Join partners Michael Payne and Ed DeLisle at the 2015 National 8(a) Association Winter Conference in Orlando, Florida for their presentation, “How to Effectively Team on a Federal Project.” In this discussion, Michael and Ed will explore the importance of well-crafted teaming agreements and how they are viewed by courts of various jurisdictions. They will also explore the practical implications of negotiating terms from both the prime and subcontractor perspectives, as well as cover the nuts and bolts of executing teaming arrangements on federal projects. For more information, or to register, please visit the National 8(a) Association website.

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Cohen Seglias is a proud sponsor of the 2015 National 8(a) Association Winter Conference, which focuses on the federal, legal and business updates that impact the ever-changing world of federal contracting. This year’s conference will be held in conjunction with the TRIAD Winter Meeting, bringing over 85 additional Small Business Liaison Officers to the National 8(a) conference attendees.

With more than 500 companies and key government stakeholders represented, this is an event you can’t afford to miss!

Michael H. Payne is the Chairman of the firm’s Federal Contracting Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.

Edward T. DeLisle is a Partner in the firm and a member 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.

Last month, Ed DeLisle and Maria Panichelli’s guest article on federal teaming agreements “Common Pitfalls in Federal Contracting” appeared on Onvia’s website. The article is based on Maria’s very successful webinar series on Teaming Arrangements.  The article and webinars address the benefits and drawbacks of teaming arrangements with a focus on how improper teaming can adversely impact a small business’ size status or eligibility for small business programs. The article also provides tips on avoiding teaming pitfalls and outlines best practices in teaming on federal projects.  You can see the full article below:

It’s no surprise that in today’s market, with a growing number of Federal government contracts set-aside for various types of small businesses, teaming relationships are increasingly popular. Large contractors like teaming because it provides them access to contracts for which they would otherwise be ineligible. Small businesses know that teaming is a good way to break into the federal contracting arena, an arena in which experience and past performance can prove critical to securing a contract. By teaming with a more experienced, larger contractor, a small company can acquire the experience needed to secure future federal contracts on its own. However, teaming is not without its downsides.

For small businesses in particular, teaming can pose significant risks. If done improperly, teaming can destroy a concern’s “small” business status, or otherwise render it ineligible to participate in the various Small Business Administration (“SBA”) programs. Small businesses most often lose their status in one of two ways: (1) a finding of “affiliation” pursuant to 13 C.F.R. § 121.103; or (2) violation of the percentage of work requirements set forth at 13 C.F.R. § 125.6. Small businesses need to be educated about these common pitfalls, and how to avoid them. This article seeks to do just that.

Affiliation

“Affiliation” can alter a small business’ size and render it ineligible to compete for small business set-aside contracts. When two companies are found to be “affiliated,” their respective sizes (determined by either revenue or number of employees) are added together; the total is what is evaluated when determining whether the company is actually “small” based upon the SBA’s “Small Business Size Standards.” If the sizes of the two businesses, added together, exceed the applicable size standard, neither can be considered “small.” Accordingly, a finding of “affiliation” is something small businesses want to avoid.

Affiliation is governed by 13 C.F.R. § 121.103, which explains that “concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.” (13 C.F.R. 121 § 121.103(1)). In assessing whether or not two businesses are affiliated, the SBA considers factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships; the SBA may find affiliation even though no single factor is sufficient to constitute affiliation. (13 C.F.R. 121 § 121.103(2, 5)). In the teaming context, affiliation generally occurs in one of two ways.

Teaming Partners

First, a teaming relationship on a single project can result in a finding of affiliation under the “Ostensible Subcontractor” rule. The Ostensible Subcontractor rule holds that a small business that “is unusually reliant” on a subcontractor will be deemed affiliated with that subcontractor for size determination purposes. In other words, a small businesses can run afoul of the SBA’s affiliation rules if the small business teams with a subcontractor on a particular project, but then allows that subcontractor to control that project. In order to determine whether the subcontractor is, in fact, in control of a given project, the SBA will look to a variety of factors, including, but not limited to: whether it is the small business prime contractor or the subcontractor that is performing the vital components of the project; whether the small business prime contractor is financially reliant on the subcontractor; whether the small business has the requisite experience or managerial capability to control the project; and whether it is the small business prime contractor or the subcontractor who is, in reality, controlling the means and methods necessary to successfully complete the project. If the subcontractor appears to be the party in control, the SBA is likely to find that the small business prime contractor and subcontractor are affiliated.

