Transcript Agenda

Implementing the Most Contentious
Mandatory Flowdown Provisions:
From Data Rights to TINA
Presentation to the East Tennessee Chapter of the
National Contract Management Association
May 6, 2015
Todd R. Overman
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Agenda
Introduction
Overview Topics
Mandatory vs. Non-Mandatory Flowdowns
Prime and Subcontractor Negotiation Strategies
Specific Topics and Negotiation Techniques
Penalties for Noncompliance with Flowdowns
Q&A
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Overview – What is a Flowdown Clause?
Clauses from prime contract that are incorporated in the
subcontract.
►
Either by reference or in full-text
►
Typically in Section H and I of prime contract
“Flowdown” prime responsibilities to subcontractor.
Methods of incorporation: FAR 52.102
►
Clauses requiring verbatim incorporation
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Clauses that must be incorporated in substance
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Clauses silent on incorporation
Some, but not all, flowdowns are negotiable.
Can turn any company into a government contractor.
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Overview – Who is a Subcontractor?
No definition in FAR 2.101, so look to what third party is
providing under prime contract.
But, FAR 44.101:
►
►
“contract entered into by a subcontractor to furnish supplies or
services for performance of a prime contract or subcontract.”
“Subcontractor” = “any supplier, distributor, vendor, or firm that
furnishes supplies to or for a prime contractor or another
subcontractor.”
Subcontract = necessary to performance of the prime
contract. For example:
►
►
Specifically required or directly charged to the prime contract.
Product/services unique or customized for inclusion in end product.
Subcontract does not include purchases of good/services
used by the company as a whole.
►
For example, purchases of standard inventory items used for
commercial and government contracts
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Overview – Size and Type of Subcontract Impact
Flowdowns
Flowdown clauses frequently triggered by subcontract
dollar value threshold.
Different requirements for different type of subcontracts:
►
Commercial Item
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GSA Schedule
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Fixed Price
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Time & Materials
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Cost Reimbursement
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Cost-Plus-Fixed-Fee
Some clauses do not apply to subcontracts performed
wholly outside of the US.
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Overview – The Christian Doctrine
Mandatory contract clause that expresses a significant
tenant of public procurement policy is considered to be
included in the prime contract by operation of law. G.L.
Christian & Assoc. v. United States, 312 F.2d 418 (Ct. Cl.
1963).
Only clauses that are both mandatory and reference public
procurement policy are covered by the doctrine.
Examples:
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Termination for Convenience – FAR 52.249
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Termination for Default – FAR 49.401
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Changes – FAR 52.243
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Payments – FAR 52.232
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Buy-American Act – FAR 52.225
EO and AA clauses
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Overview – The Christian Doctrine
Christian Doctrine does not generally apply to subcontracts.
However, recent case applied Christian Doctrine to a subcontract:
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UPMC Braddock v. Seth D. Davis, Civ. 09-1210 (D.D.C. Mar. 30, 2103)
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Incorporated DOL socioeconomic requirements into subcontract
Commentators differ on whether the Christian doctrine applies to
subcontracts, but even those who believe it does not generally
apply to subcontracts acknowledge that certain EEO clauses are
read into a subcontract by operation of law. For example:
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“[T]he Christian doctrine is not applicable to subcontracts … [with] a few
exceptions … [such as the] equal employment opportunity and affirmative
action [clauses which are read into a subcontract by operation of law] …
[With respect to these clauses, a subcontractor] will be expected to
comply with these requirements or face serious penalties and
administrative actions by the DOL.” 05-7 Briefing Papers 1 (2005).
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Mandatory vs. Non-Mandatory Flowdowns
Mandatory = prime contract clauses that require
inclusion of all or substantially all of their text in
subcontracts.
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Look for “shall” language.
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These clauses are NOT negotiable.
►
Not all clauses must be flowed down in every instance, but some
require flowdown in ALL subcontracts
Non-Mandatory = prime contract clauses that should be
flowed down to ensure that subcontractor will provide
adequate assistance or cooperation to enable prime
contractor to meet prime contract requirements.
Special Contract Clauses
►
Can be mandatory or non-mandatory
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Mandatory Flowdowns Examples
FAR 52.225-13 (Restrictions on Certain Foreign Purchases)
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“(c) The Contractor shall insert this clause, including this paragraph (c), in all
subcontracts.”
