Are You a Sub?

Your company sells gizmos to another company known for providing large systems to the federal government. To effect the sale, all you use is a simple sales order form with commercial terms and conditions on the reverse of the form. You don’t know how the buyer is using your gizmos, but wouldn’t be surprised to find them in a large federal installation.

Are you a federal subcontractor? Is your company subject to certain government contract clauses that flow down from the prime contractor’s contract to you? If so, what do these clauses require your company to do? Who is responsible for including these clauses in your sales contracts, anyway?

Let’s begin by limiting our discussion to the provision of commercial, off-the-shelf (COTS) products, not specialty items. In the Federal Acquisition Streamlining Act of 1994, Congress, in response to complaints from numerous subcontractors, eliminated many of the laws applicable to subcontractors providing COTS items. More restrictive and complicated rules and regulations still apply, however, to companies supplying specialty, custom made products and components for use in federal contracts.

The definition of “subcontractor” is very, very broad. Read literally, it encompasses most any business supplying goods or services to another business for use in a federal prime contract. As defined in the Federal Acquisition Regulations § 44.101, subcontractor means:

any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime contractor or another subcontractor.

Depending on the circumstances, subcontractor can include any subsidiary, affiliate, or parent of a business providing goods or services for use in a federal prime contract. The courts have broadly interpreted the term subcontractor as well.

If you are a subcontractor, what’s the effect? Now that Congress eliminated most boilerplate clauses for providers of commercial items, there are only three government contract clauses that a prime contract is supposed to flow down directly to a subcontractor. The first is the Equal Opportunity clause, FAR § 52.222-26, which requires the subcontractor not to discriminate in its employment practices. More particularly, subcontractors must generally establish a written affirmative action program designed to increase minority employment in keeping with minority population of the subcontractor’s metropolitan region. The subcontractor must also file annual reports of its progress in meeting its affirmative action goals. A small business subcontracting plan may also be required for subcontractors that are large businesses.

The second mandatory flow down clause is Affirmative Action for Disabled Veterans and Veterans of the Vietnam Era clause, FAR § 52.222-35, which requires subcontractors to seek to employ Vietnam Veterans to the extent possible. The third clause is Affirmative Action for Workers with Disabilities clause, FAR § 52.222-36, which requires subcontractors to seek to employ handicapped persons to the extent possible. The requirements of both these clauses may be incorporated into a subcontractor’s affirmation action plan.

A few other laws still apply even though there is no requirement for a prime contractor to include clauses about these laws in its subcontracts. For example, a prime contractor is not allowed to contract with you if your company is listed on the EPA’s list of companies violating the Clean Water Act or the Clean Air Act. Similarly, while certain arcane government contract cost accounting rules nominally apply, your status as a commercial item provider almost assuredly exempts you from coverage.

Wait a minute! Your company has been supplying gizmos to federal systems integrators for years, but has never worried about these clauses. What gives?

Reality is not always the same as legality. In practice, federal primes contractors often omit required clauses for commercial items, simply buying them under purchase orders. Perhaps the prime contractors don’t want to frighten their suppliers by including government contract clauses. More likely, the prime contractors know that while the FAR requires them to flow down certain clauses to subcontractors, in reality the federal government rarely ever enforces these clauses. In fact, these clauses are more likely to arise in the context of a lawsuit by a disgruntled employee than in every day commercial transactions between subcontractors and prime contractors.

So what happens if a prime contractor omits these clauses but you’re called on account of them? You may be required to establish an affirmative action plan and a small business subcontracting plan. The outcome will depend on the particular facts of your case, including your relations with the federal prime contractor. Prime contractors that fail to include mandatory flow down clauses could be subject to termination proceedings.

Subcontractor clauses are one of those fuzzy areas of federal contracting, relatively clear by regulation but hazy in practice. While your every day procedures may not include compliance with subcontractor clauses, don’t be surprised if one day one or more of these clauses comes out of the haze into your field of view.