Friday, December 14, 2012

Flow-down clauses

In many contracts where the ultimate customer is the government, there are requirements that the prime contractor flow specific clauses down to lower tier contractors and suppliers. There are three basic approaches to
doing flow-downs:

1. Use an omnibus clause that says that everything that should flow down flows down.
2. Use an omnibus clause, but make changes to those that apply to that subcontractor.
3. Prepare a list of all the specific clauses that must be met and incorporate that by reference into the subcontract.
In each of these approaches you also need to address the subcontractor’s responsibility to flow those requirements down to lower tier subcontractors and suppliers.

Omnibus clauses are much simpler to write and are less time consuming to do, but they basically require disclosure of the prime contract to the sub and lower tiers so they are aware of what they are agreeing to. Omnibus clauses with changes also require disclosure of the prime contract and may become a problem in negotiating where the subcontractor may want more of the subcontract terms to be the same as the prime has. My preference is to only flow down the specific required provisions.

While you have a contractual requirement to flow down clauses, you still need to do what is best for your company. If there is a problem the government doesn’t care who caused the problem, their contract is with the prime contractor. As such, the prime needs to both meet the flow down requirements, but also protect themselves against potential problems with the subcontractors. I don’t want a blanket flow down of provisions as I may have something in the prime contract that I would not want to be disclosed to them and have the subcontractor want those terms to be extended to them. I may also want to impose stricter controls or requirements on the subcontractor than are required by the prime contract as my way of managing against potential risks with the subcontractors. In flowing them down, I may also want to establish the government requirements as minimum requirements that must be met. That allows the subcontractor to be able to establish more stricter controls or requirements with their lower tier suppliers or contractors if that is needed.

When you do a blanket flow down of the prime contract terms, or flow down only specific terms, you need to make sure that you do not have conflicts between your terms and the required flow-down terms and also establish a precedence in the event of a conflict. Since you are required to flow-down the required terms the precedence in the event of a conflict shouldn’t be based on the writer. If you gave precedence to your terms and the conflicting term was less than what was required to be flowed-down you would not have met your prime contract obligation.

If you always gave precedence to the flow-down that would override any stricter requirements you may have in your terms. In this case precedence should be given to the term that has the strictest requirement of the conflicting terms. That way if the flow-down term has the strictest requirement, it applies. If your terms are stricter than the flow-down term, they apply.