Federal Contracts: Incorporating Prime Contract Clauses by Reference in Subcontracts - Is It a Good Idea?

Author: Kenneth B. Weckstein, Daniel B. Abrahams
Organization: Epstein Becker & Green P.C.
Every day government agencies release new solicitations in which they request proposals for the hundreds of billions of dollars in goods and services that the government purchases annually. By law, those solicitations are required to include certain contract clauses. Most of those clauses are spelled out in the Federal Acquisition Regulation (FAR). Many of those FAR provisions include provisions which require that the clauses be flowed down to lower tier subcontractors. Is it sufficient to reference those FAR provisions by number and incorporate them by reference without repeating the full text of the clause? If full text is not required, is it desirable to repeat the entire text in the subcontract? As with many questions of legal interpretation, the answer is: "It depends."

As to whether it is desirable to include full text instead of references, there likely is a tension between the business side and legal side of the house. The legal position is simple. The more notice you give, the better. If a prime contractor references a clause by number and the subcontractor does not look it up, cannot find the clause or, worst of all, the number reference is wrong, the subcontractor later can argue that the prime contractor did not sufficiently give notice of the requirements of the clause. While incorporation of a clause by number should be sufficient notice, does a large, sophisticated prime contractor want to give a small subcontractor any argument to excuse a failure to perform? The business side, quite properly, is interested in protecting the prime contractor, with a minimum of paperwork, without scaring away the subcontractor. The business side will ask the lawyer, do I have to repeat the clause in the entirety? If the lawyer answers "no", the discussion is over.

So, must the FAR clauses be repeated word for word in subcontracts? The drafters of the FAR have not made the answer to that question easy. Different FAR provisions contain different flow down language.

FAR 52. 203-7 is titled Anti-Kickback Procedures. Paragraph (c)(5) of the clause says: "The Contractor agrees to incorporate the substance of this clause, including this subparagraph (c)(5) but excepting subparagraph (c)(1), in all subcontracts under this contract which exceed $100,000. " Emphasis added. Under that clause, is it sufficient for a prime contractor to write: FAR 52. 203-7 Anti-Kickback Procedures is incorporated by reference, with the exception of subparagraph (c)(1) of that clause." That would seem to be legally sufficient because the substance of the clause would be incorporated in the subcontract.

FAR 52. 203-11 is titled Certification and Disclosure Regarding Payments to Influence Certain Federal Transactions. This clause basically says that contractors cannot use appropriated funds to influence members of congress and certain other persons. Paragraph (b)(3) of the clause requires the contractor to certify that "he or she will include the language of this certification in all subcontract awards at any tier and require that all recipients of subcontract awards in excess of $100,000 shall certify and disclose accordingly." Emphasis added. Because the requirement is to include the language, an attorney can counsel that incorporation by reference is not enough. The language should be repeated. It makes sense that if a prime contractor wants a subcontractor to certify something, it should require the specific language of the certification.

Other FAR provisions contain a third type of flow-down language. FAR 52. 214-26 is titled Audits and Records--Sealed Bidding. Paragraph (e) of that clause states that: "The Contractor shall insert a clause containing all the provisions of this clause, including this paragraph (e), in all subcontracts expected to exceed the threshold in FAR 15. 403-4(a)(1) for submission of cost or pricing data." Emphasis added. The clause does not say how to insert a clause "containing all the provisions. . . ." While you can incorporate a clause containing all the provisions by incorporating those provisions by reference, how do we reconcile the "containing all the provisions" language with the "incorporate the substance" wording of other FAR provisions? Because the drafters of FAR 52. 214-26 presumably rejected the "incorporate the substance" language, does that mean that the FAR provision must be spelled out word for word in subcontracts? That would seem to be the more conservative approach.

A fourth type of flow-down provision is included in FAR 52. 215-2 Audits and Records--Negotiation. Paragraph (g) of that clause says that: "The Contractor shall insert a clause containing all the terms of this clause, including this paragraph (a) [sic], in all subcontracts under this contract that exceed the simplified acquisition threshold. . . ." Emphasis added. (Note that the difference between this clause and FAR 52. 214-26 is the use of "terms" instead of "provisions". How do you include "all the terms" in the subcontract? The clause does not permit the prime contractor to "incorporate the substance" (as does FAR 52. 203-7) but it does not require the contractor to "include the language" (as does FAR 52. 203-11). We know that the conservative answer requires inclusion of the terms, word for word.

The parade of ways in which the drafters of the FAR elected to require clauses to be flowed down continues. FAR 52. 222-21 Prohibition of segregated facilities, in paragraph (c), states that "The Contractor shall include this clause in every subcontract and purchase order that is subject to the Equal Opportunity clause of this contract." Emphasis added. FAR 52. 222-27 Affirmative Action Requirements for Construction contains similar "include this clause" flow-down language at paragraph (b). Is it sufficient to "include the clause" through incorporation by reference? If you do so, can a subcontractor argue that you didn't include the clause, but rather included a reference to the clause? Would that be a frivolous argument? Is it less frivolous because some FAR clauses mention incorporation while other FAR clauses are silent? Does a prime contractor want to risk exposure for and the taint of subcontractors not having complied with subcontract provisions regarding employment laws because the prime contractor did not spell out the clause in the subcontract?

FAR 52. 227-11 Patent Rights--Retention by the Contractor (Short Form) contains a variation on the "include this clause" language. Paragraph (g)(1) provides that "The Contractor will include this clause, suitably modified to identify the parties, in all subcontracts, regardless of tier. . . ." While that can be accomplished by incorporating the clause by reference in to the subcontract and providing that references to "Government" shall be deemed to be the "Prime Contractor" and references to "Contractor" shall be deemed to be the "Subcontractor", do you want greater clarity? So what is the answer? Allow me to answer the question with two questions. Do you want to explain to your supervisor, president or board of directors that one of the company's subcontractors has been accused of paying kickbacks and that the subcontractor claimed that it would not have paid the kickbacks had the subcontract specifically defined kickbacks as including "credits" and "commissions"? At that point, wouldn't you rather have included the text of the Anti-Kickback Procedures clause in the subcontract, word for word?

How do you satisfy the legitimate concerns of your business clients? The best way may be to draft a separate attachment, with the full text of all of the FAR clauses (modified for the subcontract). That attachment can be made a part of the subcontract and separately initialed by the subcontractor. If that approach is rejected and the prime contractor decides to incorporate FAR provisions by reference, it would be prudent to state that the full text of the FAR provisions will be made available to the subcontractor at its request and that the full text of the clauses can be assessed at: http://www.arnet.gov/far/ or http://farsite.hill.af.mil/

KENNETH B. WECKSTEIN is an attorney with Epstein Becker & Green’s Washington, D.C. office. Mr. Weckstein is Chairman of the firm’s Government Contracts Department. In addition to government contracts representation, he focuses on complex civil litigation and trade secrets law. Mr. Weckstein can be reached at 202/861-1860 or at kweckstein@ebglaw.com.

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