Infotech and the Law: You may be a government subcontractor if ...

Devon Hewitt

There's something many companies selling products or services in the commercial marketplace don't know: If they sell a product or service to a government contractor, they'll likely be considered a government subcontractor and, therefore, may be subject to certain statutes and regulations -- even if they have not entered into a specific contract with the government contractor to perform work related to the prime contract.

The reason for this has to do with the definition of "subcontractor" in various federal statutes and regulations. A subcontractor generally is considered to be a company that assumes or performs a portion of a prime contractor's obligation with the government.

The Federal Acquisition Regulation Act and other federal regulations, however, define subcontractor more broadly, to include a company that has any arrangement with a prime contractor for the purchase or sale of goods or services that, in whole or in part, are necessary to perform any work the prime contractor has with the government.

The term "necessary for the performance" of any prime contract has been broadly construed. For example, the Labor Department found that a company was a subcontractor because it had agreements with the owners of commercial property to manage properties that later were leased to government tenants. Similarly, a district court held that an insurance company was a subcontractor because it provided workers' compensation insurance to employees of a government contractor.

A commercial company that sells goods and services to a government prime contractor is not subject to every statute and regulation applicable to government contractors.

If the company provides the prime contractor with goods and services it typically sells in the commercial marketplace, the company is likely to be subject to only four requirements that are explained in the following FAR clauses: equal opportunity, affirmative action for special disabled and Vietnam veterans, affirmative action for handicapped workers, and the Service Contract Act.

The first three requirements apply to any subcontractor who in the preceding 12 months has sold goods or services to the government --directly through a prime contract or indirectly by selling to a prime contractor --which exceed $10,000. The Service Contract Act clause applies to any company that has an agreement with a prime contractor, the principal purpose of which is to furnish services through service employees. The work must exceed $2,500.

The fact that a company's agreement with a prime contractor for the purchase or sale of goods or services does not include the FAR clauses or otherwise fails to reference these obligations does not exempt a subcontractor from compliance.

The requirements will be considered incorporated into the subcontract as a matter of law under the Christian Doctrine. This holds that a FAR clause or procurement regulation that implements a statutory directive has the force and effect of law, even though the clause or regulation is not expressly included in the government prime or subcontract.

Because the term subcontractor has been broadly construed by the government, and because the federal requirements do not need to be included in a subcontract agreement in order to be binding, many commercial companies may be surprised to learn they must comply with these federal requirements.

Noncompliance with some of these requirements may result in penalties or unanticipated costs. Consequently, a company assumes a tangible business risk if the requirements are ignored. *

Devon Hewitt is a partner of Government Practices at ShawPittman in McLean, Va. She can be reached at devon.hewitt@shawpittman.com.


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