Monday, July 31, 2023

SUBCONTRACTORS BEWARE THESE FLOW DOWNS

 

Doing business as subcontractor on government prime contracts can be profitable and a source of prompt payment. Many subcontract opportunities are out there and if you have the right assistance in how these deals are structured, they're a pretty risk free and profitable stream of revenue.

The problem is the prime contractors will want to pass down to the subcontractor every one of the government contract clauses in its prime contract. Some of these clauses are not all that onerous but others can create some high risks for the subcontractor. There are four clauses about which the subcontractor should be wary and insist that they be modified or eliminated altogether. Those clauses are Disputes, Changes, Termination for Convenience and Sponsorship.

Disputes.

The prime contract contains a disputes clause which requires the prime contractor to follow certain administrative procedures when a dispute arises and requires continued performance pending the outcome of the dispute process.  The prime contractor most likely will insert in your subcontract a clause which binds you as a subcontractor to follow the federal procedure rather than avail yourself of your remedies at law. Keep in mind your subcontract is a private commercial contract subject to the common law of contracts and the Uniform Commercial Code in the state in which you reside and do business. You have certain rights and remedies under your state laws. Therefore, you will want to protect your position as much as you can.

So, regarding the remedy for disputes, you want to avoid the administrative process of the prime. Instead, you want to protect your right to sue for breach of contract and the right to abandon performance considering the breach.  You want to have a clause in your subcontract that clearly addresses this protection. And you do not want the prime contractor’s disputes clause. If, because of your bargaining position, you end up having to accept the result of the disputes clause requiring you to be bound by proceeding according to the federal scheme then you should insist on compensation for acceding to that provision and accepting that risk.

Changes.

The prime contractor has a changes clause whereby the government can make changes and require the prime to continue performance. You do not want this clause. You do not want the prime contractor to be able to unilaterally change the work. If you must accept such a clause because the prime says it's essential to pass down the flexibility required by the government, you should insist on some kind of concession or compensation to account for this additional risk. There is no such counterpart in your local law contracts.

Termination for Convenience.

The prime contract contains a clause allowing the government to terminate the contract at will. At the very least, you should insist that the prime can only terminate your contract if in fact it is terminated by the government and that termination includes your portion of the work. There probably is nothing beyond that that you can do to protect yourself although it would be smart to try to get rid of that clause altogether. Try to negotiate a clause which contains a premium the prime must pay if it terminates for its convenience. Under your local law, a termination absent a clause permitting it is a breach of contract entitling you to direct and consequential damages.

Sponsorship Agreement.

You may in fact wish to pursue your claim against the government rather than sue your prime contractor in your local courts. If so, you should insist that the prime contractor agree to pay you compensation pending the outcome of that action. You are giving up your right to litigate in your jurisdiction and venue. The prime contractor should pay you for agreeing to process your claim through the prime to the government. The sponsorship agreement is written from the prime contractor’s point of view, and you need to level the playing field. The best way to do that is to avoid that process altogether but there might be good business reasons for not suing your prime contractor and to join hands with it and process the claim against the government.

No comments:

Post a Comment