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MN PTAC - Twin Cities Legal Lunch N Learn

June 9, 2016 – HiWay Federal Credit Union – St. Paul

Who Me, a Federal Government Contractor or Subcontractor?

- Framework for Evaluating Flow-Down Requirements from Your Customer & Practical Points to Effectively Negotiate

Chuck Barry, Special Counsel, Eckland & Blando LLPcbarry@ecklandblando.com

Cell: 763-807-9724

COPYRIGCOPYRIGHTHT CONTCONTRACTSRACTS

ADVISORYADVISORY SERVICES,SERVICES, INCINC 20102010

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Agenda

• Common reasons some claim they are not Fed contractor/subcontractor & exempt from compliance obligations

• Prime and Subcontractor Relationship• Flow-down Clauses (Mandatory & Others)• Small Business Subcontracting Issues• Be Wary – Subcontractor Trap• Limitations on Subcontracting

(SBA Final Rule takes effect 06-30-2016.)

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Common Reasons Claim Not Federal Contractor / Subcontractor - Exempt

• We have no direct contracts with any government customer

• Small business and fifth company down supply chain

• We only sell commercial-off-the-shelf (COTS”) • We sell in large lots to wholesalers-impossible

to trace our products to a government contract

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Common Reasons Claim – Cont’d

• For some government contract compliance requirements, these facts make a difference and will insulate your firm .

• For others, however, they do not.• Over past 8 years, enforcement is up, more

compliance reviews, audits, investigations, and enforcement actions – e.g., EEO & related

• “Indirect contracts” with USG often includes any subcontracts necessary to or assume portion of a USG contracts. Be careful for compliance.

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Prime & Subcontractor Relationship

• Why does a prime subcontract?– Strategic advantage or alliance-small business– Enhance prime’s capabilities– Assist entry into otherwise closed markets– Greater value to customer– Spread financial risk– More cost effective vs. performing in-house– US Government requires prime to sub out contracts

to small disadvantaged business (socio-economic)

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Prime and Subcontractor Relationship

• Subcontracting Risks – Prime perspective– Complex oversight by USG– Prime responsible for final accountability– Subcontractors lack of timely reporting of costs on

cost reimbursement contracts– Prime’s performance assessment depends on

subcontractor performance

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Prime & Subcontractor Relationship

• Subcontracting Risks – Sub perspective– Price, cost and delivery pressures by Prime– Getting paid within agreed period of time– Doing things the Prime’ way (even if Sub has more

experience or know-how)– Subcontractor’s past performance not usually

reported in USG reporting system

GOVERNMENT VS. COMMERICAL CONTRACTING

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Privity (Contractual Relationship) exists only between the Buyer & Seller

Privity does not exist between Buyer and the Seller’s Subcontractors

PRIVITY YES

BUYER(Government

)SELLER(Prime)

SUBSCommercial

Contract

PRIVITYNO

Federal Procurement

Contract

PRIVITY YES

GENERAL DEFINITION OF A SUBCONTRACT

Broadly Defined: Any Contract or Agreement To Perform Work or Provide Material in Support of A Prime Contract. • FAR Part 44.101 [Wessel & Co. 2011] Far Part 44.101

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Important Numbers for Small Businesses

• Micro-purchase threshold: $3,500 +exceptions• Simplified Acquisition Threshold (SAT): $150,000• SAT for Commercial Items: $7.0 million • Some laws-clauses NOT apply to Micro-purchases.

– See 48 CFR 13.005 - 006• Prime contracts between $3K and $150K are “set-

aside”for small businesses. 48 CFR 19.502• FedBizOpps pre-award & post-award notices: $25K

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Flow-down Clauses

• ISSUES IN SUBCONTRACTING• FAR FLOWDOWN CLAUSES

– Clauses prime contractor must or ought (due to E.O. or law) to incorporate into its subcontracts or supplier agreements

– Flow-down clauses may also designate rights and responsibilities between primes and subcontractors

– Three types of flow-down clauses:• Mandatory (Required)• Necessary flow-down clauses – Protect business from valid risks:

government not require flow-down, but that you better flow down to protect yourself, e.g. FAR Changes, Indemnification, Stop-Work, Termination for Convenience and Default, and Warranty

• Optional – Depends on $ value, type of contract, applicability…

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Flow-down Clauses – How Do You Know if FAR Applies?

