Flowdown Negotiations, Part I: Common Mistakes

There are a couple of mistakes we often see in flowdown negotiations. One is confusing contracting officers' clause inclusion instructions with a contractor’s flowdown obligations. The other is analyzing clause applicability language to determine whether there is a flowdown obligation when the flowdown language itself is clear.

When I see one of these errors, I sometimes take a deep breath and (from our office in DC) imagine for a moment the placid waters of an Idaho spring creek. Then I get on with the work, communicating as effectively as I can with the other side.

Contracting Officer Instructions are Not Flowdown Obligations

Consider this hypothetical: A contractor is obligated to flow down Defense Federal Acquisition Regulation Supplement (DFARS) 252.204-7012 (Safeguarding Covered Defense Information and Cyber Incident Reporting) in its subcontracts under certain conditions. A subcontractor resists acceptance of this clause, pointing to DFARS 204.7304(c), asserting that a contractor is not obligated to flow down DFARS 252.204-7012 to a subcontractor providing commercially available off-the-shelf (COTS) products. "We're providing COTS products only," the subcontractor argues, "so this attempted flowdown is neither mandatory nor necessary."

Here is the text the subcontractor representative references as authority for his position:

Use the clause at 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting, in all solicitations and contracts, including solicitations and contracts using FAR part 12 procedures for the acquisition of commercial products and commercial services, except for solicitations and contracts solely for the acquisition of COTS items.

What the subcontractor representative fails to appreciate is that DFARS 204.7304 contains instructions for government contracting officers about when to include specific clauses in prime contracts. The provision says nothing about contractor flowdown obligations.

Flowdown Obligations are Contractual

Like all flowdown obligations, the one here is found within a contract clause. In the DFARS, contract clauses reside in Part 252, while in the FAR they are in Part 52. Flowdown obligations arise from clauses that are incorporated into a particular contract, starting at the prime level. Contractors pass down clause requirements by incorporating them into their agreements with subcontractors. Assuming the parties meet their flowdown obligations, this "flow" continues down to the lowest tier.[1]

In our hypothetical, the contractor's flowdown obligation is set forth at paragraph "m" of DFARS 252.204-7012:

Include this clause, including this paragraph (m), in subcontracts, or similar contractual instruments, for operationally critical support, or for which subcontract performance will involve covered defense information, including subcontracts for commercial products or commercial services, without alteration, except to identify the parties.

As you can see, this flowdown obligation includes commercial products and services. Nowhere within this text is there a carve-out for the narrower category of COTS products. Thus, the subcontractor representative’s assertion does not hold.

If the subcontractor representative remains unconvinced (“If COTS primes are exempt, why can’t we be?”), you could take a step back and describe how it should work overall: The only circumstance in which COTS providers are off the hook is when they provide support (prime level or lower) under a prime contract "solely" for the acquisition of COTS items. In that instance, the cybersecurity clause should not be in the prime contract to begin with.

Stay Within the "Four Corners”

Another error we encounter is the broad assessment of clause applicability language to determine whether there is a flowdown obligation, even when the flowdown language itself is clear.

To determine whether a contractor has an obligation to flow down to the tier below, begin with the text of the flowdown section of the clause at issue (again, in our example, section “m” of DFARS 252.204-7012). In the words of Professor Williston, stay within the "four corners" of the express flowdown language, venturing outside only when that language is ambiguous. Much of the time, it will not be, and venturing will be counterproductive.[2]

In our example, negotiating parties might disagree in good faith about what it means to say that a subcontract “involves” covered defense information. In such an impasse, it might be beneficial to assess other language in the clause and refer to a standard English dictionary to gain a better understanding.

Conclusion

In this Part I of our two-part series on flowdown issues, we wanted to highlight a couple of common errors we’ve seen over the last 20 years. For a broader consideration, check out Flowdown Negotiations, Part II: Navigating the Floodwaters.

If you need assistance in government contracting, feel free to reach out. Email us at [email protected] or message us here on LinkedIn. Read more about our work at https://www.dhirubhai.net/in/eric-aaserud-40220618/. Read more of our articles in our ongoing "Tending" series.

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This article is for informational purposes only. It does not constitute legal advice. Readers should consult with their own legal counsel to address specific compliance issues or concerns.

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[1] As a general matter, courts do not “read” clauses into subcontracts. The Christian Doctrine applies at the prime contract level. See G.L. Christian & Associates v. United States, 312 F.2d 418 (Ct. Cl. 1963) (courts should include in federal prime contracts those clauses required by regulation and expressing significant public procurement policy, even if not expressly incorporated). A subcontractor's obligations essentially begin and end based on the terms accepted in the subcontract agreement. Certain EEO obligations, however, have been read into subcontracts pursuant to express regulatory language. UPMC Braddock, et al. v. Harris, 934 F. Supp. 2d 238 (D.D.C. 2013).)

[2] One important exception: It's perfectly fine, of course, to venture outside the flowdown section to review and understand definitions (which are typically found in section "a" of the clause), such as "operationally critical support’’ and "covered defense information."

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