FedSubK Feature: Subcontracting - Best Practices, Pitfalls, and Frequently Asked Questions

Everyone is always talking about the big wins – getting that first PRIME contract. But you don’t have to be a prime to make a difference by providing much needed products and services to support agency missions and get a pie of the Federal marketplace pie. In this FedSubK Feature, I’ll share a few best practices, pitfalls, and frequently asked questions I get about Subcontracting.

When we talk about best practices, we are coming from the perspective of the business looking for subcontracting opportunities, but primes can also benefit from these tips as well when thinking about it from their perspective.

BEST PRACTICE #1 – BUILD A NETWORK OF PRIME CONTRACTORS

Let me tell you a story from when I was a CO/KO. I had a subcontractor come to me one day after a prime they had worked with on our site for about seven years had failed to win the follow-on award for the work. The sub said, “I’m not sure what we’ll do now. This is our bread and butter.” I asked about other prime contractors they had subcontracts with and what work they did commercially. The sub said, “Well, this job was so big, we put all our eggs in this basket. We thought we’d be here a long time.”

My advice is don’t put all your subcontract eggs in one prime contractor’s basket. There is too much at risk to think that one lucrative contract with a prime with continue in perpetuity just because things are great now. Why? Because of the reliance on a process where you don’t control – that being the prime’s relationship with the agency, the prime’s submission of an offer, and the Government’s evaluation of it as a winning proposal.

You must build a network of prime contractors that allows you to spread your exposure and income from Federal work across several subcontracts so that one prime losing a contract does not become a catastrophic event to YOUR business. I’ll cover below how to find Federal prime contractors.

BEST PRACTICE #2 – READ THE SUBCONTRACT AGREEMENT

There are several things outside of the work that subcontractors need to focus on in the Federal space, more so than in the commercial sector. You must read (and understand) the subcontract agreement between you and the prime. That includes:

• The scope of the effort the prime is having you perform or support,
• Payment terms,
• Non-disclosure agreements,
• Non-compete clauses,
• The flow down of government terms and conditions from the prime contract,
• How changes in performance will be handled,
• Disputes / termination / cancellation / closeout, and many other terms.

Your agreement is what it is. And it can change based on changes in Federal regulations, policies, and procedures that impact the Prime’s contract at any point of performance.

Know it and get very familiar with it. Make sure you agree with it before you sign. Subcontractors can ask the prime to clarify processes, communication, and terms before signing. But understand that some terms will flow down from the Government. More on that in a minute.

You must also understand privity of contract between the prime and the Government, meaning the prime and Government have a contractual relationship for the work. Subs do not have privity of contract with the Government…your relationship is with the prime only (or higher tier sub). There is no coming directly to the Government with a complaint about your subcontract or the terms it contains, except for very few special circumstances. I’ll also address one of those below.

BEST PRACTICE #3 - UNDERSTAND FEDERAL REQUIREMENTS

Have you heard of the legal principle that says, “Ignorance of the law is no excuse”? Thomas Jefferson said that if ignorance of the law was an excuse, laws would lose their effect. In the case of Federal contracting, even at the subcontractor level, this still holds true.

It is important as a subcontractor to understand the specific Federal requirements called out within your subcontract terms and conditions that flow down from the prime’s contract to yours. Failure to comply can lead to fines or penalties for you and your prime contractor.

The “flow downs” are Federal requirements set forth through a number of avenues that culminate in your subcontract as mandatory for compliance by both the prime and you as a subcontractor.

• Set by statute -- such as compliance with prevailing Department of Labor wage determinations
• Regulatory -- such as what is found in the Federal Acquisition Regulation (FAR) or set forth in agency supplements to the FAR)
• Technical Performance – such as compliance with a specific method of performance (like as in environmental cleanups or handling hazardous waste) set forth in policies or compliance with security requirements like security checks for employees or badging for access to government facilities
• Procedural – such as upwards reporting requirements

If you oversee a lower tier sub, these requirements may also have to be flowed down to all lower tiers, as indicated in your subcontract.

