Five (5) Reasons Why You Should Negotiate Your Government Subcontract

It is a known fact many small businesses do not read or negotiate contracts. The same fact is true also for small businesses in the aerospace and defense industry as it relates to Government subcontract negotiations.

Here are five reasons this is important.

1. Know what you’re getting into. Many small businesses allow the excitement of a deal or business opportunity to cloud their judgment and neglect the need to negotiate a subcontract. Many people are satisfied to know the general terms of a deal, for example, what needs to be done, how they will be paid, and how much. Yet, they forget to pay attention to the rest of the language of the contract as if what’s in it is irrelevant and no one need bother to look at all that legal mumbo jumbo. When it comes to understanding a Government contract or a Government subcontract it is imperative that we read the legal mumbo jumbo because what’s included in it is there for a reason and a purpose.  The excitement has led many businesses to discover they agreed to terms they shouldn’t have. A good deal has turned often into a disaster or nightmare. So, as a first step take the time to read and understand the subcontract. Both will help you to prepare for negotiation. And, you must negotiate. 
2. Look at Flow Down Clauses. You all know that each prime contract includes many mandatory and required clauses. Prime Government contractors for their convenience often incorporate these clauses by reference and often these clauses are placed on their website. It is a common practice for many small businesses to not pay attention to these clauses and not check what is actually incorporated by reference. Not all clauses in a prime contract apply to you and not all clauses applicable only to the prime contractor need to be flowed down to you. If you don’t know what applies to you, you’ll carry more than your fair share. Once you sign a contract what should be there now is there and you are bound to it because these unnecessary clauses do not delete themselves. Pay attention to the flow down clauses and make sure the ones in your subcontract are the ones the prime is mandated and required to flow down.
3. Intellectual Property. If intellectual property is involved as part of the agreement with the prime contractor, make sure you are not relinquishing your intellectual property rights. Therefore, read the intellectual property clauses to make sure your intellectual property rights as a Government subcontractor are protected. “Follow the money trail” is a well-known axiom in Government contracting, it is an axiom applicable also for finding out who owns what and how much of it in intellectual property negotiations. If the Government is paying for developing the intellectual property you must understand, what rights are they entitled to, equally if the prime contractor is paying for developing the intellectual property you as a subcontractor must understand what rights they are entitled to. So, when a prime contractor flows down an intellectual property clause you will understand its implications and make sure that the intellectual property clause is suitable for the transaction.
4. Dispute Resolution. Going to arbitration is not always the best course of action for you as a subcontractor. When reading a subcontract pay clause attention to the dispute resolution clause to then conclude for yourself what is the best course of action for you as a subcontractor should you find yourself involved in a dispute with the prime contractor. Would it best for parties to negotiate before calling in the lawyers? Would litigation in court be the best option? What choice of law applies to the subcontract? These are at least three questions that should guide your thinking when you’re reading a subcontract. The lesson to take away from this point is: don’t ignore a dispute clause because you may think is boilerplate language.
5. The warranty clause. Whether a commercial or government contract people spend a great deal of time negotiating warranties. Here are questions to remember when reading a warranty clause: Does Uniform Commercial Code or common law apply to the contract? If your contract is for the sale of goods, most likely UCC applies. Is there a Government warranty clause flow down in the subcontract? Do you find the terms of the Government warranty clause to be more favorable than the terms of the prime contractor’s warranty clause? If so, what can you do to negotiate to include the preferred clause as part of your contract? Is there a disclaimer of warranties? What is custom in your industry when warranties are concerned? What can you do to limit your potential liability exposure? I hope these questions will help you pay attention to the warranty clause so you can protect your liability exposure or negotiate a higher price as a subcontractor.

These five (5) reasons are not an all inclusive list of the issues you as a small business in the aerospace and defense industry should be paying attention to when negotiating a subcontract, they are, however, pointers to guide your thinking so that even without the assistance of counsel you can think about these issues instead of signing a contract in a moment of excitement without paying attention to its possible consequences for you and your business to make sure that a transaction you’re about to enter into is mutually beneficial and not so much one sided. Understand that you have leverage therefore you must negotiate.

If you have questions about Government Subcontract negotiations please reach out to me at contact@dismondy.com or you can schedule a consult. Also, check out this free training related to 7 Tips To Stay Compliant as Government Contractor in the Aerospace and Defense Industry.