Failure to tailor flowdowns appropriately can lead to problems for both primes and subcontractors.
Companies must assess each contract clause's applicability to the scope of work to avoid issues.
Staying updated on clauses and maintaining clear communication between primes and subs is key.
Flowdowns play a crucial role in government contracting, and both prime contractors and subcontractors (subs) need to understand their importance. Improper flowdowns can lead to compliance risks, legal liabilities and increased administrative burden for all parties involved.
Flowdowns are the clauses in the Federal Acquisition Regulations (FAR) or its supplements that a prime or higher tier contractor (prime) is obligated to pass down to its subcontractors. These clauses dictate the rules and compliance standards that subs must follow to meet government requirements.
Ideally, primes assess the applicability of each FAR clause for inclusion to the subcontract based on factors such as dollar amount, contract type, place of performance and so on. The FAR will prescribe whether the entire clause needs to be included word for word or if only certain requirements apply to subcontracts. For example, FAR 52.203-7 (Anti-Kickback Procedures) says the contractor agrees to incorporate “the substance of this clause, including this paragraph (c)(5) but excepting paragraph (c)(1) of this clause, in all subcontracts under this contract that exceed the threshold specified in Federal Acquisition Regulation 3.502-2(i) on the date of subcontract award.”
Improper flowdowns arise when a prime fails to assess the applicability of FAR clauses to each subcontract. Many primes opt for a blanket approach—copying and pasting all clauses from their contract with the government into their subcontracts. This leads to an inefficient, and sometimes legally problematic, transfer of obligations.
Even if a prime takes a more detailed-oriented approach to flowdowns, problems can occur over different interpretations or overlooked clauses. In such cases, subs might fail to meet critical requirements or perform needless tasks. Subs may strive to fulfill clauses that don’t apply to their scope of work, leading to frustration and lost productivity over adhering to regulations that are unrelated to the services they are providing. For example, a subcontractor selling a commercial product or service may unnecessarily work on creating fraud hotline posters if the prime flows down FAR 52.203-14 (Display of Hotline Posters).
Improper flowdowns can lead to major difficulties for both primes and subs. From the prime’s perspective, noncompliance on the part of its sub can create questions during government audits. If the government finds that the flowdowns were incorrectly implemented, it may question the prime’s purchasing system and overall compliance strategy.
In turn, subs might find themselves accepting terms that are irrelevant to their work, which can create legal headaches and balloon expenses. For example, the subcontractor may not have any prime contracts but still use valuable resources to create a final indirect rate cost proposal if they mistakenly accept FAR 52.216-7 (Allowable Cost and Payment) as a flowdown.
There are several steps that both primes and subs can take to protect their organizations. These include the following:
Flowdowns are essential for ensuring that government contractors comply with FAR and other regulations. However, primes and subs must negotiate thoughtful, tailored flowdowns that match the specific work being done. By educating themselves, negotiating up front and documenting their compliance efforts, contractors can reduce risks and avoid costly issues down the line. Using government-provided tools and working with advisors (if necessary) can limit potential legal troubles and save time and money.
Proper flowdown management is a shared responsibility of both primes and subs. By adhering to best practices, both parties can ensure compliance, mitigate risks and foster healthier, more transparent contractual relationships.
