Is Your Teaming Agreement Enforceable?

Teaming agreements are a key part of assembling a winning team.  Unfortunately, once a prime contract is awarded, team members often learn that the prime contractor wants concessions in exchange for a subcontract or the prime contractor makes the terms of the subcontract untenable.   Although teaming agreements are ubiquitous in the government contracts arena, their enforceability should be considered each time from both a practical and legal standpoint.

Just because the team is successful and a prime contract is awarded, does not necessarily mean the teaming partner will be awarded a subcontract.   For instance, many teaming agreements require the parties to exert good faith efforts to negotiate a subcontract once a prime contract is awarded.  After receiving the prime contract award, the prime contractor may decide it doesn’t want to be exclusive to the teaming partner or that the partner’s pricing is too high.  From a practical standpoint, if the prime contractor wants to avoid awarding a subcontract to the teaming partner, it can cause the negotiations to fail by insisting the subcontractor agree to unacceptable terms while claiming it is acting in good faith.

If the prime contractor refuses to award a subcontract to a teaming partner, the partner may find that the courts refuse to enforce the teaming agreement.  The enforcement of teaming agreements by courts is mixed.  They have been called unenforceable “agreements to agree” by some courts, and enforced by others.  The more ambiguous the agreement, the less likely it is to be enforced.  Conversely, a teaming agreement is likely to be enforced if it clearly shows the parties intent to be bound by the agreement and the terms of the agreement are sufficiently definite.  To increase the likelihood of enforcement, an agreement must identify the duration and scope of the agreement, as well as the compensation to be paid.

Companies that carefully draft their teaming agreements will greatly increase their chances of having a contract that is  enforceable.  Key terms to consider are any requirements and exceptions to the award a subcontract, the term of the subcontract, as well as definitive pricing and scope of work.  Also, attaching a draft subcontract as an exhibit to the teaming agreement may help avoid conflicts over subcontract terms after the prime contract is awarded.

Intellectual Property Rights in Government Contracts

A company’s intellectual property is often its most valuable asset. Companies that are not vigilant may unknowingly lose rights in their intellectual property when entering into a contract with an agency of the U.S. Government. What intellectual property rights are granted to the Government will depend upon various factors, including whether the item qualifies as a “commercial item”, was developed at Government or private expense, which regulations apply to the procurement and whether the company complied with those regulations to limit the Government’s rights to the intellectual property. Depending upon the circumstances, the Government’s rights to a company’s intellectual property will be subject to the company’s standard commercial license, Limited Rights (Restricted Rights for software), Government Purpose Rights, or Unlimited Rights.

 

Commercial item procurements by the Government are streamlined and allow the contractor to use its standard commercial license when granting intellectual property rights to the Government. It is therefore in a company’s best interest to have an item qualify as a commercial item, as defined in FAR 2.101. In general, to qualify an item must (i) have been sold, leased, or licensed to the general public or offered for sale, lease, or license to the general public; and (ii) have been developed at private expense.

 

A company may retain greater rights in an item that is developed solely at private expense. If no Government funds are used in the development of an item, the item may qualify as a commercial item or, at minimum, the Government will only obtain Limited Rights (Restricted Rights for software), as defined in FAR 52.227-14 and applicable agency supplements, in the underlying intellectual property. If an item was developed at private expense and a Government contract requires that it be customized or modified, the company should be careful to evaluate whether such changes will provide the Government with greater rights in the item than expected.

 

The Government will obtain either Government Purpose Rights or Unlimited Rights, as defined in FAR 52.227-14 and applicable agency supplements, in items that are not developed solely at private expense. In general, the Government will obtain Government Purpose Rights in items developed with a mixture of company funds and Government funds. The Government will obtain Unlimited Rights in items developed solely with Government funds.

It is imperative that companies act diligently prior to entering into a contract with the Government and undertake ongoing steps to maximize their intellectual property rights. These steps include –

· Claim commercial item treatment when applicable.
· Develop items at private expense when they have commercial application and may result in a competitive advantage.
· Properly mark all data and software with the appropriate protective legend before delivering to the Government.
· Provide written notice to the Government of all items that will be delivered with less than Unlimited Rights, and obtain agreement from the Government that such items may be delivered with less than Unlimited Rights.

· If you are acting as a subcontractor, ensure that you understand what intellectual property rights the Government requires in your item and that the prime contractor has adequately limited the Government’s rights to the rights you granted.

