ConstruCtion subContraCting A Comprehens PDF

Construction
Subcontracting
A Comprehensive Practical and Legal Guide
Editors
Aaron P. Joseph C. Tracy L.

Silberman Kovars Steedman
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PA RT 5
Special Project Issues
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CHAPTER 17
Public Projects (Federal, State,

and Local)
ROBERT M. OSIER
AARON P. SILBERMAN
I. Introduction
Although subcontracting on a public project is in many ways the same as on
any other project, there are some important legal differences. The most signif-
icant of these differences are discussed below. Further complicating matters
are the many differences among federal, state, and local governments’ require-
ments. While it would not be possible to list in this chapter every approach
taken by every jurisdiction, the most prevalent and significant approaches
that impact subcontracting on public projects are included.
II. What Is a “Public Project”?

Different jurisdictions define public projects differently. Courts have focused
on (1) the nature of the ownership, (2) the source of funding, and (3) the use to
which a project is put. Even within a jurisdiction, whether a project is public
will typically vary depending on the legal requirements at issue. For example,
jurisdictions may define a public project differently when the issue concerns
the state’s performance and payment bond requirments,1 its prevailing wage
requirments,2 or its mechanic’s lien laws.3
1. For further discussion, see chapter 14. See also, e.g., CD 752, Standard Subcontract
Agreement for Use on Federal Construction Projects, § 9.3.
2. For further discussion, see chapter 12.
3. See, e.g., United States ex rel. Miller v. Mattingly Bridge Co., 344 F. Supp. 459 (W.D.
Ky. 1972); W.T. Andrew Co. v. Mid-State Sur. Corp., 221 Mich. App. 438 (1997), aff’d, 461
Mich. 628 (2000); A.C. Legnetto Constr., Inc. v. Hartford Fire Ins. Co., 92 N.Y.2d 275 (Ct.
App. 1998); T&R Dragline Serv., Inc. v. CNA Ins. Co., 796 F.2d 133 (5th Cir. 1986); L. Suzio
341
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342 CHAPTER 17: PUBLIC PROJECTS (FEDERAL, STATE, AND LOCAL)
III. Who Is a “Subcontractor” Under Public Project Rules?

Some rules applicable to public projects apply only to prime contractors, oth-
ers to primes and first-tier subs, and others still to contractors at all tiers. For
example, both the federal Miller Act and its state counterparts (aka, Little
Miller Acts) typically impose limited or no notice of claim requirements on
first-tier subs, impose more significant notice requirements on second-tier
subs, and limit or preclude claims from subcontractors below the second tier.4
Federal and state prevailing-wage laws (i.e., the Davis-Bacon Act and its state
counterparts), on the other hand, typically apply to subcontractors at all tiers.5
Finally, some jurisdictions’ rules apply only to subcontractors that per-
form labor on or at a project, while others also apply to suppliers and service
providers (like waste haulers and demolition contractors). For example, the
definitions of “subcontract” and “subcontractor” under federal contracting
regulations do not distinguish between subcontractors and suppliers, such
that many federal requirements apply equally to both.6 Exceptions are federal
and state prevailing-wage laws, which generally apply only to subcontractors
that provide labor at the site,7 and several states’ Little Miller Acts (but not the
federal statute), which offer more limited protection to suppliers than to sub-
contractors that provide labor.8
IV. What Law Applies to Subcontracts

for Federal Government Projects?
Subcontracts are likely to be governed by applicable state law, either under
applicable state choice-of-law rules or according to the subcontract itself.9
However, when the work is performed on a federal project, federal contract
Concrete Co. v. New Haven Tobacco, Inc., 28 Conn. App. 622 (1992); James J. O’Rourke, Inc.
v. Indus. Nat’l Bank of R.I., 478 A.2d 195 (1984).
4. See, e.g., 40 U.S.C. § 3133 (former 40 U.S.C. § 270b); Cal. Civ. Code §§ 3247–3252.
For further discussion, see chapter 14.
5. See, e.g., 40 U.S.C. §§ 3141–3148 (former 40 U.S.C. §§ 276a–276a-5); Cal. Lab.
Code § 1770, et seq. For further discussion, see chapter 12.
6. FAR 3.502-1, 19.701, 44.101, 52.244-2(a); 48 C.F.R. § 44.101; see also Richmond
Eng’g Co., IBCA No. 426-2-64, 64 BCA ¶ 4465 (Oct. 1, 1964).
7. See, e.g., 40 U.S.C. § 3141, et seq.; Mont. Code Ann. § 18-2-401, et seq.; Or. Rev.
Stat. 279C § 800, et seq.; Alaska Stat. § 30.910.
8. See, e.g., Ariz. Rev. Stat. Ann. §§ 34-222, 34-223, 34-224; Ala. Code § 39-1-1;
Alaska Stat. § 36.25.010; Cal. Pub. Cont. Code §§ 10220–10232; 30 Ill. Comp. Stat. 550;
N.Y. Fin. Law § 9-137; see also 5 Steven G. Stein, Construction Law § 17.03 (2013) (dis-
cussing the Little Miller Acts and some of the differences among them).
9. Westinghouse Elec. Corp. v. Garrett Corp., 437 F. Supp. 1301 (D. Md. 1977), aff’d,
601 F.2d 155 (4th Cir. 1979); Wallace Process Piping Co. v. Martin-Marietta Corp., 251 F.
Supp. 411 (E.D. Va. 1965).
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V. Competitive Bidding 343
law and regulations, such as the Federal Acquisition Regulation (FAR),10 may
preempt state law. A few courts have analyzed the question and chosen appli-
cable law based on the degree to which the outcome of the case will affect the
interest of the federal government.11 While a few courts have held that federal
common law governs the interpretation of a subcontract on a federal project,12
most decisions have, without discussion, applied state law.13 A rare exception
is when the federal government orders the prime to assign its subcontract to
the government and sues the subcontractor; in such cases, courts are apt to
apply federal law.14 Due to courts’ inconsistency in determining what law
applies to subcontracts under government prime contracts,15 many prime con-
tractors include a choice-of-law clause in their standard form of subcontract,
which incorporates federal contract law as the primary source, with a speci-
fied state law as backup in the absence of relevant federal law.16
V. Competitive Bidding
Competitive bidding has been and continues to be the cornerstone of the
method by which a public entity procures construction contracts. The con-
struction of public buildings, utilities, roadways, bridges, and other structures
is usually governed by a well-defined contractual process of competitive bid-
ding. The primary purpose of competitive bidding is to protect the public
10. 48 C.F.R. § 1.00, et seq.

11. Whittaker Corp. v. Calspan Corp., 810 F. Supp. 457 (W.D.N.Y. 1992); Northrop
Corp. v. AIL Sys., Inc., 959 F.2d 1424 (7th Cir. 1992); see also Koppers Co. v. Brunswick Corp.,
303 A.2d 32 (Pa. 1973); United States ex rel. U.S. Steel Corp. v. Constr. Aggregates Corp., 559
F. Supp. 414 (E.D. Mich. 1983).
12. Am. Pipe & Steel Corp. v. Firestone Tire & Rubber Co., 292 F.2d 640 (9th Cir. 1961);
see also United States v. Taylor, 333 F.2d 633 (5th Cir. 1964); Grinnell Fire Prot. Sys. Co. v.
Regents of Univ. of Cal., 554 F. Supp. 495 (N.D. Cal. 1982); cf. CEMCO, Inc., Subsidiary of
E-Sys., Inc., ERDA BCA 4-2-75, 76-1 BCA ¶ 11,702.
13. Clifton D. Mayhew, Inc. v. Blake Constr. Co., 482 F.2d 1260 (4th Cir. 1973); Elte,
Inc. v. S.S. Mullen, Inc., 469 F.2d 1127 (9th Cir. 1972); Peter Kiewit Sons’ Co. v. Summit Con-
str. Co., 422 F.2d 242 (8th Cir. 1969).
14. Clearfield Trust Co. v. United States, 318 U.S. 363 (1943); Taylor, 333 F.2d 633.
15. See, e.g., New SD, Inc. v. Rockwell Int’l Corp., 79 F.3d 953 (9th Cir. 1996) (state law
displaced by federal law on subcontract under national security prime contract); Whittaker
Corp., 810 F. Supp. 457 (financial impact on the government not sufficient to overcome stan-
dard use of state law in prime-sub dispute where jurisdiction was based on diversity);
United States v. Seckinger, 397 U.S. 203 (1970) (federal contract law will apply to issues aris-
ing under a prime contract with the government). But cf. Empire HealthChoice Assurance,
Inc. v. McVeigh, 547 U.S. 677, 691 (2006) (“uniform federal law need not be applied to all
questions in federal government litigation, even in cases involving government contracts”).
16. See CD 752, § 12.1.
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against the misuse of public funds and prevent abuses such as fraud, collu-
sion, and favoritism.17
The public entity’s award of a construction contract to a prime contractor is
ordinarily regulated by statute or constitutional provision, and the prescribed
method must be followed. Although the requirement for public bidding does
not apply to all projects, if the project requires a significant expenditure of
public funds, government entities usually must use a bidding process. In the
awarding of construction contracts, the public entity invites prime contrac-
tors to submit bids. A prime contractor’s bid must substantially and materially
conform to the details contained in the bid specifications—generally referred
to as the “responsiveness” requirement.18 Failure to substantially comply with
the bid requirements will result in rejection of the bid as nonresponsive. The
other key component to public bidding is that the bid must be submitted by a
“responsible” contractor, which generally relates to the contractor’s ability to
perform the work.19
The traditional “design-bid-build” project delivery method—in which
the public entity provides a detailed, complete design, puts it out to bid, and
awards the contract to the lowest responsive bid—continues to be the primary
method of awarding public construction contracts. Through federal, state, and
local legislation, however, other project delivery methods have been autho-
rized, including design-build contracts, whereby the public entity provides
the general design intent and performance standards rather than a complete
design, and prime contractors’ bids include the cost of completing the design
to deliver the finished project.20
A. Protecting the Bidding Process for Subcontractors

