I’m here to talk today about federal government subcontracts. The prime contractor and the subcontractor in any subcontract relationship have very special interests under a federal government contract. But these interests can diverge. It’s important to understand what the interests are.

For example, under a federal government contract, there are two special clauses that appear in every federal government contract. And the prime contractor needs to account for each of those clauses in the subcontract. The subcontractor on the other hand needs to be able to accommodate with respect to its own interests what those clauses do and do not do.

One for example is the Changes Clause. Every federal government contract has a Changes Clause. The Changes Clause allows the government to order unilaterally the prime contractor to do a change in the scope of work. The prime contractor is reimbursed for this work, but the prime contractor is required to do the work and cannot refuse. So, if the changed work is to affect a subcontractor, then the subcontract also has to have a similar Changes Clause to make sure that your subcontractor will also be required to do the work, and that your subcontractor can’t refuse to do the work. Now the subcontractor will be compensated for it, but you have to be in a position where the subcontractor cannot refuse. So that protects the prime’s responsibility under the prime contract.

On the other hand, if you’re the subcontractor, your interests are different. You can accept the Changes Clause, but you want to modify it. You should modify the clause to ensure that the changed work originates with the government and not just with the prime contractor. You don’t want the prime to change your scope of work unless the government has first changed the prime’s scope of work. That protects the subcontractor from unilateral acts of the prime that aren’t first originated with the government. So that’s the Changes Clause.

The next clause that’s essential in any government contract is the Termination for Convenience Clause. The Termination for Convenience Clause, which appears in every government contract, allows the government to terminate the contract unilaterally. The government must reimburse the prime contractor for the expenses associated with the termination, not including lost product on a contract. But the government is allowed to terminate your contract unilaterally. As a prime contractor, you need to have that same right over your subcontractor without being in breach of the subcontract. So we recommend inserting a subcontractor Termination for Convenience Clause that will allow you, either unilaterally or if responded to by the government, to terminate your subcontractor’s contract for your own convenience.

On the other hand, if you are a subcontractor, your interests are different. You don’t want the prime contractor to have the absolute right to terminate you without first being terminated by the government. So you can accept the Termination for Convenience Clause in your subcontract, but you should insist that the prime be restricted in termination you, only in the situation — restricted to only the situation where the prime has already been terminated by the government. So we recommend that the subcontractor Termination for Convenience Clause be modified in that way.

This is a value that an experienced government contracts attorney can bring to your business, to review your subcontracts, to review your teaming agreements, and to prevent problems before they occur. This resource is available and every government contractor should utilize it to the best extent possible.

This wraps up our discussion on federal government contracting. If anyone has questions, please feel free to contact me either at questions@legalriver.com or at the email and telephone number displayed. This is a reminder that this was intended for discussion purposes only and not intended as legal advice. Thanks.

Thanks for listening to this edition of the Legal River podcast. If you have a business law question you would like to see answered in a podcast, please email us at podcast@legalriver.com. To reiterate, all views expressed in this presentation are intended only as a general discussion of the issues and should not be regarded as legal advice. For additional details or advice about a specific situation, please consult legal counsel directly.