• Ask Customer or prime or consultant or your legal counsel• Funding source• Location for delivery or provision of services

– “Ft. Sam Houston”– “Walter Reed Hospital”

• The Subcontract– Documents incorporated by reference– Requests you agree to “abide by the terms and accept responsibility

to perform certain obligations under the Client’s prime contract as identified to Company by the Client.”

• Other documents you are asked to sign or submit– Certificate of Cost or Pricing Data (if agreed price $750,000 or more)– Subcontracting Plans ($700K or $1.5 million for construction)

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Flow-down Clauses - Mandatory• Clauses - Primes required to flow-down (include) in

the subcontract– By Law– By Regulation– By Contract

• “Mandatory” Defined – If the clause in prime contract, the prime is obligated to flow it down to the subcontractor per clause – to support prime.

• “Mandatory” is usually conditional, e.g. $ value, subcontract/supply agreement type, commercial item.

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Sample Mandatory Language• 52.203-7 Anti-Kickback Procedures

(c) 5) The Contractor agrees to incorporate the substance of this clause, including this subparagraph (c)(5) but excepting subparagraph (c)(1), in all subcontracts under this contract which exceed $150,000. [Not apply to SAT contracts as below $150K.]

• 52.215-12 Subcontractor Certified Cost or Pricing Data [$750,000 or more value]– (c) In each subcontract that exceeds the threshold for

submission of certified cost or pricing data at FAR 15.403-4, when entered into, the Contractor shall insert either—

– (1) The substance of this clause, including this paragraph (c), if paragraph (a) of this clause requires submission of certified cost or pricing data for the subcontract; or

– (2) The substance of the clause at FAR 52.215-13, Subcontractor Certified Cost or Pricing Data—Modifications.

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Minimum Mandatory Clauses – Prime For Other Than Commercial Items –

• FAR requirements are least intrusive when the Government buys COTS (Commercial Off The Shelf), a subset of “Commercial Items”

• BUT still minimum flow-down requirements

• FAR 52.244-6 Subcontracts for Commercial Items (rev FEB 2016) - specifies 14 clauses required to be in all subcontracts for CI (includes COTS items).

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What Is “Commercial Item”?Defined in FAR Section 2.101

• Goods or services or combination of a type customarily sold, leased, or licensed (or offered for same) and used for nongovernmental purposes – to the public.

• Not include real property (land)• Includes items evolved from above by advances in

technology; or modifications of type in commercial marketplace; or

• Minor modifications in commercial arena made to meet US Government requirements.

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The 14 Mandatory Clauses – Commercial Items Subcontracts

• 52.203-13, Contractor Code of Business Ethics and Conduct (applies over $5 million & 120 days)

• 52.203-15, Whistleblower Protections Under the American Recovery and Reinvestment Act of 2009 (applies if funded by Recovery Act)

• 52-219-8, Utilization of Small Business Concerns (applies if contract price exceeds $150,000)

• 52.222-21, Prohibition of Segregated Facilities• 52.222.26, Equal Opportunity (if sub over $50K and sub has 50

or more employees)• 52.222-35, Equal Opportunity for Veterans (Subcontract over $100,000)• 52-222-36, Affirmative Action for Workers with Disabilities

(Subcontract over $15,000)

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14 Mandatory Clauses – Commercial Items Subcontracts – Cont’d

• 52.222-37, Employment Reports-Veterans • 52-222-40, Notification of Employee Rights Under

the National Labor Relations Act• 52-222-50, Combating Trafficking in Persons

(Applies-all subcontracts, including with agents)• 52.222.55, Minimum Wages Under EO 13658

(all subs any value, if subject to Service Contract Act/Wage Rate Reqts. for construction)

