Privity in Subcontracting Revisited

Privity of contract is something that affects every government subcontractor, even if it never really comes up. Knowing your rights under contract privity will be crucial if a subcontract dispute ever arises.

Simply put, privity is a legal term having to do with the contractual ties between parties; if privity of contract exists, it means that the contractual ties are close enough that one party can bring a claim against the other party should something go wrong. For a government subcontractor, there is rarely a contract with the government. Instead, the subcontractor’s entire contractual relationship is with the prime, who in turn directly contracts with the government agency. So privity of contract exists between the agency and the prime, and between the prime and the subcontractor, but not between the agency and subcontractor. This complex relationship has its advantages and disadvantages.

Privity in Government Subcontracting: Pros and Cons

In many ways, the lack of contract with the government is one of the biggest advantages of being a government subcontractor. Nailing down all the details of a large, complex government contract is a time-consuming process that often gets bogged down in red tape. By comparison, subcontractor agreements are relatively straightforward. Much of the murky details have already been squared away and can be extended to the subcontract via a flow-down clause. Privity of contract can help a subcontractor out in the event that the government contract is terminated. The end of the prime’s relationship with the agency does not let them off the hook when it comes to the subcontractor agreement; a prime contractor may be forced to pay the subcontractor in full even if the contract with the agency is no longer in effect.

A prime contractor can also go to bat for a subcontractor if a contract dispute does arise; if this looks likely, try to get a “provision requiring sponsorship” added to the contract. This will require the prime to sponsor any claim against the agency, although most such provisions include a caveat that the prime find that the claim has merit.

However, if a prime contractor is weak financially, contract privity can actually prevent a subcontractor from receiving payment. If the prime stops payment to the subcontractor, the subcontractor has no way to seek recourse from the government. It isn’t the agency’s responsibility to ensure that the subcontractor agreement is fulfilled. The prime is obligated by contract to pay the subcontractor, but that doesn’t always mean that the subcontractor will receive payment. The agency can also withhold payment from the prime to cover previous debts to the government, which can also affect the prime’s ability to pay subcontractors.

Ken Miller said,

June 23, 2008 @ 11:04 am

What rights does a sub-contractor have when the prime will not pay correct invoices?

editor said,

October 8, 2008 @ 2:38 pm

Unfortunately, a subcontractor will probably not be able to seek recourse from the government. You’ll have to take up the contract dispute with the prime contractor, in the same way you would in any other private sector contract dispute.

daniel said,

January 23, 2009 @ 2:26 pm

Where can simple subcontractors pick up a list of the contractors that will be on these jobs doing the work for the goverment, so that they may obtain some of the work…? I do mean, many are bankrupt without file on it. Anotherwords, its a real mess. And needs much more than 800 billion.

editor said,

February 2, 2009 @ 12:01 pm

Great question, Daniel. I’ve written a few times on how subcontractors can find government prime contractors to work with. Try reading http://gov.onvia.com/government-prime-contractors/, http://gov.onvia.com/subcontractor-contracts-investigate-locate-more-subcontracting-opportunities/, and http://gov.onvia.com/resources-to-help-you-identify-government-project-primes/. Hope this helps!

Bill said,

June 1, 2009 @ 7:07 am

If an “independent contractor” retained by a subcontractor does not have contractual privity with the govt, or even with the prime, can the govt or prime claim ownership of software that was written by the “independent contractor” of the subcontractor (i.e., not an employee of the subcontractor)?

To clarify, here are the relationships:
Govt>>Prime>>Subcontractor>>Independent Contractor

Ed said,

June 7, 2009 @ 2:50 am

If the sub contractor is providing a needed service to the government but is not being paid by the prime (despite the prime being paid by the gov) is there a way for the gov to go straight to the sub so not to lose or interupt the service being provided.

editor said,

June 11, 2009 @ 2:03 pm

Great question, Ed. If the amount of the contract is below $25,000, the government agency should be able to purchase directly from the sub - however, they will need to approach you. When it comes to being paid by the prime, it may be necessary for the sub to take the prime to contracts court in order to ensure the contract is fulfilled.

The good news is, the sub still has a record of providing a good and needed service to the agency. When the contract comes up for re-bid, plenty of prime contractors would be happy to partner with that sub to try to win that contract.

editor said,

June 11, 2009 @ 2:05 pm

Hi Bill,

Without knowing the details of the contract, it’s difficult to say - I’d suggest you contact an intellectual property lawyer.

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