This is the third and final installment in a series of articles brought to you by Maria L. Panichelli and Edward T. DeLisle for GovBizConnect, an online professional network for government contracting professionals.
Originally published on the GovBizConnect website.
Welcome to the third and final installment of our three-part series, Key Considerations in Small Business Teaming: How to Form a Productive Partnership While Safeguarding your Interests and Protecting your Small Business Eligibility. Today, we will be focusing on crucial concepts to keep in mind when drafting your teaming agreement. But check out our previous installments on: (1) the differences of teaming and joint venturing; and (2) avoiding common pitfalls in teaming. Stay tuned for our upcoming piece on the new “All Small” Mentor Protégé Program.
In today’s Federal contracting market, a growing number of government contracts are set-aside for various types of small businesses. It’s no surprise that, in this highly competitive environment, cooperative contractor relationships – including teaming and joint-venturing – are increasingly popular among small and large businesses alike. Of the two, teaming has become more popular because it can provide more flexibility that joint-venturing, and can often be finalized more quickly than joint venture agreements. For this reason, teaming has become one of the hottest topics in Federal contracting.
However, though teaming is often talked about, it is just as often misunderstood. Many people overestimate the “flexibility” it allows for, and run afoul of the various SBA and VA small business regulations. Moreover, although there are many reputable, honest large business contractors out there looking for teaming partners, there are also one or two unethical large companies that will try to take advantage of small business contractors, using them as for their small business eligibility. These businesses care little about protecting the small business’ long-term eligibility or reputation. These things, together, can have disastrous consequences for small businesses, including the loss of small business size status and eligibility.
As a small business, it is critically important that, when teaming, you take care to avoid these types of problems. The key to doing that is to draft a detail-specific, enforceable teaming agreement that creates a productive partnership, but also protects your interests and eligibility. This article seeks to help you do just that by using the three “E”s: Enforceability, Exclusivity and Expectations.
Many people assume that they can draft a generic teaming agreement and figure the details of the teaming relationship, and eventually, subcontract, at a later point. This is simply not the case. It is critically important that you include in your teaming agreement detailed terms that outline, specifically, how the parties intend to structure their team, and what work each party plans on performing. Absent specific provisions, courts will view teaming agreements as mere “agreements to agree” Such “agreements to agree” are generally considered unenforceable.
A 2013 case out of Virginia, Cyberlock Consulting, Inc. v. Information Experts, Inc., is particularly instructive on this point. The plaintiff, Cyberlock Consulting, Inc. (“Cyberlock”), entered into two separate and distinct teaming agreements with the defendant and prospective prime contractor, Information Experts (“IE”). In the first agreement, the parties included very specific terms that demonstrated the parties intent to be bound, and laid out the structure of the parties relationship, and their performance in connection with the subject procurement. The agreement had appended to it a very detailed breakdown of the scope of work to be completed by each party in the event of award. Also attached was a formal subcontract agreement. The teaming agreement clearly stated that, if IE was awarded the prime contract, IE would, “within five (5) business days from date of award…enter into the subcontract attached to this Agreement.” Lastly, the first teaming agreement identified a number of bases that could result in its termination. None of those bases included the failure to agree upon the terms of a subcontract agreement.
In contrast, the second Cyberlock/IE teaming agreement (which pertained to a different solicitation) lacked the attention to detail, and the explicit assignment of specific, discrete tasks, which was evident in the first teaming agreement. It identified only a generic “percentage of work” to be completed by each party. Moreover, the parties did not attach a draft subcontract to the second teaming agreement, as they did with the first agreement.
Not surprisingly, problems eventually arose in connection with the second teaming agreement. Although IE received the prime contract in connection with the second solicitation, after negotiating for a month, IE and Cyberlock were unable to agree on a subcontract agreement. Cyberlock then sued IE, seeking enforcement of the teaming agreement. But the Court found that the agreement was not enforceable. Specifically, the judge concluded that the second teaming agreement simply was not definitive enough to qualify as an enforceable agreement. The problem was that the parties left too many details up in the air; too many issues subject to too many conditions.
Other cases since Cyberlock have followed similar logic. For example, in Trianco, LLC v. Int’l Bus. Machines Corp., the Court held that a teaming agreement was unenforceable under New York law because the agreement omitted a material term, specifically, the price for performing the subcontract work. Therefore, the Court concluded, the teaming agreement was merely an unenforceable “agreement to agree.” Cases that have gone the other way, and found that teaming agreements were enforceable, all did so based on the inclusion in those teaming agreements of very specific terms.