FAR 52.203-6 (Restrictions on Subcontractor Sales to the
Government)
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“(c) The Contractor agrees to incorporate the substance of this clause, including
paragraph (c), in all subcontracts under this contract which exceed the simplified
acquisition threshold.”
FAR 52.219-9 (Small Business Subcontracting Plan)
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“ … the offeror will include [FAR 52.218] in all subcontracts that offer further
subcontracting opportunities … “
FAR 52.222-41 (Service Contract Act of 1965)
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Flowdown to “subcontracts subject to the Act.”
FAR 52.222-36 (Affirmative Action for Workers with Disabilities)
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Include in subcontracts > $15,000, unless exempted by the Secretary of Labor.
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Mandatory Flowdowns by Executive Order
E.O. 11246
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FAR 52.222-26 (Equal Opportunity)
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All subcontracts in excess of $10,000.
E.O. 13502
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FAR 52.222-34 (Project Law Agreement)
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All large scale construction subcontracts
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Mandatory Flowdowns by Statute
(Limited Flowdowns for Commercial Items)
Definition of “commercial item”?
In a commercial item prime contract, FAR 52.212-5:
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(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 paragraphs (e)(1) of
this paragraph in a subcontract for commercial items.
►
Identifies 17 clauses to be included.
(e)(2) While not required, the contractor MAY include in it
subcontracts for commercial items a minimal number of additional
clauses necessary to satisfy its contractual obligations.
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Mandatory Flowdowns by Statute
(Limited Flowdowns for Commercial Items)
FAR 52.244-6, Subcontracts for Commercial Items
►
Clauses used in prime contracts for other than “commercial
items”.
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Requires contractors and subcontractors to incorporate
commercial items or nondevelopmental items as components of
items to be supplied under the contract.
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Identifies 12 clauses that shall be included depending on size
and term of subcontract (vs. 17 in FAR 52.212-5)
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While not required, the contractor may flow down to subcontracts
for commercial items a minimal number of additional clauses
necessary to satisfy its contractual obligations.
DFARS 252.244-7000, Subcontracts for Commercial
Items:
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Not required to flow down any DFARS clause in commercial
items subcontracts, unless so specified in the particular clause.
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Examples of Non-Mandatory Flowdowns
Changes clause
Definitions clause
Acquisition of Supplies
►
►
►
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FAR 52.225-1, Buy American Act
FAR 52.225-3, Buy American Act – Free Trade Agreements – Israeli
Trade Act
FAR 52.225-5, Trade Agreements
FAR 52.225-13, Restrictions on Certain Foreign Purchases
Termination Clauses for Other than Commercial Items
►
►
FAR 52.249-8, 9 and 10, Termination for Default
FAR 52.249-1 through 6, Termination for Convenience
Reliance on subcontractor’s reps/certs under FAR 52.212-3
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Small business status, Buy American Act, and Certification Regarding
Responsibility Matters
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Overview of Negotiation Strategies
Strategy driven in part by stage of relationship,
documents being negotiated
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NDA
►
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Who is disclosing what?
Teaming Agreement
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Work share in exchange for exclusivity and performance
commitment
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Possibly some discussion of flowdowns
• Examples: T for C, exercise of options, price/cost terms
Subcontract
-
Main topic of this presentation
Contains the flowdowns
• Some are mandatory flowdowns from prime contract; others designed
to help the prime manage performance, allocate liabilities
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Negotiation Strategies - Subcontract
Are you the prime or the subcontractor?