1. Competitive Bidding Generally
While project delivery methods for public construction contracts have evolved
and continue to evolve, the process of subcontractors submitting bids to prime
contractors has experienced less change. As part of the bidding process, prime
contractors will request bids from trade contractors—for example, concrete,
17. See, e.g., John C. Grimberg Co. v. United States, 185 F.3d 1297, 1300–01 (Fed. Cir.
1999); Konica Bus. Machs. USA, Inc. v. Regents of Univ. of Cal., 206 Cal. App. 3d 449, 456–57
(1988); Datatrol Inc. v. State Purchasing Agent, 379 Mass. 679 (1980).
18. See, e.g., B-G Mech. Serv., Inc., B-265782, 96-1 CPD ¶ 6; Bishop Contractors, Inc.,
B-246526, 91-2 CPD ¶ 555; Tropabest Foods, Inc. v. State Dept. of Gen. Svcs., 493 So. 2d 50
(Fla. 1st Dist. Ct. App. 1986); Transit Team, Inc. v. Metro. Council, 679 N.W.2d 390 (Minn.
Ct. App. 2004); AT&T Commc’ns, Inc. v. Nassau, 214 A.D.2d 666 (N.Y. 1995); Smith & John-
son Constr. Co. v. Ohio Dep’t of Transp., 134 Ohio App. 3d 521 (1998); Valley Crest Land-
scape v. City Council, 41 Cal. App. 4th 1432, 1442 (1996); Ghilotti Constr. Co. v. City of
Richmond, 45 Cal. App. 4th 897, 906 (1996).
19. See, e.g., John C. Grimberg Co., 185 F.3d at 1300–01; Great W. Contractors, Inc. v.
Irvine Unified Sch. Dist., 187 Cal. App. 4th 1425, 1450–51 (2010); D.H. Williams Constr., Inc.
v. Clovis Unified Sch. Dist., 146 Cal. App. 4th 757, 763 (2007).
20. For a discussion of alternative project delivery, see chapter 18.
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steel, roofing, drywall, mechanical, electrical, and plumbing—to perform

defined scopes of work the prime contractor cannot or is not licensed to per-
form.21 Typically, the prime contractor will request bids from several subcon-
tractors for the same scope of work to increase the likelihood it will secure
the lowest price for that trade’s scope of work and thereby increase the chance
the prime contractor’s bid will be lowest. Trade subcontractors also want to
be part of the winning bid and therefore will submit bids to more than one
bidding prime contractor.22 For major scopes of work, subcontractors will wait
as long as possible before committing to a final price, often not until bid day,
and sometimes minutes before the prime contractor must submit its bid to the
public entity. That results in a hectic and tense bid-day scramble, with prime
contractors taking bids on cell phones and then handwriting the final prices
and tallying them up for the total bid price to be submitted to the owner.
Subcontractors submitting bids for major scopes of work wait until the
last minute to commit to a price because that is one of the few protections a
subcontractor has to keep its bid confidential and limit the opportunity for
the prime contractor to offer the contract to another competing subcontrac-
tor if that subcontractor will provide a lower price. Because the subcontrac-
tor’s bid is only an offer, no contract is formed until the bid is accepted by the
prime contractor, and that will occur only if the prime contractor submits the
winning bid.
However, since the basic needs of the bidding process must prevent a sub-
contractor from withdrawing its bid to a general contractor, courts in many
jurisdictions have applied the doctrine of promissory estoppel to create a
binding legal relationship by the mere offer from the subcontractor when the
prime contractor has relied upon that offer in submitting its bid. The offer
remains binding for a reasonable time, even if the subcontractor’s bid contains
an error and regardless of whether the subcontractor has attempted to revoke
its bid before the prime contractor has “accepted” it.23
Promissory estoppel is a one-way street, as the prime contractor does not
have to accept the subcontractor’s bid. That puts the prime contractor in a sig-
nificantly better bargaining position with the subcontractors, especially if the
prime contractor submits the winning bid. That superior bargaining position
allows the prime contractor the opportunity to “shop” or “peddle” a subcon-
tractor’s bid, primarily for the sole benefit of the prime contractor.
2. Subcontractor Listing Laws

In an effort to protect the subcontractors from bid shopping/peddling, “sub-
contractor listing laws” have emerged in some states. The laws vary in details
and procedures but have some general principles in common.
21. For discussion of licensure issues in subcontracting, see chapter 15.

22. An alternative approach is the use of teaming agreements or joint ventures. For
further discussion, see chapter 23.
23. Promissory estoppel is also discussed in chapter 2.
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a. No Federal Subcontractor Listing Law

Currently, there is no subcontractor listing law for federal construction proj-
ects, but attempts to enact such listing law have been introduced. House bills
titled the “Construction Quality Assurance Act” were introduced in 2000 and
again in 2005. The stated purposes of the bills were no different from those
supporting state listing laws—to eliminate the practices of bid shopping and
bid peddling. Those bills died in committee. Yet another attempt has been
made, in May 2013, through House Resolution 1942. That bill, like its unsuc-
cessful predecessors, has been referred to the House Oversight and Govern-
ment Reform Committee.
b. State Subcontractor Listing Laws

State legislatures, on the other hand, have had considerable success enacting
anti-bid-shopping/-peddling statutes that require a listing of subcontractors
on public construction projects.24
(1) Which Subcontractors Must Be Listed?

The prime contractor, either with its bid or shortly thereafter, must submit a
list of subcontractors to which the prime contractor intends to award subcon-
tracts. Although it varies by state, the common method of determining which
subcontractors must be listed relates to the dollar value of the subcontrac-
tor’s proposed subcontract as a percentage of the prime contractor’s bid. For
example, in California, all subcontracts with a value of one-half of 1 percent or
greater of the prime contractor’s bid must be listed.25
(2) What Information Must Be Listed?

The listing requires, at a minimum, enough information to identify the sub-
contractor and its general scope of work.26 The value of the subcontractor’s bid
is not required by all statutes.27
24. Alaska Stat. § 36.30.115; Ark. Code Ann. § 22-9-204; Cal. Pub. Cont. Code
§ 4104; Conn. Gen. Stat. § 4b-93; Del. Code Ann. tit. 29, § 6962; Fla. Stat. § 255.0515; Haw.
Rev. Stat. § 103D-302; Idaho Code Ann. § 67-2310; Iowa Code § 8A.311(15); Kan. Stat.
Ann. § 75-3741; La. Rev. Stat. Ann. § 38:2212; Mass. Gen. Laws ch. 149, § 44A; Nev. Rev.
Stat. § 338.141); N.J. Rev. Stat. § 40A:11-16; N.M. Stat. Ann. § 13-4-34; N.Y. Gen. Mun. Law
§ 101; N.C. Gen. Stat. § 143-128; Or. Rev. Stat. § 279C.370; S.C. Code Ann. § 11-35-3020;
Tenn. Code Ann. § 62-6-119; Utah Code Ann. § 63A-5-208; Wash. Rev. Code § 39.30.060;
W. Va. Code § 5-22-1; Wis. Stat. § 66.0901; see also Sean Calvert, Preference Programs in
Public Projects: The Future Is Now (2013), http://www.americanbar.org/content/dam
/aba/directories/construction_industry_knowledge_base/dp_plenary_2_2.authcheckdam
.pdf.
25. Cal. Pub. Cont. Code § 4104(a)(1).
26. See statutes cited in note 24.
27. See, e.g., Cal. Pub. Cont. Code § 4104(a)(1) (requiring listing of only the “name
and location of the place of business”); N.J. Stat. Ann. § 40A:11-16(b) (no requirement for
subcontract amount).
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(3) Can the Listed Subcontractor Be Replaced?

Another common feature of subcontractor listing laws is a specific procedure
for substituting, with the public entity’s approval, the listed subcontractor for
specified reasons, such as the subcontractor’s refusal to perform the work or
the subcontractor’s inability to perform the work due to bankruptcy.28 With-
out these specifics, prime contractors have proven able to renege on their com-
mitments to use subcontractors listed in their bids.29
B. Preference and Incentive Programs

Federal, state, and local governments provide billions of dollars to the con-
struction economy. With this economic clout, the government has an oppor-
tunity to advance social and economic objectives through the preference and
incentive programs governing procurements.
1. Typical Features
Disadvantaged business enterprise (DBE) programs target specific subcon-
tractor groups that may not have the economic ability on their own to par-
ticipate in large construction projects. Among the types of subcontractors that
participate in these programs are businesses that are small, women owned,
minority owned, veteran owned, or service-disabled-veteran owned, located
in economically distressed areas, local, or combinations thereof.30 Some
programs result in artificially lowering a DBE prime contractor’s bid price
through credits or incentives, which increases the likelihood the DBE prime
contractor will submit the winning bid. Other programs require the prime
contractors as part of the bidding process to reach out to small or DBE sub-
contractors to encourage their participation. To participate in these programs,
the subcontractors and suppliers typically must be certified by the governing
agency or meet specific qualifications.
2. Federal Programs
The federal government has developed a variety of programs to provide bet-
ter opportunities to small and disadvantaged businesses.
a. Federal Small Business Administration Programs

The Small Business Administration (SBA) administers the federal govern-
ment’s small-business program. As explained in the authorizing statute, the
objective is to “ensure that a fair proportion of the total purchases and contracts
28. See, e.g., Cal. Pub. Cont. Code § 4107; Utah Code Ann. § 208(3)(d).
29. See, e.g., Finney Co. v. Monarch Constr. Co., 670 S.W.2d 857, 858, 863 (Ky. 1984).
30. See, e.g., FAR 19.702 (small business); Ala. Code § 39-3-5 (resident bidder); Cal.
Gov’t Code § 7118; Cal. Code Regs. tit. 2, § 1896.6 (small business); Fla. Admin. Code
Ann. r. 25-25.025 (minority-owned company); S.C. Code Ann. § 12-28-2930(F) (disadvan-
taged ethnic minority or women owned).
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or subcontracts for property and services for the Government (including con-
tracts or subcontracts for maintenance, repair, and construction) are placed
with small business concerns.”31 A small-business concern is defined as “one
which is independently owned and operated and which is not dominant in its
field of operation.”32
The SBA’s eligibility requirements vary by industry. In the construction
industry, eligibility is based on annual receipts (rather than number of employ-
ees as in other industries). The eligibility requirements also vary among dif-
ferent areas of construction. For example, the SBA’s eligibility requirements
differ for subcontractors performing “Construction of Buildings” than for
“Specialty Trade Contractors.”33
(1) Section 8(a) Program