Specific requirements to be aware of where ignorance does not excuse a lack of compliance includes, but is not limited to:

• Regulatory compliances with agencies outside of the agency for whom the work is performed (i.e., Fish and Wildlife Service, Department of Homeland Security, etc.)
• Pricing (depending on the type of prime contract, subcontractors can be subject to certified cost or pricing data) – your prime will indicate this in the subcontract.
• Prevailing wages – Dept of Labor Wage Determinations – provided by prime
• Data Rights
• Acquisition, Handling, and Treatment of Government Furnished or Contractor Acquired Property
• Security & Facilities Access
• Safety
• Section 889 Prohibition on Contracting with entities using certain telecommunications and video surveillance service or equipment from made by five specific Chinese companies and their subsidiaries, affiliates, and successor organizations. (Search on “Section 889 prohibited companies” for a list).
• Prohibition on the use of any hardware, software, or service developed or provided by Kaspersky Lab to include any successor, any company that is controlled by or under common control with Kaspersky Lab, or any company with which Kaspersky has a majority ownership.
• Prohibition on ByteDance applications (aka Tik Tok) related to the use of any equipment used in the performance of work to acquire, store, analyze, evaluate, manipulate, manage, move, control, display, switch, exchange, transmit, or receive data or info under a contract with an executive agency….including computers, peripherals, telephones, hardware, software, firmware, etc. The Contractor is prohibited from having or using a covered application on any information technology owned or managed by the Government, or on any information technology used or provided by the Contractor under this contract, including equipment provided by the Contractor’s employees.
• Cybersecurity
• Reporting
• Other Compliance (Gratuities, Code of Ethics, etc.)

As mentioned, many of these impact lower-tiered subs you may manage on the work, and they must be flowed down to them as well in your agreements.

BEST PRACTICE #4 - CREATE A COMMUNICATION & COORDINATION CADENCE

To avoid disagreements and other pitfalls we will talk about later, you must insist that your prime engage in a regular communication and coordination cadence.

This spells out--

• Who do you contact in specific instances. This will likely be the Prime in all instances but who at the Prime is important and having an open line of communication.
• How will you communicate? Phone, email, text, WhatsApp? Etc. and as we will talk about next, keeping records of those communications – particularly if they impact the scope, cost, schedule, or other key aspects of the project.
• When do you communicate? Set a cadence for regular communication – a check in at the very least or more formal status meetings weekly or biweekly, particularly on long terms projects. Have an agenda and an understanding of the critical elements or the prime that require your immediate communication (i.e., security or safety incident, departure of an employee deemed “key personnel”, etc.)
• How will conflicts or disputes be handled? Determine an escalation chain so conflicts and disputes can be resolved quickly. On large projects with multiple subs, the Government does want to know that lost time / effort is minimized in these situations.

As the sub, you may have to be proactive to engage your prime and not wait for them to contact you. You likely aren’t their only sub or this isn’t their only contract.

You must also your best judgement and err on the side of caution when it comes to notifying your prime during performance of potential or actual issues. It could save you a lot of grief later.

BEST PRACTICE #5 - ESTABLISH A RECORDKEEPING SYSTEM

Establishing a recordkeeping system for your Federal work is a good idea. In it you should include:

• Project Library – summaries of the work you’ve performed and outcomes for future use with other primes or stretching into becoming a prime contractor yourself one day.
• Pricing / Rates – maintain a record of your prices and labor rates and how they were substantiated so you withstand any future questions or the rare possibility of an audit.
• Payroll / Accounting – particularly when Department of Labor prevailing wages are involved, you must keep detailed records of the wages, fringes, and benefits paid to those employees and how they were calculated. The DOL Wage and Hour Division has amazing guides on how to do all that correctly so you don’t find yourself on the receiving end of a not-so-great outcome should they get a compliant and do an audit.
• Organized and segregated – make sure records are organized and segregated by contract, project code, or other method.
• Retention after performance – make sure you retain all records for the required minimum time after the end of contract performance (which should be called out in your subcontract agreement)
• Available for audit – if required, be sure you can make all records available for audit by the prime or Government.

Too many subs think about these things too late and then play catch up once they are in the middle of performance.

COMMON PITFALL #1 - FAILURE TO MAINTAIN RELATIONSHIPS

If you aren’t leveraging relationships with prime, suppliers, and Government contacts for future opportunities, you are missing out on future opportunities both as a subcontractor but possibly as a prime. Even as a subcontractor, you will build valuable relationships with the Government through business name recognition and performance. You can use that to further your relationships with agencies, primes, and other team members to create and grow in the type of sizes of Federal opportunities you participate in and the roles you hold.

Letting these relationships die on the vine shows a lack of interest in future opportunities. Never “check out” of a relationship with an agency or prime without completing the work. It can come back to haunt you on future opportunities.

