Advantages of Subcontracting

As a subcontractor, your agreement to provide supplies and/or services would be with the prime; you would have no contractual relationship with the government. Therefore, you have another entity--the prime, in this case--between you and the government.

This can work to your advantage since dealing with a prime is generally more straightforward, less complicated and less burdensome than dealing directly with the government. Administrative requirements are reduced. In addition, government rules offer more protection to subs when it's time to be paid, because the subs are required to get their money before the prime does.

Although the primes are looking for good suppliers, the key operative word is "good." You are not going to get a contract just because you're small, minority, woman-owned or some other defined category. You still have to supply them with good quality products on time and at a competitive price.

Less administrative burden. In general, there is less administrative burden for a subcontractor because many of the administrative requirements imposed by the government are borne by the prime. Some burdens might pass through or "flow down" to subcontractors, but there are relatively few. Also, the dollar value of a subcontract is often below the dollar threshold that must be reached before many of the government requirements kick in.

Have a problem while working on the job? If your contract is directly with the government, you would have to follow a certain prescribed procedure and chain of command, as would the government, for submitting your problem and getting it resolved.

If your contract is with a prime, you could probably get your problem resolved with a phone call. There will be structure in dealing with a prime, but it is not as rigid as the government structure. In addition, there is another advantage--payment protection.

More protection. Traditionally, small businesses have dreamed of doing business with one of the "Big 3" auto makers. Associated with doing subcontracting work for any big player is the perception that you are part of a small, but "elite" group of small businesses that will always have work and will end up making lots and lots of money.

However, perception is not reality, and there are some definite disadvantages that you could experience in working for the Big 3 (or for any other big commercial company, for that matter) that you won't experience in working for a government prime. Some subcontractors to big players have found themselves dependent on these companies for 50 to 90 percent of their work and, because of that, having to work on slimmer and slimmer margins when "requested" to do so. It's easy to see why these small companies probably end up feeling more "stuck" than "elite."

Why won't you experience this same thing working for a government prime? Because just as the government is required, by law, to pay its contractors within 30 days after receiving a proper invoice, so are government primes required, by contract, to pay their subcontractors.

In fact, contractors do not get paid until they have shown proof that they have paid their subcontractors. This is called "flow down"--where the government requires specific prime contract requirements to flow down to subcontractors and be incorporated into their subcontracts.



However, there is a down side of "flow down." For example, if right now you are thinking, "Great! If I have no contractual relationship with the government, I won't have to deal with all that government paperwork and all those rules and requirements," you'd better think again. If the contract is complex, you could actually be required to put up with some of the same paperwork, rules, and obligations as the prime under a "flow down" clause in your subcontract.

Flow-down clauses are especially common in government and construction subcontracts. The government, recognizing the need to assure that important federal policies are followed throughout performance, sometimes will require specific prime contract requirements to flow down to subcontractors and be incorporated into their subcontracts.

The usual flow-down clause will incorporate, by reference, parts of the prime contract into the subcontract. Such clauses bind the subcontractor to the prime to the same extent that the prime is bound to the government. In effect, the prime contractor's duties and obligations "flow down" to the subcontractor. What was that about no paperwork?

However, if you have a problem with a prime contractor that involves a flow-down clause in the prime contract concerning subcontractors, such as paying for work performed or some technical issue, the government could possibly decide to step in on your side and help you fix it. (This depends on the nature and severity of the problem. There is no guarantee that the government will do anything.) However, if your problem does not involve a government flow-down requirement concerning subcontractors, you are on your own; the government will not help you.

Related Resources

Lay the Groundwork

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