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Teaming and Limitations on Subcontracting in Federal ContractsJennifer M. MillerWyrick Robbins Yates & Ponton LLPRaleigh, North Carolina

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Overview

• Why Team? Joint Venture or Subcontract?• Joint Venture Requirements Where One JV

Partner Is a “Preference Company”• Subcontracting Limitations Where Prime Is a

“Preference Company”• Teaming Agreements – Key Provisions• Joint Venture Agreements – Key Provisions

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Why Team?

• Combined capabilities• Access to set-aside contracts• Past performance and experience in a

new area

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Joint Venture or Subcontract?

• Key indicator is the sharing of profits and losses

• Both companies can deal with the Government

• Both parties can have relatively equal control (subject to some limitations when certain “preference companies” are involved)

• Cannot share profits and losses

• Subcontractor has no privity with the Government

• Subcontractor cannot “control” the contract

Where a “preference company” is involved, SBA requirements may dictate the form that your team must take

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Joint Venture RequirementsWhere One JV Partner Is a “Preference Company”

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Joint Venture Requirements: Small Businesses (13 C.F.R. § 121.103(h)(3))

• SBs can JV on a SB set-aside contract if:• JV partners’ combined average annual revenues are

less than the applicable size standard, OR• Both JV partners are under the size standard, AND

• The procurement is a “bundled” requirement, OR• The contract value exceeds half the size standard for the

contract (if a revenue-based size standard) or it exceeds $10 million (if an employee-based size standard)

• Repeated JV relationships could lead to a finding of general affiliation

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Joint Venture Requirements: HUBZone SBCs (13 C.F.R. § 126.616)

• A JV bidding on a HUBZone contract must be comprised only of HUBZone SBCs. In addition,• JV partners’ combined average annual revenues must be less

than the applicable size standard, OR• Each HUBZone SBC must be small under the size standard

for the contract, AND the value of the procurement must exceed half the size standard for the contract (if a revenue-based size standard) or it must exceed $10 million (if an employee-based size standard)

• The JV itself does not need to be certified as a HUBZone SBC

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Joint Venture Requirements: 8(a) SBCs (13 C.F.R. § 124.513)

• An 8(a) SBC and a non-8(a) company can JV together on an 8(a) set-aside contract if:• JV partners’ combined average annual revenues are less than the

applicable size standard; OR• Both companies are small under the size standard for the contract,

AND at least one 8(a) participant in the JV is less than half the size standard for the contract, AND the contract value exceeds half the size standard for the contract (if a revenue-based size standard) or it exceeds $10 million (if an employee-based size standard); OR

• The JV is between a protégé firm and its approved mentor, and the protégé is small under the size standard for the contract (this is the only instance where a large business can JV with a preference company)

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Joint Venture Requirements: 8(a) SBCs (13 C.F.R. § 124.513)

• JV Agreements involving 8(a) companies must be approved by SBA before the contract is awarded

• To be approved, the 8(a) company must lack the capacity to perform the contract on its own, and the JV Agreement must be fair and equitable and of substantial benefit to the 8(a) company

• If the 8(a) brings little to the relationship other than its 8(a) status, SBA will not approve the Agreement

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Joint Venture Requirements: 8(a) SBCs (13 C.F.R. § 124.513)

• SBA’s regulations set out specific provisions that must be included in the JV agreement (13 C.F.R. §124.513(c)):

• An 8(a) SBC must be the managing venturer• An employee of the 8(a) SBC must be the project

manager on the contract• A special bank account must be established for the JV,

and all parties’ signatures must be required for withdrawals

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Joint Venture Requirements: 8(a) SBCs (13 C.F.R. § 124.513)

• That the 8(a) SBC will meet the performance of work requirements in the regulations:• Unpopulated JV: 8(a) must perform at least 40% of the

work performed by the JV; must be more than administrative or ministerial functions

• Populated JV: 8(a) must demonstrate what it will gain from performance of contract and how performance will assist in its business development

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Joint Venture Requirements: SDVOSBCs (13 C.F.R. § 125.15(b))

