ISM-FASMG - The Group's News

Questions on these articles should be addressed to the author, as noted in their bio at the end of each article. The following is the first article in this TIPS series. We invite you to submit tips you may feel should be included in this new activity. Just send them to your chair at ewhitt2@verizon.net and we will get them out in e-mails to all our members.

A unique feature of the Federal subcontracting environment is that it is subject to a set of complex Federal Acquisition Regulations (F.A.R.) – only some of which apply. It is also concurrently subject to the Uniform Commercial Code (UCC), as generally implemented through a state commercial code.

The distinction of a "subcontract" is that the material or service is being obtained in the Federal Acquisition environment to ultimately support a purchase by the US Government (USG) under a prime contract between the USG and the prime contractor.

Although not often apparent to the Supply Manager, it is important to note that the subcontract is a "commercial contract;" therefore, the primary governing body of law in the subcontracting environment is commercial contract law (not F.A.R. or Federal law). This generally takes the form of state versions of the Uniform Commercial Code (U.C.C.). The Federal Acquisition Regulations (F.A.R.) are applicable only to the extent incorporated by the parties in the subcontract. While many Federal laws may apply to such transactions, they apply because they are Federal laws – not because they are part of the F.A.R. In such instances, the F.A.R. is only the implementing vehicle for such laws. Examples of these are Procurement Integrity Act, Small Business Legislation, and Affirmative Action Legislation.
Since F.A.R. clauses are not automatically applicable to, or incorporated into the subcontract, the SCM must understand the significance of ensuring the incorporation of the appropriate F.A.R. clauses into each transaction. This is known as the "flowdown" of a F.A.R. obligation to a lower tier subcontractor. This is particularly important when a specific clause gives the government a right that requires collateral action on the Supply Manager's part with the supplier, e.g.: the changes clause, or the termination for convenience clause. Since there are no comparable rights in commercial law, the Supply Manager's company could be "caught in between," if the government were to exercise such a right in their company's prime (sales) contract, and the Supply Manager could not concurrently do likewise with their major suppliers, e.g.: if the USG terminated the prime contract under the F.A.R. termination for convenience clause, the prime contractor would need to terminate all underlying subcontracts which existed to support the prime contract. If the termination for convenience clause were not incorporated into the subcontract(s), there would be no legal right to terminate the subcontract(s) under commercial law.

It is not only important to ensure "flowdown" of appropriate F.A.R. clauses to Supply Manager's suppliers, but to ensure that some of them are incorporated into the subcontract in their entirety, and not just by reference. For example, the Federal government right of access to records and/or audit clause(s) would require significant modification to be acceptable in a subcontract. This is because it is doubtful that a subcontractor would grant the purchasing company the same rights, which the prime contractor is obliged to grant to the government. Therefore, caution must be exercised when determining how to incorporate the requirements of a specific F.A.R. clause into the subcontract.

Additional guidance on this subject will be provided in future issues of FASMG TIPS.

Extracted from "Contract and Subcontract Writing and Management" by Ernest G. Gabbard in Supply Management Handbook, 7th edition (Cavinato, Flynn & Kauffman, editors), 2006.
Contact author: egabbard@alleghenytechnologies.com

The FASMG's Tips