FAR Flowdowns and Requirements:
Do You Understand What You’re
Getting Into?
Breakout Session # D01
Michelle M. Currier, CPCM, CFCM
Professor of Contract Management
Defense Acquisition University
Jim Kirlin, CPCM, CFCM
Senior Subcontracts Manager
Raytheon Company
Date: March 13, 2015
Time: 9:30am – 10:45am
FAR Flow Downs and Requirements:
Do You Understand
What You’re Getting Into?
2
Agenda
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The Rising Importance of the Subcontract Professional
Flow Down of Terms and Conditions
Definition of a Flow Down
Prime and Subcontractor Perspectives
Sets of Clauses
Flow Down Wording
Typical Prescriptions
Defining Subcontractor and Subcontract
Clauses Not Required to be Flowed Down
Christian Doctrine
Negotiating Flow Downs
Commercial Item Flow Downs
Ethics and Compliance Flow Downs
Resources for Determining Flow Downs
Questions
3
The Rising Importance of the
Subcontract Professional
Subcontract Managers Must be Aware of
the Unique Federal Prime Contract Requirements
• Under a U.S. government prime contract, subcontract
management is a hybrid between the company’s own
commercial subcontracting requirements and those of the
federal government.
• Subcontract managers must be proficient not only in the
purchasing and sourcing aspects of supply chain
management, but also in the unique requirements
imposed by the federal prime contract.
• These unique requirements implement the government’s
acquisition laws, regulations, and policies.
4
Flow Down of Terms and Conditions
•
Like price and contract type, terms and conditions are a risk-sharing mechanism:
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Price agreement alone does not define the business arrangement.
The price must be associated with agreement on the terms and conditions.
The government is not a party to the prime/subcontractor relationship:
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However, the government requires the flow down of terms and conditions to comply with law.
The prime contractor flows down the mandatory terms and conditions to comply with its
obligations under the prime contract.
•
Subcontracts under a government prime contract are a hybrid of industry commercial
clauses and FAR clauses, which implement federal acquisition law and regulations.
•
The primary governing body of law in the subcontracting environment is commercial
contract law (not the FAR or federal law). This generally takes the form of stateenacted versions of the Uniform Commercial Code (UCC).
See Joseph L. Cavinato, Anna E. Flynn, and Ralph G. Kaufmann; The Supply Management Handbook, seventh ed.
(New York: McGraw-Hill, 2006): 552. See also Contract Management Body of Knowledge (CMBOK), fourth ed.
(Ashburn, VA: NCMA, 2013): 18–24.
5
Definition of a Flow Down
• A flow down can be described as transferring and
translation of requirements from a prime contract into a
subcontract in support of the prime contract.
• The prime contractor’s contract manager provides the
terms and conditions to the subcontract manager.
• The contract manager usually highlights changes to
the key terms and conditions from the company
proposed terms versus the final negotiated terms. The
result is that the subcontract manager will have the
latest prime contract terms and conditions and, hence,
can assess the impact of previous terms and
conditions flowed to the subcontractor in the proposal
phase.
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Prime’s Perspective
• The prime’s tendency is to flow down as much as possible as
a risk management strategy.
• This is out of concern for being compliant to the prime
contract’s requirements. In many cases, the prime does not
see much latitude for negotiation.
• However, if overdone, this strategy can be costly in terms of
time to negotiate and to add unnecessary requirements.
Instead of forcing subcontractors to take exceptions, a better
strategy is for the prime to ask the subcontractor to identify the
terms and conditions that are increasing the proposed price.
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Subcontractor’s Perspective
• The subcontractor’s first concern is to understand what the
prime wants to flow down.
• This requires the subcontractor to understand enough about
the prime contract to determine if a flow down applies.
• The subcontractor should review the proposed clauses in the
request for proposal and identify and relay any concerns or
exceptions to the prime as early as possible.
• It is best to offer a rationale and alternatives so that the prime
will understand the impact of the proposed flow down and
ways to possibly accomplish the same result at less cost.
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Sets of Clauses
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Companies typically use sets of clauses tailored to
known variations in the procurement types.
This enables the development of flow downs
appropriate to the subcontract.
The company uses the sets as a standalone or in
combination with other sets.
This approach avoids the disadvantages of a “one size
fits all” approach in which each procurement action
would require the contract manager to tailor clauses.
By using a “building block” approach, the subcontract
manager can assemble the needed sets for a wide
variety of subcontracts.