• An SDVOSBC can JV with other SBCs to perform an SDVOSBC contract if:• JV partners’ combined average annual revenues are

less than the applicable size standard, OR• Each JV participant is small under the size standard for

the contract, AND the contract value exceeds half the size standard for the contract (if a revenue-based size standard) or it exceeds $10 million (if an employee-based size standard)

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Joint Venture Requirements: SDVOSBCs (13 C.F.R. § 125.15(b))

• The JV Agreement need not be approved by SBA, but it must include specific terms, including (13 C.F.R. §125.15(b)(2):• An SDVOSBC must be the managing venturer• An employee of the SDVOSBC must be the project

manager on the contract• Not less than 51% of the profits must go to the

SDVOSBC(s)

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Joint Venture Requirements: WOSBs and EDWOSBs (13 C.F.R. § 127.506) and SDBs (13 C.F.R. § 124.1002(f)

• A JV can submit an offer on a WOSB, EDWOSB or SDB contract (or claim a SDB price preference) if:• The WOSB of EDWOSB JV participant is designated in CCR and

ORCA as a WOSB or EDWOSB OR the SDB JV participant has an SDB certification from SBA or has submitted an application for SDB certification; AND• JV partners’ combined average annual revenues are less than

the applicable size standard; OR• Both JV partners are small under the size standard, AND the

contract value exceeds half the size standard for the contract (if a revenue-based size standard) or it exceeds $10 million (if an employee-based size standard)

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Joint Venture Requirements: WOSBs and EDWOSBs (13 C.F.R. § 127.506) and SDBs (13 C.F.R. § 124.1002(f)

• The WOSB, EDWOSB or SDB must be the managing venturer of the JV, and an employee of the WOSB, EDWOSB or SDB must be the project manager on the contract

• The WOSB, EDWOSB or SDB must perform “a significant portion” of the contract work

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Subcontracting Limitations Where Prime Is a “Preference Company”

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Subcontracting Limitations: SB, 8(a), WOSB, EDWOSB, or SDB Price Preference

Service (non-construction)

General construction Special trade contractor

construction

Supplies or products

Prime must perform 50%+ of cost of the contract incurred for

personnel with its own employees

Prime must perform 15%+ of the cost of

the contract (not including the cost of materials) with its

own employees

Prime must perform 25%+ of the cost of

the contract (not including the cost of materials) with its

own employees

Prime must perform 50%+ of the cost of manufacturing (not

including cost of materials) must be performed by the

Prime

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Subcontracting Limitations: SDVOSBCs

Service (non-construction)

General construction Special trade contractor

construction

Supplies or products

Prime must perform 50%+ of cost of the contract incurred for

personnel with its own employees or employees of other

SDVOSBCs

Prime must perform 15%+ of the cost of

the contract (not including the cost of materials) with its own employees or employees of other

SDVOSBCs

Prime must perform 25%+ of the cost of

the contract (not including the cost of materials) with its own employees or employees of other

SDVOSBCs

Prime must perform 50%+ of the cost of manufacturing (not

including cost of materials) must be performed by the

Prime or other SDVOSBCs

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Subcontracting Limitations: HUBZone SBC (Set-Aside or Price Preference)

Service (non-construction)

General construction Special trade contractor

construction

Supplies or products

Prime must perform50%+ of cost of the contract incurred for

personnel with its own employees or employees of other

HUBZone SBCs

Prime must perform 15%+ of the cost of

the contract (not including the cost of materials) with its own employees.

50% of the cost of the contract incurred for personnel with its

own employees or employees of other

HUBZone SBCs.

Prime must perform 25%+ of the cost of

the contract (not including the cost of materials) with its own employees.

50% of the cost of the contract incurred for personnel with its

own employees or employees of other

HUBZone SBCs.

Prime must spend at least 50% of the

manufacturing costs (not including the

cost of materials) in a HUBZone. One or

more HUBZone SBCs may combine to

meet this requirement.

