Defense Primes (Subcontracting Basics)

This section provides some basic information on using DOD as a source of non-dilutive capital.

The term Prime is often used to refer to a handful of very large companies that hold contracts for major DoD systems and programs

Technically, the term “prime” means anyone who has a direct contractual relationship (in this case, with a DoD government entity)
These generally include companies such as: Lockheed Martin, Boeing, Northrop Grumman, Raytheon, and General Dynamics

In many cases, new entrants may be asked to subcontract to an existing DoD prime

This could be one of the few very large DOD “Primes” or one of a large number of other companies who have a direct contractual relationship with the DOD
It is often easier to fit a new effort under an existing contract rather than go through the process of establishing a new contract
- New contracts can take a long time to establish (often 1-year or longer), with the exception being OTAs or other rapid acquisition methods
- Depending on the office, they may prefer to use an existing contract rather than establish a new one, especially for an initial exploratory effort with a new performer
- See additional info under “Defense Contracting 101” within the General Info and Tips section

Depending on the size of the company and the size of the relevant DoD contract on which they serve as the “prime,” they may be supportive or resistant to engage a new entrant at the government’s advice or direction

New entrants ultimately enhance competition; depending on the size of the prime and the specific focus on the sub-effort through the new entrant, supporting this could be seen as contrary to the prime’s best interests
The prime may be supportive, seeing this as an opportunity to gain favor with their customer and/or build a relationship with a potential long-term subcontractor (with the expectation that the new entrant would either remain dependent on subcontracts or would continue to act as a partner to the prime, perhaps in helping them to win new prime contracts)

General business “good sense” applies when negotiating a business-to-business arrangement as a subcontractor

Be clear on what are your primary objectives, including both negotiables and non-negotiables
Understand your financial situation and needs
Clarify any special requirements, such as tracking costs, documentation, special security requirements, restrictions regarding foreign nationals, etc.

There are a handful of nuances with DoD contracts that are worth acknowledging

Excessive pass-through & work share:
- There is a guideline that advises government contracting officers to provide justification if a prime contractor is performing less than 30% of the work overall on a given contract
- Some contracting officers are more strict about this than others
- Some companies use this guideline (which applies at the overall contract level) to insist that they receive at least 30% of the funding
Prime contract clauses (“flow-down”):
- Typically, whatever terms and conditions (asserted in contract clauses) have been negotiated at the overall prime contract level are passed along or “flowed down” to subcontractors
- E.g., if the overall contract requires that all staff have a minimum Secret security clearance, then this requirement would be passed along to any/all subcontractors, even if that specific work doesn’t handle classified materials
Payment terms and timing:
- Existing contracts will generally fit under one of two broad categories (though there are multiple types of contracts under each of these categories)
  - Fixed price: the government pays a set pre-negotiated amount, regardless of how much work or cost/investment is required; payments can be set for individual “deliverables” (e.g., reports, prototypes, etc are individually priced) or for a larger overall effort (i.e., price is established at the overall larger project level)
  - Cost reimbursable: the contractor must report actual costs and is paid for those (various types treat profit differently, and may include it in hourly labor rates or cover it as an additional fixed fee or incentive fee)
- Subcontract types does not necessarily need to align with the overall contract
  - g., a fixed price subcontract can be issued under a cost reimbursable prime contract
- Typically, payment is authorized after the work has been completed
  - Part of the subcontract will be payment terms; most typical is Net-45 (payment will be made within 45 days after an approved invoice), but sometimes prime contractors will ask for “pay when paid” terms, which means the sub won’t be paid until the prime has been paid by the government, which could take several months after work has been completed
  - Up-front payment can be authorized, but would most likely only cover up front costs for materials; even in this case, payment is typically made after costs have been incurred
  - Plan on carrying a sufficient line of credit, and ensuring that you know how much credit you will be able to carry and negotiate payment terms to align with your credit
- Intellectual Property:
  - An existing contract will generally have established high level IP requirements for all work under the contract
    - This can potentially be changed if needed, but would take extra work for the government and prime contractor
  - As a standard, the government tends to ask for “government purpose rights” on any new IP developed with government funding
    - This means that the government is authorized to use the IP without any added costs
    - The Contractor has the exclusive right, including the right to license others, to use technical data in which the Government has obtained government purpose rights under this contract for any commercial purpose
    - This does not impact existing IP, for which typically you will list all relevant pre-existing IP to clarify where the prime and government will not have any rights (typically)
  - The main thing to remember are that IP is not cut and dried, but should be specifically and clearly negotiated