Be Careful What You Wish For: Limited Commercial Subcontract Flowdowns May Increase Administrative Burdens

The Department of Defense recently issued a long-awaited final rule prohibiting DoD prime contractors from “flowing down” FAR and DFARS clauses in subcontracts for commercial products or services, unless flowdown is specified by regulation. This rule implements language, dating from the 2017 National Defense Authorization Act, intended to reduce administrative burdens on DoD contractors and subcontractors by adding a prohibition on extraneous flowdowns at DFARS 252.244-7000 Subcontracts for Commercial Products or Commercial Services.

As part of its supply chain management framework, the Government relies on contractors at every tier to “flow down” mandatory FAR and DFARS clauses to their lower tier contractors. Prior to the final rule, contractors were “not required” to flow down clauses in subcontracts for commercial products and services unless the flowdown was specified by regulation. However, although not required, the contractor was also permitted to flow down a “minimal number” of additional clauses necessary to satisfy their contractual obligations. In practice, prime contractors often elect to flow down many, if not all, of their prime contract clauses in subcontracts for commercial products and services. Such a “kitchen sink” approach can lead to confusion about the clauses that are actually applicable to the subcontractor and increase the commercial subcontractor’s administrative and compliance burden.

The final rule revises DFARS 252.244-7000 to direct that “[t]he Contractor shall not” flow down FAR or DFARS clauses at any tier unless: (i) for FAR clauses, the clause is listed at FAR 52.212-5(e)(1) or FAR 52.244-6(b)(1); or (ii) for DFARS clauses, the mandatory flowdown is specified in the particular clause. (Emphasis added). The rule also revises the prescriptive language in DFARS 212.301 to prohibit Contracting Officers from including additional clauses in a prime contract unless doing so is either required by the FAR or DFARS, or consistent with customary commercial practices.

Although the final rule may provide a level of relief for commercial product and service subcontractors, DoD prime contractors (and lower-tier contractors with subcontracts) may in fact see increased administrative burdens and should review their practices to ensure compliance with the final rule (which became effective November 17, 2023). Contractors also should be aware that Defense Contract Management Agency (DCMA) contractor purchasing system reviews, which assesses compliance with subcontracting policy under DFARS 252.244-7001 Contractor Purchasing System Administration, may find deficiencies if a contractor includes unnecessary or prohibited clauses in commercial product and commercial service subcontracts. At the same time, contractors often have often relied upon flowdowns now prohibited under the final rule, such as the flowdown of clauses addressing Termination for Convenience under FAR Part 49. Contractors will need to ensure that such topics are appropriately addressed in their standard subcontract terms and conditions (rather than in flowdowns) to avoid running afoul of the new regulation.