Avoid incumbent-itis and the thought only you can do what you do as a sub. Trust me, there is another sub waiting in the wings to do the work if you aren’t or don’t maintain the relationships that matter to keep yourself as a person who is “in” with the prime or Government.

COMMON PITFALL #2 - AMBIGUOUS TERMS & CONDITIONS

We talked about a best practice being reading your subcontract agreement. But you also need to understand it. If you aren’t sure, ask the prime to clarify or explain early and “GET IT IN WRITING” to avoid assumptions, misinterpretations, and other disputes that can be costly to you in performance.

Clearly understand—

• Scope
• Payment Terms
• Prevailing wages
• Compliance
• Reporting
• Communications (who and when)
• And limits of your authority within the project, with the prime, and with the Government

Don’t let things get glossed over to your detriment.

COMMON PITFALL #3 - FLOW DOWN FAILURES

We talked earlier about clauses that flow down from the prime contract to the subcontract. It is the prime’s responsibility to ensure that all applicable contract clauses are flowed down to subcontractors. Primes will often flow down as much as possible as a means of risk mitigation, even when a flow down is not required by the clause itself.

It’s important to do your due diligence to understand the clauses that should flow down from the contract as a course of business on Federal contracts as well as understand the clauses that should NOT flow down. And it’s important from two perspectives. You want to be sure you are not being held to a requirement not required for performance AND you want to be sure any mandatory requirement is not left out of your subcontract.

If a flow down is not required, subcontractors can negotiate with the prime using the applicability language in the clause and the prescription for its use as found in the FAR to have it removed from the subcontract agreement. Easy enough.

But…what happens when the prime fails to correctly flow down a clause that is required to be in its subcontracts. And what happens to you -- the subcontractor -- when that occurs?

Some say the Christian Doctrine could potentially apply. The Christian Doctrine is a principle stating that if a contract clause is required by either statute (i.e., law), regulation, or Executive Order the required clause is automatically incorporated by operation of the law into any existing contract. This could imply that a clause in the prime contract that states it should flow down to the subcontract in its language is still binding on the subcontractor. However, that can depend on the nature of the clause.

At present there is no direct precedent where the Christian Doctrine has been explicitly used to hold a subcontractor responsible solely due to the prime contractor’s failure to include a required FAR clause. However, s subcontractor may find itself subject to certain obligations even if those were not explicitly stated in the subcontract, especially if the clauses involve important regulatory or statutory requirements; one example being payment of prevailing wages or a federal minimum wage to subcontractor employees. This this case, a subcontractor could face legal risk if it is assumed that it is not bound by certain FAR clauses simply because they weren’t included in the subcontract. Courts could still enforce these clauses based on underlying public policy.

While the prime contractor is ultimately held accountable for any failure to comply with contract terms and conditions, The prime contractor can amend the subcontract to include the missing clause. Subcontractors may need to negotiate with the prime for any changes such as increased costs, should that occur.

I highly recommend that you have an attorney you can contact who is versed in Federal contract law to review your subcontracts – particularly if you are new to Federal subcontracting – and advise you of your responsibilities so you operate within the law.

COMMON PITFALL #4 - COMMITMENT VS DELIVERY

A prime has asked you if you are available for some subcontract work. You’ve got several other commercial jobs and a few other subcontracts with other primes. You don’t want to miss the opportunity so you decide to try to make it work and agree to the prime’s schedule even though it will be tight. A few weeks later, you realize you can’t meet the prime’s schedule. You reach out to the prime and try to work out a schedule delay so you can finish the work.

When it comes to Federal work never ever EVER over commit and under deliver. It is the fastest way to get a bad reputation, and it not only impacts you but every other subcontractor on the job, your client (the prime), and the Government as well as the end user, which could be military members, veterans, or the public.

If you can’t meet a schedule, take a pass or negotiate a longer schedule up front. Build in contingency time and/or have a “Plan B” for not if, but when, delays occur and take you off your timeline and take the project off the critical path.

I highly suggest that subcontractors, like primes, create surge capability so that if another opportunity hits or a project delay occurs you can flex without fear of failure. This gives you practice for moving into prime contractor opportunities and builds a network of reliable subcontractors for yourself when that time comes.

COMMON PITFALL #5 - POOR MANAGEMENT & RECORDKEEPING

We talked about a best practice being the creation of a communication and coordination cadence with your prime. Projects can suffer from a lack of proactive management. And it can occur at any level. And management includes compliance with contract requirements from both a technical and operational perspective.

