Subcontracting is a natural element of a technology community where there is such extensive specialization and pressure to provide timey cost-effective consulting service delivery projects. When you combine that with a sacristy of certain specialized technical skills, and the economic pressure of needing to fully utilize your staff, effective subcontracting becomes essential to any cost-effective project delivery practice.  Very few vendors can afford to hire, train and retain all the skills that they are called upon to deliver.  However, while its easy to understand why subcontracting is so prevalent in the industry, it is important to acknowledge that effective subcontracting places an even greater importance on the prime-contractor’s formal project management skills  and discipline (discussed below). Within a subcontract context, you must be explicit in documenting  what you require, what each party is obligated to perform and stipulate the process and systematic frequency for monitoring ongoing work that tracks the progress of the Work In Progress against a formal project plan. This sounds simple, but the fact is, most technical delivery organizations become accustomed to a much less formal service delivery process (i.e. they cut corners when it comes to formal communications and documentation) when they are the party doing the service delivery, and they tend to treat subcontractors in the same informal manner when they get introduced to the service delivery project team. However, in many cases, the sparse written documents are all that the subcontractor has to work from.  Remember- they did not develop the initial customer proposal or project description, they just understand the services that they bid based exclusively on the written documentation that they have been provided.

Project Management. Your subcontract should require both the prime-contractor and the subcontractor to designate a project manager in every SOW (“Project Manager“). The Project Manager should be the focal point for all communications to and from that party. They should be copied on every written communication related to that SOW (“Project“). The Project Managers should hold regular weekly status meeting where they meet with the other Project Manager and any parties they may wish to invite (“Status Meeting“). The purpose of the Status Meeting  is to recap progress on the Project since the last Status Meeting, plan for the upcoming week’s activities and identify who or what is necessary for the upcoming project delivery so that those resources can be scheduled. The Status Meeting should comment on any outstanding changes to the SOW (“Change Order“), any outstanding acceptance test responses and identify any known or suspected causes for Project change in the scope or timing of the service delivery. The minutes from the Status Meeting should be captured in writing, sent to the other party with instructions that they should update the report with any errors or omissions requested within 48 hours of delivery, or that Status Report will be considered the mutually agreed upon (“Status Report“). The Status Reports effectively updates and amends the SOW and Project Plan that was established at the outset of the Project.

In addition to the need for meticulous communication, most subcontractors delivery process and practice is based upon the subcontractor delivering their services directly to the end user; therefore they are not familiar with routing all project communications through the Prime-contractor’s Project Manager.  While it is true in any service delivery context, it is even more so the case in a subcontract context,….project assumptions kill. State everything clearly, try to secure an acknowledgment from the other party, and always follow the established communication chain. The important realization for the prime-contractor to rememeber is the customer will read the SOW and contract as broadly as possible; while the subcontractor will read the exact same language as narrowly as possible; and you, as the prime-contractor  are the party caught in between the two parties difference of opinion; worse yet, you will be liable to the customer for any disagreement. Precise language can certainly help manage this miscommunication exposure, it is also well advised that you make a conscious decision to commit to a little less in the customer facing SOW, and secure a little more in your subcontractor SOW (like additional time for scheduled deliveries). If you hear about one party wanting to “flip the SOW” from the customer into the subcontractor, beware that’s how service delivery problems start. If you construct separate and distinct SOWs for the customer and subcontractor, you have some margin for forgiveness in the delivery of the service before liability kicks in. Do not take short cuts when you document the respective party’s obligations, service delivery time lines and acceptance criteria; you will  not save time by limiting the frequency of your Status Meetings (it’s quite the opposite). The more actively engaged both parties remain, the less likely your are to have a service delivery problem.

When should you not Subcontract:

• If you do not add substantial value to the Project, in the form of experience, professional project magement or supplemental technical services, over and above those of the subcontractor, then you should probably not be the party bidding that work as the prime-contractor.
• If you do not have the project management skills on your staff to manage the subcontractor, you probably should not be bidding the work as a prime-contractor (“NEVER” subcontract project management).
• If the function is not closely related and proportionate to your value in the delivery of the overall project, then you probably should not be the party bidding the work as a prime-contractor.
• When the Subcontractor writes the SOW (You must assume primary responsibility for defining the SOW to meet your customer facing delivery obligations, the subcontractor cannot do this for you).