The SBA has also established a program to assist small, minority-owned busi-
nesses. The program is named “Section 8(a)” after Section 8(a) of the Small
Business Act of 1953.34 The Section 8(a) program is unique in that the SBA
enters into direct contracts with the procuring agency, and then SBA contracts
with participants of the Section 8(a) program. For a contractor to qualify for the
Section 8(a) program, it must be a “socially and economically disadvantaged”
small-business concern.35 This means it must be owned (at least 51 percent) and
operated on a daily basis by a qualifying individual. Initially, the owning indi-
vidual must not have a net worth in excess of $250,000, and, for continuation
in the program, the individual’s net worth cannot increase above $750,000.36
Additionally, the owner must show that reasonable prospects for competing in
the private sector exist and, unless waived, must show the small business has
been providing the specific services for at least the prior two years.37
(2) Small Disadvantaged Business Program

Like the Section 8(a) program, the small disadvantaged business (SDB) program
assists socially and economically disadvantaged small businesses.38 Businesses
that qualify for the Section 8(a) program also qualify for the SDB program. In
addition, since the SDB program has less restrictive eligibility requirements
than the Section 8(a) program, other businesses may qualify for the SDB pro-
gram as well. For example, the initial limit on the owner’s net worth for the
31. Irving Maness, The Emergence of the Current Interest in the Defense Small Business
and Labor Surplus Area Subcontracting Programs, 18 Mil. L. Rev. 119 (1962) (citing 75 Stat. 666
(1961), 15 U.S.C. § 631(a) (Supp. 111, 1962)).
32. 72 Stat. 384 (1958); 15 U.S.C. § 632 (1958).
33. 13 C.F.R. § 121.201, sector 23.
34. 15 U.S.C. § 695, et seq.
35. 13 C.F.R. § 124.101.
36. 13 C.F.R. § 124.104(c)(2).
37. 13 C.F.R. § 124.107.
38. 13 C.F.R. §§ 124.1001–.1014.
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SDB program is currently higher than that for the 8(a) program—$750,000 as
opposed to $250,000.39 Additionally, unlike the Section 8(a) program, the indi-
vidual does not have to meet the same standards for reasonable prospects of
business.
(3) Historically Underutilized Business Zones Program

The Historically Underutilized Business Zones (HUBZone) program seeks to
assist certain small businesses that are “located in historically underutilized
business zones in an effort to increase employment opportunities, invest-
ment, and economic development in such areas,” and thereby to gain access
to more federal contracting opportunities.40 The program was authorized by
the Small Business Reauthorization Act of 1997 and is administered by the
SBA.41 The benefits of the HUBZone program include competitive and sole-
source contracting for members and a 10 percent price evaluation preference
in open competitions. The HUBZone program applies to all federal agencies
and establishes a goal of 3 percent prime and subcontractor HUBZone con-
tracting for the agencies.
To be certified in the HUBZone program, a business must (1) qualify as
a small business by SBA standards, (2) be at least 51 percent owned or con-
trolled by U.S. citizens or a community development corporation, agricultural
cooperative, or Indian tribe, (3) have its principal office located within a des-
ignated HUBZone, and (4) have at least 35 percent of its employees reside in a
HUBZone.42
b. Other Federal Disadvantaged-Business Programs

There are other federal programs, both within the SBA and at other federal
agencies, with similar goals of assisting the growth and development of
small business. These include the Service-Disabled Veteran-Owned program,
Women-Owned Small Business and Economically Disadvantaged Women-
Owned Small Business programs, and various mentor-protégé programs.43
c. Federal Subcontracting Plan Requirements

The federal government generally requires that prime contractors that are not
small businesses must provide for government approval a small business
and small disadvantaged business subcontracting plan for most federal
construction contracts. The threshold for this requirement is that the proj-
ect has subcontracting possibilities and is expected to exceed $1.5 million.44
The plan must include a number of items, such as participation percentages
39. 13 C.F.R. § 123.1002(c) (for SDB); 13 C.F.R. § 124.104(2) (for Section 8(a)).
40. 13 C.F.R. § 126.100.
41. Pub. L. No. 105-135 (Dec. 2, 1997).
42. See 13 C.F.R. § 126.200 (different requirements apply to certain identified groups).
43. 13 C.F.R. §§ 125.8–.10; 13 C.F.R. pt. 127; 13 C.F.R. § 124.520; 49 C.F.R. pt. 26.
44. FAR 19.702, 52.219-9.
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by small and disadvantaged businesses, types and quantities of materials

and labor to be supplied by these businesses, and other related information.45
Prime contractors must flow down this requirement to subcontractors whose
contracts meet the threshold requirements.46
d. Buy American Act

In addition to assisting small-business contractors, the federal government
seeks to increase access to federal contracts for domestic suppliers through pro-
grams such as the Buy American Act.47 The purpose of the Buy American Act
is to ensure preferential treatment for domestic sources of construction mate-
rials, among other things, for public use unless a specific exemption applies.
Under the government’s required contract clause, a government “[c]ontractor
shall use only domestic construction material in performing [the] contract.”48
Paragraph (b)(3) of that clause implements exceptions to the act’s requirement
if the government determines that—
(i) The cost of the domestic construction material would be unreason-

able. The cost of a particular domestic construction material subject to
the requirements of the Buy American Act is unreasonable when the
cost of such material exceeds the cost of foreign material by more than
6 percent;
(ii) The application of the restriction of the Buy American Act to a

particular construction material would be impracticable or inconsis-
tent with the public interest; or
(iii) The construction material is not mined, produced, or manufac-

tured in the United States in sufficient and reasonably available com-
mercial quantities of a satisfactory quality.49
In order to meet its contract obligations to the government, the prime con-
tractor must flow down these requirements to its subcontractors.50 Similar
requirements are contained in the federal Trade Agreements Act and Ameri-
can Recovery and Reinvestment Act of 2009.51
45. FAR 19.704. The SBA’s various small disadvantaged business programs, such as
Section 8(a), HUBZones, and others, are located in title 13 of the Code of Federal Regulations.
46. FAR 52.219-9(d)(9). See, e.g., CD 752, § 12.9.
47. 41 U.S.C. §§ 10a–10d.
48. FAR 52.225-9(b)(1).
49. FAR 52.225-9(b)(3)(i)–(iii).
50. CD 752, § 3.7.2.
51. 19 U.S.C. § 2501, et seq.; Pub. L. No. 111-5.
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3. State and Local Programs

State and local public agencies have also developed statutes to encourage par-
ticipation by small businesses and other classifications, such as minority- or
women-owned businesses. For example, New Jersey requires contracting state
agencies to make a good-faith effort to award public construction contracts to
small businesses by authorizing the establishment of set-aside programs of at
least 25 percent of the total dollar value of the state contract.52
In New York, the law requires in pertinent part:
In every state agency, department and authority which has let more
than ten million dollars in service and construction contracts in the
prior fiscal year, the chief executive officer of that agency, department
or authority shall develop a mentor-protégé program to foster long-term
relationships between approved mentor firms, and small business con-
cerns and minority and women-owned businesses certified pursuant
to article fifteen-A of the executive law, in order to enhance the capa-
bilities of small and minority and women-owned business concerns,
improve their success in contracting with the state or receiving subcon-
tracts under a state contract, and to create sources of reliable contractors
and subcontractors ready to perform larger jobs and responsibilities.53
The interest in promoting the success of small-business interests is also

found in local laws and regulations. Los Angeles, for example, has a minority
subcontractor outreach program that does not require a prime-contractor bid-
der achieve any particular percentage of minority subcontractor participation,
but does require documentation of its outreach efforts. Prior to being awarded
a government contract, the bidder must establish that it has complied with the
program by showing that it (1) made a good-faith effort to obtain the award-
ing authority’s participation goals for minority business enterprises (MBEs),
women business enterprises (WBEs), and other business enterprises (OBEs);
(2) attended pre-solicitation or pre-bid outreach meetings; (3) made efforts to
identify specific items of work and/or divide the work into smaller portions
to permit maximum participation of MBEs, WBEs, and OBEs; (4) advertised in
minority-oriented publications no less than 10 calendar days prior to bid sub-
mission; (5) provided written notice to MBEs and WBEs no less than 10 calen-
dar days prior to submission; (6) documented its efforts to follow up the initial
solicitation; (7) provided copies of plans and specifications to interested MBEs,
WBEs, and OBEs or made them available for review; (8) requested assistance
from MBE, WBE, and OBE organizations not less than 15 calendar days prior
to bid submission; (9) negotiated in good faith; and (10) documented efforts
52. See Exec. Order No. 71 (2003).

