When a company enters into a contract with the federal government, they become a prime contractor. When that prime contractor purchases “commercial items” from another company in support of a federal contract, that company becomes a supplier and will be viewed as a federal subcontractor to the prime contractor. The term “commercial item” is very broadly defined under the Federal Acquisition Regulation (FAR) as “any product or service that is customarily used by the general public or nongovernmental entities for nongovernmental purposes.” It could be as basic as a packaged food item or a commodity that you find at your local hardware store. The sale of a commercial item to a prime contractor triggers mandatory (contractual) flow-down requirements under the FAR, and some companies are not fully aware of their compliance requirements as a subcontractor.
Oftentimes the prime contractor will use boilerplate language in their purchase orders or include a hyperlink to the FAR in their agreements so that the flow-down clauses will apply to the subcontractors upon their acceptance of that purchase order. Because these methods of incorporation make it easy for a subcontractor to miss seeing the flow-down clauses, some primes are asking their vendors to sign agreements to verify their compliance with all of the applicable federal regulations.
Making compliance more complicated for subcontractors is the Christian doctrine, which provides that some federal contracting clauses are so important to public policy that they will be incorporated into a federal contract as a matter of law and do not need to be specified in writing. This means that the flow-down clauses are not always written into subcontractor agreements with primes, yet the subcontractor is still responsible for complying with them.
The U.S. Department of Labor’s Office of Federal Contracting Compliance Programs has been expanding its oversight of subcontractors. There is an increased emphasis to require prime contractors to notify the federal government of their subcontracts to enable the scheduling of compliance evaluations for these subcontractors.
If you have any questions or concerns regarding this uptick in federal government scrutiny and the increase in compliance evaluations for subcontractors, please contact Michael Stone, Adam Bruski or a member of Warner’s Government and DoD Contracting Industry Group.