Relief for Defense subcontractors drowning in a sea of contract clauses

For smaller suppliers, selling to DoD still isn't a walk in the park – but things are getting a little simpler. Last month, the department enacted a long-awai...

For smaller suppliers, selling to DoD still isn’t a walk in the park – but things are getting a little simpler. Last month, the department enacted a long-awaited rule change that prohibits prime contractors from flowing unnecessary contract clauses down to their subcontractors. It is all a part of more changes that are meant to simplify commercial buying in DoD that are still in the rulemaking pipeline. Dan Ramish is counsel at the law firm Haynes & Boone. He talked with Federal News Network’s Deputy Editor Jared Serbu about what the changes mean on the Federal Drive with Tom Temin.

Interview Transcript: 

Jared Serbu Dan, thanks for joining us. And before we talk about what this rule actually does, I’d like you to help us explain to our listeners a little bit the scope of the problem. Certainly, there are always going to be some number of clauses that get flowed down, you know, by operation of other parts of the FAR or statute. But I think what we’re talking about here is prime contractors larding up their contracts with clauses that don’t have to be in there just to be safe. Is that about right? And how much of that goes on a day to day basis?   

Dan Ramish Thanks, Jared. So I think anyone who has dealt in any significant way with federal government subcontracts has encountered the kitchen sink slowdown approach where a prime contractor will include essentially all of the flow downs that are in its prime contract with the federal government without any discretion over what does or does not apply. And sometimes there’s additional language included in that. But too often the easiest thing for the prime to do is just slow down the kitchen sink. And of course, this presents risk for commercial products and services companies and other subcontractors. And it also presents issues for the federal government that wants this streamlined approach that doesn’t drive away nontraditional defense contractors.   

Jared Serbu And so to what extent does this new rule limit that? How much does it help?   

Dan Ramish So this new rule eliminates prime contractors discretion to include clauses that are not required by the FAR or D-FARS. So the way that the FAR approaches flow downs for commercial products and services and the D-FARS approaches it is different. So the FAR specifies specific lists of flow downs depending on whether the prime contract is for a commercial product or service or noncommercial. There are different lists. On the D-FARS side. D-FARS clauses each individually either require flow down or don’t and specify whether there is an exception for commercial products or services, or only for commercially available off the shelf items. And if there is no exception for COTS or for commercial products or services, the clause needs to be flowed down if it’s otherwise applicable. And if flow down is required in subcontracts. So what the new language in the D-FARS 252-244 7000. The subcontracts for commercial products or services clause will do it says prime contractors can only include in commercial products or services subcontracts at any tier. The lists in the FAR, at the various locations within the FAR, the clauses in the D-FARS that specify that they must be flowed down without exempting commercial products or services or COTS items. And that’s it. They don’t have any discretion to include additional FAR or D-FARS clauses. Now, that said, there is an ability for a prime contractor or higher tier subcontractor to address the requirements from the prime contract elsewhere in their terms and conditions for commercial products or services. And they need to do that. There are cases where some prime contractors would have flowed down clauses because they need to for their prime contract. But even though those aren’t mandatory clauses, so I’ll give you some examples. Sure. The convenience termination clause. The prime contract allows the government to terminate the prime contract for convenience. Prime contractor needs to be able to terminate subcontracts and supplier agreements for convenience as well. That’s not a mandatory flow down. But it makes business sense. And they don’t get their relief is going to be limited from the federal government if they don’t have the ability to terminate lower tier agreements. The changes clause, the federal government says they have the ability to make changes within the general scope. The prime contractor needs to be able to make the same changes in lower tier agreements with subcontractors and suppliers. And the Buy American Trade Agreements Act obligations also aren’t mandatory flow downs, but are restrictions on the sourcing of prime contractor and need to the obligation to supply end items that are compliant with those statutes must be able to be flowed down. And in the case of the Buy American Act, that includes instances of components that need to be compliant with domestic sourcing requirements. So all these are examples where prime contractors in some cases might have taken the path of least resistance and just flowed down exactly the same clause that was in the prime contract, often with some additional language that explains substitution of terms to make it make the obligations between the prime and the sub similar to the relationship between the government and the prime. Now, prime contractors are going to have to revisit their terms of conditions for commercial products and services to give themselves the rights they need in their subcontractors and supplier agreements to make sure they can uphold their obligations to the government in their prime contracts.   

Jared Serbu And as I understand it, there’s also language in the new rule that applies not just to prime contractors, but also it tries to impose some discipline on DoD contracting offices, restricting them from adding some unnecessary clauses at the prime level, too. Right. How does how does that work?  

 Dan Ramish So there is new language actually comes directly from the 2017 National Defense Authorization Act that says that the contracting officer shall not use other FAR or D-FARS provisions in clauses except for those that are required by the FAR or D-FARS or consistent with customary commercial practices. So that’s specifically a limit limitation on what the agency can do, what the what the DOD contracting officer can do, and including additional clauses that aren’t mandatory in contracts for commercial products or services. Now, there is some question as to how this will actually play out, because under FAR part 12, there is an ability to seek a waiver to get around customary commercial practices in commercial product or services contracts. So it’s not clear whether this will limit that in the case of FAR, D-FARS clauses. That is a little bit uncertain, but it should be a discouragement from including extra non required FAR. D-FARS clauses in DoD commercial product and services contracts.   

Jared Serbu Just almost a side note. As you said, this implements language that Congress passed in the 2017 NDAA, which would have been passed in late 2016. So seven years to translate statute into the final rule. I mean, I knew the D-FARS rulemaking process was slow, but is it always this slow?   

Dan Ramish Unfortunately, that’s all too common. And actually there are a number of other provisions of the same section of the 2017 NDAA that are still pending. And, you know, it underscores some of the complexity. One of the other things that Congress said in the 2017 NDAA was that DoD needs to define what subcontract means. The 809 panel had said there were numerous different definitions of subcontract, and this is a very basic and important term when it comes to flow downs and obligations of primes and subcontractors under the FAR. And so DoD was looking at doing that. And actually the proposed rule had included subcontract definition language in various provisions. And in the final rule, they, they backed that out because the FAR has a parallel rule addressing the same issue. So that’s one of the complexities where sometimes the DAR counsel and the FAR counsel are operating in parallel and there are a lot of moving parts. And mind you, every year a new NDAA comes out and sometimes the interplay between one year’s NDAA and the next year adds additional complexity. So I could understand it, but it certainly makes life more difficult for contractors.   

Jared Serbu Yes, indeed. I kind of want to wind up toward the beginning of where we started, which was you made a comment that having unnecessary flow downs creates risk for subcontractors. Can you just share a little bit what you mean? What kind of risk is involved when you’ve got clauses that that don’t need to be there?   

Dan Ramish Sure. Well, it’s possible for flow down clauses to impose additional obligations, compliance obligations. I think that’s the main thing. And in many cases you’re dealing with companies that may be nontraditional defense contractors, and they don’t even have a full understanding of what their obligations are or are not. And it’s a real disincentive for those companies to even participate in the defense market because of the uncertainty about what the requirements are for them under the contract. They look at this massive list of flow downs and they see a lot of very onerous requirements cybersecurity, domestic sourcing and there are new requirements every year. And that is a real scary thing for companies that are not sophisticated in this area and are new to this area.  

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