Subcontract Training

The doctrine of privity of contract is a legal principle that states that only a person who shares a direct contractual relationship with another person may claim rights or have obligations under that contract. This doctrine derives from common law and was established to prevent individuals or entities without a direct contractual interest from bringing lawsuits related to that contract.

In the context of government contracts and subcontracting, the doctrine of privity has significant implications:

• Lack of Privity for Subcontractors with the Government: Generally, government subcontractors do not have privity of contract with the Government. Their contractual relationship exists solely with the prime contractor.
  • Consequences of Lacking Privity: Due to this lack of direct contractual relationship, subcontractors typically:
  • Have no direct access to the Boards of Contract Appeals (BCAs) or the U.S. Court of Federal Claims to pursue claims against the Government.
  • Have no direct claim against the Government for issues such as payment or changes.
  • In many instances, cannot even communicate directly with the Government customer without the prime contractor’s permission.
  • Cannot directly protest an award to another company because they did not submit a proposal directly to the Government.
• Privity with the Prime Contractor: Subcontractors only have privity of contract with the prime contractor. This means that any rights or claims a subcontractor may have must typically be pursued against the prime contractor, who then has privity with the Government.
• Irrelevance of Certain Factors: The following factors do not affect the lack of privity between a subcontractor and the Government.
  • The type of subcontract, such as whether it is a cost-reimbursement subcontract.
  • The fact that the prime contract and subcontract contain parallel terms that are largely dictated by the Government.
  • The source of funding for the contract, such as a federal government grant or flow-through payments.
  • The prime contractor incorporating the entire prime contract by reference into the subcontract.

However, the sources also outline certain exceptions to the doctrine of privity between the Government and subcontractors:

1. Government “liens” under Progress Payments provisions: The Government obtains title to property acquired or produced by the contractor using progress payments.
2. Government rights under Intellectual Property clauses: Clauses like DFARS 252.227-7013 allow the Government to ensure subcontractors’ intellectual property rights are protected and sometimes allow direct delivery of technical data. DFARS 252.227-7037 allows the Government to transact directly with subcontractors regarding restrictive markings on technical data. Importantly, these direct dealings do not create privity.
3. Government audit rights: The Government reserves the right to audit subcontractors through clauses flowed down in the prime contract.
4. Rights granted by socioeconomic laws: The Government can enforce socioeconomic laws (labor, civil rights, environmental) directly against subcontractors.
5. Suspension and debarment proceedings: The Government can suspend or debar subcontractors directly.
6. Ethics and mandatory disclosures: Subcontractors may be required to disclose wrongdoing directly to the Government, bypassing the prime contractor.
7. Industrial Security regulations: Government rights related to the handling of classified materials are tied to a subcontractor’s facility clearance agreement with the Government.
8. Small business subcontractors’ right to contact the Contracting Officer (CO) regarding payments: Small businesses can contact the CO if a large prime contractor fails to pay them on time under a non-commercial contract.

Additionally, direct dealings by the Government with a subcontractor could affect privity in certain situations, and third-party beneficiary theories can sometimes substitute for privity, such as in the case of data rights or direct payment agreements. However, these are often limited and fact-specific.

In summary, the doctrine of privity establishes a fundamental barrier between subcontractors and the Government in terms of direct contractual rights and obligations. While several exceptions exist, they generally favor the Government and do not grant subcontractors the same direct recourse against the Government as the prime contractor enjoys. Therefore, subcontractors primarily rely on their contractual relationship with the prime contractor for resolving disputes and pursuing claims.

A flowdown refers to terms and conditions from a government prime contract that a prime contractor is required or finds it necessary to include in its subcontracts with subcontractors and suppliers. These clauses essentially “flow down” from the higher-tier contract to the lower-tier contract.

