High “Litigation Impact”​ Term Number 7 – Incorporation by Reference

A hallmark of subcontracting in government contracts is the requirement to flow-down certain provisions of the prime contract to subcontractors. The FAR outlines mandatory and suggested flow-downs, but the prime will also want to evaluate with counsel including additional requirements in subcontracts.

Importantly, flow-downs are not automatic. The clauses must be included in the subcontract to be enforceable against the subcontractor. From a litigation perspective, how these clauses are enumerated in the subcontract agreement is critical to its enforceability. For example, courts across jurisdictions have delineated between “incorporation by reference” and prescriptive language in the FAR clause. Some courts have held that by simply incorporating by reference flow-down clauses or the entirety of the prime contract, that a subcontracting party has sufficient notice of the requirement. However, others have held that if the language of the clause necessitates mandatory inclusion in full, meaning has language like the prime contractor “shall include” this clause in a subcontract agreement, the clause is only enforceable if it is enumerated in the agreement.

The Take-Away – When drafting or negotiating subcontract agreements, primes and subs will want to take care to look at the law of the governing jurisdiction regarding how courts determine the enforceability of prime contract flow-downs. And, irrespective of jurisdiction, out of an abundance of caution and to ensure no confusion about scope and compliance with prime contract terms, the parties should directly incorporate any flow-downs that contain language that a contractor “shall include” the clause in any subcontract agreements.

FAROur government contracts posts are published by Attorney Kristi Morgan Aronica. She serves as litigation counsel to prime contractors and subcontractors in the government contracts market throughout Texas and nationally.