End Client
Owner of information
Prime Contractor
Direct relationship
Subcontractor
You (or your sub)
Sub-Subcontractor
Further tiers
Each tier must have NDA protections at least as strong as the tier above it.
Two Perspectives
As Prime Contractor (Hiring Subs)
You have a contract with the end client and need to bring in subcontractors to help deliver the project.
- Review your prime contract's subcontracting provisions
- Check if client consent is required before subcontracting
- Create flow-down NDA that meets prime contract requirements
- Ensure your sub-NDA is at least as protective
- Consider whether end client needs direct NDA with sub
- Track what information you share with each subcontractor
As Subcontractor (Receiving Flow-Down)
A prime contractor is bringing you onto a project with an end client you don't have a direct relationship with.
- Ask to see the prime's NDA with the end client
- Understand whose information you're protecting
- Ensure flow-down obligations are reasonable and clear
- Negotiate for proportionate liability (to your fees)
- Clarify what happens if you need to use your own subs
- Understand return/destruction requirements at project end
For Prime Contractors: Creating Flow-Down NDAs
Step 1: Review Your Prime Contract
Before bringing in subcontractors, carefully review your agreement with the end client:
- Is subcontracting permitted? Some contracts prohibit it entirely.
- Is prior written consent required? Get it in writing before engaging subs.
- What flow-down requirements exist? Many contracts specify minimum terms.
- Are you liable for subcontractor breaches? (Usually yes.)
- Must subs sign directly with the end client?
Step 2: Create Your Flow-Down NDA
Your subcontractor NDA should include these key provisions:
Flow-Down Acknowledgment
Subcontractor acknowledges that the Confidential Information originates from [END CLIENT] and is subject to the confidentiality obligations of the Prime Agreement between Contractor and [END CLIENT] dated [DATE]. Subcontractor agrees to comply with all confidentiality provisions of the Prime Agreement as if Subcontractor were a direct party thereto.
Standard of Care
Subcontractor shall protect Confidential Information using the same degree of care it uses to protect its own confidential information, but in no event less than reasonable care. Subcontractor's confidentiality obligations shall be no less protective than Contractor's obligations to [END CLIENT] under the Prime Agreement.
No Further Subcontracting
Subcontractor shall not subcontract, delegate, or outsource any portion of the work involving Confidential Information without Contractor's prior written consent. If consent is granted, Subcontractor shall ensure any sub-subcontractor is bound by confidentiality obligations at least as protective as those in this Agreement.
Third-Party Beneficiary
[END CLIENT] is an intended third-party beneficiary of this Agreement with respect to the confidentiality provisions herein and may enforce such provisions directly against Subcontractor.
Step 3: Manage Your Subcontractors
- Get signed NDAs BEFORE sharing any confidential information
- Maintain a log of what information was shared with each sub
- Conduct periodic compliance checks
- Have a process for information return/destruction at project end
- Include the right to audit in your subcontractor agreements
For Subcontractors: Accepting Flow-Down Obligations
What to Ask Before Signing
- See the prime agreement (relevant sections): You need to understand what obligations you're taking on
- Who is the end client? Make sure it's not a competitor or conflict
- What specific information will you access? Limit scope where possible
- How long do obligations last? Match survival period to your involvement
- What liability cap applies? Should be proportionate to your fees
Negotiation Points for Subcontractors
| Issue | Prime's Position | Your Counter |
|---|---|---|
| Liability | "Unlimited liability for breach" | "Cap at [X] times fees paid or $[AMOUNT]" |
| Scope | "All prime contract obligations" | "Only obligations relevant to sub's work" |
| Duration | "Same as prime agreement (10 years)" | "3 years from sub's last access" |
| Third-Party Rights | "End client can sue sub directly" | "Only prime can enforce; prime handles client" |
| Further Subcontracting | "Prohibited entirely" | "Permitted with flow-down NDA" |
Red Flags in Flow-Down NDAs
- Unlimited liability: Your exposure shouldn't exceed your fee
- Vague scope: "All information" without definition is dangerous
- No access to prime terms: How can you comply with what you can't see?
- Direct end client enforcement: Creates exposure to unknown party
- Indemnification without cap: Could expose you to massive liability
Special Considerations by Industry
Government Contracts
Government prime contracts often have specific flow-down requirements:
- FAR (Federal Acquisition Regulation) clauses must flow down to subs
- Security clearances may be required for access to classified information
- Controlled Unclassified Information (CUI) has specific handling requirements
- DFARS (Defense) adds additional cybersecurity requirements (CMMC)
- Small business subcontracting plans may affect who you can use as subs
Technology & Software
- Source code protection requires specific technical controls
- Open source obligations may need to flow down
- Export control compliance (EAR, ITAR) affects who can access
- Consider code escrow requirements for critical deliverables
Healthcare & Life Sciences
- HIPAA Business Associate Agreements (BAAs) must flow down for PHI
- Clinical trial data has specific regulatory requirements
- FDA submission information may need enhanced protection
- State privacy laws may add additional requirements
Financial Services
- GLBA requirements for customer financial information
- SOC 2 compliance expectations may flow down
- SEC/FINRA record retention requirements
- PCI DSS for payment card data handling
Best Practices Checklist
For Prime Contractors
- Create a standard subcontractor NDA template that meets your typical client requirements
- Maintain a subcontractor register with signed NDAs on file
- Implement a "need to know" principle - only share what's necessary
- Use secure methods to share confidential information (encrypted email, secure portals)
- Include confidentiality reminders in project kickoff meetings
- Conduct exit procedures when subcontractors leave projects
- Have incident response procedures for potential breaches
For Subcontractors
- Keep a file of all NDAs you've signed with active obligations
- Track confidentiality expiration dates in your calendar
- Maintain separate folders/repositories for each client's confidential information
- Document what information you received and when
- Follow data handling requirements precisely
- Ask questions if you're unsure what's confidential
- Report potential issues to the prime contractor promptly
Related Resources
Need a Subcontractor NDA Template?
Generate a flow-down NDA for your subcontractors.