You have a disproportionate amount of project delivery failures when the work is subcontracted, quite often that is because the prime-contractor bid on the wrong Project. The structure of a prime-contractor/subcontractor can lend itself to finger pointing when things go wrong, but there is only one party who is liable to the customer if the Project fails- the prime-contractor. Conversely, when a Project delivery comes together and the Service is delivered properly, on-time with the service of a subcontractor; there are always a lot of coordinated moving parts behind the scene. The subcontractor must do everything called for under the  SOW  and report on the progress of that service delivery to the prime-contractor every step of the way.  This formal process of planning, reporting  and on-going communication  is referred to as the Project  Management.

FLOW DOWN obligations are a hallmark of effective subcontracting. You must carefully study and understand the delivery obligations outlined in the customer facing Agreement. Traditionally, you start with an examination of the rights granted under the customer agreement, and then you ensure that you have secured the necessary rights from the subcontractor to satisfy that obligation. If you are working from a Subcontract Agreement, you may have included an IP assignment where the subcontractor assigns his rights in the Service or deliverable in consideration for the payment called for under the SOW. However, be careful, if the subcontractor you are working with simply proposes to provide you with subcontract service under the standard customer facing Consulting Service Agreement (“CSA“)  they use with their end user customers, they may not be providing you with sufficient right in the service or deliverable; often CSAs just grant a license to use rather than ownership of the IP created. Another term generally addressed in a subcontract agreement is confidentiality, so that the subcontractor agrees to protect the confidential information of the customer and all third parties where that information is disclosed during the Project. Subcontracts also generally include a warranty of some sort; you must ensure that the subcontractor’s warranty to the prime-contractor aligns in scope and term with the warranty that the prime-contractor provides to the customer. Subcontract agreements are generally clear that only the services called for under the SOW are authorized and that the parties will agree mutually upon a change order in writing if changes or additions to that service are required. If your customer contract contains a representation that there will be no malware or back-doors, or a prohibition on the inclusion of Open Source, or advance notice before the use of third party products, all of those requirements must also be flowed down to the subcontractor in your subcontract SOW.

Privacy and Security requirements in particular need to be carefully flowed down to the subcontractor. Customer facing agreements have recently expanded to help customers satisfy their privacy and security compliance obligations. Under the General Data Protection Regulation (“GDPR“) that went into effect through the EU and EEA in May 2018, GDPR requires  that you  have adequate contractual agreements in place with your vendors and subcontractors before you transmit personal data to another party for processing; in this context, the subcontractor would likely be viewed as a sub-processor, and the prime-contractor as the processor. As with other types of subcontracting, the prime-contractor (“Processor”) would be liable for any breach committed by the subcontractor (“Sub-processor“).  The prime-contractor will need to require that subcontractor personnel undergo the same background screening that they previously committed to the customer and follow the same security procedures called for in the customer facing agreement. Also, if the prime-contractor was part of the Privacy Shield, they would require the subcontractor to also be part of the Privacy Shield, under which they agree to comply with GDPR. If the prime-contractor grants the customer an audit right, typically the customer will require that subcontractors also grant an audit right, as a condition to being considered an eligible subcontractor. Keeping with the compliance theme, the Subcontractor, (i) should also have an affirmative duty to notify the prime-contractor within a very short period of a Security Incident (as defined in GDPR), typically within 24-48 hours; and (ii) agree to cooperate in efforts to mitigate the impact of the Security Event.

This article touches on some common themes that should be considered when you plan to subcontract technical services, however, as stated above, you will need to carefully study the customer facing agreement and customer facing SOW to properly ensure that the subcontract has addressed all the required coverage. Technical Services delivery can be complicated in the context of subcontracting, you need to understand those details and carefully plan for how you can do all that is required through a 3rd party. As you construct your project plan, you should assume that you may not necessarily have the opportunity to update and correct them during their service delivery. Subcontracting is like Ginger Rodgers dancing; she needs to know all the same fancy dance steps as Fred Astaire, but she must be able to do them backwards and in heels.

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