Federal statutes, regulations and "common law" (i.e. case law principles) govern the relationship between U.S. procuring agencies and contractors. The Armed Services Procurement Act governs purchases by DOD and NASA while the Federal Property and Administrative Services Act govern the civilian agencies and the General Services Administration. Then special statues further affect federal acquisitions such as the U.S. General Accounting Office that consider protests and the Contract Disputes Act (CDA) that cover postaward claims and disputes. In addition, the Office of Federal Procurement Policy Act issued the Federal Acquisition Regulation and then most federal agencies have issued their own acquisition regulations supplements. Most federal statutes and regulations do not apply to subcontractors because the federal government and subcontractors generally lack "privity" – a direct contractual relationship. However, in numerous instances that we will discuss the statutes and regulations can apply to federal subcontractors.

Publicizing and Planning Procurements. The FAR provides that the federal government announce most acquisitions exceeding $25,000 at the government-wide point of entry located at www.fedbizopps.gov. Businesses interested in becoming subcontractors for a particular acquisition should contact the agency for a copy of the solicitation and perhaps more importantly, attend the agency’s in person proposal conference in order to gain additional insight about the procurement and interact with other firms especially prospective prime contractors and upper-tier subcontractors. Other FAR provisions in the procurement planning process affecting subcontractor under larger acquisition include (1) agencies must address their plans for achieving subcontract competition (2) establish solicitation mailing lists for interested firms and (3) will have small business specialists to aid small businesses.

Subcontract Competition. Though most federal procurements are subject to the "full and open competition" requirements where all responsible sources must be permitted to compete, these requirements do not apply to subcontracting giving prime contractors great leeway on subcontractor competition. The only exception is for cost reimbursement contracts that include the "Competition in Subcontracting" clause at FAR 52.244-5 that requires prime contractors to select subcontractors "on a competitive basis to the maximum practical extent." The contractor is required to determine the availability of subcontractor sources unless the government includes a warranty of the source’s availability or direct all prospective prime contractors use a particular subcontractor.

Contractor Team Arrangements. Ordinarily the government will recognize the integrity and validity of contractor team arrangements as long as the arrangements are identified and the company relationships are fully disclosed. The chief exception to this rule is where the combination violates a federal antitrust law.

Subcontract Consent. Sometimes the government must consent to the placement of subcontracts. If a prime contractor has a government approved purchasing system prior government consent will be limited only to subcontract limitations set by the CO in the "Subcontract" clause of the prime contract. If there is no such approval consent to subcontract is required for cost reimbursement, time and material, labor hour or letter contracts and for un-priced actions under fixed price contracts exceeding the simplified acquisition threshold (currently $100,000). Under cost type contracts, the contractor must notify the agency before award of any cost-plus-fixed-fee subcontract and any fixed-price contract that exceeds the dollar limits specified by regulation. In granting consent the CO must consider several issues. For example, COs may not accept cost type subcontracts exceeding certain minimum allowable fees or an agreement that requires the CO to deal directly with a subcontractor.

Subcontractor Costs and Pricing. The CO determines price reasonableness for all awards including subcontract costs. Prime contractors (and higher-tier subcontractors) must contribute to this process by (1) conducting appropriate cost or price analysis to determine reasonableness of proposed subcontract prices (2) including the results of these analyses in their price proposal and (3) submitting cost or pricing data, when required, as part of its own cost or pricing data. The meaning of "cost or pricing data" has a long history of dispute but it basically means all verifiable factual information as of the date of price agreement which a prudent buyer and seller would expect to affect price negotiations significantly. The author reminds us the FAR has a rather complex set of rules on when cost or pricing data is required or exempted from prime contracts (e.g. commercial items, adequate price competition). Regarding subcontracts, the prime contractor must obtain and analyze cost or pricing data when the higher-level contractor is required to submit the data and (1) the subcontract is $10 million or more or (2) the agreement is more than $550,000 and is more than 10% of the higher-level contractor’s proposed price, unless the CO considers such data unnecessary. On the other hand, the CO may require submission of cost or pricing data below the above threshold where deemed necessary for reasonable pricing.

Patent and Data Rights. The FAR has extensive rules governing rights in patents and data in contractor deliverables. These FAR prescriptions are implemented through more than 20 possible contract clauses plus additional ones in individual agency supplements. The authors recommend contacting a legal specialist in these areas but offer a few general observations. FAR Part 27.3 addresses contractor patent rights and the general rule is the policies and procedures covered here apply to all contracts at any tier. FAR Part 27.4 covers data rights and the government’s policy is to strike a fair balance between the agency’s mission needs and the contractor’s legitimate proprietary interests. Since rights in data – such as computer software documentation – frequently concerns subcontractor products the authors urge subcontractors to achieve a full understanding beforehand with their prime contractors about the rights in deliverables provided to the government. As for data right rules in DOD contracts, the applicability of data rights to subcontractors is still "unsettled". DFARS Part 227.71 states data rights are to apply equally to prime contractor and subcontractors which implies that DOD clauses are included in subcontracts as a matter of law; however case law indicates that subcontractor’s rights in technical data are controlled by its contract with the prime, not the prime contract with the government.

Taxes. The FAR provides that prime contractors and subcontractors are generally not considered agents of the government for purpose of claiming the government’s immunity from sate and local taxation. Only an exemption under state or local law – if one exists at all – will provide tax relief for a transaction where the subcontractor provides supplies or services to a higher tier contractor. FAR 29.305 prescribes the rules whereby subcontractors may obtain state and local tax exemptions.

Commercial Item Subcontracting. The FAR expresses a strong preference for prime contractors and higher-tier subcontractors to incorporate "commercial items" or "non-developmental items" as components of items delivered to the government. The prime or upper-tier contractor has the discretion to make this determination and is not required to include any particular FAR clause in its lower level agreement except those required by regulation which is addressed in the "Subcontracts for Commercial Items and Commercial Components" clause at FAR 52.244-6.

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