Infotech and the Law: Subcontracts: Much more than baby prime contracts
The U.S. government is a unique customer in many ways. Among the many
oddities that accompany dealings with the government, the terms and conditions
are, in many respects, totally non-negotiable. The Federal Acquisition
Regulation and the Defense Federal Acquisition Regulation Supplement lay out a
wide range of provisions that typically are presented as a take-it-or-leave-it
As a result, those involved in negotiating prime contracts may feel they
need not be concerned with common-law rules, state and federal regulations and
business practices associated with commercial, nongovernment contracting. This
idea soon strikes a rocky shoal when even a single subcontractor enters the
Once subcontractors are involved, the basic tenets of
commercial contracting and contract governance become paramount.
Other than the clauses that the FAR and DFARS say must flow from the
prime contract to the subcontract, there are only a few instances in which
either set of regulations specify the provisions that must or must not be in the
subcontract, which is essentially a standard commercial contract.
As a result, government contractors must think like purely commercial
enterprises in reaching agreements with subcontractors and other vendors, and
the prime contractor must think like a commercial customer.
As many IT services customers have found, one of the most important parts
of any IT services relationship is contract governance. Procurements are like
romantic relationships. A subcontractor's one-time delivery of a commodity
product is the contract equivalent of speed dating. On the other hand,
multiyear, complex system development is much more of a marriage. As in any
successful marriage, the key in this relationship is communication.
Also as with a successful marriage, successful contract governance takes
work and attention to detail. IT governance is a framework that addresses
strategic alignment, performance measurement, risk management, value delivery
and resource management of the IT organization. Proper governance is the tool
kit that the project manager needs to achieve delivery in a multivendor
Good contract governance begins with setting objectives for the
subcontractor. Based on that footing, governance consists primarily of a
continuous stream of communication that provides the information the prime
contractor needs to measure and compare the subcontractor's performance
against the objectives. The governance structure also must let the prime
contractor realign the subcontractor's performance as appropriate, to keep
performance in line with objectives. The key elements of a successful IT
governance program include:
?Developing a clear vision for what constitutes an acceptable delivery
?Defining appropriate oversight procedures, reporting requirements,
meeting plans and escalation paths to measure both current performance and
realistic expectations for future performance
?Establishing "structures" between the prime contractor and the
subcontractor that act on the defined governance program.
What has any of this to do with the subcontract, or the subcontract as a
commercial contract? Everything. Some things are fundamental rules of the
relationship. Payment terms, delivery dates, acceptance rules, warranties,
remedies, limitations of liability and intellectual property ownership are
fundamental to a contractual relationship. As a result, those issues are made a
part of the contract.
Proper IT governance is fundamental to a successful relationship and,
accordingly, needs to be defined in the contract. Proper IT governance is hard
work; it costs money and it requires resources. If terms are not agreed upon
upfront, there is no reason to expect the subcontractor to undertake the effort
and cost to expose itself to being managed and held accountable.
The choice is up to you. Make governance a fundamental issue that is
addressed as part of the deal or leave it to chance.
Lawrence Schultis is in the Global Sourcing group of
Pillsbury Winthrop Shaw Pittman LLP,