• 52-225-26, Contractors Performing Private Security Functions Outside the United States

• 52-232-40, Providing Accelerated Payments to Small Business Subcontractors [Commercial Items]

• 52-247-64, Preference for Privately Owned U.S.-Flag Commercial Vessels

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Other Minimum Clauses – Prime for Commercial Items

• 52.212-5 Contract Terms and Conditions Required to Implement Statutes or Executive Orders – Commercial Items (FEB 2016)

• Includes 18 mandatory clauses- 12 of 18 mandatory are in 52.244-6, too- 6 not in 52.244-6- See “Combination” of these 2 sets of Mandatory

Clauses for “Commercial Item” subcontracts in next 2 slides

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The Combination = 18 Mandatory Clauses for Commercial Item Subs

• 52.203-13, Contractor Code of Business Ethics and Conduct

• 52-219-8, Utilization of Small Business Concerns• 52.222-17, Nondisplacement of Qualified Workers*• 52.222-21, Prohibition of Segregated Facilities• 52.222.26, Equal Opportunity• 52.222-35, Equal Opportunity for Veterans• 52-222-36, Affirmative Action for Workers with Disabilities• 52.222-37, Employment Reports on Veterans• 52-222-40, Notification of Employee Rights Under the

National Labor Relations Act• 52.222-41, Services Contract Act of 1965*• 52.222-50, Combating Trafficking in Persons

*One of 18 In FAR 52.212-5 (e) (1)

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Combination – 18 Mandatory Clauses for Commercial Item Subs - Cont’d

• 52.222-51, Exemption from Application of the Service Contract Act to Contracts for Maintenance, Calibration, or Repair of Certain Equipment*

• 52.222-53, Exemption from Application of the Services Contract Act to Contracts for Certain Services – Requirements.*

• 52.222-54, Employment Eligibility Verification*• 52-225-26, Contractors Performing Private Security

Functions Outside the United States• 52.226-6, Promoting Excess Food Donation to Nonprofit

Organizations*• 52.222-55, Minimum Wages Under EO 13658*• 52-247-64, Preference for Privately Owned U.S.-Flag

Commercial Vessels

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Necessary Flow-down Clauses• Necessary flowdown clauses, are ones the

government does not require you to flow down• However, good practice is to flow-down to

protect yourself, such as:– Clauses listed on Slide 12 that include, among others

(to protect valid business interests) -• Changes

– (FAR 52.243-1 for Fixed Price)

• Termination for Convenience – (FAR 52.249-2 for Fixed Price)

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Optional Flow-down Clauses

• Many primes insert optional flowdown clauses for their convenience – easier than drafting new language.

• Optional means optional – subcontractors should try to negotiate or insist on deletion in some cases of clear inapplicability to what sub or supplier is producing or providing.

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Flow-down vs. Insertion

• Flowdown based on clauses already in prime contract.

• “Insertion” deals with clauses not in prime contract but must be inserted based on guidance external to the FAR, e.g. SBA or Small Business Administration or other sources.

• Example: Clauses dealing with Small Businesses

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Small Businesses Subcontracts

• Contracts under the Minimum Threshold• Small Business Act• SBIR Program (separate, complex technology

innovation area subject – only mention here)• SBIR Policy Directive• – SBIR Data Rights

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Flow-down Techniques• Generic flow-downs

• “Subcontractor agrees to abide by all of the clauses in the prime contract replacing “Government” or “Contracting Officer” with “Contractor” and replacing “Contractor” with “Subcontractor.”

• What happens to the “Disputes” Clause?• “Self-Deleting” - Does that really

happen?– How does “self-deleting” work such clauses as:

• 52.203-13 Contractor Code of Business Ethics and Conduct• 52.215-10 Price Reduction for Defective Certified Cost or Pricing Data

– Be careful…

Source: Getting Closer to FARs: Small Contractor – ACC – D.Cole and M.Delahunty, 10-31-

2014

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“Best Practice” for Small Businesses On Flow-downs

• SPECIFIC IS BEST. HOWEVER, YOU HAVE TO OR SHOULD KNOW WHAT IS IN THE PRIME CONTRACT!