53. N.Y. State Fin. Law § 147.
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to advise and assist in obtaining bonds, credit, and insurance for the MBEs,
WBEs, and OBEs.54
4. Constitutional Issues and Challenges

Classifications based on the owner’s race or gender, among other factors, for
the purposes of preferences have been scrutinized by the courts as an equal
protection constitutional violation.55 At the state and local levels, preference
and incentive programs have also been challenged with varying results. For
example, an Ohio court found that a state program that required approxi-
mately 15 percent of the state’s purchasing contracts to be set aside for compet-
itive bidding by MBEs only and that contained other provisions with explicit
references to race was constitutional as applied.56
State and local public-entity preference programs that do not set strict quo-
tas but require a showing of best efforts to be inclusive and provide opportu-
nities for small and disadvantaged business generally fare much better in the
courts. For example, a New York court found that a program that “demands
only ‘good faith’ efforts on the part of each contractor” to voluntarily set aside
a certain percentage of the total amount of state contracts awarded to small
business DBE programs “represent[s] a constitutionally appropriate means of
redressing identified discrimination against minority contractors.”57
C. Bid Protests
In a competitive bid, it is not uncommon for the presumptive low bidder’s bid
to be challenged. The challenge usually comes from the bidder next in line for
the award but can come from other bidders if there is a basis to challenge each
of the bids above. Additionally, if the bid fails to comply with the material
requirements of the invitation for bids, the public entity may determine the
bid “nonresponsive” on its own.
The presumptive low bidder ordinarily is entitled to reasonable notice
and a hearing prior to rejection of its bid. Additionally, unsuccessful bidders
can protest the public entity’s determination of the winning bid through the
administrative process, typically set forth in the invitation for bids. In many
jurisdictions, if unsuccessful in protesting the proposed award, the unsuc-
cessful bidder can initiate a lawsuit for an injunction to prevent the award.
The subcontractor generally does not fall into the category of those that
have standing to submit a protest and challenge the award of the prime con-
tract. Moreover, except for very limited circumstances, the subcontractor
cannot protest the prime contractor’s award of a subcontract to another sub-
contractor. For example, the federal Competition in Contracting Act (CICA)
54. L.A. City Charter, Office of the Mayor, Exec. Directive No. 2001-26 (2001), http://
bca.lacity.org/site/pdf/soe/Executive%20Directive%202001-26.pdf.
55. See City of Richmond v. J.A. Croson Co., 488 U.S. 469 (1989).
56. Ritchey Produce Co. v. State Dep’t of Admin. Servs., 707 N.E.2d 871, 928 (Ohio
1999) (re: Ohio Rev. Code Ann. § 125.081).
57. Rex Paving Corp. v. White, 531 N.Y.S.2d 831, 839 (App. Div. 1988).
siL25410_17_ch17_339-368.indd 352 3/25/14 11:38 AM

VI. Government Approval Issues 353
limits its definition of “interested parties” that may protest a federal contract
award to actual or prospective bidders,58 and the Government Accountability
Office, which hears many federal bid protests, states in its rules that it “will
not consider a protest of the award or proposed award of a subcontract except
where the agency awarding the prime contract has requested in writing that
subcontract protests be decided. . . .”59 There have been a few state court deci-
sions allowing subcontractors to protest subcontract awards,60 but these are
exceptions to the general rule.
In some cases, the subcontractor’s qualifications may be the issue being
protested. For example, the protest may concern reduced scoring or dis-
qualification of the portion of the prime’s bid due to the subcontractor’s lack
of required qualifications or certifications. In those cases, the subcontrac-
tor should, and often will, play an active role in support of the prime’s bid.
Finally, because public contracts are matters of public interest, some jurisdic-
tions allow citizen suits or taxpayer suits to contest proposed contract awards;
in those jurisdictions, a subcontractor for a disappointed bidder may have
standing to bring such suits.61
VI. Government Approval Issues

Generally, the public entity does not interject itself into the contractual deal-
ings between the prime contractor and its subcontractors. There are, however,
exceptions.
A. Consent Required for Certain Subcontracts

For federal projects, if the prime contract is based on a fixed price, the prime
contractor does not need the consent of the contracting officer to enter into
subcontracts. However, for contracts where the price is not fixed—for example,
cost-reimbursement, time-and-materials, labor-hour, and letter contracts—the
contracting officer must consent to the subcontract.62 The purpose of requir-
ing consent in these situations is to allow the contracting officer (i.e., the gov-
ernment) to protect itself against cost overruns by having the opportunity to
review the proposed subcontractor and the general form of the subcontract.
The contracting officer’s consent, however, usually is not given as to the sub-
contract’s price, costs allowed, or other specific subcontract terms.63
58. 31 U.S.C. § 3551(2)(A).

59. 4 C.F.R. § 21.5(h).
60. See, e.g., Orion Tech. Res., LLC v. Los Alamos Nat’l Sec., LLC, 287 P.3d 967 (N.M.
Ct. App. 2012); New England Insulation Co. v. Gen. Dynamics Corp., 522 N.E.2d 997, 998
(Mass. App. Ct. 1988).
61. See, e.g., Cal. Civ. Proc. Code § 526a; Ind. Code § 34-13-5-1; N.Y. Gen. Mun. Law
§ 51.
62. See FAR 44.201-1, 52.244-2.
63. FAR 44.203(a).
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B. Government-Directed Subcontractors
While the regulations are not clear, it is likely that the federal government
may direct the prime contractor to use a specific subcontractor when there
is a compelling justification for doing so.64 A number of federal tribunals
have adopted the view that when the government, as the owner, designates
a particular subcontractor as a sole source, the government necessarily war-
rants the performance by that subcontractor.65 At least one federal tribunal
(the Armed Services Board of Contract Appeals) has chosen not to follow this
view, finding that the government warrants only that the source exists and
has the ability to produce the product, not that it will do so without defect.66
VII. Subcontractor Claims on Public Projects

A. Claims Against the Prime Contractor
On public projects, as with private projects, the ability of the subcontractor to
assert claims against the prime (or, for lower-tier subcontractors, against the
subcontractor at the next higher tier) is governed primarily by the terms of the
subcontract. On federal projects, the prime will often flow down a modified
version of the standard FAR clause in its prime contract relating to claims.67
Flow-down of these provisions is permissive, not mandatory,68 and primes
and subcontractors may and often do agree on different claims provisions.69
B. Direct Claims Against the Government

In most cases, when a subcontract has a claim for increased costs or other
damages arising from the action or inaction of the government on a public
project, its only avenue of recovery is through a claim against the prime con-
tractor, rather than against the public owner. This is due to lack of “contractual
privity” between the subcontractor and the public entity; that is, the subcon-
tractor cannot claim the government failed to honor its contract because the
subcontractor is not a party to that contract. Thus, in effect, the subcontractor
must make its claim against the prime contractor, and then the prime must
pursue that claim against the government on behalf of the subcontractor.
64. See Office of Inspector Gen., Dep’t of Def., Audit Report D-2000-129, Air
Force Contract for Installation of Radios and Antennae (May 22, 2000); U.S. Gov’t
Accountability Office, GAO-04-206, Satellite Communications—Strategic Approach
Needed for DoD’s Procurement of Commercial Satellite Bandwidth (2003).
65. Franklin E. Penny Co. v. United States, 524 F.2d 668 (Ct. Cl. 1975); Kaplan Con-
tractors, Inc., GSBCA 2747, 70-2 BCA ¶ 8511; Electro-Nav, Inc., DCAB No. NOAA-1-74, 75-1
BCA ¶ 11,162; Engineered Sys., Inc., B-184098, 76-1 CPD ¶ 144.
66. Salisbury Special Tool Co., ASBCA 37530, 89-2 BCA ¶ 21,838.
67. FAR 52.233-1. For further discussion of subcontractor claims, see chapter 8.
68. See section X.
69. See, e.g., CD 752, §§ 3.5, 7.1–7.7.
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VII. Subcontractor Claims on Public Projects 355
There are exceptions, however. In rare circumstances, a subcontractor may

pursue claims directly against the government. The two most common are
(1) when the government takes assignment of the subcontract from the prime
contractor and (2) when the subcontractor is a third-party beneficiary under
the prime contract. Both exceptions are extremely narrow.
Federal government regulations expressly recognize the government’s
ability to accept assignment of subcontracts from primes in certain limited
circumstances. For example, the government may do so when it has termi-
nated for convenience the portion of the prime contract that includes the sub-
contract work.70 Although the government rarely accepts such assignments,
when it does, the subcontractor has the same rights to pursue claims against
the government as the federal prime contractor.71 At least one court has recog-
nized this rule under state law as well.72
In the absence of an assignment, the subcontractor may still be able to pur-
sue a direct claim against the government if it can show that the government
and prime contractor intended the subcontractor to be a third-party benefi-
ciary under their prime contract, but this is very difficult to do.73 Many states
have evaluated this issue in the context of subcontractor claims against gov-
ernment owners that did not require their prime contractors to obtain statuto-
rily required payment bonds. Some states have allowed such claims under the
third-party beneficiary theory;74 others have not,75 nor have they been allowed
in this context for federal projects.76
C. Pass-Through Claims
1. Where Allowed
Generally, pass-through claims are allowed for subcontractor claims on federal
construction projects.77 Most states that have considered pass-through claims
have allowed them. For example, in Interstate Contracting Corp. v. City of Dal-
las, a Texas court allowed such a claim, finding that 18 of 19 states that have
70. FAR 49.108-8, 52.249-2(b)(4); see also Clearfield Trust Co. v. United States, 318 U.S.
363 (1943); United States v. Taylor, 333 F.2d 633 (5th Cir. 1964). For discussion of termina-
tions, see chapter 9.
71. Nw. Bank Ariz., NA v. United States, 37 Fed. Cl. 605, 610 (1997); K&S Elec., Inc.,
ASBCA 30759, 85-2 BCA ¶ 18,088.
72. Topco, Inc. v. Mont. Dep’t of Highways, 912 P.2d 805 (Mont. 1996).
73. Winter v. Floorpro, Inc., 570 F.3d 1367 (Fed. Cir. 2009) (theory recognized but claim
not allowed); D&H Distrib. Co. v. United States, 102 F.3d 542 (Fed. Cir. 1996) (claim allowed).
74. See, e.g., Lake Cnty. Grading Co. v. Antioch, 935 N.E.2d 638 (Ill. 2013); Electrical
Electronic Control, Inc. v. L.A. Unified Sch. Dist., 126 Cal. App. 4th 601 (2005).
75. See, e.g., Imperial Mfg. Ice Cold Coolers, Inc. v. Shannon, 101 P.3d 627 (Alaska
2004); O&G Indus., Inc. v. Town of New Milford, 640 A.2d 110 (Conn. 1994).
76. Dep’t of the Army v. Blue Fox, Inc., 525 U.S. 255, 264 (1999).
77. E.R. Mitchell Constr. Co. v. Danzig, 175 F.3d 1369 (Fed. Cir. 1999); J.L. Simmons
Co. v. United States, 304 F.2d 886 (Ct. Cl. 1962); Severin v. United States, 99 Ct. Cl. 435
(1943), cert. denied, 322 U.S. 733 (1944).
siL25410_17_ch17_339-368.indd 355 3/25/14 11:38 AM

