Use Caution When Negotiating Commercial Item Subcontract

Use Caution When Negotiating Commercial Item Subcontract

By Jonathan T. Cain
Contributing Writer

Procurement reform legislation designed to expand the government's purchase of commercial rather than government-unique items has significantly expanded the pool of potential subcontractors for government contracts. To those engaged in selling commercial items to the government as a subcontractor, many of the pitfalls have been eliminated. Significant differences remain, however, and it pays to be cautious when considering or negotiating a commercial item subcontract.

In 1994 Congress specifically exempted prime contracts for commercial items from many procurement statutes. Similar waivers applicable to subcontracts for commercial items were not included in the statute and have been less clear. As enacted, the Federal Acquisition Streamlining Act waived certain statutory requirements for prime contracts for commercial items but left to the Federal Acquisition Regulation Council the authority to waive statutory requirements for commercial item subcontracts.

The FAR Council's authority is limited in certain important respects. The requirements of sections 8(a) and 8(d) of the Small Business Act, special procedures for acquiring goods and services from small and disadvantaged businesses and from the handicapped, are examples of requirements that cannot be waived. Most important, statutory requirements are not waived for commercial items obtained from a subcontractor and resold or distributed by the prime contractor without adding value. In other words, prime contractors may not avoid requirements imposed upon them by law merely by serving as a supermarket for commercial items of its subcontractors.

The FAR Council has waived requirements imposed under the Drug-Free Workplace Act, the Walsh-Healy Act and the Service Contract Act on commercial item subcontractors in their entirety. Commercial item subcontractors are also freed from certain provisions allowing the government to audit their books with respect to cost reimbursable contracts.

Commercial item subcontractors are no longer required to certify their compliance with certain other statutes, such as the Clean Air Act, the federal water pollution control act and certain workplace safety and labor hours acts. The underlying requirements of these federal statutes remain, but subcontractors are no longer required to make compliance certifications.

In some respects, however, Congress has not been wholly satisfied with the implementation of waivers from procurement regulations by procurement bureaucrats. For example, in FASA, Congress said that it wanted to exempt fixed-price contracts and subcontracts for commercial items from the burdens of the Cost Accounting Standards. Procurement bureaucrats were frustrated that congressional instruction exempted only fixed-price contracts.

In 1996 Congress tried again, specifically commanding an exemption from the Cost Accounting Standards for all contracts and subcontracts for the acquisition of commercial items. Refusing to give up, the executive branch again narrowed the scope of the exemption in its regulations. The current Cost Accounting Standard regulation exempts only fixed-price contracts and subcontracts for commercial items, leaving other types of contracts and subcontracts subject to the burdensome Cost Accounting Standards.

Beyond the issue of the applicability of federal procurement laws to commercial item subcontractors, there is the ques-tion of whether a commercial item subcontractor must accept a subcontract that attempts to flow down contractual obligations of the prime contractor as a condition of selling commercial items to the government.

Current law states that the government may require only clauses that are required to implement provisions of law applicable to subcontracts for commercial items or that are standard commercial practice to be flowed down to commercial item subcontractors. These are limited in number, but can have significant consequences.

First among the required flow-down clauses are those imposing Equal Employment Opportunity nondiscrimination requirements, preferences for handicapped workers and Vietnam veterans preferences. These requirements involve substantial compliance burdens, including creating and annually updating affirmative action plans, record keeping and reporting requirements, and exposure to Department of Labor compliance audits.

Second, the prime contractor may be required to flow down the requirement to provide information necessary to establish that the subcontractor's prices for commercial items are reasonable.

Prime contractors may wish to flow down other prime contract clauses to their commercial item subcontractors, and nothing in the law prohibits the practice. This is an issue for negotiation between the prime and subcontractor.

Congressional efforts to remove the barriers between commercial and government subcontracting for commercial items over the past few years have been largely, but not entirely, successful. While many of the burdensome requirements formerly imposed on government subcontractors have been eliminated, selling commercial items to the government as a subcontractor still imposes sometimes unexpected obligations.

Jonathan T. Cain chairs the Technology Practice Group of Mays & Valentine LLP, McLean, Va. His e-mail address is jcain@maysval.com.