Ostensible Subcontractor Pitfall in Teaming Agreements

It is common for contractors to join together to compete for government contracts under teaming agreements. Teaming arrangements allow companies to compete for government contracts that they might not be able to obtain and perform individually. A properly structured teaming arrangement allows the participating companies to work together in seeking an award, but avoids the companies being deemed “affiliated” for purposes of size standards. Improperly structured teaming arrangement, however, can cause the companies to be deemed “affiliated” and lose their ability to compete for the government contract.

Subpart 9.6 of the Federal Acquisition Regulations (“FAR”) recognizes that teaming agreements enable offerors to complement each other’s capabilities, and to offer better performance, deliveries, and cost structures. Agencies must recognize the integrity and validity of teaming agreements if the agreements are fully revealed in competitive proposals or before the teaming agreement becomes effective.

A properly structured teaming arrangement must vest control and daily management in the proposed prime contractor, and the proposed prime contractor must be solely responsible for performance. The government may find parties of a teaming arrangement to be “affiliated” for purposes of size standards, where the would-be prime contractor is overly reliant on its teaming partners or the tasks and areas of responsibility of the parties are not clearly delineated.

The Small Business Administration (“SBA”) decides whether parties to a teaming arrangement are deemed “affiliated.” If the parties are deemed “affiliated” their revenues and personnel will be combined by the SBA in making its decision of whether the affiliated companies are small for purposes of the procurement at hand.

Under the Ostensible Subcontractor Rule, 13 C.F.R. 121.103 (h)(4), a would-be prime contractor and its subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes if the subcontractor has too great of a role under the teaming arrangement. More specifically, “an ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract, or of an order under a multiple award schedule contract, or a subcontractor upon which the prime contractor is unusually reliant. All aspects of the relationship are considered, including, the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance or the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation.”

With proper planning and structuring of teaming arrangements, companies can reap the benefits of teaming and avoid the pitfall of being deemed “affiliated.”

Timing Is Everything: Protesting Government Contract Solicitations To The GAO

It is not unusual to have questions regarding a procurement. However, when those questions concern possible improprieties in the solicitation, a contractor must address such questions in a timely manner or risk losing the right to challenge the possible improprieties.  If a contractor is unable to resolve the issue directly with the agency, the contractor’s only path for resolution is filing a protest.

The deadline for filing a protest with the GAO or at the agency level regarding solicitation improprieties depends on when the impropriety became apparent.  If the impropriety was apparent prior to initial proposal submissions, the protest must be filed prior to such time.  A protest that alleges a defect that was not apparent on the face of the solicitation must be filed not later than 10 days after the defect became apparent.  If the grounds for the protest arise out of an agency’s evaluation of proposals or award of a contract, then the protest must be filed within 10 calendar days after the date the contractor first learned of the agency’s adverse action.

 

The following are some examples of common improprieties:

 

1.      The specifications are unduly restrictive and don’t allow a company to bid.

2.      The specifications are ambiguous, preventing a company from determining what the agency really needs.

3.      The evaluation plan is unclear, preventing a company from understanding how the offeror will be selected for award.

It should be noted that a protester may be able to challenge the impropriety by filing suit in the Court of Federal Claims, even if the issue has been rejected by the GAO.

Using the Past Performance of a Parent or Affiliates

The Government has wide latitude when evaluating the past performance of a bidder.  When evaluating a bidder, the Government may consider the experience and qualifications of a parent, subcontractor, or other third party to meet a responsibility criteria.  However, the bidder must provide the Government with adequate evidence that the third party is committed to the success of the bid.  A recent case before the GAO, Charter Environmental, Inc., B-297219, December 5, 2005, demonstrates how important it is for a bidder to provide such evidence to the Government, even when the third party upon whose experience it relies has a close relationship to the bidder.

 

In Charter Environmental, the Forest Service issued an Invitation for Bids (“IFB”) for a contract to remove and stabilize mine waste. As a component of the IFB’s responsibility criteria, the winning bidder was required to show that it had successfully completed at least three similar projects. The Government received six bids and awarded the contract to ECI Northwest (“ECI-Northwest”), the low bidder. The second-lowest bidder, Charter Environmental, Inc. (“Charter”), filed a protest with the GAO. Charter argued that the Forest Service improperly considered projects performed by ECI’s parent company, Environmental Contractors of Illinois (“ECI”), in determining that ECI-Northwest met the IFB’s responsibility criteria. ECI-Northwest would not have met the responsibility requirements had it not used ECI’s past performance in its bid.