Affiliation can also occur when there is an ongoing relationship between two companies, where one business appears to control the other, or where the two companies appear too closely related or intertwined. In the teaming context, this type of general affiliation can occur if a small business repeatedly teams with the same subcontractor/teaming partner, is financially reliant on its teaming partner, shares employees, office space, equipment or other resources with the teaming partner, or if the small business and its teaming partner have common ownership. Familial relationships, or previous employee/employer relationships are also considered to be signs of affiliation.

By now you should be asking, “How do I avoid affiliation?” The advice we give our clients is simple: maintain control over your company and every project on which you are the prime contractor. If you are going to team with a subcontractor, make sure you do not have other ties to that company. If possible, avoid teaming with companies owned by family members, or companies at which you were previously employed. If you must team with such a company, be very careful that you do not appear reliant on, or intertwined with, that business. Hire your own employees, rent your own office space, and secure your own equipment. Do not allow your company to rely too heavily or regularly on a teaming partner for financial support, and avoid having another business serve as a guarantor of your credit line. Team with different concerns, rather than repeatedly teaming with the same company, especially if you have other ties (financial, familial, or work-related) to that company. Overall, maintain corporate formalities, and ensure that all transactions with other companies are made at arms-length. These tips should help you avoid a finding of general affiliation.

To avoid the perils of the “Ostensible Subcontractor” rule, the same type of principals apply. You may enter into subcontracts, but make sure that you retain control over how the subcontract is performed. Do not rely on subcontractors for financial assistance, or expect them to supply the managerial experience needed to complete the project. Perhaps most importantly, do not allow subcontractors to take over or perform the most vital aspects of the contract. Also, make sure your company performs the requisite percentage of work, as discussed below.

Percentage of Work Requirements

The SBA regulations are very specific about the percentage of work a small business prime contractor must perform on a project to remain eligible for that project, and future small-business set-asides. 13 C.F.R. § 125.6 sets forth these “Prime Contractor Performance Requirements” (aka limitations on subcontracting). Each type of small business has its own requirements, and the percentages further vary depending upon the nature of the contract (services, supplies/products, general construction or specialty construction) being performed. For example, an 8(a) business performing a general construction contract is governed by different self-performance requirements than a SDVOSB performing a supply contract. It is critically important to pay attention to how these percentages are calculated for your particular type of business, and the nature of your contract. In some cases, the required percentage of work is calculated using the total cost of the contract; in others it is calculated using the cost of the contract incurred for personnel. The applicable work percentage requirements for each type of small business can be found as follows:

• 8(a) – 13 C.F.R. § 125.6(a)
• WOSB/EDWOSB – 13 C.F.R. § 125.6(a)
• VOSB/SDVOSB – 13 C.F.R. § 125.6(b)
• HUBZone – 13 C.F.R. § 125.6(c) and § 121.600

If a small business fails to self-perform the amount of work required by these regulations it may have to surrender its small-business status and could thereby lose its ability to compete for future set-aside contracts. It is, therefore, vital to demonstrate to the SBA your compliance with these regulations. To that end, small business prime contractors should include in every teaming agreement (and resulting subcontract) the percentages (by number) and the specific scopes of work (by description) that will be performed by the small business prime contractor.

