Tuesday, March 27, 2012

Subcontract Administration - Flowdown Provisions

Yesterday we discussed the civil penalties brought by the U.S. Government against Lockheed Martin for failing to adequately oversee a subcontractor's charging practices and by mishandling information revealing these practices. According to the settlement agreement, Lockheed failed to undertake appropriate measures to ensure the integrity and validity of subcontract costs that were passed along to the Government. Although we don't know much in the way of details beyond what was in the DoJ's press release, we can surmise two things;

  • Lockheed Martin did not administer this particular subcontract according to its own subcontracting policies and procedures, and 
  • When an indication of impropriety came to Lockheed's attention, it did not sufficiently follow up on the information.

Broadly speaking, prime contractors should administer their subcontracts similar to the manner in which the Government administers its prime contracts. The methods will not be the same but the basic concepts regarding subcontract administration should be similar to the way the Government works. These concepts vary depending on type of contract/subcontract (e.g. CPFF, FFP, T&M) and size. Generally, cost-reimbursable contracts requires more oversight than do firm-fixed price contracts.

Our focus in these next few blogs will be prime contractor responsibilities after subcontract award, particularly awards of cost-reimbursable subcontracts. Keep in mind that activities leading up to subcontract award are just as important as post-award actions. In fact, the Government has specialized teams that review contracting purchasing systems which include elements of subcontracting.

The word "flowdown" refers to the practice of obtaining a certification or representation from a prospective subcontractor that was first required of the prime contractor including the actual text of the "substance" of all or part of a Government prime contract clause in a subcontract and requiring something of a subcontractor that the Government requires of the prime.

First and foremost, prime contractors must ensure that all required flowdown requirements/clauses are included in the subcontract. There are two types of flowdown requirements; mandatory and essential. Mandatory flowdown requirements are those expressed in the texts of provisions and clauses. Numerous FAR provisions and clauses contain such mandatory flowdown requirements. By entering into a prime contract that includes mandatory flowdown clauses a prime contractor promises the Government that it will include the clauses in its subcontracts. Failure to do so would be a breach of contract.

Essential flowdown requirements are those that the Government does not require the prime contractor to flow down, but that the prime contractor must include in its subcontracts in order to be able to fulfill its obligations to the Government.

Ensuring that the proper clauses are included in subcontracts is not an easy task. It requires a careful reading of the clauses in the prime contract. There are (by one account) potentially 88 different clauses that could be flowed down to a subcontract, depending on circumstances. We've seen some contractors flow down all the clauses from their prime contract whether they are relevant or not. That may be safe but it often leaves subcontractors scratching their heads trying to figure out what clauses mean and how they apply. There are practice aids available to purchase that can help contractors sort out the flowdown requirements.

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