause that allows the government to terminate with very little
liability and converts what otherwise would be a breach into an administrative claim. Additionally, the
clause seriously circumscribes the rights of the contractor primarily by limiting the extent of recovery. The
concept of fault is of only minor significance in instances of termination for convenience.
Termination for Default: a termination clause that contains substantial penalties in the event the
government determines that a default event has occurred. Therefore, each contract recipient should
exercise due diligence to verify that the proper termination clause has been prescribed, to carefully
consider issues associated with any lower-tier subcontractors and to ensure that the recipient has
carefully performed a cost-benefit and risk analysis in order to be certain it is prepared to handle the
repercussions of termination by the federal government.
Time and Materials Contract: These agreements are based on budgets that include direct labor hours at
specified fixed hourly rates that include wages, overhead, profit, and general and administrative expenses
and actual material cost.
Walsh-Healey Public Contracts Act: requires contractors engaged in the manufacturing or furnishing
of materials, supplies or equipment to the government under contracts exceeding $10,000 to pay
employees the federal minimum wage for all hours worked plus time-and-a-half for more than 40 hours
worked in a workweek.
Warranty: promise or affirmation given by the contractor to the government regarding the nature,
usefulness, or condition of the supplies or performance of the services furnished under the contract.
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REFERENCES
41CFR300-304: Federal Travel Regulations
FAR 31.2: Commercial Cost Principles
FAR 31.303: Reference within the FAR that incorporates OMB Circular A-21 “Cost Principles for
Educational Institutions”
FAR 52.230-5: FAR Clause that references the 4 Cost Accounting Standards applicable to educational
institutions
FAR 52.216-7: Allowable Cost and Payment: This clause is prescribed for use in cost type federal
contracts
FAR 52.227-1: “Authorization and Consent”: Basic FAR clause that provides for the government to
indemnify contractors for the contractor’s patent infringement when providing non-commercial services to
the government.
FAR 52.227-3: “Patent Indemnity”: Basic FAR clause that provides for the contractor to indemnify the
government for patent infringement in commercial contracts.
FAR 52.227-11: “Patent Rights”: Basic FAR clause that states the government’s patent policy as it
relates to federal contracts.
FAR 52.227-14: “Rights in Data – General”: Basic FAR clause that states the government’s data and
copyright policy as it relates to federal contracts.
FAR 27.3: “Patent Rights under Government Contracts”
FAR 27.4: “Rights in Data and Copyrights”
DFARS 52.227.7103: “Rights in Technical Data—Noncommercial Items”
CFR, Part 29: “Labor” -- implementation of wage rate requirements
FAR 22: “Application of Labor Laws to Government Acquisitions”
FAR 22-4: “Labor Standards for Contracts Involving Construction”: General prescriptions for wage rate
requirements
FAR 22.403-2: “Copeland Act”
FAR 22.403-3: “Contract Work Hours and Safety Standards Act”
FAR 22.404: “Department of Labor Regulations”
FAR 22.6: “Walsh-Healey Public Contracts Act”
FAR 22.10: “Service Contract Act of 1965, as Amended”
FAR 52.222-4: “Contract Work Hours and Safety Standards Act—Overtime Compensation”:
Implementation of Work Hours and Safety Standards Act
FAR 52.222-6: “Davis-Bacon Act”
FAR 52.222-10: “Compliance with Copeland Act Requirements”
FAR 52.222-11: “Subcontracts (Labor Standards)”
FAR 52.222-13: “Compliance with Davis-Bacon and Related Act Regulations”
FAR 52.222-20: “Walsh-Healey Public Contracts Act”
FAR 52.222-41: “Service Contract Act of 1965”
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