Posted on 7/26/2011 1:16 PM

The Advantages of Subcontracting

Subcontracting has its advantages.  One of them is the flexibility to negotiate terms and conditions.  The prime contractor may well treat your subcontract as a contract of adhesion by dictating its terms and conditions.  However, if you are knowledgeable about mandatory flow down clauses and skillful in your negotiations, you can reduce your risks and enhance your profits.
 
You cannot go to FAR or DFARS to find a list of mandatory subcontract flow down clauses.  FAR Subpart 52.3 does contain, however, a matrix of mandatory and optional prime contract clauses.  The only places to find a list of mandatory subcontract flow down clauses are "Service Subcontract Terms and Conditions" and "Fixed-Price Supply Subcontract Terms and Conditions" published by the Public Contract Law Section of the American Bar Association.  (See www.americanbar.org.)
 
Changes, termination for convenience, termination for default and disputes are not mandatory flow down clauses.
 
At the very least, limit the application of changes and terminations to situations where the actions are taken by the federal government.  The disputes clause has to be totally rewritten.  You should preserve your common law and state law rights and remedies against the prime contractor while at the same time allow yourself the option to pass your dispute through to the government where appropriate.
 
Pay attention to the choice of law provision.  Your state law should apply to disputes not implicating federal law.  The federal common law of contracts should apply in all other situations.  Primes usually go for this.  After all, it is eminently fair that the federal law apply when the subcontract is under a prime U.S. Government contract.
 
Avoid arbitration clauses.  Preserve your right to litigate but always seek to mediate disputes.  Prefer ADR forms other than arbitration.  Arbitration has become another form of litigation.

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