In summary, it is important for small business contractors to remain cognizant of the rules pertaining to affiliation and self-performance when entering into teaming agreements. Failure to pay attention to these issues could result in the loss of a concern’s eligibility to participate in small business programs. In contrast, if a small business is aware of the issues above, is careful to avoid such pitfalls, and properly structures its teaming relationship, teaming can be a rewarding, and very profitable experience. If you have any questions about how to properly team, contact a legal professional.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Teaming Agreements in the world of federal procurement are commonplace.  They are formally encouraged by the government at FAR part 9.602 (wherein it states that “Contractor team arrangements may be desirable from both a Government and industry standpoint in order to…complement [contractor]’s capabilities; and [o]ffer the Government the best combination of performance, cost, and delivery…”) and can be critically important to small, and small disadvantaged, business concerns in winning small business set-aside contracts of all types.  Very often a government agency will consider the collective strength of a team’s credentials in awarding such contracts, particularly if the procurement is of the larger variety.  But what if a government agency awards a contract based on a teaming agreement, and you and your teammate cannot then reach accord on a subcontract agreement?  Can you sue to enforce the teaming agreement?  A recent decision from Virginia provides some guidance.

Cyberlock Consulting, Inc. v. Information Experts, Inc. was truly a tale of two agreements.  The plaintiff, Cyberlock Consulting, Inc. (“Cyberlock”), entered into two separate and distinct teaming agreements with the defendant, Information Experts (“IE”).  In both cases, IE was the prospective prime contractor.  In the first agreement, the parties very clearly set forth their intent to be bound to each other.  The language was clear.  Reinforcing that intent, 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.

The second teaming agreement, which pertained to a different solicitation, stood in stark contrast to the first.  The second teaming agreement identified only a generic “percentage of work” to be completed by each party.  The attention to detail, and the explicit assignment of specific, discrete tasks, which was evident in the first teaming agreement, was conspicuously absent in the second.  Moreover, the parties did not attach a draft subcontract to the second teaming agreement, as they did with the first agreement.  In addition, the second teaming agreement contained language providing for a number of situations that could result in termination of the relationship, including the “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.”

While I find it a little odd that Cyberlock would agree to terms that were so drastically different than those contained in the first teaming agreement, I’m sure there were reasons that it did so.  Perhaps there was insufficient time to fully negotiate the second teaming agreement and Cyberlock simply trusted IE, especially after successfully negotiating the first agreement.  Whatever the reason, it would come back to haunt Cyberlock later.  Let’s consider what happened.

After entering into the first teaming agreement, the government agency awarded IE a prime contract; IE and Cyberlock quickly executed the subcontract agreement attached to the teaming agreement.  No problem.  The problems arose in connection with the second teaming agreement.  Although IE received the prime contract in connection with the second solicitation as well, after negotiating for a month, IE and Cyberlock were unable to agree on a subcontract agreement.  Cyberlock was NOT happy and sued IE.

It was up to a judge to determine whether the second teaming agreement was enforceable.  It was Cyberlock’s position that it had a deal with IE.  If IE was awarded a contract by the government, Cyberlock was entitled to a share of the work, in this case 49%.  IE saw it differently.  IE argued that the parties did not have an agreement at all.  All they really did was “agree to negotiate later.”  Such agreements, according to IE, were not enforceable.  The judge agreed with IE.

Citing to Virginia law, 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, and subject to too many conditions, if IE were able to secure the prime contract.  Most disturbing, the court went on to state the following:  “Indeed, calling an agreement something other than a contract or a subcontract, such as a teaming agreement or a letter of intent, implies ‘that the parties intended it to be a nonbinding expression in contemplation of a future contract.'”  Wow…what is one to take from a statement like that?  The FAR specifically refers to, and encourages, teaming agreements.  How does that position comport with this court’s view?

While I think that the court went a hair too far in making that last statement, it does draw attention to something that is often taken for granted:  the assumption that the document that you’re signing is enforceable.  It’s actually something that you need to consider when it comes to teaming because, if successful, the parties do expect a second agreement, a subcontract (which, incidentally, is where all the money is) to follow their teaming agreement.  That said, it’s not an issue that arises very often in my practice.  Why?  Well, I think because, very often where teaming takes place, the parties have a distinct need for each other.  If, for example, a procurement is set aside for small disadvantaged businesses, such as 8(a) concerns or SDVOSBs, the small disadvantaged business may need a large business concern’s experience, or manpower, or bonding capacity to help it.  On the flip side, the large business concern needs the small business concern for it would not have access to this set-aside work at all without the small business.  It is assumed that things will work out just fine if an award is made.  Let this opinion be a lesson that you really do need to consider the terms of your teaming agreement and, moreover, consider the possibility that things could go wrong.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

A seminar on “How to Win Federal Construction Contracts with Teaming Arrangements” is being held at three different locations.

