Article

What's the low-down on flow down?

Jan. 6, 2022 · Authored by Alex Mikhelson, CPA and Tom Ruckdaschel, CPPM CF

Anyone who has ever dealt with a flow-down finding coming out of a property management system analysis (PMSA) or a contractor purchasing system review (CPSR) will tell you that odds are the finding fell into one of three buckets: failing to flow something down, flowing it down incorrectly or not flowing it down to the correct parties. Is it really that complicated? For example, when it comes to government property, Federal Acquisition Regulation (FAR) 52.245-1 requires contractors to“… include the requirements of this clause in all subcontracts under which Government property is acquired or furnished for subcontract performance” (FAR 52.245-1(b)(3)).

Most of us who have worked on or with a government contract have dealt with flow downs. But does anyone really understand what a flow down is? Or what exactly should flow down? And, arguably the most difficult question of all, a question that sometimes causes wide disagreement between the government and contractors: To whom should something flow down? Before getting back to government property and the requirements of FAR 52.245-1(b)(3), let’s dive in and get the low-down on flow down.

What is a flow down?

If you’ve been following along with us, our two previous articles, “Contractor Purchasing and Property Management Business Systems—Two Sides of the Same Coin” [1], and “Back to Basics: the Interconnectedness of the Defense Federal Acquisition Regulation (FAR) Supplement (DFARS) Business Systems, [2] both discussed the degree of overlap and interconnectedness between the six (6) DFARS business systems [3] with the former specifically highlighting the relationship between the contractor purchasing system and contractor property management system.

As we can see, the flow-down language cited in their respective system criteria contains the same basic requirement, appropriate flow-down of contract terms and conditions:

However, for all of the definitions, provisions and clauses contained within the FAR, you would be hard-pressed to find a definition of “flow down.” Any first-year law student will tell you when a contract does not define a particular term, the common understanding of the term prevails. A quick search using your favorite search engine will yield something along the lines of: “A flow-down clause is a contract provision by which the parties incorporate the terms of the general contract between the owner and the general contractor into the lower tier agreement.” [4]

In other words, flow down (in government contracting terms) is the means by which the government imposes the incorporation of prime contract requirements into lower-tier agreements, thereby ensuring consistent application of those requirements.

Back to the requirements of FAR 52.245-1

Let’s go back to the beginning of our discussion with FAR 52.245-1(b)(3) stating that the contractor shall “… include the requirements of this clause in all subcontracts under which Government property is acquired or furnished for subcontract performance.” The FAR 52.245-1 clause itself is a performance-based requirement, describing what needs to be done and not how to do it. It prescribes outcomes and outputs of a contractor’s property management system. That property management system depends upon the nature of the contractor’s business, the type and quantity of property, and the risks involved, a subset of which would be the surveillance of the subcontractor’s system. To the extent the prime contractor identifies a supplier as a subcontractor, the type and scope of assessment and surveillance is a prime contractor, not a government, decision, since the government has no privity with lower-tier suppliers. This language reflects the need to balance the government’s requirements for consistency through the contracting/supply chain (what needs to be done) while offering the prime contractor discretion on how to do it.

Contractors, like the government, must consider other factors, including commercial practices, supplier risk, cost, schedule and performance criteria. These may be acceptable depending upon the circumstances properly disclosed in the prime contractor’s disclosure statement, subcontracting plan or accounting or purchasing procedure; contractors need some degree of discretion on actual flow-down practice, for contractors must be able to navigate their business relationships with suppliers.

There has been anecdotal evidence of contractors receiving questions and even corrective action requests related to disagreements by the government over what a subcontractor is. Some of these disagreements revolved around the contractor’s alternate sites or divisions and even some around flowing down requirements to vendors. These disagreements often stem from another part of the clause:

"The Contractor’s responsibility extends from the initial acquisition and receipt of property, through stewardship, custody, and use until formally relieved of responsibility by authorized means, including delivery, consumption, expending, sale (as surplus property), or other disposition, or via a completed investigation, evaluation, and final determination for lost property. This requirement applies to all Government property under the Contractor’s accountability, stewardship, possession or control,  including its vendors or subcontractors (see paragraph (f)(1)(v) of this clause).”