considered the viability of pass-through claims have allowed them: Alaska,

California, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Caro-
lina, Oregon, Rhode Island, and Virginia (though only for Virginia Department
of Transportation contracts).78 One state, Connecticut, has expressly rejected
the ability of the prime contractor to pass through the subcontractor’s claim.79
2. Severin Doctrine
From the 1943 decision in Severin v. United States emerged a substantial limita-
tion on the ability of the subcontractor to pass through its claim to the public
entity. Known commonly as the Severin doctrine, it provides that unless the
subcontractor has a valid recoverable claim against the prime contractor, the
prime contractor cannot pass through the subcontractor’s claim, even when
the subcontractor’s damages result from the action or inaction of the public
entity. In the Severin case, the prime contractor brought suit against the project
owner for recovery of both its damages and the damages claimed by its sub-
contractor. The court allowed recovery for the prime contractor but disallowed
recovery for the subcontractor’s portion of the claim, reasoning that, since the
subcontract provided that the prime would not be liable to the subcontractor
for any “loss, damage, detention or delay caused by the owner,” there was no
liability to pass through to the government.80
The Severin doctrine has been limited by later cases. The government now
has the burden to show that the sponsoring contractor has no liability to the
subcontractor that is making the claim. A contingent liability (to pay over
sums recovered) is usually sufficient to defeat the government’s defense.81
3. Procedure
Typically the prime contractor and subcontractor enter into a liquidating agree-
ment wherein the prime contractor takes on the obligation to pursue the sub-
contractor’s claims against the owner. In exchange for sponsoring the claim,
the prime contractor often negotiates a limit to its liability. This may entail a
waiver of other claims unrelated to the pass-through claim and/or a limit of
the recovery on the pass-through claim to the amount received from the public
owner. Due to the Severin doctrine, it is important for the liquidating agree-
ment to state that the subcontractor retains its right to recover against the prime
78. 135 S.W.3d 605 (Tex. 2004).

79. FDIC v. Peabody, NE, Inc., 680 A.2d 1321 (Conn. 1996); see also Wexler Constr. Co.
v. Hous. Auth. of Norwich, 183 A.2d 262 (Conn. 1962); Walter Kidde Constructors, Inc. v.
Connecticut, 434 A.2d 962 (Conn. Super. Ct. 1981).
80. Severin, 99 Ct. Cl. at 445.
81. See Beacon Constr. Co. v. Prepakt Concrete Co., 375 F.2d 977 (1st Cir. 1967);
Fanderlik-Locke Co. v. United States ex rel. Morgan, 285 F.2d 939, 942 (10th Cir. 1960), cert.
denied, 365 U.S. 860 (1961); S. Constr. Co. v. United States, 364 F.2d 439 (Ct. Cl. 1966); Folk
Constr. Co. v. United States, 2 Cl. Ct. 681 (1983); Alamo Cmty. College Dist. v. Browning
Constr. Co., 131 S.W.3d 146, 158 (Tex. App. San Antonio 2004); Aetna Bridge Co. v. Dep’t of
Transp., 795 A.2d 517, 524 (R.I. 2002).
siL25410_17_ch17_339-368.indd 356 3/25/14 11:38 AM

VIII. False Claims Laws 357
contractor, at least for those sums recovered from the owner. This will help to
avoid the harsh results suffered by the subcontractor in Severin and its progeny.
VIII. False Claims Laws

False claims laws apply to an increasing number of publicly owned and pub-
licly funded projects and, when they apply, significantly impact subcontract-
ing on those projects.82 They apply to federal government projects and projects
with federal funding.83 They apply to state-owned or state-funded projects in
a growing number of states and, in some of those states, to projects owned or
funded by local governments as well.84 A few municipalities have their own
false claims laws.85
The federal False Claims Act and state and local government equivalents
generally provide that a “person,” which includes business entities, will be
liable if it “knowingly” submits, or causes to be submitted, a false request for
payment of public funds.86 Thus, a subcontractor may be liable under these
laws for causing a prime contractor to submit a false claim to the public owner
or any owner that has received public funds.87 Under these laws, a person acts
82. See generally Aaron P. Silberman, False Claims Issues in Subcontracting, Briefing
Papers, 2d Series, July 2006.
83. 31 U.S.C. §§ 3729–3733; see Thompson Pac. Constr., Inc. v. City of Sunnyvale, 155
Cal. App. 4th 525 (2007); United States ex rel. Plumbers & Steamfitters Local Union No. 38
v. C.W. Roen Constr. Co., 183 F.3d 1088 (9th Cir. 1999); United States ex rel. Perry v. Hooker
Creek Asphalt & Paving, LLC, No. 08-6307-HO, 2011 U.S. Dist. LEXIS 144522 (D. Or. Dec.
13, 2011); United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004).
84. For a link to 29 states’ false claims laws, go to False Claims Act Resource Center,
http://www.falseclaimsact.com/states-municipalities-fcas. See, e.g., Cal. Gov’t Code
§ 12650 (state and local); N.J. Stat. Ann. § 2A:32C-1; N.Y. State Fin., art. 13, §§ 187–194 (state
and local); Del. Code Ann. tit. 6, § 1201, et seq. (retrieved June 6, 2013); D.C. Code § 2-308.14,
et seq. (1986); Fla. Stat. § 68.081 (1994); Haw. Rev. Stat. § 661-21, et seq.; 740 Ill. Comp. Stat.
§ 175, et seq. (1992); Ind. Code § 5-11-5.5, et seq. (2005); La. Rev. Stat. Ann. § 46:437.1, et seq.
(1997); Mass. Gen. Laws ch. 12, § 5, et seq. (2000); Mont. Code Ann. § 17-8-401 (2005); Nev.
Rev. Stat. § 357.010, et seq. (1999); N.M. Stat. Ann. § 27-14-1, et seq. (1978); Tenn. Code Ann.
§ 4-18-101, et seq. (2001) (state and local); Va. Code Ann. § 8.01-216.1, et seq. (2002).
85. N.Y.C. Local Law 34 of 2012 (amended Local Law 53 of 2005); Chi. Ill., Mun.
Code §§ 1-21-010 to -22-060 (2005); D.C. False Claims Act § 2-308.14 (retrieved June 6, 2013).
86. See, e.g., Pub. L. No. 111-21, § 4(A)(1)(a), (b) (amended 31 U.S.C. § 3729(a)(1)(A),
(B)); Ab-Tech Constr., Inc. v. United States, 31 Fed. Cl. 429 (1994), aff’d, 57 F.3d 1084 (Fed. Cir.
1995); Cal. Gov’t Code § 12651(a)(1); D.C. Code § 2-308.14(a)(1); Fla. Stat. § 68.082(2)(a).
87. See, e.g., United States ex rel. Sanders v. Allison Engine Co., 471 F.3d 610 (6th Cir.
2006), vacated and remanded by Allison Engine Co. v. United States ex rel. Sanders, 553 U.S.
662 (2008) (Court ruling concluded that a defendant itself must intend that the government
itself pay the claim and thereby excluded subcontractors from liability where evidence only
showed that they intended to defraud the general contractor); see also Fraud Enforcement
and Recovery Act of 2009, Pub. L. No. 111-21, § 4, 123 Stat. 1617 (enacted May 20, 2009)
(Congress amending 31 U.S.C. § 3729 in response to Supreme Court ruling by siding with
the Sixth Circuit; changes the definition of “knowingly” and expands the definition of
claim used in the FCA to ensure that the definition is more in line with the intent of the
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“knowingly” if it does so with actual knowledge of, or recklessness as to, the