Types of flowdowns: There are generally two main categories of flowdowns:

• Mandatory flowdowns: These are clauses that are required by law or regulation to be included in subcontracts. Examples mentioned include the Contractor Code of Business Ethics and Conduct, Small Business requirements, Socioeconomic/Equal Opportunity clauses, Human Trafficking prohibitions, and prohibitions on the use of Chinese telecommunications equipment and TikTok.
• Necessary flowdowns: These are clauses that, while not explicitly mandated, the prime contractor needs to include in the subcontract as a practical matter to meet its own obligations under the prime contract or to manage risk effectively. Examples include cybersecurity requirements (like DFARS 252.204-7012), Buy American/Country of Origin provisions, sourcing restrictions, technical data rights, cost or pricing data requirements, background check/facility access requirements, and Organizational Conflicts of Interest (OCIs) clauses.

Flowdowns for Commercial Subcontracts: The Federal Acquisition Regulation (FAR) has specific policies outlined in FAR subpart 44.4 that limit mandatory flowdowns in subcontracts for commercial products or commercial services. FAR 52.244-6 (updated Feb 2024) lists the specific clauses that are mandatory to flow down in these cases. FAR 52.212-5(e)(1) includes additional mandatory flowdowns specifically for commercial contracts. However, a GSA Class Deviation issued on February 15, 2025, and a DoD Class Deviation issued more recently have amended these clauses by removing certain EEO-related clauses.

DFARS 252.244-7000: This Defense Federal Acquisition Regulation Supplement (DFARS) clause, issued in November 2023, states that contractors shall not include FAR or DFARS clauses in subcontracts for commercial products or commercial services unless specifically required. This suggests a move towards limiting the burden of excessive flowdowns on commercial subcontractors.

The Christian Doctrine: It’s important to be aware of the Christian Doctrine, which states that certain deeply ingrained public procurement policies and contract clauses have the force and effect of law even if not explicitly included in a prime contract. While it’s debated whether this doctrine applies directly at the subcontractor level, prime contractors should be mindful of these fundamental principles.

Alterations to Flowdowns: Some clauses, when flowed down, should be altered appropriately, especially to reflect the subcontractor’s role and relationship with the prime contractor rather than directly with the government. Incorporating clauses without modification can lead to confusion and unintended consequences. However, other clauses, such as those related to DOD Data Rights, limitations on a subcontractor’s right to sell directly to the Government, and limitations on small business contacts with the contracting officer on noncommercial contracts regarding payment delays, should generally be flowed down without alteration (except to identify the parties).

A small business subcontracting plan is a requirement for certain large business prime contractors and outlines the contractor’s goals for subcontracting with small businesses, including veteran-owned, service-disabled veteran-owned, HUBZone, small disadvantaged, and women-owned small business concerns.

Here are some key aspects of small business subcontracting plans based on the sources:

• Requirement: A large business prime contractor must have a small business subcontracting plan if the contract (including options) is expected to exceed $750,000 ($1.5 million for construction). This requirement does not apply to prime contracts without subcontracting possibilities or contracts performed entirely outside the United States.
• Purpose: The plan outlines separate goals (in total dollars and as a percentage of total planned subcontracting dollars) for the use of various types of small businesses. The government has established goals for subcontracting with small businesses, and prime contractors are expected to make a good faith effort to meet these goals.
• Types of Plans: There are two main types of small business subcontracting plans:
  • Individual Plan: This is a contract-specific plan that covers the entire contract period (including options) and bases goals on the planned subcontracting opportunities for that specific contract. It may be tailored to implement or reference a Master Subcontracting Plan and requires Contracting Officer (CO) review and approval for changes.
  • Commercial Plan: This is a single subcontracting plan that covers all of the contractor’s contracts for a given fiscal year and includes the offeror’s total projected sales and the total value of projected subcontracts. It is preferred for commercial products and commercial services and includes all indirect costs in subcontracting goals and reports, with some exceptions. Master Subcontracting Plans typically do not have goals themselves; goals are implemented through individual plans.
• Content of the Plan: A subcontracting plan must include several key elements:
  • Separate goals for various categories of small businesses (Small Business, VOSB/SDVOSB, HUBZone, 8(a)/SDB, WOSB).
  • The total dollars planned to be subcontracted (for individual plans) or the contractor’s total projected sales and subcontract value (for commercial plans).
  • The principal types of supplies and services to be subcontracted and the types planned for each category of small business.
  • The method used to develop the subcontracting goals.
  • The method used to identify potential small business sources (e.g., SAM, trade associations).
  • A description of how indirect costs will be used in establishing goals.
  • The name of the employee administering the program and their duties.
  • A description of efforts to ensure equitable opportunities for small businesses to compete.
  • Assurances that FAR 52.219-8, “Utilization of Small Business Concerns,” will be flowed down in subcontracts with further subcontracting opportunities and that non-small subcontractors above a certain threshold will be required to adopt a subcontracting plan.
  • Assurances to cooperate in studies/surveys, submit periodic reports (using eSRS.gov), and provide required information to subcontractors with plans.
  • A description of the types of records the contractor will maintain to document implementation (e.g., checklists, source lists).
  • Assurances of making a good faith effort to subcontract with the small businesses identified in the bid or proposal.
  • Assurances not to prohibit subcontractors from discussing payment or utilization with the CO and to pay small business subcontractors on time.
  • A description of the contractor’s obligations to effectively implement the plan, such as providing assistance and counseling to small businesses and making “make-or-buy” decisions considering small business potential.
• Post-Award Reporting and Compliance: Contractors must submit reports on their subcontracting efforts through the Electronic Subcontracting Reporting System (eSRS.gov). Compliance with the subcontracting plan is evaluated by the SBA or the Defense Contract Management Agency (DCMA) through compliance reviews. Failure to make a good faith effort to comply with the plan can be considered a material breach of the contract and may result in negative past performance evaluations or liquidated damages. Good faith indicators include breaking out work, soliciting small businesses early, conducting market research, and negotiating in good faith.

