With most government contract work, the legal concept of privity of contract never comes into play. But if you're a subcontractor on a government project, knowing your rights under contract privity will be crucial if a dispute arises with your prime contractor.
Simply put, privity refers to the contractual relationship 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's rarely a contract with the government agency. Instead, the subcontractor's entire contractual relationship is with the prime, who in turn directly contracts with the 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. These relationships have advantages and disadvantages.
In many ways, the lack of contract with the agency is one of the biggest pluses in being a subcontractor in government projects. For the prime contractor, nailing down all the details of a large, complex government contract with the agency is a time-consuming process that often gets bogged down in red tape. By comparison, subcontractor agreements are relatively straightforward. Many of the murky details have already been squared away and if necessary can be extended to the subcontract via a flow-down clause.
What's more, privity of contract can help a subcontractor in the event that the government contract is terminated. The end of the prime's relationship with the agency does not let the prime off the hook with the subcontractor agreement; instead, a prime may be forced to pay the subcontractor in full even if the contract with the agency is no longer in effect.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. To be safe, 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 provisions in cases like this will require the prime to determine that the claim has merit.
Privity can work against subcontractors as well. For example, if a prime 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.