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Typical Sets of Clauses
Set
Description
General
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Commercial—FAR Part 12
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FAR
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Defense FAR Supplement (DFARS)
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Agency Supplement
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International
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Program-Specific
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Basic for all purchases.
Fixed price.
Commercial goods and services.
No government flow downs.
Used as the “foundation.”
Standalone or used in combination.
Used when the prime contract falls under FAR Part 12, “Acquisition of Commercial
Items.”
Added to general set.
Flow downs required by the FAR.
Added to general set.
Flow downs required by the DFARS.
Added to general set.
Flow downs required by a specific federal agency FAR supplement.
Added to general set.
For international subcontracts.
Can be designed to be added to the general set or can be a standalone set for either direct
commercial sale subcontract (no U.S. government) and/or subcontract under a government
prime contract (e.g., foreign military sale).
Flow downs specific to one program, typically a large government program in which there are
many flow downs unique to the prime contract.
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Topic-Specific Sets
•
The company may also have standard sets based on the topics.
•
These sets usually provide implementing details such as systems
requirements, forms, formats, and instructions. There is no limit to
these sets.
•
A few of the more popular topics include:
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Quality
Property
Insurance
Payment
Packaging and marking
Transportation and shipping
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Custom Terms and Conditions
• There are many instruments that do not lend themselves to
standard or topic sets of terms and conditions.
• Typical custom arrangements include:
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Intellectual property and licenses,
Agreements,
Memoranda of understanding,
Memoranda of agreement, and/or
Letters of intent.
• The content of these arrangements depend on the
customs of the market and the buyer.
• These arrangements usually require legal advice because of
their unique nature.
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Facilitating Clauses
• The body of the subcontract will typically have facilitating or
enabling clauses that provide information specific to the
subcontract.
• Because of their nature, they are not usually contentious.
• Typical examples include:
– Order of precedence for the subcontract sections and clauses,
– Designation of representatives for the subcontract and for change
notification,
– Invoicing address,
– Where to send data,
– Delivery addresses,
– Government agency contact information and addresses, and/or
– Notices and warnings.
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Flow Down of T&Cs
Method
Description
Pros
Cons
Substitute Wording
Substitutes the wording
“buyer/prime/contractor”
for references to the
“government.”
Works well for the large
majority of clauses. Saves
the administrative work
and expense of changing
myriad clauses.
Does not work well for
some clauses such as
“Intellectual Property,”
“Termination,” “Protests,”
“Disputes,” “Access to
Records,” or “Inspection.”
Actual Wording
Shows clauses in full text Ease of reading and
without reference to
reduction in ambiguities.
federal clauses.
Time and expense to
establish and maintain
currency of the clauses.
Hybrid
Uses the substitute
Administratively efficient
and avoids contentious
wording method, but
substitutions.
clarifies where this
method is not followed
and provides clausespecific wording for these
differences.
Does not mean the
wording is acceptable to
the subcontractor.
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Use of “Current Version”
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Some primes state that the “current version” of the federal clauses at
the time of subcontract award will be used in the subcontract.
The advantage is that this method does not require the updating of
the clause dates in the sets of terms and conditions.
•
However, the disadvantage is that parties may not know that the
clauses changed before the subcontract award.
•
A solution to this problem is to agree on the currency of the clauses
stated in the prime contract or as of the negotiated date of the prime
contract (anticipating there is a time delay between negotiations and
award).
•
Both parties should be aware of the usage of the “current version”
language.
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How a Clause is Required to be
Flowed Down
• Clauses are generally flowed down in one of
three ways:
– By reference.
– By using the full text of the clauses.
– By applying the “substantially as follows” or
“substantially the same as” basis.
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Fill-in Information and Dates
•
Before flowing down the clauses, the prime should review the fill-in
information and the dates in the clauses because this information
may require altering in order to provide for the execution of the
subcontract.
•
For example, if the prime’s termination settlement proposal is due to
the government within one year of contract termination, then the
prime will need to require the subcontractor’s termination settlement
proposal before that (e.g. six months) to allow time for the prime to
evaluate and include the subcontractor’s proposal in its proposal.
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Typical Prescriptions
Prescription
Examples
Dollar Value
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All subcontracts regardless of dollar value.
Over the micro-purchase threshold, as defined in FAR 2.101.
Over the simplified acquisition threshold, as defined in FAR 2.101.
Small business plan requirements/thresholds.
Cost Accounting Standards requirements/thresholds.
Cost or pricing data requirements/thresholds.
Business ethics and compliance requirements/thresholds.
Subcontract Type
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Fixed-price.
