When properly structured, teaming agreements allow both large and small businesses to expand their federal government procurement opportunities, complement one another’s capabilities, and offer the government the best combination of performance, cost, and delivery. Yet, when parties to a teaming agreement fail to pay close attention to applicable rules and regulations, including the Federal Acquisition Regulation (“FAR”) and U.S. Small Business Administration (“SBA”) regulations, they risk penalties ranging from disqualification to civil or criminal prosecution. In light of robust suspension and debarment activities by the federal government in recent years, changes to applicable regulations, and the increased risk of size protests, contractors must carefully structure teams for small business set-aside contracts.
 
This article focuses on avoiding the potential risks that arise when a small business teams with a large business with the intent of subcontracting part of the work on a set-aside contract to the large business. Although such arrangements are common and generally permissible, contractors must ensure that they do not run afoul of the so-called “ostensible subcontractor rule,” which would render the team ineligible for award. Contractors may avoid affiliation under the ostensible subcontractor rule through careful attention to the FAR and SBA rules and regulations. This article provides a summary of key tips to keep in mind when developing a teaming relationship or drafting a teaming agreement for a small business set-aside.
 
What Is The Difference Between A Teaming Agreement And A Joint Venture, And Which
One Is Right For My Company?
 
A teaming agreement is an agreement between two independent business entities to work together for the specific purpose of obtaining and performing a contract. The government generally recognizes the integrity and validity of such arrangements. Pursuant to a teaming agreement, a potential prime contractor may agree with one or more other companies to have the company or companies act as subcontractor(s) under a specified government contract or acquisition program.
 
A joint venture, on the other hand, is an association of two or more individuals or companies that form a partnership for the purpose of engaging in a single defined project. The members of the joint venture generally share profits and losses.
 
With limited exceptions, parties to a joint venture are deemed affiliated by the SBA for the purpose of determining size status for a particular procurement. Teaming agreements, on the other hand, may provide an avenue for companies to work together to compete for government contracts without being deemed affiliated and in violation of the SBA’s size standards.
 
How Can My Company Best Minimize The Risk Of Affiliation And Comply With
Limitations On Subcontracting?
 
Generally, under existing regulations, a small business must perform at least 50% of the cost of contract performance incurred for personnel of a set-aside contract with its own employees. Pursuant to the National Defense Authorization Act of 2013 (NDAA), small business prime contractors generally are limited to subcontracting no more than 50% of the amount paid to the small business prime under the contract; however, neither the SBA regulations nor FAR have been updated to reflect the changes implemented by the NDAA. As application of the subcontracting limits is often complex, particularly given the changes implemented by the NDAA, contractors may wish to consult with an experienced attorney to ensure compliance.
 
Even if a small business meets the applicable subcontracting limits, the government may find parties to a teaming agreement to be “affiliated” for purposes of size standards if the proposed prime contractor is unduly, or unusually, reliant on its teaming partner(s), or if the teaming partner(s) will perform primary and vital requirements of the contract. This rule, referred to as the ostensible subcontractor rule, seeks to prevent large firms from forming relationships with small firms for the purpose of evading the SBA’s size requirements.
 
What Are The Risks Of Non-Compliance?
 
Where affiliation exists, the SBA adds the size of the teaming partners together for eligibility purposes. As such, affiliation may render a team ineligible for award or subject to protest.
 
Other potential sanctions where ineligible parties willfully seek and certify eligibility to receive work that is set aside, reserved, or otherwise classified as intended for award to small businesses, include fines up to the amount paid by the government under the contract itself, suspension and debarment, liability under the False Claims Act, and civil and criminal prosecution. The federal government increasingly is investigating and prosecuting ineligible businesses that obtain small business set-aside contracts.
 
Given such risks, contractors must be proactive in evaluating compliance with applicable rules and regulations. Contractors must be familiar with such rules and must actively watch for and avoid red flags that may signal a risk of affiliation.
 
How Can My Company Best Minimize The Risk Of Affiliation And Comply With
Limitations On Subcontracting?
 
In determining whether affiliation exists, SBA considers the “totality of the circumstances,” including, but not limited to, the following factors:
 
• Division of Work: The small business must perform primary and vital requirements of the contract with its own employees. The “primary and vital” requirements of a particular contract are determined by all aspects of the solicitation, proposal, contract, and relationship between the parties.
• Skills and Experience: The small business must have skills and experience applicable to the primary and vital requirements of the contract.
• Proposal Support: The small business must lead proposal efforts.
• Use of Resources and Personnel: The small business and its subcontractor must not commingle resources, personnel, equipment, and/or office space.
• Teaming Agreement and Proposal Terms: The teaming agreement and proposal must designate the small business as the lead contractor. The teaming agreement should also make clear that the scope of the subcontractor’s work complies with the applicable limitations on subcon-tracting.
• Contract Management: Although per-forming the contract management function, in and of itself, is not enough to avoid affiliation, in addition to performing the primary and vital work required by the contract, the small business must take primary responsibility for contract management.
• Incumbency: A subcontractor’s incum-bency may indicate unusual reliance, particularly when coupled with other risk factors. As such, contractors should treat a subcontractor’s incum-bency as a potential risk factor for affiliation.
 
Conclusion
 
Of course, whenever possible, contractors should avoid any potential for affiliation. When ostensible subcontractor risk factors do exist, however, structuring the relationship carefully may help contractors avoid a successful size protest. Both large and small businesses alike should keep the factors highlighted above in mind when forming teaming relationships.