There are stories of both sadness and joy when it comes to teaming agreements, particularly in the federal contracting marketplace. As one who has reviewed, drafted, negotiated, and litigated over more than 100 teaming agreements , this author has seen his share of both emotional experiences, not just as an attorney, but also as a government small business advocate.
When I headed the small business program at NASA, a small minority business came to my office for help alleging that a large prime contractor with whom he had a teaming agreement refused to comply with its terms. The two had agreed to work together to win a major federal government contract worth millions. If they won, the teaming agreement stated that the small business would receive 18% of the contract’s total value in the form of a subcontract. The large company pointed out, however, that the teaming agreement was not a binding contract, but rather a gratuitous promise, and pointed to clauses in the agreement which supported that assertion. He offered the small company 2% of the value of the contract as a consolation. When the small business refused and sued the corporation, the court dismissed the complaint and ruled in favor of the prime contractor. Thus, the small business was deprived of several million dollars which it expected to receive through a subcontract from the prime. This was a sad case of the teaming agreement not being drafted properly.
As an attorney, a small business owner came to me a couple of years ago, and indicated that his company was planning to compete as a prime contractor on a super huge contract with a federal agency. He also shared that he intended to have a large business as his subcontractor, and that he wanted guidance in drafting the teaming agreement between the two, because he expected his company to face a size protest if his team won. Size protests occur when a federal competition is restricted to small firms and a bidder that did not win a contract alleges that the small prime contractor that did win is improperly affiliated with the large subcontractor. If found to be true, the small business is then deemed to be a “other than small” by the Small Business Administration (SBA) and the contract award is then taken from the firm that initially won the contract.
After a suitable teaming agreement was drafted, the small firm entered the small business set-aside competition and won the contract. As the small business owner feared, one of the losing firms did file a size protest against his company alleging affiliation. Because in this case the teaming agreement was drafted correctly, we defeated the protest and was permitted to perform the contract. He was one of six awardees on a 5 year contract worth $5.7 billion. This was a joyous case of a teaming agreement that was drafted properly.
Introduction to Teaming Agreements
As an introduction to the topic, 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 firms agrees to be the potential prime contractor and one or more other firms agree to be the potential subcontractors, in the mutual pursuit of a government contract. The underlying basis for having a teaming agreement is that the subcontractor expects to receive a certain amount of the work if the “team” is successful in its quest for a contract. In exchange for its selection to the team, the potential subcontractor generally shares its rates, prices, and trade secrets with the prime contractor in the prime’s development of the competitive proposal that it eventually submits to the government.
Theoretically, companies team when they seek to complement their own capabilities with that of another in order to improve their chances of being awarded a contract.
When the Small Business is the Subcontractor
Why would a large business be interested in a particular small business to be its teaming partner in competing for a government contract? The overall reason that a major prime contractor would be interested in small businesses for any subcontracting opportunities at all is because federal laws and regulations require that any federal prime contractor, other than a small business, must provide subcontracting opportunities for small businesses, on all contracts over $550,000 or contracts above $1 million for the construction of a public facility.
These subcontracting opportunities are expressed in numerical percentage goals for each category of small firms, including small disadvantaged businesses (SDB), women-owned small businesses (WOSB), Historically Underutilized Business (HUB) Zone Contractors, veteran-owned small businesses (VOB), and service-disabled veteran owned small businesses (SDVOSB). These percentages are usually written right into the Request for Proposals (RFP) or the Solicitation for the contract by the federal agency that puts out the contract.
Notwithstanding the above, there are other reasons why a large prime contractor would seek out a particular small business as its subcontractor teaming partner, both good and bad. They are as follows:
The prime may need a subcontractor to fulfill a particular need within the contract that requires a technical expertise that the prime does not have but which a subcontractor does possess. This is a most desirable scenario in which the small business has maximum leverage in teaming agreement negotiations.
Quid Pro Quo:
The small business might also possess a classification in which it is eligible for set-aside contracts, such as 8(a) , HUBZone, or SDVOSB. In these cases a prime might select a small business to be its subcontractor on one contract while insisting that the small business make the large business its subcontractor on a set-aside contract in which the small business is a prime.
New Market Penetration:
The prime may have household name recognition nationally, however, it may need a certain small business at a federal facility where the prime has never worked, but where the selected small business has an excellent company reputation.
The reasons go downhill from this point. The prime may have no intention to utilize the small business but wants to impress the federal agency in its competitive proposal by listing a number of small businesses it supposedly “intends” to subcontract to if selected for contract award.
This is a situation in which the prime has no intention to utilize the small business as a subcontractor but negotiates with the company only to obtain its pricing information so as to better negotiate downward the prices of the small business subcontractor it either regularly uses or intends to use for the upcoming contract.