Cost reimbursement.
Time and materials.
Labor hour.
Commercial
 Subcontracts for commercial items (FAR Part 12).
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Defining Subcontract and Subcontractor
•
The FAR does not include a definition of subcontract or subcontractor in Part 2,
“Definitions of Words and Terms.”
•
Instead, it first defines contract in Part 2, as follows:
A mutually binding legal relationship obligating the seller to furnish the supplies or
services (including construction) and the buyer to pay for them. It includes all types of
commitments that obligate the government to an expenditure of appropriated funds
and that, except as otherwise authorized, are in writing. In addition to bilateral
instruments, contracts include (but are not limited to) awards and notices of awards;
job orders or task letters issued under basic ordering agreements; letter contracts;
orders, such as purchase orders, under which the contract becomes effective by
written acceptance or performance; and bilateral contract modifications. Contracts do
not include grants and cooperative agreements covered by 31 U.S.C. 6301, et seq.
•
The first sentence makes it clear that a “subcontract” is a “contract” in terms of the
FAR.
– Therefore, in terms of the FAR, the term subcontract is inclusive and broad.
– This presentation uses this definition for simplicity.
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Varying Definitions of Subcontract
and Subcontractor
•
While it does not provide a specific definition of subcontract or subcontractor
in Part 2, the FAR does provide definitions of these two terms that vary by
the part of the FAR where they appear.
•
The definitions are helpful in reading that specific part.
•
Sometimes it is difficult to distinguish the significance of the variations in the
definitions among the parts.
•
Varying definitions of subcontract and subcontractor are shown in the book
to alert the reader to the differences that may arise when applying definitions
to the specific FAR parts.
•
Consult with your legal department for advice on the significance of the
differences.
•
These definitions are provided to alert the reader, but this presentation
adopts the general convention that a “subcontract” is a “contract” as defined
in FAR Part 2.
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Examples of Variations
•
As Used in FAR 3.502, “Subcontractor Kickbacks”:
– “Subcontract” means a contract or contractual action entered into by a
prime contractor or subcontractor for the purpose of obtaining supplies,
materials, equipment, or services of any kind under a prime contract.
– “Subcontractor” 1) means any person, other than the prime contractor,
who offers to furnish or furnishes any supplies, materials, equipment, or
services of any kind under a prime contract or a subcontract entered into
in connection with such prime contract; and 2) includes any person who
offers to furnish or furnishes general supplies to the prime contractor or a
higher-tier subcontractor.
•
As Defined in FAR 3.10, “Contractor Code of Business Ethics and Conduct”:
– “Subcontract” means any contract entered into by a subcontractor to
furnish supplies or services for performance of a prime contract or a
subcontract.
– “Subcontractor” means any supplier, distributor, vendor, or firm that
furnished supplies or services to or for a prime contractor or another
subcontractor
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Examples of Variations
• As Used in FAR Part 12, “Acquisition of Commercial
Items”:
– “Subcontract”…includes, but is not limited to, a
transfer of commercial items between divisions,
subsidiaries, or affiliates of a contractor or
subcontractor.
• As Used in FAR 15.4, “Contract Pricing”:
– “Subcontract” (except as used in 15.407-2) [dealing
with make or buy programs] also includes a transfer of
commercial items between divisions, subsidiaries, or
affiliates of a contractor or a subcontractor (10 U.S.C.
2306a(h)(2) and 41 U.S.C. 254b(h)(2)).
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Clauses Not Required to be Flowed
Down
Clauses Not Required to be Flowed Down
•
The following prime clauses are not required to be flowed down:
– Changes
– Stop work
– Termination
•
While these clauses are not required to be flowed down, the prime
should have clauses in the subcontract to ensure it complies with these
clauses as they relate to subcontracting.
•
For example, when the prime receives a stop work order, it must, in turn,
stop the work of its subcontractors.
•
See Chapters 19 and 29 of the Subcontract Management From A to Z
book for a further discussion.
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Christian Doctrine
•
The Christian Doctrine (based on the court case G.L. Christian &
Assoc. v. United States, 31 F.2d at 424,247) is a principle stating that
if a contract clause is required either by a statute, regulation, or
executive order, the required clause is automatically incorporated by
operation of law into an existing contract.
•
Can the Christian Doctrine be used to incorporate such clauses into
subcontracts?
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The fact that the government is not a party to the subcontract would suggest the answer is
“no.”
However, this is an evolving area.
The “four corners” of the subcontract may not contain all the clauses.