The same with recordkeeping. Most reporting subcontractors do on Federal contracts flows up through the subcontracting tiers to the prime. Waiting on the records of your lower-tier subcontractor or having the prime wait on you isn’t good.

You can perform the work well on a contract and may think that’s enough. But if you can’t manage your lower-tier subs well enough and/or keep accurate, complete, and organized records, it will leave the Government doubting your capabilities to one day migrate from subcontractor to prime. And they will remember you…but not in a good way

Now let’s go over five frequently asked questions I receive about subcontracting.

WHERE CAN I FIND A LIST OF FEDERAL PRIME CONTRACTORS?

There are a few great places to find this information (links at underlines):

• SBA Directory of Federal Government Prime Contractors with a Subcontracting Plan -- List of all Federal prime contractors with a subcontracting plan requirement.
• GSA Subcontracting Directory
• DoT Subcontracting Directory
• FAA Subcontracting Directory
• DHS Prime Contractors List
• GSA eLibrary -- Subcontractors can use this resource to identify potential prime contractors who may need subcontracting partners for GSA Schedule contracts.

WHERE CAN I FIND SUBCONTRACTING OPPORTUNITIES?

• SAM.gov -- While it's mainly used by prime contractors to find federal opportunities, subcontractors can also use it to identify potential prime contracts that may require subcontracting. By searching for opportunities by NAICS codes, keywords, or specific agencies, subcontractors can identify prime contractors who might be looking for subcontractors.
• SBA SubNet -- Is a database of subcontracting opportunities posted by prime contractors. This platform is particularly useful for small businesses looking to partner with larger primes on federal contracts.
• APEX Accelerators (formerly Procurement Technical Assistance Centers (PTAC)) -- free or low-cost assistance to businesses seeking to compete in the government marketplace. They provide guidance on finding subcontracting opportunities and can connect subcontractors with prime contractors.
• Direct outreach to Prime Contractors -- Large Federal Prime Contractors sometimes have their supplier portals, under which you can register for possible subcontract opportunities. Lockheed Martin, Northrop Grumman, Raytheon Technologies, Boeing, General Dynamics, BAE Systems, Leidos, L3Harris Technologies, SAIC, and Huntington Ingalls Industries are a few of the large contractors in the Federal marketplace with such portals

DO I NEED TO BE REGISTERED IN THE SYSTEM FOR AWARD MANAGEMENT (SAM.GOV) TO BE A SUBCONTRACTOR?

No. However, primes often use SAM to find a list of potential subcontractors. Being registered builds credibility since your business is vetted through the IRS TIN Match and the SAM Exclusions match processes. Registration gives you visibility to prime contractors, access to SBA SubNet, allows you to respond to critical FAR clauses such as choosing your business type (small, WOSB, SDVOSB, etc.), and representing and certifying to certain critical FAR flow down clauses like some we talked about (Section 889, etc.).

WHAT SHOULD I DO IF I HAVE AN ISSUE OR DISPUTE WITH THE PRIME?

Follow your subcontract agreement and the procedures outlined within it. Working within the bounds of agreed to dispute resolution through escalation chains, mediation, and arbitration before litigation, when possible.

Do not call the Contracting Officer or Federal Government to complain about your prime contractor. Without privity of contract, the Government has no authority or ability to pursue any recourse on the subcontractor’s behalf.

For example, if you have a claim against the prime and the prime is not willing to settle it, if it chooses the prime can sponsor the subcontractor’s claim to the Government for consideration. But it is not required that the prime sponsor the claim and the sub cannot present its own claim to the Government. Again, it gets back to that privity of contract thing.

There is one exception, however, to the don't-call-the-CO/KO guidance...

WHAT IF I HAVEN'T BEEN PAID BY THE PRIME?

If the prime contractor has failed to make timely payments and there is no resolution with the prime after multiple attempts, subcontractors can document the communications made (in detail) and, after seeking legal assistance, the matter can be reported to the Contracting Officer for assistance in resolving payment disputes (FAR 32.112-1).

The role of the subcontractor is vital in providing products and services to the Government. Primes can’t do it all. They rely heavily on subcontractors and an overwhelming majority of those subcontractors are small businesses.

Want to learn more about the role of the subcontractor? Check out our FedSubK Feature “Prime or Subcontractor: What to Know About Each Role” at https://www.fedsubk.com/post/prime-or-subcontractor-what-to-know-about-each-role.

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