Negotiation dynamics: Subcontracts generally require
subcontractor to perform and prime to pay money
Prime Contractor’s goals:
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Make obligations of subcontractor to prime co-extensive with
obligations of prime to the Government
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Mandatory flowdowns
Performance obligations
Management of program
Deliverables
Broaden liability-creating terms
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Negotiation Strategies – Subcontract
Subcontractor’s goals:
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Broaden terms that could lead to more revenue
-
Work share
• Percent vs. dollars vs. SOW sections vs. hopelessly vague
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Options
Narrow or eliminate terms that could take away revenue
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Subcontract term
Termination for convenience
Changes
Narrow liability-creating terms
-
Indemnification
Limitation of liability
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Negotiation Strategies
Leverage points -- Teaming
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Prime wants subcontractor to help it win
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Past performance
Qualifications
Relationships
Small business obligations
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Prime wants exclusivity
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Subcontractor wants to expand work share
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Perfect right to work
Limit “outs” after award
Pre-negotiate key terms
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Negotiation Strategies
Leverage points – Subcontract
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Prime
• Subcontractor needs you to get revenue
-
Subcontractor
• Prime needs you to meet commitments to customer
• May need access to technologies, facilities, personnel
• May want to use relationships
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Other circumstances
• Directed subcontract
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Complying with teaming agreement
• Award a subcontract, good faith, work share
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Subcontract Negotiation -- Process
Typical approach:
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Prime has standard terms, sends them to subcontractor
-
Exchanges of redlines
Time passes, can benefit either party, depending on circumstances
Alternatives
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Meet to negotiate terms, attendees empowered to make a deal
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Pre-negotiate subcontract before award
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Master agreements on core terms between regular partners
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Subject to supplementing based on, e.g., varying prime contract
terms
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Specific Topics and Negotiation Techniques
The “Preamble”
Disputes
Data and Patent Rights
Federal Funding Accountability and Transparency Act
(FFATA)
Cost Accounting Standards and Cost/Pricing Data
OCI and PCI
Prime’s responsibility to manage subcontractor’s key
business systems
Hidden flowdowns
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The “Preamble”
Describes implementation of flowing down Section I-type
FAR and FAR supplement clauses
►
►
Replaces “Government” with “Prime,” “CO” with “Prime Contracts
Manager,” etc.
Typical areas of focus:
►
Audit
Data rights/IP
Termination
But read all carefully
-
Example: FFATA clause, “Reporting Executive Compensation and
First-Tier Subcontract Awards,” at 52.204-10
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Prime needs information from subcontractor but clause is not read
to apply to subcontractor, even with name substitutions
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The “Preamble”
Does simple replacement of “Government” with “Prime”
always work?
►
Example: FAR 52.245-1(g), Government Property
g) Systems analysis.
(1) The Government shall have access to the contractor’s premises and all Government
property, at reasonable times, for the purposes of reviewing, inspecting and evaluating
the Contractor’s property management plan, systems, procedures, records, and
supporting documentation that pertains to Government property.
(2) Records of Government property shall be readily available to authorized Government
personnel and shall be safeguarded from tampering or destruction.
(3) Should it be determined by the Government that the Contractor’s property
management practices are inadequate or not acceptable for the effective management
and/or control of Government property under this contract, and/or present an undue
risk to the Government, the Contractor shall immediately take all necessary corrective
actions as directed by the Property Administrator.
(4) The Contractor shall ensure Government access to subcontractor premises, and all
Government property located at subcontractor premises, for the purposes of reviewing,
inspecting and evaluating the subcontractor’s property management plan, systems,
procedures, records, and supporting documentation that pertains to Government
property.
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Disputes
Straight flowdown of prime contract disputes clause may
miss some nuances
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Prime may not want to bring forward all claims
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Deadlines for sub-to-prime notices must be shorter
Approach with two types of claims -- prime contract
disputes, subcontract disputes
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Some primes offer this up front
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Some subcontractors negotiate for this regularly
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Disputes
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Prime contract disputes
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Presented to CO under Disputes clause, including as certified claim
• Subcontractor undertaking for FCA and related liability
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Subcontractor accepts results or appeals
Negotiation issues
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Who chooses what type of dispute is presented?
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May prime choose at any time to designate dispute as subcontract
dispute?
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Extent of undertaking
Must the prime appeal each unfavorable decision if subcontractor
requests?