truth of a payment request (referred to as “scienter”).88
Other false claims violations of particular relevance to subcontracting
include conspiring to submit such a claim and benefiting from the submis-
sion of a false claim and failing to disclose that benefit. A subcontractor may
be liable under the false claims laws if it participates in a scheme with the
prime to submit a false claim—that is, conspiracy.89 Some state false claims
laws, but not the federal act, also provide for liability when a person does
not knowingly submit or cause submission of a false claim, but the person
later learns that a false claim was submitted and that it has benefited from
that false claim.90 This type of liability could apply to subcontractors to the
same extent as prime contractors. A prime is particularly subject to poten-
tial liability under such laws when, at the time it requests payment, it has
no reason to know that a subcontractor is causing it to submit a false claim
but later learns of the falsity and fails to disclose this to the government or
government-funded owner.91
Prime contractors should be aware of ways in which they may be liable
for false claims arising from subcontracting on their public projects. Generally
speaking, a prime’s duty under false claims laws to ensure any claims for pay-
ment it submits are true includes the duty to take reasonable steps to verify
claims based in whole or in part on its subcontractor’s work.92 Thus, a prime
may violate these laws by requesting payment for a subcontractor’s work with-
out confirming that the work has actually been performed and complies with
contract requirements.93 This may arise through normal invoicing or when the
prime submits a pass-through claim on behalf of one of its subcontractors.94
law); United States v. Sequel Contractors, Inc., 402 F. Supp. 2d 1142, 1150–51 (C.D. Cal.
2005); City of Pomona v. Superior Court, 89 Cal. App. 4th 793, 795 (2001).
88. See, e.g., 31 U.S.C. § 3729(b); Cal. Gov’t Code § 12650(b)(2); Mass. Gen. Laws ch.
12, § 5A(a); N.Y. State Fin. Law, art. 13, §§ 187–194; N.J. Stat. Ann. § 2A:32C-1.
89. See, e.g., 31 U.S.C. § 3729(a)(3); Cal. Gov’t Code § 12651(a)(3).
90. Cal. Gov’t Code § 12651(a)(8); D.C. Code § 2-308.14(a)(8); Mass. Gen. Laws ch.
12, § 5B(9); Nev. Rev. Stat. Ann. § 357.040(1)(h).
91. See, e.g., Armenta ex rel. City of Burbank v. Mueller Co., 142 Cal. App. 4th 636 (2006).
92. See, e.g., Lamb Eng’g & Constr. Co. v. United States, 58 Fed. Cl. 106, 110 (2003).
93. See, e.g., id.; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Lockheed
Martin Corporation Reaches $15.85 Million Settlement with U.S. to Resolve False Claims
Act Allegations (Mar. 23, 2012), http://www.justice.gov/opa/pr/2012/March/12-civ-367
.html (settlement reached in case where subcontractor inflated cost; government sued
prime contractor for reckless and inadequate oversight).
94. See, e.g., Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 793 (4th Cir.
1999); Sequel Contractors, Inc., 402 F. Supp. 2d at 1150–51; United States ex rel. Ervin &
Assocs., Inc. v. Hamilton Secs. Grp., Inc., 370 F. Supp. 2d 18, 41 n.12 (D.D.C. 2005); United
States ex rel. Wilkins v. N. Am. Constr. Corp. (Wilkins I), 101 F. Supp. 2d 500, 523–24 (S.D.
Tex. 2000).
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Other common ways in which a prime contractor may violate false claims
laws based on its subcontracting include false certification that it has paid
its subcontractors and false certifications of its subcontracting with disad-
vantaged business entities. Under many public contracts, and in some juris-
dictions under prompt payment statutes, the prime expressly or impliedly
certifies that it has promptly paid its subcontractors.95 If a prime has not done
so and submits a request for payment, it may violate the false claims law.96
Likewise, many public projects require use of DBEs or give bid preferences
based on DBE utilization.97 If a prime contractor falsely certifies in its bid that
it will utilize a DBE subcontractor and that certification qualifies the prime
for award or, due to application of bid preferences, puts it ahead of other bid-
ders for a public contract, it may have tainted the entire contract.98 Under the
“fraud in the inducement” theory of false claims liability, the prime may be
liable for multiple violations of the false claims laws for all requests for pay-
ment it submits under that contract.99
If a prime or subcontractor violates a false claims law, it will be liable for
the government’s actual damages, tripled (“trebled”), and a penalty for each
violation.100 The penalty amount varies by jurisdiction.101 When the violation is
committed by the subcontractor, an issue arises concerning how to count viola-
tions for the calculation of penalties. The question is which governs: the num-
ber of requests the subcontractor makes to the prime or the number the prime
95. See, e.g., 31 U.S.C. § 3901; CD 752, § 8.1; Cal. Bus. & Prof. Code § 7108.5. For
further discussion, see chapter 4.
96. See, e.g., Lamb Eng’g, 58 Fed. Cl. at 110; United States ex rel. Told v. Comtrol, Inc.,
No. 2:02CV593DAK, 2005 WL 2177225 (D. Utah Sept. 6, 2005); United States v. Gatewood,
173 F.3d 983 (6th Cir. 1999); see United States ex rel. Wall v. Circle, No. 3:07-0091, 2010 WL
1170468, at *9 (M.D. Tenn. Mar. 15, 2010) (prime contractor certified that payments were
made to subcontractor’s employees); United States ex rel. Wall v. Circle Constr., LLC, 697
F.3d 345 (6th Cir. 2012) (federal contractor violated the False Claims Act when its subcon-
tractor failed to pay prevailing wages to its employees).
97. See section V.B.
98. See, e.g., Ab-Tech, 31 Fed. Cl. 429; S. Cal. Rapid Transit Dist. v. Superior Court, 30
Cal. App. 4th 713 (1994).
99. See, e.g., United States v. Gen. Dynamics Corp., 19 F.3d 770, 772, 775 (2d Cir. 1994);
United States v. Ehrlich, 643 F.2d 634 (9th Cir. 1981), cert. denied, 454 U.S. 940 (1981); United
States ex rel. Durcholz v. FKW, Inc., 997 F. Supp. 1143 (S.D. Ind. 1998); United States ex rel.
Fallon v. Accudyne Corp., 880 F. Supp. 636, 639–40 (W.D. Wis. 1995); Fassberg Constr. Co.
v. Hous. Auth. of L.A., 152 Cal. App. 4th 720 (2007); City of Pomona, 89 Cal. App. 4th 793.
100. See 31 U.S.C. § 3729(a); Cal. Gov’t Code § 12651(a); Mass. Gen. Laws ch. 12,
§ 5B(a).
101. See, e.g., 31 U.S.C. § 3729(a); 28 C.F.R. § 85.3 (although the False Claims Act pro-
vides for penalties in the range of $5,000 to $10,000, the Department of Justice has adjusted
the penalties to $5,500 and $11,000 pursuant to other statutory authority); Ariz. Rev. Stat.
Ann. § 13-2311 ($5,500 to $11,000); Cal. Gov’t Code § 12651(a) (same); Mont. Code Ann.
§ 17-8-402, et seq. ($5,000 to $10,000); N.Y. State Fin. Law, art. § 189 ($6,000 to $12,000); tit.
7, ch. 8, § 7-801, et seq., tit. 46, ch. 3, § 3-10, et seq. ($5,000 to $15,000).
siL25410_17_ch17_339-368.indd 359 3/25/14 11:38 AM

makes to the owner? A court evaluating this question under the federal statute
has held that the number of requests to the government should be used.102
When parties negotiate a subcontract for work on a public project subject
to a false claims law, certain provisions should be included. One provision
should require the subcontractor to certify the truth and correctness of any
requests for payment it submits with regard to the completeness and compli-
ance of the work for which payment is sought; a second should require that
the subcontractor’s own subcontractors and suppliers have been paid for their
portions of prior payments received. A third provision should give the prime
the ability to take reasonable steps to ensure the truth and correctness of a
subcontractor’s claim before it will be obligated to pass it on to the govern-
ment or government-funded owner.
When a subcontract provides for arbitration of disputes,103 the parties should
be aware that it may not be enforceable for resolution of alleged false claims.
While courts have enforced such provisions in direct actions by government
owners against prime contractors,104 at least one decision has stated in dicta that
they would not apply in qui tam actions.105 Additionally most subcontracts con-
tain indemnification provisions, most commonly requiring the subcontractor to
defend and indemnify the prime for claims arising out of the subcontractor’s
work;106 the courts are unlikely to enforce such provisions if the prime is sued by
the subcontractor (as a qui tam relator) for false claims, even if the alleged false
claims are based on the conduct of that subcontractor.107 Courts are more likely,
however, to enforce contractual indemnity when the indemnitor is not a party
to the false claims action.108 Finally, many subcontracts require the subcontrac-
tor to obtain specific types and levels of insurance and to name the prime as
an additional insured.109 Whether these provisions will be effective to provide
102. United States v. Bornstein, 423 U.S. 303, 312–13 (1976) (Supreme Court held that
a subcontractor was liable for penalties for three violations based on three false subcontrac-
tor requests that were submitted to the government in 35 prime-contractor invoices); see
also United States ex rel. V.I. Hous. Auth. v. Coastal Gen. Constr. Servs. Corp., 299 F. Supp.
2d 483 (D.V.I. 2004) (district court found a contractor liable for penalties for 10 violations
based on 10 subcontractor requests that were submitted to the government in one prime
request for payment).
103. See chapter 16.
104. United States v. Bankers Ins. Co., 245 F.3d 315, 317 (4th Cir. 2001) (compelling
United States to arbitrate all claims arising out of contract, including those for federal False
Claims Act violations); Cnty. of Solano v. Lionsgate Corp., 126 Cal. App. 4th 741, 749 (2005).
105. Cnty. of Solano, 126 Cal. App. 4th at 749.
106. See, e.g., CD 752, § 9.1. For further discussion, see chapter 11.
107. See, e.g., United States ex rel. Head v. Kane Co., 668 F. Supp. 2d 146, 154 (D.D.C.
2009).
108. See, e.g., Cell Therapeutics, Inc. v. Lash Grp., Inc., 586 F.3d 1204, 1209 (9th Cir.
2010); United States ex rel. Pub. Integrity v. Therapeutic Tech., 895 F. Supp. 294 (S.D. Ala.
1995).
109. See, e.g., CD 752, § 9.2. For further discussion, see chapter 13.
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insurance coverage for the prime or the subcontractor for false claims defense
and liability will depend on the terms of the policy, the applicable law, and the
alleged conduct.110 For example, if the insured allegedly had actual knowledge
of the falsity, coverage may be excluded, whereas if the only allegation is reck-
lessness, the exclusion may not apply.111
The federal false claims law and state laws modeled after it provide for
two types of enforcement actions: direct actions brought by the government
and qui tam actions brought by whistle-blowers, aka “relators.”112 Where false
claims arise from a subcontractor’s work or conduct, the government may,
and often does, sue both the prime and sub.113 This may implicate subcon-
tract indemnity and defense provisions.114 Indemnity or defense claims, when
enforceable, generally will not be allowed as counterclaims in a false claims
lawsuit; rather, they must be brought in a separate action.115 When both the
prime and subcontractor are sued for false claims, they may be held jointly
and severally liable.116 Their interests will often be aligned, in whole or in
part, such that joint defense privileges may apply. A joint defense agreement
is often worth considering.
In qui tam actions, may a subcontractor sue a prime as a relator, even in
cases arising out of the subcontractor’s own work? It has been held that false
claims laws define who may sue as a relator broadly enough to include sub-
contractors.117 A whistle-blower action by a subcontractor, however, may be of
limited value. The false claims laws discourage such lawsuits by limiting the
recovery of a relator that is found to have been a participant in the fraud.118
110. See, e.g., Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing
Ctr., 566 F.3d 689 (7th Cir. 2009); Zurich Am. Ins. v. O’Hara Reg’l Ctr. for Rehab., 529 F.3d
916, 921–22 (10th Cir. 2008); Watts Indus., Inc. v. Zurich Am. Ins. Co., 121 Cal. App. 4th
1029 (2004).
111. See, e.g., M/G Transp. Servs., Inc. v. Water Quality Ins. Syndicate, 234 F.3d 974,
978–79 (6th Cir. 2000) (held that, under Ohio law, an insurer had no duty to defend its
insured against a False Claims Act lawsuit because the insured’s policy contained exclu-
sions of coverage for willful negligence, misconduct, fines, penalties, and punitive and
exemplary damages); New Mem’l Assocs. v. Credit Gen. Ins. Corp., 973 F. Supp. 1027
(D.N.M. 1997) (New Mexico law); Int’l Ass’n of Chiefs of Police, Inc. v. St. Paul Fire &
Marine Ins. Co., 686 F. Supp. 115 (D. Md. 1988).
112. See, e.g., 31 U.S.C. § 3730(b); Cal. Gov’t Code § 12652(a)(1); N.Y. State Fin. Law,
art. 13, § 190.
113. See, e.g., United States v. Kellogg Brown & Root Servs., 800 F. Supp. 2d 143 (D.D.C.
2011); United States v. Cabrera-Diaz, 106 F. Supp. 2d 234, 242 (D.P.R. 2000).
114. For further discussion, see chapter 11.
115. See, e.g., Mortgs., Inc. v. U.S. Dist. Court, 934 F.2d 209, 213 (9th Cir. 1991); United
States v. Nardone, 782 F. Supp. 996, 999 (M.D. Pa. 1990); United States v. Kennedy, 431 F.
Supp. 877 (C.D. Cal. 1977).
116. Cabrera-Diaz, 106 F. Supp. 2d at 242.
117. See, e.g., 31 U.S.C. § 3730 (b)(1), (d)(1); Told, 2005 WL 2177225; Del. Code Ann. tit.
6, § 1203; Fla. Stat. § 68.083.
118. See, e.g., 31 U.S.C. § 3730(d)(3); Del. Code Ann. tit. 6, § 1205; Fla. Stat. § 68.085(6).
siL25410_17_ch17_339-368.indd 361 3/25/14 11:38 AM