In order to assess its leverage during teaming agreement negotiations, it is important for the small business to determine where it stands with regard to the above classifications. It can do so by asking the prime two simple questions: 1) Are you going to send me a written teaming agreement? and, 2) Do you have or do you intend to have a teaming agreement with any other firm to do the same work that my company is supposed to do?
Although a prime can get out a written teaming agreement in a variety of ways, it is still a legal document to which it is bound. Having a written agreement denotes a certain seriousness on the part of the prime which simply does not exist with just an oral promise. If the prime answers “yes” to the second question, it generally means that the firm is planning to have small businesses compete against one another to get the same subcontract work. This is not what the small business bargained for when entering into the teaming arrangement. At the end of the day it wants a subcontract, period. If that is not going to happen, the small business needs to know ahead of time, so that it better assess its risk in entering into the teaming agreement.
Promise vs. Contract
In the opening story of this article the small business lost its case, because its teaming agreement was no more than a gratuitous promise, which is not legally binding. Thus, an effective teaming agreement should have all of the elements of a legal contract. Such clauses should include, but not be limited to: 1) an explicit identification of the work the subcontractor will perform (usually attached to the teaming agreement as Exhibit A “Scope of Work”); 2) the price to be paid for the work, which might be defined in terms of the percentage of the total value of the contract; 3) the estimated quantity of goods or services involved; 4) the anticipated time of performance; 5) the date and delivery of the work; and, 6) the time for payment.
Other Protective Clauses
There should be clauses in the teaming agreement which protect or limit the exposure of the small business subcontractor’s intellectual property, i.e., copyrights (which could include computer software and technical data), patents, trade secrets, and other proprietary information. If the small business unwittingly gives away these rights to the prime in a teaming agreement, it generally loses a unique competitive edge it had over its competitors – forever.
The small business should make sure that there are no “Termination for Convenience” clauses in the teaming agreement. The effect of this clause is that the prime can terminate the small business from its team for any reason or no reason. If the small business does not have enough bargaining power to get the prime to delete the clause altogether, it should try to have the prime “water down” the clause so that the small business can be terminated for convenience only if the prime is terminated by the government for convenience. Any contract that allows for one party to get out of it for no reason and with no consequences is not really a contract.
Small businesses should insist on a clause protecting it from the “morning after award surprise” in which, like the opening story of the article, a prime promises the subcontractor a certain amount of the award and then informs the small business after the contract is won that the government made the prime reduce the small business’s share of the contract because of changes to the contract performance strategy. There should be a clause in the contract that prohibits the prime from reducing the subcontractor’s prices or share of the contract in negotiations with the government without the consent of the subcontractor, after providing the subcontractor with written proof verifying that such reduction has been requested.
There should also be clauses in the teaming agreement that has a process for resolving disputes. Arbitration is usually the best route for a small business, and it should be sure to include a clause indicating that failure to award the small business a subcontract after the prime is awarded a prime contract is subject to arbitration. Finally, there should also be a damages clause in the teaming agreement which allows monetary damages, injunctive relief, and attorneys fees, for a breach of the teaming agreement.
Whether or not a small business is successful in getting all of the above clauses into a teaming agreement will depend upon its leveraging power. In such case the small business subcontractor will have to decide what it can live with. In a realistic situation the small business may not be able to walk away from a teaming agreement just because it doesn’t contain all of the clauses (and maybe none of the clauses) that it would like to have.
Nevertheless, the small business is still not at a total disadvantage, because simply knowing what protections it does not have can help the firm better assess its risks. For example, if an individual has misplaced his driver’s license but must get to a meeting by a certain time, the fact that he cannot find his license will not deter him from driving to the meeting, but it will certainly dictate the manner in which he drives. He won’t take a chance on speeding through too many yellow lights, because of the missing license, but he will make sure that he drives in a prudent enough manner to get to the important meeting on time.
The same applies to companies engaged in teaming agreements. Having knowledge of the legal effect of having or not have a particular clause in a teaming agreement will dictate how the small businesses conducts itself through the duration of the teaming agreement as well as during its performance of the subcontract which will hopefully follow.
Teaming agreements are extremely important to a firm’s growth and development. Being teamed with the right partner can help a small business participate in contracts that it might never have had an opportunity otherwise and most government contracts usually last for 5 years at a time. Moreover, a small business can accumulate the experience, past performance and financial capacity to become a large firm at some point in the future. In the world of teaming agreements, knowledge truly is power. The small business that takes the time to obtain such knowledge is always the firm that succeeds. Next Issue: “Teaming Agreement Strategies When the Small Business is the Prime.”