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Subcontracting Limitations: Relevant Definitions

• "Cost of the contract" – all allowable direct and indirect costs allocable to the contract, excluding profit or fees

• "Cost of contract performance incurred for personnel" – direct labor costs and any overhead which has only direct labor as its base, plus the Prime's G&A rate times the labor cost

• "Cost of manufacturing" – costs incurred by the firm in the production of the end item being acquired. Includes the direct costs of fabrication, assembly, or other production activities and indirect costs which are allocable and allowable. Cost of materials and profit or fee are excluded.

• "Cost of materials" – includes costs of the items plus shipping and handling costs, special tooling, special equipment, and construction equipment purchased for and required to perform on the contract

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Teaming Agreements – Key Provisions

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Teaming Agreements – Key Provisions

1. Identify the contract at issue2. Identify whether the parties will form a JV

or prime/sub relationship3. Representation by a preference partner

that it qualifies for the applicable preference and that it will perform the amount of work required by the relevant regulation

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Teaming Agreements – Key Provisions

4. Allocating responsibility (who will do what?)•Division of Statement of Work•Preparation of proposals•Negotiation of contracts

5. How will proposal costs be handled?6. Confidentiality provision

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Teaming Agreements – Key Provisions

7. Exclusivity clause - parties will only team with each other on the contract• Exception if one partner decides not to pursue the contract?• Exception if sub not approved by Government• Each side could have reasons for not wanting exclusivity

• Prime may want to be able to sub work to others if price too high or work unsatisfactory, or if prime wants to do work in-house

• Sub might want to team with other primes, in case this prime is not awarded the work

• If not exclusive, the agreement needs provisions to protect the parties' confidential information from other partners

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Teaming Agreements – Key Provisions

8. If prime/sub teaming agreement, basic subcontracting terms (agreement to agree might not be enforceable): • That sub's work will be performed IAW prime contract

requirements and SOW• How price will be determined (relationship to sub’s price in

proposal)• When sub will be paid• That subcontract will automatically renew if contract option is

exercised or contract is extended• T/C of subcontract only in the event of T/C by the government• Inclusion of mandatory flow-down provisions

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Teaming Agreements – Key Provisions

9. Other prime/sub issues:•Deadline to negotiate subcontract?•Duty to proceed/duty to pay during

subcontract negotiations (including payment terms: NTE price? Cost only? Cost plus fee?)

•Award of subcontract contingent on government approval

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Teaming Agreements – Key Provisions

10.Non-solicitation provision11.Disputes provision

•Informal attempt to resolve? •Mediation? •Arbitration? •Silence?

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Teaming Agreements – Key Provisions

12. Termination provisions• Ensure that certain provisions survive termination of

the Teaming Agreement:• Protection of proprietary data• Rights in mutually-developed data, patents or copyrights• Indemnity obligations• Non-solicitation provisions

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Teaming Agreements – Key Provisions

12. Termination provisions, continued• Possible Grounds for Termination:

• Failure to win prime contract• Government’s withdrawal or cancellation of RFP• Suspension/debarment/proposed debarment of either

company• Either party decides not to pursue the contract (?)• Bankruptcy or insolvency of either company• Government disapproval of sub

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Teaming Agreements – Key Provisions

12. Termination provisions, continued• Possible Grounds for Termination, continued:

• Failure to agree on subcontract within "x" period of time• Loss of key employees by a team member• Award of a subcontract• Impossibility of performance• Mutual agreement• Default

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Joint Venture Agreements – Key Provisions

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Joint Venture Agreements – Key Provisions

1. Parties' respective shares of the JV2. Name of the JV3. JV's place of business4. Business opportunities to be pursued (3 contract

awards over 2 years rule; possibility of forming additional JVs)

5. Management structure of JV6. Identification of key personnel (especially if PM is

required to be an employee of a preference partner)

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Joint Venture Agreements – Key Provisions, continued

7. Assignment of responsibility for key activities8. Veto rights9. Banking10. Insurance11. Administrative procedures for invoicing, payment,

etc.12. Responsibility for preparing and executing proposals,

claims, etc.

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Questions?

Jennifer M. MillerWyrick Robbins Yates & Ponton LLP4101 Lake Boone Trail, Suite 300Raleigh, North Carolina(919) 781-4000jmiller@wyrick.comwww.wyrick.com