Subcontractors also should consider that, by filing against the prime, they will
be drawing government attention to the alleged false claims. Once a relator
files a qui tam action, the government may intervene in the case and, even if it
does not intervene, retains certain rights (for example, to approve of or object
to dismissals or settlements).119 By filing suit, a subcontractor may lead the
government not only to intervene but also to sue the subcontractor as an addi-
tional defendant.
A subcontractor also may be concerned that, if it sues its prime for false
claims, the prime will retaliate against the subcontractor (e.g., by terminating
its subcontract, refusing to do further business with the sub, “black balling,”
etc.). There may be contractual or common law remedies for certain acts (e.g.,
suing for breach of contract or defamation), and at least some false claims laws
themselves provide protection against retaliation. For example, the federal act
provides that any contractor “shall be entitled to all relief necessary to make
[it] whole, if [it] is discharged, demoted, suspended, threatened, harassed, or in
any other manner discriminated against in the terms and conditions of employ-
ment because of lawful acts done by the . . . contractor . . . in furtherance of”
either a qui tam action or “efforts to stop 1 or more violations” of the act.120
IX. Improper Pricing Practices

A. Bid Rigging
Both federal and state governments prohibit efforts to eliminate competi-
tion or restrain trade. The FAR specifically lists a number of anticompetitive
practices as antitrust violations that must be reported to the attorney general:
collusive bidding, follow-the-leader pricing, rotated low bids, collusive price
estimating systems, and sharing of business.121 The Federal Acquisition Regu-
lation (FAR) requires rejection of offers suspected of being collusive.122
Prime contractors on federal projects also are not permitted to enter into
agreements restricting their subcontractors’ ability to provide their goods or
services directly to the government. Contractors may not unreasonably pre-
clude subcontractors from making direct sales to the government.123 This
restriction is implemented through the contract clause at FAR 52.203-6, Restric-
tions on Subcontractor Sales to the Government. That clause prohibits entering
119. See, e.g., 31 U.S.C. § 3730(b); United States ex rel. Badr v. Triple Canopy Inc., 950 F.
Supp. 2d 888 (E.D. Va. 2013); Cal. Gov’t Code § 12652(3); N.Y. State Fin. Law, art. 13,
§ 190.
120. 31 U.S.C. § 3730(h).
121. FAR 3.301, 3.303(c); see FAR 3.303(a); 41 U.S.C. § 253b(i); 10 U.S.C. § 2305(b)(9).
122. FAR 3.103-2(b)(2).
123. 10 U.S.C. § 2402; 41 U.S.C. § 253g.
siL25410_17_ch17_339-368.indd 362 3/25/14 11:38 AM

IX. Improper Pricing Practices 363
into any agreement with an actual or prospective subcontractor, nor

otherwise act in any manner, which has or may have the effect of
restricting sales by such subcontractors directly to the Government of
any item or process (including computer software) made or furnished
by the subcontractor under this contract or under any follow-on pro-
duction contract.124
These prohibitions do not preclude a contractor from asserting rights that

are otherwise authorized by law or regulation.125 This clause also has to be
flowed down to subcontractors.126
B. Subcontractor Kickbacks
Federal and state law prohibit prime contractors from accepting and subcon-
tractors from offering anything of value as consideration for the prime using
or proposing the subcontractor on a public project. The federal Anti-Kickback
Act of 1986127 prohibits providing or accepting kickbacks, or attempting to do
so. It also prohibits including the amount of any kickback either in the price
of any prime contract with the federal government or in any price of a sub-
contract charged to a prime contractor or a higher-tier subcontractor.128 Many
state laws prohibit similar conduct.129
The federal statute defines kickbacks broadly to include
any money, fee, commission, credit, gift, gratuity, thing of value, or com-
pensation of any kind which is provided, directly or indirectly, to any
prime contractor, prime contractor employee, subcontractor, or subcon-
tractor employee for the purpose of improperly obtaining or rewarding
favorable treatment in connection with a prime contract or in connec-
tion with a subcontract relating to a prime contract.130
In Morse Diesel International, Inc. v. United States,131 the Court of Federal

Claims held that the Anti-Kickback Act covers any kind of benefits that might
be provided to a prime contractor in return for participation on a federal gov-
ernment contract. According to the court, “Congress intended the language
‘favorable treatment’ be construed broadly to reach all conduct analogous
124. FAR 52.203-6(a).

125. FAR 3.501-1, 52.203-6(b).
126. FAR 52.203-6(c).
127. 41 U.S.C. §§ 51–58.
128. FAR 3.502-2(a), 52.203-7(b).
129. See, e.g., Cal. Bus. & Prof. Code § 650; Mass. Gen. Laws ch. 175H, § 3 (amended
2012); Tex. Occ. Code § 102.001(a).
130. FAR 3.502-1, 52.203-7(a).
131. 66 Fed. Cl. 788 (2005).
siL25410_17_ch17_339-368.indd 363 3/25/14 11:38 AM

to commercial bribery . . . even if it did ‘not directly [impact] the federal

treasury.’”132 In that case, a bond broker’s sharing of commissions with a prime
contractor was determined to be a kickback under the act.133 In the same opin-
ion, the court also emphasized that the Anti-Kickback Act creates “a presump-
tion that any kickback was included in the price of an affected federal contract
or subcontract and therefore increased costs to the Government.”134
Knowing and willful violations of the Anti-Kickback Act are subject to
criminal liability.135 Knowing violations can lead to double damages and
per-occurrence civil penalties.136 The act also authorizes a government to
withhold the amount of a kickback and to direct a prime contractor to with-
hold the amount of a kickback from a subcontractor.137
The act creates an obligation not only to avoid kickbacks but also to pre-
vent, detect, and report them. A contractor is required to have and follow
“reasonable procedures designed to prevent and detect violations of the Act in
its own operations and direct business relationships.”138 Specific examples of
reasonable procedures are listed:
• company ethics rules prohibiting kickbacks by employees, agents, or
subcontractors
• education programs for new employees and subcontractors, explain-
ing policies about kickbacks, related company procedures, and the
consequences of detection
• procurement procedures to minimize the opportunity for kickbacks
• audit procedures designed to detect kickbacks
• periodic surveys of subcontractors to elicit information about kickbacks
• procedures to report kickbacks to law enforcement officials
• annual declarations by employees of gifts or gratuities received from
subcontractors
• annual employee declarations that they have violated no company
ethics rules
• personnel practices that document unethical or illegal behavior and
make such information available to prospective employers
If the contractor has reasonable grounds to believe the Anti-Kickback
Act has been violated, it is obliged to “promptly report in writing the possi-
ble violation . . . to the inspector general of the contracting agency, the head
132. Id. at 800 (quoting United States v. Purdy, 144 F.3d 241, 244 (2d Cir. 1998)).
133. Id. at 801.
134. Id. at 800.
135. FAR 3.502-2(b).
136. 41 U.S.C. § 55(a)(1); see also FAR 3.502-2(c); United States ex rel. Vavra v. Kellogg
Brown & Root, 727 F.3d 343 (5th Cir. 2013).
137. FAR 3.502-2(d), 52.203-7(c)(4).
138. FAR 3.502-2(i)(1); see also FAR 52.203-7(c)(1).
siL25410_17_ch17_339-368.indd 364 3/25/14 11:38 AM

X. Flow-Downs 365
of the contracting agency if the agency does not have an inspector general,
or the Department of Justice.”139
The Anti-Kickback Act is enforced through a contract clause, FAR 52.203-7,
Anti-Kickback Procedures. The Anti-Kickback clause must also be flowed down
to all subcontracts worth more than $100,000.140
X. Flow-Downs
Generally speaking, a prime contractor will include a provision in each sub-
contract that incorporates or “flows down” some or all of the requirements of
the prime contract.141 Many prime contracts require that the prime contractor
flow down certain prime contract provisions—that is, mandatory flow-down
clauses—while others are permissive. Even when not mandatory, the prime con-
tractor will have a practical reason for flowing down many prime-contract provi-
sions because the prime contractor cannot be in a position where it has promised
certain performance that it did not secure from its subcontractor(s). However,
without careful drafting, flow-down clauses can result in conflicts between
the prime contract and subcontract requirements. Generally these conflicts are
resolved through an order of precedence clause in the subcontract that sets a
hierarchy to the documents in the event of a conflict.142 General flow-down pro-
visions also may be contrary to the prime and subcontractor’s intent, or, at least,
they will not make the parties’ intent clear. For this reason, courts, particularly
state courts, may decline to enforce such general provisions.143
A. Mandatory Flow-Down Clauses

For federal contracts, FAR part 52 contains contract clauses to be included in
prime contracts. Depending on the type and value of the subcontract, only
certain clauses must be included, or flowed down, to the subcontract agree-
ment. Often, mandatory flow-down clauses specifically require that they
also be included in all subcontracts or at least certain specified subcontracts
(e.g., those over a certain dollar value). Some examples include Anti-Kickback
(52.203-7); Audit and Records (52.214-26); Subcontractor Cost and Pricing Data
(52.214-28); Davis-Bacon Act (52.222-6); Apprentices and Trainees (52.222-9);
Equal Opportunity (52.222-26); Contract Termination—Debarment (52.222-12);
139. FAR 52.203-7(c)(2); see FAR 3.502-2(g).