The takeaway lesson? Sweat the little stuff. Always make sure to include details in your teaming agreement. Make sure that you have a clear statement of work, and – more specifically – a clear explanation of what specific portions of the to-be-awarded contract each team member plans to self-perform. (For extra credit, calculate the percentages of work associated with those tasks, so that you can clearly demonstrate that your team is complying with the limitations on subcontract provisions, discussed in part II of our series!) You should also include a clear statement of subcontract pricing. The teaming agreement should state, in clear, unequivocal language, that it is the parties intent to be bound by the agreement, and that the proposed prime contractor “SHALL,” upon award of the contract, enter into a subcontract with the proposed subcontractor within a certain time period. A provision regarding the duration of the teaming agreement, which limits the termination of the agreement to limited circumstances (such as, only upon the award of the contract to someone other than the prime, or the termination of the solicitation, etc.) is also advisable. Ideally, you should attach a copy of the subcontract you plan on entering into, should the proposed contractor receive the award. Including these provisions almost certainly guarantees that your teaming agreement will be found to be enforceable. But just in case, do some research and make sure that, if possible, your choice of law provision selects a state that favors the enforceability of teaming agreements.
Another important concept to keep in mind when you are a small business is exclusivity. Exclusivity clauses are provisions in teaming agreements that prohibit one or both parties from entering into other teaming arrangements. This is helpful from small businesses because it can keep larger businesses from “playing the field.”
Consider the following example. SmallBiz, Inc. and LargeCo are going to team for purposes of competing for Project X. Project X is a 100% small set-aside procurement. SmallBiz, therefore, would be the prime, with LargeCo as the subcontractor/teaming partner. Now, without an exclusivity provision, LargeCo could go around and enter into teaming agreements with SmallBiz, as well as all of SmallBiz’s competitors, who will also be competing for the Project X contract award. It is in LargeCo’s interest to pursue such a strategy. If they do, no matter which small business offeror gets the contract, LargeCo gets to perform as the teaming partner/subcontractor. In other words, LargeCo wins no matter what – but, SmallBiz does not.
Presumably, the reason SmallBiz was teaming with LargeCo was so that SmallBiz could get a leg up and be a stronger competitor, as compared to the other small businesses competing for the Project X award. Maybe SmallBiz was relying on LargeCo’s past performance and experience; maybe SmallBiz was relying on LargeCo’s extensive capital resources, or capabilities. But if LargeCo has entered into teaming agreements with all of the offerors (or even some) then all of those offerors are getting the same LargeCo “boost.” SmallCo isn’t gaining any competitive edge because all of its competitors are also relying on the same LargeCo teaming partner’s experience, resources, or capabilities. SmallBiz, therefore, does not get a leg up over its competitors. Which kind of defeats a major point of teaming.
So how do you avoid this? With an exclusivity provision. As a small business, it is critical that your teaming agreement prohibit your teaming partner from entering into multiple teaming agreements. Make sure that they are teaming with you, and you alone, and that you are the only competitor who be getting that “boost” from your teaming partner’s past experience or capabilities, etc. Sometimes, especially in cases of multiple-award contracts, exclusivity provisions are even boarder. They might prohibit the team members from entering into teaming agreements with regard to any task order issued under a MAC/MATOC. Either way, this is a vital provision that needs to be negotiated before entering into a teaming agreement.
As with any contract, it is important that the parties to a teaming agreement understand and agree with each other’s expectations in terms of division of work, control, and communication. Nowhere is this more important than in the small business context, where small business contractors need to make sure that the performance of a contract does not negatively impact their small business size or status. It is imperative that small business contractors discuss, and negotiate, teaming agreement (and subcontract) terms that ensure that affiliation, ownership and control issues are dealt with, and that all requirements set forth in the small business regulations – including those concerning performance of work requirements –be met. A good way to cover these is to include provisions specifically outlining each contractor’s scope of work, responsibilities, and authority. If you follow our advice above, concerning enforceability, it is likely that you have covered much, if not all, of these types of provisions already. But if not, make sure these crucial provisions are included.
In addition, make sure to discuss other standard contract provisions such as how to handle disputes and disagreements, applicable processes and procedures, and communication requirements. If you have questions, consult a legal professional.
Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.
Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.