Miller Act Payment Bonds. Contracts covered by the Miller Act require payment bonds from the prime contractor on projects exceeding $100,000. The Act is intended as a substitute for a subcontractor’s right to obtain a mechanics lien under state law because federal property is immune and the Miller Act is quite effective in ensuring payments to subcontractors. The payment bond protects subcontractors by ensuring payments to all persons supplying labor or material for the contract. Payment bond coverage is limited to the first and second tier subcontractors so no coverage exists for subcontractors of suppliers or third or lower tier subcontractors.

Subcontractor Payment. Subcontractors’ ability to obtain assistance from the government in collecting payments from the prime contractor is pretty limited. Congress amended the Prompt payment Act in 1988 to help ensure timely subcontractor payments on construction contracts by adding the "Prompt Payment for Construction Contracts" clause at FAR 52.232-27 that requires subcontractor payments for satisfactory performance within seven days out of payments received from the government with an interest penalty for late payments. This clause has flow-down coverage for each lower-tier subcontractor. Since the statute and clause are unclear how COs should deal with subcontractor complaints of untimely payments Congress enacted another statute (National Defense Authorization Act for 1992 and 1993) requiring COs to take certain actions upon receiving complaints of subcontractor nonpayment for all type of contracts. Implementing the statute in FAR 32.112, if the CO finds the prime contractor is not in with compliance with subcontractor payment terms the CO may (1) encourage the contractor to make timely payments or (2) reduce or suspend progress payments to the prime as authorized by the applicable payments clause. Subcontractors should not expect extensive CO mediation or resolution of the controversy since lacking privity with the subcontractor, the government usually does not wish to expend the time and resources to investigate all the facts and instead, expects the prime and subcontractor to resolve their own disputes. Most COs, however, will be concerned about whether the prime contractor’s certification of payment of a subcontractor or supplier accompanying its payment request accurate. As a final aid to subcontractors, FAR 32.112 provides that upon request of a subcontractor or supplier, the CO must promptly advise the inquirer as to certain information such as whether the prime contractor has submitted requests for progress payments to the government or whether it has received final payment.

Government Contract Quality Assurance. The various QA functions such as inspection provided in the contract will generally will not performed for subcontracts except in limited circumstances. For example, the government must perform the QA function at the subcontract level when the item is to be shipped from the subcontractor’s facility to the using activity and the inspection at the source is required. It should be noted that such government review does not relieve the prime contractor of its contract responsibilities.

Use of Government Supply Sources. Addressed in FAR 51 the government may permit the subcontractor to use government supply sources (e.g. GSA Federal Supply Schedules) under cost type contracts or other subcontracts where the majority of the supplier’s subcontracts are cost type.

Effect of Subcontractor Default. Under the standard "default" clauses the prime contractor is accountable for excess costs of re-procurement based on a default stemming from delays in providing goods or services even when such default is caused by the subcontractor. An exception is allowed when the failure to perform based on the subcontractor’s default is beyond the control of the prime or subcontractor and neither is at fault or negligent. Cases have held that illness or death of subcontractor personnel is not excusable because contractors must provide acceptable workforces but prime contractors can be excused for subcontractor delays due to production difficulties beyond the existing state of the art and that were outside the contemplation of the principle parties at award.

Pricing of Contract Adjustments. When the government and prime contractor negotiate a pricing adjustment action from, say an upward equitable adjustment for a change, the prime ordinarily will make the adjustment to its price when the change affects its subcontractor where the adjustment made below the prime contract level is governed by the subcontractor clause addressing changes. Conversely, the prime contractor and subcontractor can be affected when the government and prime contractor negotiate a downward price adjustment from say, deleted government work, but difficulties arise when the subcontract does not include the subcontract clause. Board cases have held the that where the prime contract change reduces subcontract costs the prime contractor can be liable to the government even though it is unable to obtain a price reduction from its subcontractor so the prime must protect itself by inserting appropriate coverage in the subcontract.

Impact of Terminations. When the government terminates a prime contact the prime makes a corresponding subcontract termination and the provisions of FAR 49 spell out the procedures for settling both the prime contracts and subcontracts. The overriding principle is the subcontractor has no contractual rights against the government upon termination of the prime contract and the prime contractors and subcontractors are responsible for the prompt settlement of their termination settlement proposals.

Subcontractor Claims and Disputes With the Government. Under the Contract Disputes Act a "contractor" has the right to have a claim against the government be considered by the contracting officer and appeals hear by agencies boards of appeal or the U.S. Court of Federal Claims.It is quite common for a subcontractor to believe it has sustained damages by government action but since the CDA and the FAR "Disputes" clause (FAR 52.233-1) use the term "contractor" subcontracts generally do not have a right to seek and collect damages because they are not in privity with the government. Accordingly, where the subcontractor seeks relief from the government it can proceed indirectly through the prime contractor in one of two ways: first, the prime contractor must sponsor and certify the subcontractor’s claim where the certification reflects the prime contractor’s belief there is "good ground" for the claim and second, a prime contractor filing a claim can include a component for its liability to a subcontractor. It should be noted that in an old 1943 case of Severin v. United States the government held the prime contract is not entitled to collect for the subcontractor when it has no liability for the subcontractor’s costs. Later cases put the burden on the government to prove there was no liability.

There are rare exceptions to the general "no-direct right of action" rule for subcontractors in CDA cases. First, the subcontractor will have a direct right of action where the contract terms state that parties indeed to give the subcontractor the right to direct appeal but since the FAR prohibits the COs from consenting to such an arrangement this circumstance is practically non-existent. Second, privity for CDA purposes will exist where the contract provides that the contractor will act as a purchasing agent for the government. Third, subcontract privity will be present when the government so circumvents the authority of the contractor that the contractor becomes a mere agent of the government. For example when the Small Business Administration awards an agency a contract under the "8(a) program" the agency subcontracts with an 8(a) firm the firm amy take direct action against the government.

The author provides a summary checklist:

1. Subcontractors generally do not have a direct contractual relationship – privity – with the federal government and hence have few contractual rights and responsibilities to each other.

2. The FedBizOpps has valuable information for prospective subcontractors seeking business opportunities with prime contractors. Prospective subcontractors should also be familiar with other avenues of potential business such as pre-proposal conferences for the prime contractors and a particular agency’s website.

3. Guard against inappropriate flow-down clauses from the prime contract especially where they conflict with other subcontract clauses. Also make sure that applicable key clauses such as those addressing data rights, pricing of adjustments and rights upon government terminations are included in the subcontract.

4. Since prime contract awards commonly depend on the quality of proposed subcontractor’s technical qualifications and past performance work closely with your prime contractor to ensure these are in order.

5. Prime contractors need to ensure their proposed subcontractors are not debarred or suspended.

6. Subcontractors generally have no right of protest but one narrow exception is the can recover subcontract proposal preparation costs where the prime contractor prevails in a protest.

7. Subcontractors have only limited rights to obtain the assistance of government COs when prime contractors do not pay on time. However, the Miller Act under construction projects give subcontractors extra protection when a payment bond is available.

8. Subcontractors having a dispute with the government generally have no rights of direct appeal so if they believe the government action warrants a remedy they should attempt to persuade their prime contractor to either "sponsor" a claim or include your costs in the prime contractor‘s claim. Also, investigate whether one of the rare circumstances for privity exists.

9. Familiarize yourself with FAR Part 49 if your subcontract is terminated to maximize your recovery.

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