140. FAR 52.203-7(c)(5).
141. See, e.g., CD 752, §§ 2.4, 12.14, and ex. H.
142. See, e.g., CD 752, § 13.1.5.
143. See, e.g., Performance Control v. Seaboard Sur. Co., 163 F.3d 366 (6th Cir. 1998)
(holding that a general clause incorporating the prime contract’s obligations did not flow
down an exhaustion of administrative remedies clause).
siL25410_17_ch17_339-368.indd 365 3/25/14 11:38 AM

Employment Eligibility Verification (52.222-54); and Prompt Payment for Con-

struction Contracts (52.232-27).144
B. Permissive Flow-Down Clauses

In general, the prime contractor may choose to flow down other clauses that
are not specifically mandated by the FAR to be included in those subcontracts.
For example, the FAR clauses for changes and terminations are not manda-
tory flow-down clauses,145 but the prime contractor would be wise to include
them to bring continuity between the prime and subcontracts regarding these
important contract terms.146
C. The Christian Doctrine

The G.L. Christian & Associates v. United States147 case provides that in prime
contacts where the government failed to specifically include a contract clause
required by the governing regulations, the clause will be read into the prime
contract. In the G.L. Christian case, the contracting officer omitted the “termi-
nations for convenience” clause that would have limited the prime contractor’s
damages. The governing regulations at the time required the inclusion of the
termination for convenience clause in the prime contract, and therefore the
court, as a matter of law, read it into the contract. This holding has long been
known as the Christian doctrine. It has since been refined, limiting its applica-
tion to omitted clauses that express “a significant or deeply ingrained strand
of public procurement policy.”148 While the Christian doctrine has not tradi-
tionally been applied to subcontracts, a recent District Court for the District
of Columbia decision, UPMC Braddock v. Harris,149 rejected an argument that
the Christian doctrine applied only to prime contracts. The court found that
“the subcontractor helps the contractor to fulfill its agreement with the gov-
ernment, and indirectly reaps benefit from that agreement,” and, as a result,
there was no reason why the government could impose terms on government
prime contracts by operation of law but not on government subcontracts.150
144. CD 752, ex. H.

145. FAR parts 43, 49.
146. For further discussion on changes and terminations, see chapters 6 and 9, respec-
tively. See also CD 752, arts. 7, 10.
147. 312 F.2d 418 (Ct. Cl. 1963).
148. S.J. Amoroso Constr. Co. v. United States, 12 F.3d 1072, 1075 (Fed. Cir. 1993) (citing
G.L. Christian & Assocs., 312 F.2d 418).
149. 934 F. Supp. 2d 238 (D.D.C. 2013).
150. Id at 258.
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XI. Mandatory Disclosure and Internal Control Systems 367
XI. Mandatory Disclosure and Internal Control Systems

Contractors holding major subcontracts on federal projects, defined as worth
more than $5 million and lasting more than 120 days, are required to disclose to
the appropriate agency's Office of Inspector General (OIG) all “credible evidence”
related to a government contract of (1) violations of criminal law involving fraud,
conflict of interest, or bribery; (2) violations of the federal civil False Claims
Act;151 or (3) significant overpayments. In addition, to make sure that contractors
do not try to avoid making disclosures by ignoring potential problems, federal
regulations also require most contractors to establish internal control systems
that actively seek disclosable evidence to be passed on to agency OIGs.152
The federal government has three separate tools to enforce mandatory dis-
closure. First, a contract clause must be included in all prime contracts and flowed
down to all major subcontracts.153 That clause requires the prime contractor and
major subcontractors to disclose to the agency’s OIG any criminal violations or
civil false claims violations that relate to that contract and any subcontracts.
Second, the same FAR clause also imposes specific obligations on the prime
contractor and each major subcontractor to establish and maintain an elaborate
internal control system, unless the contract is with a small business or is for
commercial items. As a baseline, contractors must have a written code of busi-
ness ethics and conduct.154 All contractors should have an employee business
ethics and compliance training program and an internal control system that—
(1) Are suitable to the size of the company and extent of its
involvement in Government contracting;
(2) Facilitate timely discovery and disclosure of improper conduct
in connection with Government contracts; and
(3) Ensure corrective measures are promptly instituted and carried
out.155
If a contractor has a contract containing FAR 52.203-13, the contractor
takes on the additional obligation to “(i) Exercise due diligence to prevent and
detect criminal conduct; and (ii) Otherwise promote an organizational cul-
ture that encourages ethical conduct and a commitment to compliance with
the law.”156 These internal control obligations require the contractor to imple-
ment the Justice Department’s corporate compliance standards established in
the U.S. Sentencing Guidelines. To meet those standards, the internal control
system must actively look for potential violations of criminal law and the civil
151. 31 U.S.C. §§ 3729–3733. For further discussion of FCA issues, see section VIII.
152. See 73 Fed. Reg. 67,064 (Nov. 12, 2008).
153. FAR 3.1004(a), 52.203.13(d); see also CD 752, § 12.7.
154. FAR 3.1002(b)(2).
155. Id.
156. FAR 52.203-13(b)(2).
siL25410_17_ch17_339-368.indd 367 3/25/14 11:38 AM

False Claims Act. Violations that are uncovered related to any of the contrac-
tor’s federal contracts or subcontracts must then be disclosed to the relevant
agency's OIG.
Third, separate FAR provisions make the failure to disclose any viola-
tions and overpayments on any federal contract or subcontract grounds for
suspension or debarment.157 There is no dollar threshold for the debarment
and suspension provisions: they apply to all contractors and subcontractors
on any federal government contracts that have not been closed out for more
than three years. The definition of “contractor” for purposes of the debarment
and suspension applies to any party that submits an offer or is awarded a
contract with the federal government and any subcontractors to such a party,
of any tier.158 It also applies to anyone who “[c]onducts business, or reasonably
may be expected to conduct business, with the Government as an agent or
representative of another contractor.”159
Taken in combination, these FAR provisions essentially establish a manda-
tory disclosure system applicable to all companies that do business—including
construction—with the federal government, including small businesses, com-
mercial contractors, and companies who do all of their work outside the United
States.
A prime contractor is required to disclose credible evidence of violations
by and overpayments to not only itself but also its subcontractors.160 But it
is required only to disclose known violations by the subcontractor, and the
prime contractor is not required to review or approve subcontractor internal
control systems.161
A major subcontractor on a government construction contract can take on
an independent mandatory disclosure requirement, even if it has no direct con-
tracts with the federal government. The clause at FAR 52.203-13 must be flowed
down to all subcontracts that meet the same threshold as the prime contract: a
value in excess of $5 million and performance period of more than 120 days.162
When subcontractors are required to make disclosures, they are required to
disclose directly to the agency's OIG and not through the prime contractor.163
157. FAR 9.403.

158. Id.
159. Id. at 9.403(2).
160. Id.
161. 73 Fed. Reg. 67,064, 67,084.
162. FAR 52.203-13(d)(1).
163. FAR 52.203-13(d)(2).
siL25410_17_ch17_339-368.indd 368 3/25/14 11:38 AM

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Construction

A Comprehensive Practical and Legal Guide

Aaron P. Joseph C. Tracy L.

ABAPUB_CnstrctSubcntrct_TP.indd 1 3/26/14 4:25 PM

Special Project Issues

siL25410_17_ch17_339-368.indd 339 3/25/14 11:38 AM

Public Projects (Federal, State,

II. What Is a “Public Project”?

siL25410_17_ch17_339-368.indd 341 3/25/14 11:38 AM

III. Who Is a “Subcontractor” Under Public Project Rules?

IV. What Law Applies to Subcontracts

siL25410_17_ch17_339-368.indd 342 3/25/14 11:38 AM

10. 48 C.F.R. § 1.00, et seq.

siL25410_17_ch17_339-368.indd 343 3/25/14 11:38 AM

A. Protecting the Bidding Process for Subcontractors

siL25410_17_ch17_339-368.indd 344 3/25/14 11:38 AM

steel, roofing, drywall, mechanical, electrical, and plumbing—to perform

2. Subcontractor Listing Laws

21. For discussion of licensure issues in subcontracting, see chapter 15.

siL25410_17_ch17_339-368.indd 345 3/25/14 11:38 AM

a. No Federal Subcontractor Listing Law

b. State Subcontractor Listing Laws

(1) Which Subcontractors Must Be Listed?

(2) What Information Must Be Listed?

siL25410_17_ch17_339-368.indd 346 3/25/14 11:38 AM

(3) Can the Listed Subcontractor Be Replaced?

B. Preference and Incentive Programs

a. Federal Small Business Administration Programs

siL25410_17_ch17_339-368.indd 347 3/25/14 11:38 AM

(1) Section 8(a) Program

(2) Small Disadvantaged Business Program

siL25410_17_ch17_339-368.indd 348 3/25/14 11:38 AM

(3) Historically Underutilized Business Zones Program

b. Other Federal Disadvantaged-Business Programs

c. Federal Subcontracting Plan Requirements

siL25410_17_ch17_339-368.indd 349 3/25/14 11:38 AM

by small and disadvantaged businesses, types and quantities of materials

d. Buy American Act

(i) The cost of the domestic construction material would be unreason-

(ii) The application of the restriction of the Buy American Act to a

(iii) The construction material is not mined, produced, or manufac-

siL25410_17_ch17_339-368.indd 350 3/25/14 11:38 AM

3. State and Local Programs

The interest in promoting the success of small-business interests is also

52. See Exec. Order No. 71 (2003).

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4. Constitutional Issues and Challenges

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VI. Government Approval Issues

A. Consent Required for Certain Subcontracts

58. 31 U.S.C. § 3551(2)(A).

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VII. Subcontractor Claims on Public Projects

B. Direct Claims Against the Government

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There are exceptions, however. In rare circumstances, a subcontractor may

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considered the viability of pass-through claims have allowed them: Alaska,

78. 135 S.W.3d 605 (Tex. 2004).