Legal advice should be sought.
Contract Management Body of Knowledge (CMBOK), fourth ed. (Ashburn, VA: NCMA, 2013): 147.
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Most Negotiated Clauses
• It is not unusual for the same issues to be the most
contentious as they carry high risk.
• The International Association for Contract and
Commercial Management (IACCM) conducts an annual
survey of the top terms negotiated.
• The next slide summarizes the top 10 terms for the years
2008–2012.
• It reflects the consistency in the high-risk areas of liability,
indemnification, changes, scope, damages, and
intellectual property.
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Most Negotiated Clauses - Ranking
Rank
Term
2011
2010
2009
2008
1
Limitation of liability
1
1
1
1
2
Indemnification
2
2
2
2
3
Price/charge/price changes
3
3
3
3
4
Scope and goals
16
12
14
-
5
Liquidated damages
6
9
9
11
6
Payment
5
6
8
8
7
Data protection/security
15
5
5
10
8
Intellectual property
4
4
4
4
9
Service level and warranties
11
7
6
7
10
Warranty
12
10
11
13
2012 Rank
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Negotiations and Resolution of Concerns
• As noted earlier, terms and conditions are a risksharing mechanism.
• It is natural for each party to want to assume the
least risk.
• However, the parties should understand the
impacts to costs for their risk positions.
• Patient and careful exchanges of views and
concerns may be required to reach
understandings that can lead to balanced
agreements.
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Flow Down of Commercial
Prime Contract Clauses
For other than commercial items
For commercial items
FAR clause for
prime contract
52.244-6, “Subcontracts for
Commercial Items”
52.215-5, “Contract Terms and Conditions Required to Implement
Statutes or Executive Orders—Commercial Items”
Flow down to
subcontracts
The prime must include the terms of
this clause, including the requirement
to further flow down the clause, in
subcontracts awarded under the
prime contract.
(Extract from 52.2125-5)
(e)(1) Notwithstanding the requirements of the clauses in
paragraphs (a), (b), (c), and (d) of this clause, the contractor is not
required to flow down any FAR clause, other than those in this
paragraph (e)(1) in a subcontract for commercial items. Unless
otherwise indicated below, the extent of the flow down shall be as
required by the clause—[nine clauses follow with the contracting
officer able to check/indicate whether another six alternate
clauses are also applicable or not]. (2) While not required, the
contractor may include in its subcontracts for commercial items a
minimal number of additional clauses necessary to satisfy its
contractual obligations.
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Flow Down of Ethics Requirements
Applicability to Prime Contracts
Subcontract
Kickbacks
52.203-7
Unreasonable Restrictions
on Subcontractor Sales
52.203-6
Display of Hotline Poster(s)
52.203-14
Below
Simplified
Acquisition
Threshold
No
No
Yes
Above
Simplified
Threshold
Yes
Yes
Yes
Commercial
Item
Flow Down
Requirements
No
Alternate I of clause
No
Include substance
in subcontracts
over $150,000.
Include substance in
subcontracts exceeding
simplified acquisition
threshold.
Include substance in subcontracts
exceeding $5 million except when
the subcontract is for a commercial
item or is performed entirely
outside the United States.
FAR Clause
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Flow Down of Contractor Code of
Business Ethics and Conduct
Contractor Code of Business Ethics and Conduct
Disclosure
Regarding
Certain
Violations
Less than $5
million and
120 days
Applicability
“Must”
“Should”
Flow Down
“Must”
“Should”
FAR Clause
None
(See 3.1003)
None
(See 3.1002)
Greater than
$5 million and 120
days
Yes
Business
Ethics
Awareness
And
Compliance
Program
(BEACP)
Internal
Control
System (ICS)
Applies to contracts greater than $5
million and 120 days. Does not apply
to small business and commercial
items.
Include the substance in subcontracts over $5 million and
120 days.
52.203-13
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Resources for Determining Flow
Downs
• Legal Counsel (company or outside).
• The National Defense Industrial Association (NDIA):
– The NDIA has available for purchase the publication
Study of the Applicability of FAR Clauses to
Subcontracts Under Prime Defense and NASA
Contracts, which includes flow downs for the DFARS
and for the NASA FAR Supplement (NFS).
• See Appendix of the Subcontract Management From A to
Z book.
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Contact Information
• Michelle Courier
– Defense Acquisition University
– Michelle.Currier@dau.mil
• Jim Kirlin
– Raytheon Company
– Jim.W.Kirlin@raytheon.com
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Thank You!
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Questions
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