Level of participation of each party
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Disputes
Subcontract disputes
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Generally issues not presenting questions squarely under prime
contract terms
-
“Commercial” terms, tailored clauses
Issues the prime does not want to bring to the Gov’t
• May not agree with subcontractor’s position
• May not have confidence in subcontractor’s damages calculation
• May have strategic, relationship-based or other reasons for not wanting to
have a dispute with this customer at this time
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Typical commercial dispute resolution options
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Management escalation followed by third party adjudication
Court
Arbitration/mediation/ADR
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Data and Patent Rights
Clauses will address both flowdowns from the prime and
specially tailored clauses
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FAR – no flowdowns for typical data rights
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DFARS – specific flowdowns
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Tailored clauses in Section H and elsewhere
Prime needs a license in delivered materials – prime
does not get this license from mere flowdown of
FAR/DFARS clauses
Deferred ordering/delivery
Breakdown between prime rights from subcontractor and
Gov’t rights from prime
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Data and Software -- FAR/DFARS Clauses
Provide the Gov’t a license – not title – in specific types of
intellectual property, typically tied to Gov’t funding
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Licenses for restricted, limited, govt purpose, or unlimited rights
►
Some agencies have special clauses taking title in IP (ie, Section H)
Primes generally have the ability to offer less than unlimited
rights or replace the default license rights in the FAR/DFARS
with commercial license or specially negotiated terms (some
difference in approach between FAR and DFARS)
►
But requires assertion of rights, typically in the original proposal or at
the time the work requiring/creating the data/software is added to the
contract
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May be ratified later, but there is a risk CO will not agree
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Data and Software -- FAR/DFARS Clauses
Major flowdown challenge is actually a flow-up problem
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Subcontractor may assert less than unlimited rights (or
commercial or specially negotiated license rights)
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First challenge for the prime is to validate this assertion
-
The prime will want to demonstrate to the gov’t that it has performed
some due diligence to validate the assertions
• Note that the assertion may rely on information the prime may not have
access to and that the subcontractor may not be willing to provide the
prime
» For example, subcontractor’s IR&D charging, negotiations with the
gov’t and/or primes under prior contracts
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Gov’t typically will step in to address objections it has
Subcontractor’s assertions also may be inconsistent with prime’s
bid strategy
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Data and Software -- FAR/DFARS Clauses
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►
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Prime must flow up these assertions to the gov’t in its original
proposal or preferably before definitizing the contract action for
the work that will create the data/software
Especially hard if the contractor has separate Contracts and
Subcontracts organizations – check your processes
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Are the Subcontracts Managers providing the CMs the
subcontrators’ assertions?
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Are the CM soliciting assertions from the SMs?
Otherwise there may be a gap – prime has committed to the
gov’t rights that exceed those obtained from the subcontractor
Gov’t may not agree to the subcontractor’s assertions, which can
call for more complex, multi-party negotiations
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DFARS Flowdowns
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-
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DFARS 252.227-7013, Rights in Technical Data –
Noncommercial Items
DFARS 252.227-7014, Rights in Noncommercial
Computer Software and Noncommercial Computer
Software Documentation
DFARS 252.227-7019, Validation of Asserted
Restrictions – Computer Software
DFARS 252.227-7025, Limitations on the Use or
Disclosure of Government-Furnished Information
Marked with Restrictive Legends
DFARS 252.227-7028, Technical Data or Computer
Software Previously Delivered to the Government
DFARS 252.227-7037, Validation of Restrictive
Markings on Technical Data
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Other IP Clauses
•
At a minimum, prime needs license in all materials delivered in
order to perform prime contract, fulfill all obligations to the gov’t
•
Primes regularly seek “work for hire”-type terms
-
•
Arguably needs license in IP used in performance
Becomes a negotiation point
But for DoD procurements, prime may not use its “power to award contracts
as economic leverage to obtain rights” in technical data or software from subs
Other clauses
- IP used in performance but not developed under subcontract
- Joint IP
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Patent Rights
Various versions of the clause (long and short, special purposes), but
generally clauses provide to the gov’t:
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License in “subject inventions”
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March-in rights to take title if prime does not provide timely notice of inventions
-
Subject invention -- "conceived" or "reduced to practice" during contract performance
and there is a "close" relationship between invention and SOW
FAR clause (52.227–11) is a mandatory flowdown
►
Unique clause that creates privity of contract between the gov’t and
subcontractor
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Prime may not leverage special rights for itself:
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“The subcontractor shall retain all rights provided for the Contractor in this clause, and
the Contractor shall not, as part of the consideration for awarding the subcontract,
obtain rights in the subcontractor's subject inventions”
If the subcontractor refuses to accept the key terms of the clause, the
prime must notify the govt, providing the subcontractor’s reasons for
refusal
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Prime may not proceed with such subcontracting without the written authorization
of the Contracting Officer
“Work for hire” clauses
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Federal Funding Accountability and
Transparency Act (FFATA)
FFATA was signed into law on September 26, 2006, and requires
information on federal awards (federal financial assistance and
expenditures) be made available to the public via a single,
searchable website -- www.USASpending.gov.
The FFATA Subaward Reporting System (FSRS) is the reporting
tool prime awardees (i.e. prime contractors and prime grants
recipients) use to capture and report subaward and executive
compensation data regarding their first-tier subawards to meet the
FFATA reporting requirements. The sub-award information entered
in FSRS will then be displayed on www.USASpending.gov
associated with the prime award.