– Yet, many primes may choose to not disclose, even if redact confidential parts

• Develop possible subcontract “models” to cover:– If your contract value exceeds $10,000, the following clauses apply . .

– If your contract value exceeds $50,000, the following clauses apply . .

• If selling Commercial Items (including COTS goods), then press for subcontract or PO containing following minimum mandatory clauses:

– 52.244-6 and/or

– 52.212-5 (e) (1)

– Plus limited number of requirements necessary to protect valid customer business or compliance risks. See 6 listed on Slide 12. OR

• Combination list of 18 mandatory flow-downs for Commercial Item subcontracts, plus necessary requirements

Source: Getting Closer to FARs: Small Contractor – ACC – D.Cole, M. Delahunty, 10-31-2014

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Small Business Contracting Issues

• SBA Rules– New SBA Rules/Penalties for “misrepresentation

of size status.”– “Willful” includes responding to a solicitation,

registering in SAMS– Ties violation to debarment– False Claim Act (FCA) and False Statement Act

(FSA) penalties apply

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Be Wary- Subcontractor Trap

• Who identified the procurement?• Pre-existing relationship?• Who wrote the proposal?• Is the Prime doing “primary and vital” work?• What percentage of the work will the prime

perform?• Prime have necessary experience?• Who controls the payments?• Does the Sub provide financing, support, services,

space, or other vital assistance?

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Limitations on Subcontracting – SBA Final Rule Effective 06-30-2016

• Significantly changes way limitations on subcontracting are calculated and enforced

• Will allow primes to take credit for work performed by “similarly situated” subs.

• SBA: reg “creates shift from concept of required percentage of work to be performed by prime contractor to the concept of limiting a percentage of the award amount spent on subcontractors.

• Very complex – see handout – to extent applicable to your situations, by S. Koprince.

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Important Reminders for Small Businesses

•“In Business As in Life, You Don't Get What You Deserve, You Get What You Negotiate.”

Chester L. Karrass• List of 18 mandatory flow down clauses for

Commercial Item subcontracts is relatively short vs. the average of 50+ clauses in federal government contracts and subcontracts.

• Test what prime is saying about “mandatory” clauses.

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Sources• Large, medium and small business clients experience of CBarry with U.S. Government contract flow-

downs to subcontractors.• “You Say You Aren’t A Government Contractor – Or Is It Just Wishful Thinking,” by Holly Emrick Svetz,

member of Womble Carlyle Sandridge & Rice, LLP, Oct 27, 2013.• “Getting Closer to FARs: Managing and Streamlining Government Contracting for the Small

Contractor for Goods and Services”, presented by the Association of Corporate Counsel (ACC) , Small Law Department Committee, Doug Cole and Mary Delahunty, Oct 31, 2014.

• “Prime and Subcontractor Relationship”, Wessel & Company, PC, Certified Public Accountants and Business Consultants, presentation June 7, 2011.

• “Contract Terms & Conditions, Subcontract and PO Flow-downs”, by National Contract Management Association members: Jim Southerland, Steven Hill and Steve Purcell, September 22, 2010.

• “Subcontract Management Training Forum”, NCMA members, Michelle Currier, Jim Kirlin, March 13, 2015.

• “Flow-Down Clauses – Understanding Requirements and Obligations”, Wisconsin Procurement Institute, December 3, 2015.

• “Limitations On Subcontracting: Important New SBA Rule Takes Effect June 30, 2016”, by Steven Koprince, government contracts attorney in Kansas City, Kansas.

• “Managing the Supply Chain: Legal and Practical Issues”, framework for flow-down requirements, M. Rizzo, D. Dixon, Pillsbury Winthrop Shaw Pittman LLP, Public Contracting Institute, Jan 2016.

• A good source on flow-downs for FAR and DFARS is available for $90 from the National Defense Industrial Association (NDIA). “Study of the Applicability of FAR Clauses to Subcontracts Under Prime Defense and NASA Contracts.”