 

Generally, a bidder is allowed to use the experience of a technically qualified subcontractor or other third party—such as a parent, subsidiary, or consultant—to satisfy responsibility criteria contained in an IFB. However, in order for a third party’s experience to meet the requirements, the third party must make a commitment to the bidder’s successful performance of the work, and the Government must have evidence of this commitment.

In this case, the GAO determined that there was “no information in the record” that the Forest Service could have used to determine that ECI had made a commitment to ECI-Northwest’s successful completion of the contract work. Instead, the Contracting Officer improperly assumed that ECI had made such a commitment by virtue of the parent-subsidiary relationship between ECI and ECI-Northwest. The GAO held that the parent-subsidiary relationship alone was not enough evidence to determine that ECI was committed to ECI-Northwest’s bid. Without such information, it was improper for the Forest Service to use ECI’s performance record in evaluating ECI-Northwest’s responsibility. Therefore, the GAO sustained Charter’s protest.

Complying with the Buy American and Trade Agreements Acts

When procuring products, governments around the world historically have shown a preference for domestically produced products.  Laws exist that require government funds to be used only for the purchase of domestic products, or at least provide a price preference for such products.  The law implementing the U.S. Government’s preference for domestic products is known as the Buy American Act (“BAA”).   The BAA, however, is not always applicable due to the Trade Agreements Act (“TAA”).  The TAA allows for the procurement of products from certain countries other than the United States .  Understanding whether the BAA or TAA applies to your procurement, and whether your products are compliant with the applicable standard is crucial to avoid liability under the False Claims Act and termination of a contract award.

 

The BAA applies to supply contracts exceeding the $2,500 micro-purchase threshold, but that are below the TAA threshold (currently at $193,000).  To be BAA compliant, the product provided must qualify as a domestic end product.  A domestic end product is (1) an unmanufactured end product mined or produced in the U.S. ; or (2) an end product manufactured in the U.S. if the cost of components mined, produced or manufactured in the U.S. exceeds 50 percent.  Unlike the TAA, if a product is not BAA compliant the product may still be purchased by the U.S. Government.  A non-BAA compliant product is penalized by adding 6% or 12% (depending on whether small or large businesses are involved) to its price for comparison to BAA compliant products offered by competitors.  Note, in addition to domestic end products, DoD procurements allow the use of products from “Qualifying Countries” without a pricing penalty.  A list of “Qualifying Countries” for DoD procurements can be found at DFARS ¶ 225.872-1.   For DoD procurements, if the product is neither a U.S. domestic end product or Qualifying Country end product, then it will be assessed a 50% price penalty.

 

In general, the TAA applies to U.S. Government acquisitions over a certain dollar threshold, generally $193,000 for the acquisitions of supplies or services, although some individual Free Trade Agreements (e.g., Canada , Mexico , Chile , and Australia ) apply lower thresholds.  The TAA provides that the U.S. Government may acquire only U.S.-made or designated country end products.  A list of designated countries can be found at FAR ¶ 25.003.  The TAA does not use the 50% cost-of-components test like the BAA.  Instead, the TAA employs a different country of origin test, called the “substantial transformation” test.  The determination of whether there has been substantial transformation for TAA purposes is not based primarily on the value or percentage of U.S. (or designated country) content (components), but on whether the product has been given a different character or use as a result of the process it underwent in the U.S. (or designated country). 

 

Determination of the TAA threshold varies by agency.  Some agencies apply the determination of whether the BAA or TAA applies (i.e. whether the $193,000 threshold is met to apply the TAA) on an overall contract basis, while others apply it on a line item basis.  As such, it is not unusual to have a procurement where both the BAA and TAA will apply based on the expected dollar value of each line item.

       

Determining the country of origin for BAA and TAA purposes can present complex issues of interpretation and application that must be considered on a case-by-case basis, based on determinations of the Bureau of Customs and Border Protection (“Customs”).  Companies that fail to accurately identify whether their products are compliant or non-compliant with the BAA or TAA requirements are at great risk of having their contract award terminated and being liable to the U.S. Government under the False Claims Act.  In the past few years, violations have cost companies tens of millions of dollars in fines and terminated contracts.