Interim Rule published July 8, 2010, which created new FAR
subpart 4.14 and solicitation clause 52.204-10, which apply to
most prime contracts with a value of $25,000 or more
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Reporting Executive Compensation and
First-Tier Subcontract Awards
Requires a contractor to report (as applicable):
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First-tier subcontracts valued at $25,000 or more
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The names and total compensation for the preceding fiscal year of each of the 5
most highly compensated executives for each such first-tier subcontractor
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The names and total compensation for the preceding fiscal year of each of the
five most highly compensated executives (management) of the contractor
Important Considerations:
►
►
►
Contractor is responsible for notifying its subcontractors that the required
information will be made public (FAR 52.204-10(b))
“First tier subcontract” is defined to exclude “vendor” arrangements
Total compensation “means the cash and noncash dollar value earned by the
executive during the Contractor’s preceding fiscal year . . . .” -- which includes:
salary; bonus; stock awards, options, and appreciation rights; earnings for
services under non-equity incentive plans; change in pension value; abovemarket earnings on deferred compensation that is not tax qualified; and other
compensation.
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52.204-10(d)(2)
First-tier subcontract information
“Unless otherwise directed by the
contracting officer … by the end of the
month following the month of award of a
first-tier subcontract with a value of $25,000
or more, the Contractor shall report the
following information at http://www.fsrs.gov
for that first-tier subcontract”:
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52.204-10(d)(2)
First-tier subcontract information
(i) Unique identifier (DUNS Number) for the subcontractor receiving the award and for the
subcontractor’s parent company, if the subcontractor has a parent company.
(ii) Name of the subcontractor.
(iii) Amount of the subcontract award.
(iv) Date of the subcontract award.
(v) A description of the products or services (including construction) being provided under
the subcontract, including the overall purpose and expected outcomes or results of the
subcontract.
(vi) Subcontract number (the subcontract number assigned by the Contractor).
(vii) Subcontractor’s physical address including street address, city, state, and country.
Also include the nine-digit zip code and congressional district.
(viii) Subcontractor’s primary performance location including street address, city, state,
and country. Also include the nine-digit zip code and congressional district.
(ix) The prime contract number, and order number if applicable.
(x) Awarding agency name and code.
(xi) Funding agency name and code.
(xii) Government contracting office code.
(xiii) Treasury account symbol (TAS) as reported in FPDS.
(xiv) The applicable North American Industry Classification System code (NAICS).
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52.204-10(d)(1)
Executive compensation of prime contractor
As a part of its annual registration requirement in the Central
Contractor Registration (CCR) database (FAR clause 52.2047), the Contractor shall report the names and total
compensation of each of the five most highly compensated
executives for its preceding completed fiscal year, if—
(i) In the Contractor’s preceding fiscal year, the Contractor received—
►
(A) 80 percent or more of its annual gross revenues from Federal contracts (and
subcontracts), loans, grants (and subgrants), cooperative agreements, and other forms
of Federal financial assistance; and
►
(B) $25,000,000 or more in annual gross revenues from Federal contracts (and
subcontracts), loans, grants (and subgrants), cooperative agreements, and other forms
of Federal financial assistance; and
(ii) The public does not have access to information about the
compensation of the executives through periodic reports with the SEC.
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52.204-10(d)(3)
Executive compensation of first-tier subcontractor
Unless otherwise directed by the Contracting Officer, by the end of the
month following the month of award of a first-tier subcontract with a
value of $25,000 or more, and annually thereafter (calculated from the
prime contract award date), the Contractor shall report the names and
total compensation of each of the five most highly compensated
executives for that first-tier subcontractor for the first-tier
subcontractor’s preceding completed fiscal year at http://www.fsrs.gov ,
if—
(i) In the subcontractor’s preceding fiscal year, the subcontractor
received—
►
(A) 80 percent or more of its annual gross revenues from Federal contracts
(and subcontracts), loans, grants (and subgrants), cooperative agreements,
and other forms of Federal financial assistance; and
►
(B) $25,000,000 or more in annual gross revenues from Federal contracts
(and subcontracts), loans, grants (and subgrants), cooperative agreements,
and other forms of Federal financial assistance; and
(ii) The public does not have access to information about the
compensation of the executives through periodic reports filed with
the SEC.
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Exemptions and Other Considerations
Reporting Exemptions:
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Contractors with gross income in the previous tax year below $300K
are exempt from reporting subcontractor awards.