It’s important to note that a small business subcontracting plan is generally not required from subcontractors providing commercial products or services under a prime contract containing FAR 52.212-5 or when the subcontract is subject to FAR 52.244-6, Subcontracts for Commercial Products and Commercial Services.

A Contractor Purchasing System Review (CPSR) is a review conducted by the government to evaluate a contractor’s system for purchasing subcontractors. For civilian agencies, the Administrative Contracting Officer (ACO) administers CPSRs, while for the Department of Defense (DoD), the Defense Contract Management Agency (DCMA) administers them.

The purpose of a CPSR is for the government to ensure that, as federal deputies, contractors are spending subcontracting dollars wisely by:

• Mitigating risks of fraud, waste, and abuse.
• Ensuring fair and reasonable prices.
• Maintaining a secure supply chain.
• Supporting small businesses.
• Matching federal priorities.

CPSRs generally look at a contractor’s past performance and consider the complexity and dollar value of subcontracts. While formal CPSRs are not always mandatory, they may be advisable when a contractor’s total sales to the Government exceed $25 million for civilian agencies and $50 million for DoD, if it is considered to be in the Government’s best interest.

Key features that are assessed during a CPSR include the contractor’s:

• Ability to conduct market research.
• Ability to obtain competition, including price competition. The focus is on the contractor’s process, not necessarily the price.
• Pricing policies and techniques, including processes to obtain accurate and current cost or pricing data where appropriate.
• Methods of evaluating subcontractor responsibility, including checking for suspension and debarment.
• Treatment of affiliates and partners to ensure fair and reasonable pricing.
• Small business policies and procedures and adherence to socioeconomic programs.
• Planning, award, and post-award management of subcontracts.
• Compliance with Cost Accounting Standards (CAS).
• Appropriateness of subcontract types.
• Management control systems.
• Competitive sourcing.
• Determination of fair and reasonable prices.

Supply chain management, including vendor rating systems and cybersecurity.
The DCMA Contractor Purchasing System Review (CPSR) Guidebook provides detailed expectations for these reviews. The review process involves the government requesting data and examining historical subcontracting actions to assess the contractor’s purchasing system against established policies and practices. The CPSR culminates in a report with recommendations to the ACO, outlining any deficiencies and potentially requiring the contractor to implement a Corrective Action Plan (CAP).

Having an approved purchasing system as a result of a satisfactory CPSR may limit the Government’s right to consent to subcontracts under FAR Subpart 44.2, except for specific types of subcontracts listed in the contract clause. Even if a formal CPSR is not required, establishing a robust internal purchasing system is crucial for managing risks and adhering to federal policies.