1. Mandatory Subcontractor Flow-Downs and Mandatory Disclosures:
Huntsville NCMA Chapter
Mandatory Subcontractor Flow-Downs and Mandatory Disclosures:
What is Actually Required?
Why is it Important?
Presented by: Kim Bessiere Martin
Sarah Osborne
August 16, 2018

2. Agenda Subcontractor Flow-Downs False Claims Act
Mandatory vs. Necessary
Contract Risk
Compliance Risk
False Claims Act
Mandatory Disclosure Rule
Practical Advice for Proactive Compliance
Questions?

3. Subcontractor Flow-Downs
Flow-down provisions are prime contract clauses inserted into a subcontract
Includes clauses from the FAR and agency supplements
DFARs
Can significantly impact the subcontractors’ obligations and risks

4. Subcontractor Flow-Downs
Mandatory
Contract Requirement
No one size fits all approach
Often dependent on contract type, size, or subject matter
Subcontract for Commercial Items
Contains eighteen mandatory flow-downs for subcontracts for commercial items
Note that each contains separate flow-down criteria

5. Subcontractor Flow-Downs
Mandatory
Language of clause will specify whether it must be flowed-down to a subcontract and how:
Verbatim; e.g., Equal Opportunity, FAR :
“The Contractor shall include the terms and conditions of this clause in every subcontract ”
“Substance” of the clause

6. Subcontractor Flow-Downs
Necessary
Clauses that need to be flowed-down to meet requirements
May include agency-specific clauses or terms

7. Subcontractor Flow-Downs
Tailor flow-downs
Blanket incorporation of all prime contract terms presents potential issues
Cost
Compliance
Unintended interpretations
Cover risks not addressed in prime terms
Changes
Disputes
Termination for Convenience

8. Subcontractor Flow-Downs
Understand what is contained in each clause
Updates to regulations or wage determinations
Minimum Wages Under Executive Order 13658, FAR :
Minimum hourly wage for contracts performed for U.S. Government $10.35 per hour as of Jan. 1, Mandatory flow-down
Executive orders
Equal Opportunity, FAR :
Mandatory flow-down above $10,000

9. Subcontractor Flow-downs
Understand what is contained in each clause (cont’d)
Versions
“Most current version” may not be what is required under prime
Monitor for modifications for changes to FAR clauses requiring flow-down

10. Why is Flow-Down Important?
Failure to flow-down mandatory clauses is a breach of contract by the prime
Liability for performance issues
Termination
False Claims Act implications
Important for the subcontractor
Under the “Christian Doctrine,” subcontractor can be subject to these requirements even though not in the subcontract
UPMCBraddock, et al. v. Harris, 934 F. Supp. 2d 238 (D.D.C. 2013)

11. False Claims Act FCA penalizes anyone who:
Knowingly submits a false claim to the government for payment
Knowingly makes a false record or statement to get a false claim paid by the government
Treble damages and civil penalties
Record recoveries by DOJ in recent years
$3.7 billion in FY2017
$3.4 billion from suits filed by whistleblowers

12. False Claims Act
Knowingly submits a false claim to the government for payment
Knowing
Actual knowledge
Deliberate indifference
Reckless disregard for the truth
Claim is a request or demand for payment
Falsity
Factual: incorrect description of goods or services
Legal: false representation of compliance with contract terms or federal statute

13. False Claims Act: Express and Implied
Express Certifications
Seeking payment for services not actually performed
Implied Certification
Theory of liability adopted by U.S. Supreme Court in Escobar in 2016
Requires
Some representation about goods/services provided
Work complies with all contract requirements
Nonconformance that is material to the Government’s decision to pay claim
Invoice for hours worked by security guards who did not pass marksmanship test required by contract constituted false claims

14. False Claims Act: Subcontractors
Subcontractors are liable for “knowing” false claims submitted to the prime contractor for payment under a government contract
Unclear how implied certification theory will address prime contractor liability for material noncompliance by subcontractors
Deliberate indifference or reckless disregard for truth
Failure to flow-down material requirements
Failure to confirm applicable minimum wages

15. False Claims Act: Subcontract Administration in FCA Claims
U.S. ex rel. Wall v. Circle C Constr., LLC, 813 F.3d 616 (6th Cir. 2016).
Subcontractor employee brought qui tam FCA action against subcontractor and prime contractor for failure to pay applicable wage rates
Invoices for work certified compliance with Davis-Bacon Act
Difference in payments was $9,900
Government brought action seeking damages up to value of prime contract, $555k. Trial court awarded trebled damages of $763k
Appellate court affirmed liability, but lowered trebled damages to $15,000

16. False Claims Act: Subcontract Administration in FCA Claims
U.S. ex rel. Howard v. Lockheed Martin Corp., 14 F. Supp. 3d 982, 1007 (S.D. Ohio 2014)
In FCA action, Court found Lockheed Martin’s failure to flow down material specifications to subcontractors probative of whether Lockheed knowingly submitted false claim for goods that failed to meet quality standards

17. Mandatory Disclosure Rule
FAR
Contractor required to timely disclose credible evidence of:
Violation of federal criminal law,
An FCA violation; or
Significant overpayments
Credible evidence known to “principal,” which includes an officer, director, owner, partner, or person having primary management or supervisory responsibilities within a business entitles
Applies to contractor and subcontractor conduct through contract closeout
Failure to comply can result in suspension or
debarment of the contractor

18. Mandatory Disclosure Rule
Other Requirements:
Written Code of Ethics
Internal procedures to detect, process, investigate, and assess potential violations
Within 90 days of contract award:
Business Ethics Awareness and Compliance Program
Internal Control System

19. Proactive Strategies For Compliance
Have a clear understanding of:
Contract terms
Subcontract terms
Rules or specifications applicable to goods or services being billed
Advice of counsel/compliance experts
Pay close attention to clauses incorporated by reference
Develop charts to help identify and track mandatory flow-down requirements based on subcontract value and type

20. Proactive Strategies For Compliance
Supervisor training is imperative – Potential “Principal”
Internal audits to monitor compliance with contract terms
Monitor contract modifications for new clauses required for flow-down

21. Questions? Kim Bessiere Martin Sarah Osborne
Bradley Arant Boult Cummings LLP
200 Clinton Avenue
Huntsville, AL 35801
Sarah Osborne
Bradley Arant Boult Cummings LLP
200 Clinton Avenue
Huntsville, AL 35801