New DFARS Commercial Subcontract Flowdown Restrictions

To little fanfare or even notice, a revised DFARS clause, DFARS 252.244-7000, was issued that prohibits flowing down clauses to commercial item subcontracts “unless required by the FAR or DFARS or consistent with customary commercial practices.” The prior clause allowed contractors to flow down a “minimal number of additional clauses necessary to satisfy its contractual obligations.” The final rule became effective on Nov 17, 2023—it’s effective now!

Mandatory commercial item flowdowns

The revised clause is specific on what must be flowed down to commercial subcontracts at any tier—(1) For DFARS clauses, only when required in the clause; and (2) for FAR clauses primarily the clauses listed in FAR 52.212-5(e)(1) (when the prime contract is for commercial items), or FAR 52.244-6 (when the prime is not a commercial items contract). Interestingly enough, the new DFARS clause is itself a mandatory flowdown clause. All other clauses are prohibited from being flowed down to a commercial subcontract after Nov 17, 2023.

Non-mandatory commercial item flowdowns

There are situations where good business practices require additional clauses. Examples of situations where a contractor might want non-mandatory clause protection include termination for convenience (T4C), organizational conflict of interest (OCI), stop work, and a disputes clause, among others. None of these clauses are customary commercial practices; however, these and others are standard FAR/DFARS clauses in the prime contract and that have been routinely flowed down into subcontracts. In fact, in our practice, we see many instances where contractors protect their business and flow every clause in their contract down to subcontractors, with the position that if a clause does not apply it will be self-deleting.

What the rule means for contractors

The examples mentioned above are all instances where contractors need additional protection to protect their contractual obligations. For instance, if the prime contract includes a T4C clause the CO executes, then contractors and subcontractors at all levels below must similarly T4C their subcontract or face contract losses. Contractors can be disqualified from a contract if their subcontractor has an OCI so a contractor must be able to prohibit OCIs in subcontractors. If the CO issues a stop work order the contractor must similarly be able to stop work by the subcontractors. Subcontractors must continue working in the event of a dispute. None of these provisions are customary commercial terms, but will cause contract defaults or losses if not properly provided for. So how do DoD contractors protect themselves?

Our recommendation is for contractors to analyze what additional terms are required to protect their commercial interests, which include at least the examples above. Those terms should no longer be flowed down in DoD commercial subcontracts, but should be included full text in the subcontract terms, revised as necessary. That avoids the prohibited flowdowns, but protects businesses from contractual losses. From the subcontractor perspective, this new rule provides a strong lever to negotiate and keep extraneous flowdowns out of subcontracts.

Additional information

If you have questions regarding the new commercial subcontract flowdown clause or other federal government contract issues, contact the professionals at Williamson Law Group at (301) 788-8198 for confidential assistance and counsel, or e-mail Scott Williamson at srw@williamsonlawgroup.com.

This Contract Compliance Update is to keep readers current on government contract matters and is not intended to be legal advice. If you have any questions, please contact Williamson Law Group for legal advice regarding your particular case.