(FAR 52.204-10(d)(1))
►
Contractors are exempt from reporting awards to subcontractors with
gross income in the previous tax year below $300K.
(FAR 52.204-10(d)(2))
Prime contractor is required to report information on a firsttier subcontract when the subcontract is awarded.
Continued reporting on the same subcontract is not required
unless one of the reported data elements changes during the
performance of the subcontract.
Prime contractor is not required to make further reports after
the first-tier subcontract expires.
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Cost Accounting Standards
The CAS clauses at FAR 52.230-2(d) and FAR 52.230-3(d) (for full
and modified coverage, respectively) require a contractor to include
the substance of the CAS clause in all negotiated subcontracts (at
any tier) into which the contractor enters.
►
Commonly referred to as the "CAS flow down clause."
However, if a subcontract meets one of the CAS exemptions at 48
CFR 9903.201-1, the subcontract will not be subject to CAS.
For example, a CAS-covered prime contractor could not place the
requirement for CAS compliance on a subcontract with a small
business because 9903.201-1(b)(3) specifically exempts
subcontracts with small businesses from CAS requirements.
Similarly, a firm-fixed price subcontract awarded with adequate price
competition without submission of cost or pricing data is also
exempt.
Also, all subcontracts less than $700,000, and all subcontracts for
commercial items are exempt from CAS coverage.
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Truth and Negotiations Act (TINA) and
Cost or Pricing (C&P) Data
TINA requires that during certain negotiations, contractors must supply the
Government with “cost or pricing data.” (10 U.S.C. § 2306a)
C&P data is broadly defined to mean “all facts that, as of the date of price
agreement . . . prudent buyers and sellers would reasonably expect to affect price
negotiations significantly.” FAR 2.101
Current C&P data threshold is $700,000
Unless an exception applies, the CO must obtain C&P data when:
►
Awarding a negotiated contract;
►
Awarding a subcontract when the prime and any higher-tier subcontracts were required to submit
C&P data;
►
Modifying any negotiated contract that exceeds the threshold whether or not C&P was initially
required; or
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Modifying any subcontract when the prime and any higher-tier subcontractors were required to
submit C&P data
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Certification of C&P Data
C&P data is NOT required when (FAR 15.403-1):
►
Prices agreed upon are based on adequate price competition;
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Prices agreed upon are based on prices set by law or regulation;
►
A commercial item is being acquired;
►
A waiver has been granted (in exceptional cases, the head of contracting activity
(HCA) may waive the requirement for submission of C&P data); or
►
Modifying a contract or subcontract for commercial items
FAR 15.406-2
C&P data MUST be certified by the offeror, contractor or
subcontractor
Certificate of Current Cost or Pricing Data
►
►
The offeror, contractor or subcontractor is certifying that, to the best of
his/her knowledge and belief, “the cost or pricing data submitted are
accurate, complete, and current.” 10 U.S.C. § 2306a(a)(2)
Includes certification of C&P data supporting advance agreements and
forward pricing rate agreements
Ongoing obligation to provide C&P data to the contracting officer as
it becomes available
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Defective Cost or Pricing Data
Defective C&P data is data that is “inaccurate,
incomplete, or noncurrent.” 10 U.S.C. § 2306a(e)(1)(B)
Entitles the Government to a price adjustment, including
profit or fee, of any significant amount by which the
contract price was increased because of the defective
data
Applies to defects in C&P submitted by the contractor, a
prospective subcontractor or an actual subcontractor
Factors contributing to the price adjustment
►
Date when C&P data became reasonably available to the
contractor
►
Extent of the Government's reliance on the C&P data
FAR 52.215-10
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What should Prime Negotiate with Subcontractor?
Not a mandatory clause, but prime wants protection for
defective pricing claim that could be traceable to
subcontractor’s data.
Typically look to scope of indemnity –
►
All inclusive, so as to make the prime whole not only for the
actual defective pricing at the subcontract level but also for the
upstream impact caused by prime’s overhead and G&A loadings
VS.
