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Famous Last Words: “We Are Not a Federal Contractor”

April 25, 2023

Many businesses regard themselves as purely commercial, and not as government contractors. Even though a company may not sell directly to the government, this position may be sadly mistaken for several reasons. Among these reasons are the sheer magnitude of federal purchasing, the government’s increasing emphasis on Commercial Off the Shelf (COTS) solutions, broadened implementation of the “Best in Class” acquisition model, and an apparently increasing “Buy American” sentiment, among other things. These factors make it very likely that a company, any company, may be or become a supplier or subcontractor to a federal prime contractor at some point in the not-too-distant future and along with that be subject to certain requirements.

As of 2020, the federal government spent more than $630 billion on contracts, exclusive of spending for medical supplies and pharmaceuticals to treat COVID-19 patients and other things related to COVID-19. Of that number, roughly $300 billion or so is spent on “common goods and services.”  That category most certainly includes many things sold by businesses that do not consider themselves to be government contractors.

Any company that enters a contract directly with the federal government becomes a federal “prime” contractor. No prime contractor is fully or entirely vertically integrated. Therefore, it must buy from others those things that it needs for its performance but does not make or do itself. For those things, it purchases supplies and enters subcontracts with others as may be required for its own performance.

Whenever federal prime contractors make purchases from others in the performance of a prime contract, that second company becomes a federal subcontractor. This is significant because prime contracts contain provisions that are required to be flowed down to subcontractors and suppliers. Consequently, by selling to a federal prime contractor, a supplier or subcontractor becomes subject to the requirements of such flow-downs.  It thereby accrues additional and significant compliance obligations imposed by the flow downs. Those obligations can be quite specific and often require detailed compliance. Moreover, the flow-down obligations generally are not intuitive.  Further, they are not routine or familiar to commercial businesses. Inattention to compliance with such flow-down obligations could have serious consequences. Even unintentional non-compliance may result in immense and expensive administrative and legal difficulty, sometimes including criminal and crushing civil sanctions. At a minimum, agencies often and generally propose errant contractors and company officers for administrative suspension and debarment, which may have consequences much broader than the immediate matter.

These compliance obligations accrue because the prime contractor is required by its contract with the government to flow down certain obligations. And here is where an important distinction in public contracting arises. Because the prime contract is awarded under public law, the flow-down obligations also arise under public law.  The required obligations of compliance are therefore full legal obligations of the supplier or subcontractor.

Given the seriousness of compliance with flow-down provisions, one would think that they would be easily located. Yet, locating flow-down provisions specific to the product or work can sometimes be a challenge. Often the flow-downs are incorporated in a subcontract by means of reference to a link identified in the documents provided to the subcontractor by the prime contractor. That link often leads to a portal where one encounters a complex, seemingly disorganized, often confusing presentation of the flow-down materials that can seem (to the uninitiated) to be drafted intentionally to be unfamiliar to commercial businesses – although the organization may often track the government’s standard, prescribed format for contracts. Regardless, the applicable flow-downs must be carefully identified and gathered, noting the dates of each clause, as versions of the same provision may vary over time. Processes for full compliance with each should be arranged, fully documented, and carefully implemented. Care must be taken in this process to be sure to include consideration of any other provisions that may be referenced by the flow downs.

Often the substantial effort required by flow downs results in fatigue and considerable danger of compliance deficits.

Any resulting noncompliance (regardless of its degree) increases the potential for the company to encounter a perfect administrative and legal storm – a storm that may seriously affect the present and future financial stability of the company.

The federal government is aggressively increasing its oversight of both prime and subcontractor compliance. Therefore, prudence requires that every effort be made to achieve full required compliance. Fortunately, there are specialists available who can be engaged to assist with compliance issues.

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