Best Practice

Teaming Agreement Strategies: When The Small Business Is The Prime Contractor

In the last issue of this magazine we discussed the best strategies for structuring and negotiating teaming agreements in the federal contracting arena when the small business is the subcontractor and the large business is the prime contractor. For purposes of review, a teaming agreement is a document that formalizes a relationship between two or more businesses, either as a joint venture or as a prime contractor -subcontractor relationship in which one of the team members agrees to be the prime contractor and one or more of the other teaming partners agrees to be the subcontractor(s) in the mutual pursuit of a contract with the Federal government. When the small business is the potential subcontractor in such arrangement the objective is clear: The small firm wants to have sufficient clauses in the teaming agreement to make sure that it gets everything that was promised when and if the large prime contractor wins the Federal contract.

The goals and objectives of the small business are different, however, when the small business is to be the prime contractor in a teaming agreement, and the large business is the proposed subcontractor. In this situation, the main objective of the small business is to structure a teaming agreement that will withstand a size protest challenge if the small business wins the contract. One small business lost a $40 million contract due to a size protest in large part because its subcontractor was a large business, and the teaming agreement between the two parties was not structured properly – and it was a contract restricted to competition among 8(a) contractors. These 8(a) companies are small firms owned by individuals, primarily minorities, that the U.S. Small Business Administration (SBA) has certified as socially and economically disadvantaged after a stringent application process. “How could something like that happen?” one might ask.

Having a large business as its subcontractor on a Federal contract can be a real boon to the development of a small business, particularly if it is an 8(a), Historically Underutilized Business (HUB)Zone or Service Disabled Veteran Owned Small Business (SDVOSB). Under the pertinent Federal laws and regulations, contracts can be set-aside in certain circumstances for competitions that are limited only to each of the afore-mentioned small business categories, separate and apart from one another, i.e. 8(a) set-aside competitions, HUBZone set aside competitions, and SDVOSB set-aside competitions. The large business can do the “heavy lifting” on such a contract while giving valuable guidance to the small prime contractor on how to manage a large, complex contract that the small business could not otherwise do on its own. It would also enable the small business to develop and grow faster than it ordinarily would have.

The small business-prime/large business-sub teaming arrangement also has benefits for the large business. Large firms are able to participate in federal contracts that they ordinarily would not be able to have a part in, because of their size. Some of the contracts obtained by these teams are in the ten million to a hundred million dollar range, so it is also very economical for large businesses to team with small businesses under such circumstances. However, the selection process in which teams are put together is not too different for the small business in teaming arrangements where the small firm is the subcontractor. It is usually the large business that chooses the teammate, even though the small business will be the prime contractor on the requirement. The most potent adversary to a small business-prime/large business subcontractor teaming collaboration, however, is the size protest.

A size protest is filed by an unsuccessful small business after a federal agency announces what company was selected for the contract award. The protest is generally not based on an allegation that the small business prime itself has exceeded its size cap. (Size standards are set by the SBA, and they are different depending on the particular industry a small business is in. For more information, go to standards). Rather, almost always, the size protest is based on the small firm’s “affiliation” with the large firm.

Federal regulations state that businesses are “affiliated” with one another when one company controls, or has the power to control, the other, or when a third party (or parties) controls, or has the power to control, both. In determining whether affiliation exists, the SBA considers factors such as common ownership, common management, previous relationships or other ties between the two challenged companies or common ties they may have with another business, and any other contractual relationships between the challenged firms. In addition, individuals or firms that have identical, or a substantially identical, business or economic interest, such as family members, persons with common investments, or firms that are economically dependent on another through contractual or other relationships, may be treated as one party, and, thus, affiliated as well.

If the SBA determines that a small business is affiliated with a large business, it combines all of the revenues and employees of both companies and attributes the totals to the small business. This, of course, makes the small business “large” and, thus, ineligible for the hefty contract that it just won.

A “cousin” of “affiliation” is a term called the “ostensible subcontractor rule” This is where the SBA decides that a small business (usually an 8(a), HUBZone or SDVOSB) is “unusually reliant” on the large subcontractor. It is essentially a finding that the large subcontractor is really the prime contractor in disguise. This rule is designed to prevent large contractors, including small firms that have become large firms, from forming relationships with small firms to avoid the SBA’s size requirements.

When a size protest is filed against a small business, one of the documents that the SBA requests in order to investigate the matter is the teaming agreement, if one exists, between the two parties. If the teaming agreement is well-drafted, a size protest is likely to be unsuccessful, because the teaming parties will have considered all of the possible affiliation allegations in advance and will have taken pains to dilute such allegations in the teaming agreement.

Adequate preparation is the difference between winning and losing a size protest and a multi-million dollar contract. Preferably, the teaming agreement should be drafted as if the team is definitely going to face a size protest upon winning the contract. The following are some tips for success.

1) Make sure that it is the small prime contractor that drafts the teaming agreement and be sure that there is proof of that, i.e., it should be on small business’ letterhead or some other form indicating that it is the small business’ document

2) The teaming agreement should be written from the small business’ perspective and should leave no doubt as to who is managing the contract

3) There should be an attachment to the teaming agreement, “Scope of Work,” clearly indicating that the small business prime will be performing the “primary and vital requirements” of the contract

4) The teaming agreement should reflect in its entirety a typical prime contractor-subcontractor arrangement with nothing in the document that unusually favors the large subcontractor in any clause of the agreement.

The following are some acts to avoid in the teaming agreement, as they will definitely lead to a finding of affiliation: 1) Do not have clauses that show the large subcontractor getting any kind of monetary windfall that is unusual for a subcontractor to receive;

2) Do not have any references to the large subcontractor as independently managing any requirement under the contract without the small business prime’s approval;

3) Never, never write the teaming agreement written on any stationery obviously belonging to the prime – this happens more than one might imagine;

4) If the small prime must accept financial or bonding assistance from the prime, make sure that the small prime gives adequate consideration in exchange for it;

A teaming arrangement between a small prime contractor and large subcontractor can be very profitable and extremely beneficial to both parties. However, it has to be done the right way. Pitfalls must be avoided at all costs. In federal contracting there are very slim margins for error. Although the above suggestions are not intended to be a guarantee of success in every teaming arrangement, the small business entrepreneur who is mindful of them will have a much better chance of a rewarding experience than the one who is not.

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