Subrecipient Got You Down?

So, you’ve gotten your multi-million dollar award, and, to assist in your efforts, you’ve subcontracted with Epic FailCo for a portion of the work.  For the first few months, everything goes swimmingly. . .your PI is churning out results, and Epic FailCo is the epitome of competence.

Then, you notice that the required monthly progress reports from Epic FailCo are arriving every six weeks. . .and then every eight weeks.  Calls to Epic FailCo’s representatives are unreturned.  And you hear scuttlebutt that Epic FailCo’s key personnel are regularly seen at the craps tables without any cares in the world.  Finally, enough is enough, and the decision is made to terminate the subcontract.


Pop quiz, hotshot:  What do you do?


At least here, our standard form of fixed price subagreement generally states that the subagreement may be terminated by JHSPH upon thirty (30) days’ notice to the other party, and our standard form of cost reimbursable subagreement usually states that the subagreement may be terminated by either party at any time upon sixty (60) days’ written notice to the other party.

The lack of further language specifying conditions or reasons is intentional.  Our view is that, as we control and are responsible for the money, we should have the right and flexibility to terminate for any or no reason.  Consequently, we intentionally do not include any provisions in our subagreements regarding default/non-performance by the Sub for a couple of reasons.

First, we do not want to have to give a specific reason, nor defend, whether our position that the sub is in default is correct.  Once we issue a Notice of Default, it opens up a variety of possible arguments as to whether it truly was a default; if the default was minor or material; whether it was properly given (written notice to the correct legal address) and actually received; whether the time period given to cure was realistic or long enough; and whether, if the sub does attempt to cure, it is to our satisfaction or should be in their eyes.

Second, we do not want to get into a dispute over how much we owe the sub upon termination due to a default (i.e. their view of the “value” of cured portions vs. uncured portions of the non-performing work compared to our own views).   We want to make a clean break in payments without any counterclaim.

Thus, under a fixed price subagreement, our language usually reads as follows:

JHSPH shall compensate Subrecipient a proportionate amount of the total, … commensurate with all deliverables tendered and accepted by JHSPH, as of the date of termination. Any funds which are unspent or unallocated at the time of termination must be promptly returned to JHSPH.”  The amount paid is determined by us in accordance with the milestone/deliverables payment schedule.

And under a cost reimbursable subagreement, the terms would be:

“All otherwise allowable costs or commitments incurred prior to the notice of termination shall be allowable except those which may be so limited or terminated.”  The amount paid is determined by us pursuant to what is allowable prior to a certain date.

In our next posting, we’ll go over the actual mechanisms by which the subagreement would be terminated, and some important points to consider during the entire process.