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Limited to measurement of the defective pricing by the
subcontractor
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OCI and PCI
Organizational conflicts of interest (OCI)
►
►
Typically arise when services work assisting the gov’t (e.g., SETA,
acquisition support) conflicts with other work (e.g., development,
manufacturing)
Focus is unfair competitive advantage and bias in setting
requirements and reviewing proposals and contractor
work/performance
►
Unequal access to information
Biased ground rules
Impaired objectivity
No FAR clause (other than overview in FAR Subpart 9.5)
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Rule is quite dated although many basic principles endure
Proposed rule remains under consideration
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OCI
DFARS rule, clause for MDAPs
►
Arises from WSARA
►
SETA contracts for an MDAP must prohibit the contractor or its affiliate
from participating as a contractor or Major Subcontractor in the
development or construction of a weapon system under such program
►
"Major Subcontractor" -- over TINA threshold and 10 percent of Prime or $50
million
No flowdown requirement
But many RFPs/prime contracts will have Section H clause
addressing OCI
►
Typically require flowdown
►
Prime will include subcontractors in OCI plans
►
Subcontractors to prepare own plans based on their work portfolio
Subcontractors often key to prime’s mitigation strategies
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Personal Conflicts of Interest (PCI)
Recent rule extends the personal conflict of interest disclosure
requirements imposed on gov’t employees to contractor
employees performing “acquisition functions closely
associated with inherently governmental functions”
►
►
In theory, puts contractor in the position of making PCI assessment
In practice, contractors may provide the information to the gov’t for
adjudication
Primes and most subcontractors must inquire into the
relationships, interests, and activities of "covered" employees
before assigning them to perform covered work
►
►
►
Stock ownership, outside and family business interests, etc.
Other obligations – NDAs, training, discipline, mandatory disclosure
of violations
Drives contractors to have a process for regularly requested,
obtaining and processing PCI information
Mandatory flowdown in all subcontracts over $150,000
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DoD Contractor Business Systems Rules
DFARS 252.242-7005, only included in prime contracts
subject to Cost Accounting Standards; no specific flowdown
requirement.
However, subcontractor costs are included within prime
contractor costs for purposes of potential withholding by
Government if prime contractor suffers a significant deficiency.
Under DFARS 252.244-7001, Contractor Purchasing System
Administration, several new requirements regarding
subcontract oversight, including:
►
►
►
Ensure that all subcontracts have mandatory and applicable
flowdowns to carry out prime contract requirements
Perform adequate and timely cost or price analysis on subcontract
proposals
Notify the Government of the award of all subcontracts that contain
the FAR and DFARS flowdown clauses that allow for Government
audit of those subcontracts, and ensure the performance of audits
of those subcontracts
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Hidden Flowdowns
Caution to prime -- read your contract and look for
obligations that you should flow to subcontractors, for
example:
►
Level of effort clauses (including reporting)
►
Approval requirements (e.g., travel, ODCs)
►
Labor qualifications and equivalency tables
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Penalties for Noncompliance with Flowdowns
Prime
►
Breach of contract
►
Termination for default
►
Suspension, debarment
►
False claims (U.S. ex rel Wall v. Circle Construction LLC)
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Prime contractor failed to ensure that its electrical subcontractor complied with the “prevailing
wage” requirements under the Davis-Bacon Act. One of the subcontractor’s employees, Wall,
brought a False Claims Act (FCA) under 31 USC 3729(a)(1)(B)) on behalf of the United
States.
-
Davis-Bacon Act requires “the contractor or subcontractor” shall pay its employees the
“prevailing wage” where the work is performed. 40 USC 3142(c). The contractor must also
insert in any subcontracts the relevant clauses contained at 29 C.F.R. 5.5(a)(1) through (10)
for Federal construction contracts (see FAR 22.407).
-
Prime contractor is responsible for ensuring that subcontractor submits the weekly payroll
certifications of wages paid to subcontractor employees. These weekly payroll certifications
are required to determine the accurate payment of federal funds to contractors. Here, Circle
Construction failed to ensure that the subcontractor was actually paying its employees in
accordance with the “prevailing wage” under Davis-Bacon Act, and so the wage certifications
ultimately provided to the government wrongly certified that the prevailing wages were paid on
the construction project in violation of the FCA.
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Since the government paid out over $553,000 that it “would not have paid if the United States
had known about Circle C’s false certifications,” the Court concluded that under the FCA the
government was entitled to three times its actual damages—$1,661,423.
Subcontractor
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Q&A and Contact Information
Todd R. Overman, Chair, Government Contracts
Practice, Bass, Berry & Sims PLC
1201 Pennsylvania, Suite 300, NW
Washington, DC, 20004
202-827-2975, [email protected]
Check out our Government Contracts blog at:
http:www.bassberrygovcon.com
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