Understanding flowdowns in government contracting

ARTICLE | February 10, 2025

Authored by RSM US LLP

Flowdowns play a crucial role in government contracting, and both prime contractors and subcontractors (subs) need to understand their importance. Improper flowdowns can lead to compliance risks, legal liabilities and increased administrative burden for all parties involved.

What are flowdowns?

Flowdowns are the clauses in the Federal Acquisition Regulations (FAR) or its supplements that a prime or higher tier contractor (prime) is obligated to pass down to its subcontractors. These clauses dictate the rules and compliance standards that subs must follow to meet government requirements.

Ideally, primes assess the applicability of each FAR clause for inclusion to the subcontract based on factors such as dollar amount, contract type, place of performance and so on. The FAR will prescribe whether the entire clause needs to be included word for word or if only certain requirements apply to subcontracts. For example, FAR 52.203-7 (Anti-Kickback Procedures) says the contractor agrees to incorporate “the substance of this clause, including this paragraph (c)(5) but excepting paragraph (c)(1) of this clause, in all subcontracts under this contract that exceed the threshold specified in Federal Acquisition Regulation 3.502-2(i) on the date of subcontract award.”

Why do flowdown problems occur?

Improper flowdowns arise when a prime fails to assess the applicability of FAR clauses to each subcontract. Many primes opt for a blanket approach—copying and pasting all clauses from their contract with the government into their subcontracts. This leads to an inefficient, and sometimes legally problematic, transfer of obligations.

Even if a prime takes a more detailed-oriented approach to flowdowns, problems can occur over different interpretations or overlooked clauses. In such cases, subs might fail to meet critical requirements or perform needless tasks. Subs may strive to fulfill clauses that don’t apply to their scope of work, leading to frustration and lost productivity over adhering to regulations that are unrelated to the services they are providing. For example, a subcontractor selling a commercial product or service may unnecessarily work on creating fraud hotline posters if the prime flows down FAR 52.203-14 (Display of Hotline Posters).

Potential risks

Improper flowdowns can lead to major difficulties for both primes and subs. From the prime’s perspective, noncompliance on the part of its sub can create questions during government audits. If the government finds that the flowdowns were incorrectly implemented, it may question the prime’s purchasing system and overall compliance strategy.

In turn, subs might find themselves accepting terms that are irrelevant to their work, which can create legal headaches and balloon expenses. For example, the subcontractor may not have any prime contracts but still use valuable resources to create a final indirect rate cost proposal if they mistakenly accept FAR 52.216-7 (Allowable Cost and Payment) as a flowdown.

Best practices

There are several steps that both primes and subs can take to protect their organizations. These include the following:

1. Tailor flowdowns to the contract: The prime should review each flowdown clause and decide which ones are truly applicable to the sub’s work. The flowdowns for commercial item contracts are more limited, and primes should work with subs to classify items accordingly. Ensuring this classification can minimize unnecessary flowdown clauses, reducing the burden on both parties.
2. Analyze and negotiate: Many smaller subs lack the internal compliance experience to understand the nuances of flowdowns. Hiring an advisor or consultant who can negotiate the right clauses from the start is a smart investment. This avoids the need for costly compliance implementations later.
3. Document compliance: Both primes and subs should verify their compliance efforts, including the review and acceptance of flowdowns. Having a clear record ensures that everyone is on the same page, and primes can hold subs accountable without overburdening them with irrelevant clauses. Subs should carefully review all requirements and ensure they can meet them before signing a contract.
4. Use available tools and resources: The government provides matrices that help contractors filter applicable clauses based on their contract type. These tools can assist primes and subs in ensuring compliance without overcomplicating the subcontract. Every clause can be analyzed online, and FAR Subpart 52.3 provides a provision and clause matrix that explains the applicability of each provision and contract clause.
5. Keep up to date: While understanding current flowdown regulations is critical, primes and subs must also be aware of upcoming changes. New clauses, and their applicability for nontraditional defense contractors, are constantly emerging. These changes may further complicate the landscape for flowdowns, requiring all parties to stay vigilant and proactive.

The takeaway

Flowdowns are essential for ensuring that government contractors comply with FAR and other regulations. However, primes and subs must negotiate thoughtful, tailored flowdowns that match the specific work being done. By educating themselves, negotiating up front and documenting their compliance efforts, contractors can reduce risks and avoid costly issues down the line. Using government-provided tools and working with advisors (if necessary) can limit potential legal troubles and save time and money.

Proper flowdown management is a shared responsibility of both primes and subs. By adhering to best practices, both parties can ensure compliance, mitigate risks and foster healthier, more transparent contractual relationships.