The United States government spends hundreds of billions of dollars annually on contracts. To claim as big a slice of that pie as possible, prime contractors routinely enlist subcontractors to partner with them to provide the goods and services the government needs.
Keep reading to learn more about what government subcontracting is and the best practices to follow when subcontracting government contracts for both primes and subs.
Government Subcontracting: The Basics
If you’re wondering how to subcontract with the government, here’s a brief primer, as well as the key differences between prime contractors and subcontractors.
Government Prime Contractor
A prime contractor is an independent contractor that works directly with the government. According to the U.S. General Services Administration (GSA), prime contractors are responsible for making sure the work is completed as expected in the designated amount of time and managing any subcontractors on the project.
Government Subcontractor
Often, a smaller business with fewer full-time employees, or one with more specialized skills, will work with a prime contractor as part of a larger overall agreement.
Subcontractors do not work directly with the government, but instead work on specialized tasks for other contractors (primes).
As a government subcontractor, you will want to understand the government market in the areas of your company's expertise. For example, if you mostly work in the construction industry, you may want access to market intelligence on government construction projects in your area so your firm can appear knowledgeable and prepared when seeking subcontracting opportunities.
How Subcontracting Works
When primes win federal contracts, they often look to hire subs to take responsibility for certain clauses. By doing so, they can take on more and larger projects without hiring more workers themselves. At the same time, subcontracting also enables small businesses to get work from the government that they wouldn't be able to land themselves, albeit indirectly.
With the proper contractual arrangements in place, successful subcontracting is a win-win-win scenario for all three parties: the federal government, the prime, and the sub.
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Federal Contracting 101
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Federal Subcontracting Disputes
Unfortunately, not every subcontracting contract leads to smooth outcomes for all parties. For example, it's not uncommon for subs and primes to get into disputes when contractual relationships aren't created as thoroughly as they should be.
The good news is that by doing your due diligence and understanding the best practices of subcontract management, you can avoid such disputes, leading to better outcomes for both sides of the equation.
How to Manage Government Subcontracting
Subcontracting is like any interpersonal relationship. If you want things to go well, you need to treat the other side with respect. Since two parties will be working together, both sides want to make sure the other is accountable and pulling their own weight.
In a subcontracting arrangement, primes and subs often find themselves in otherwise avoidable predicaments because they don't do their due diligence when creating and agreeing to subcontracts. They may also be operating under different time frames or have different ideas about how to complete the work.
Ensuring successful engagements between primes and subs throughout an entire project starts with the right approach. To do this, both sides need to follow several steps.
Operate with Integrity and Work Together in a Cooperative Spirit
Whenever you, as an independent contractor, are working with the federal government, the work is typically governed by laws and regulations. As such, primes don't have a lot of wiggle room. Since an issue will almost certainly come up during the course of the original contract, it's important for both primes and subs to know who they're getting into business with and to ensure that the party intends to operate with integrity and be as cooperative on their current project as possible.
Communicate Effectively, Honestly, and Transparently
For the best results, both parties need to be honest and transparent, communicating any issues as they arise. That way, they stay on the same page. Understanding that subs might not have as much experience working with the government, it's imperative that primes tell their subcontractors to report any issues or project risks that arise immediately, as failure to do so could result in a contractor losing certain claims.
Be Understanding of the Subcontractor or Prime Contractor’s Concerns
The kinder you are to your business partners, the better things generally turn out. By understanding where the other side is coming from, you gain a clearer sense of your negotiating power. For example, when a sub understands why a prime is thinking in a certain way, they'll know when pushing back is a non-starter. At the same time, they'll also know where primes can modify project details in a way that's acceptable to them.
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Dos and Don’ts of Federal Subcontracts
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What is a Teaming Agreement?
A teaming agreement is a contractual arrangement between a potential prime contractor and another company to act as a subcontractor under a specified federal government contract or acquisition program.
Teaming agreements are not actually enforceable or binding until the prime contractor wins the government contract and awards the subcontract to the subcontractor.
The guide below offers a complete explanation of what teaming agreements are and how your business can benefit.
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Teaming Agreements 101
Discover how the virtual business environment has changed the way government contractors make connections, best practices for subcontracting, why small businesses should team with larger primes and next steps to get started.
What is a Flow-Down Clause?
In government contracting, a flow-down clause is a Federal Acquisition Regulation (FAR) provision that essentially stipulates that the subcontractor will be bound to the contractor in the same manner that the contractor is bound to the government. In some cases, flow-down clauses refer to other risk-shifting provisions that protect prime contractors in the event their subs mess up.
Understanding the perspectives of both primes and subcontractors is crucial when it comes to flow-down clauses in subcontracts.
Primes, for example, are concerned about potential issues such as delays, defaults, or deficiencies in work from subcontractors. Their primary goal is to avoid jeopardizing their relationship with the government or facing default or termination.
In the event of problems, primes aim to avoid being caught in the middle, managing issues with both the government and subcontractors. To mitigate this risk, primes ensure that the subcontractor's obligations are aligned with their own obligations to the government.
Best Practices for Pass-Through Claims
Sometimes, during a government contract in which prime contractors and subcontractors work together to fulfill the government's needs, a dispute may arise - this is not uncommon when many parties with different interests work together.
Unlike primes, subs don't have a direct path to submitting claims against the federal government. That's because the government has sovereign immunity, and only parties contractually bound to the government can bring suit against it.
In the event the government suspends a project in a way that causes the sub to incur damages or delays they weren't anticipating, the sub needs to prepare a claim and ask the prime to sponsor it, thereby passing it to the federal government.
This is a long and arduous legal process that can become a huge source of conflict in sub-prime relationships. On one hand, the prime is worried about being stuck in the middle of an argument between the government and their sub, and that they might be responsible in the event the sub is acting fraudulently. On the other hand, the sub is worried about not having a direct remedy for a claim and not being able to endure a lengthy process, even if they do.
Subcontracts must be drafted in a way that addresses these concerns, including the following:
- Outlining which issues the prime will sponsor
- How subs will help in the preparation and litigation of a sponsored claim
- What will happen in the event that a sub commits fraud during this process
Subcontractors should also include arbitration clauses, dispute clauses, and liquidating agreements in the original contract to cover every possible scenario. It's important to be as prepared as possible so your team can focus more of its valuable time on finding and winning more government business.
Best Practices for Claims Between Primes and Subs
What happens when a prime refuses to honor a subcontract by refusing to pass through a claim that is supposed to be passed through? What happens when a subcontractor doesn't communicate transparently, which causes issues with a project?
Any issues that may arise between primes and subs must be addressed in the contractual agreement. This should include topics such as mandatory mediation, arbitrability, where disputes will be settled, and who will cover legal fees.
Next Steps in Government Subcontracting
As you can see, engaging in and managing government subcontracts is no easy feat. But with the right approach, both the prime contractor and the subcontractor can open themselves to more government opportunities.
Tools like Deltek's GovWin IQ can help both prime and subcontractors. GovWin IQ contains features that make it easy to identify and track subcontracting opportunities through a simple search. With GovWin IQ, you can be confident that you are always finding the most relevant and reliable subcontracting opportunities for your business.