Dates/Locations:
October 5, 2010 – Hyatt Regency Dallas, TX
October 7, 2010 – Los Angeles Airport Marriott, CA
October 28, 2010 – Hilton Philadelphia Airport, PA

Time:
8:00a.m.-1:00p.m.

Cost:
$195 per person and $95 for each additional person from the same company.

The world of federal construction contracting has changed.

Cohen Seglias partner and Chairman of the Firm’s Federal Construction Practice Group Michael H. Payne will address the following topics:

  • What is a teaming arrangement?
  • What should be included in a teaming agreement?
  • What types of joint ventures are permitted in federal construction contracting?
  • What are the requirements for a joint venture agreement?
  • How can large business concerns benefit from small business set-asides that seem to exclude them from participation in many federal projects?
  • Are there any circumstances where a large business can affiliate with a small business concern?
  • What happens if two or more small businesses join to form a team?
  • How can Service Disabled Veteran-Owned Small Businesses, HUBZone contractors, and 8(a) firms leverage their size status and preferential status to maximize participation in larger dollar value procurements?
  • How can a prime contractor take advantage of the past performance of a team member to increase its competitive position?

Whatever your experience level is with teaming arrangements, this seminar will provide you with the tools to navigate the new landscape of federal government contracting.

Please click here for complete seminar details and registration form. For questions, please contact Rachel McNally at (215) 564-1700 or email rmcnally@cohenseglias.com.

A seminar on “How to Win Federal Construction Contracts with Teaming Arrangements” is being held on February 23, 2010, at the Hyatt Regency Grand Cypress Hotel in Orlando, Florida. The program is scheduled to take place from 8:00 a.m. to 1:00 p.m. and the seminar fee is $195, with a fee of $95 for additional people from the same company.

As contractors are well aware, the world of federal construction contracting has changed. Sealed bidding has largely given way to contracting by negotiation (“best value’), and the government is using task order contracts for construction more frequently. These large dollar value multi-year procurements are often beyond the economic reach of many small and medium-sized contractors. The negative effect on small businesses has not gone unnoticed.

The way to survive and thrive in this new world of federal construction contracting is to engage in various forms of teaming arrangements. These include joint ventures, committed subcontracting, large and small business teaming agreements, and small business subcontracting. In fact, the government often includes provisions in solicitations that encourage and promote teaming and joint ventures. These provisions permit small and medium-sized businesses to compete for contracts they would otherwise be deemed ineligible.  To further foster small business participation, the government also uses set-aside procurements that limit competition to HUBZone business, Service Disabled Veteran Owned firms, or 8(a) concerns.

This seminar is being presented by the law firm of Cohen Seglias Pallas Greenhall & Furman and the Chairman of the Firm’s Federal Construction Practice Group, Michael H. Payne, will address the following topics:

* What is a teaming arrangement?

* What should be included in a teaming agreement?

* What types of joint ventures are permitted in federal construction contracting

 * What are the requirements for a joint venture agreement?

* How can large business concerns benefit from small business set-asides that seem to exclude them from participation in many federal projects?

* Are there any circumstances where a large business can affiliate with a small business concern?

* What happens if two or more small businesses join to form a team?

* How can Service Disabled Veteran-Owned Small Businesses, HUBZone contractors, and 8 (a) firms leverage their size status and preferential status to maximize participation in larger dollar value procurements?

* How can a prime contractor take advantage of the past performance of a team member to increase its competitive position? hatever your experience level is with teaming arrangements, this seminar will provide you with the tools compete in the new landscape of federal government contracting.

To register, please respond by February 18, 2010 by clicking here.  For questions, please contact Crystal Garcia at (215) 564-1700 or email cgarcia@cohenseglias.com.