When your company is subcontracting on government projects, your subcontracting agreement is solely with the prime contractor; you have no contractual relationship with the government at all.
In many ways, this simplifies your involvement with the project. Contracts with government agencies are carefully regulated and can involve a lot of red tape, bureaucracy, forms, and administrative processes for the prime contractor. As a subcontractor, you'll typically find the regulatory environment to be much less demanding.
However, an agency may require that certain sections of the prime's contract also apply to the subcontractor. These are known as subcontract flow-down clauses.
Even though the agency will most likely be the party requiring the flow-down clause, your subcontracting agreement is with the prime, not the agency. For this reason, the flow-down clause must be part of your contract with the prime. Usually, a contractual obligation that has "flowed down" will have exactly the same wording it did in the original contract, with "prime contractor" substituted for "agency" and "subcontractor" substituted for "contractor."
Common clauses that are "flowed down" include product/service specifications, scope of work, dispute-resolution guidelines, and federal regulations that must be followed.
Blanket Flow-Down Clauses
In recent years it has become more common for subcontracts to include a blanket flow-down clause, in which the entire prime contract is used for the subcontractor with the substitutions above made throughout. This type of flow-down could put the subcontractor in the awkward position of having to fulfill requirements that don’t apply to its work. In addition, the agency may have certain rights with the respect to the prime contractor (such as the right to terminate the contract or to receive proprietary information) that the prime shouldn’t have with the subcontractor. Be sure to read any such contract carefully and negotiate any problematic sections before signing; accepting a blanket flow-down could complicate your partnership with the prime.
Be aware, though, that in most cases a subcontract flow-down clause is in place to protect the prime or subcontractor in some way. For example, without a flow-down clause, the prime could still be contractually obligated to pay the subcontractor for goods and services even if the agency terminates the contract. In general, subcontract flow-down clauses are there to ensure consistency.