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Copyright © 2013 Holland & Knight LLP All Rights Reserved Teaming and Subcontracting Tricky Issues in the U.S. Procurement System 29 October 2013 Alan.

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Presentation on theme: "Copyright © 2013 Holland & Knight LLP All Rights Reserved Teaming and Subcontracting Tricky Issues in the U.S. Procurement System 29 October 2013 Alan."— Presentation transcript:

1 Copyright © 2013 Holland & Knight LLP All Rights Reserved Teaming and Subcontracting Tricky Issues in the U.S. Procurement System 29 October 2013 Alan Dickson 1 Subcontracts

2 Subcontracting Basics Govt needs will drive size and value of procurement, and influence question of whether subcontractors are needed to assist prime, or to conform to Govt’s desires or socio-economic policies. Primes may also independently desire sub support and participation: –Subs may have critical experience, patent rights, tech data ownership; may have been prior incumbents and have key personnel. FAR 19.201(a) recites Govt policy to provide maximum opportunities for participation by small business concerns, veteran-owned small companies, service-disabled vet owned small companies, HUBZone small business, small disadvantaged companies, women-owned small companies, including as subcontractors, consistent with efficient contract performance. 2

3 Subcontracting Basics SBA monitors contractor actions to ensure fair proportion of contracts is placed with small firms. Contractors receiving contracts for more than simplified acquisition threshold must agree to provide maximum practicable opportunities for small business participation in the various special small business categories. FAR 19.702. In negotiated acquisitions, each RFP for a contract or contract mod expected to exceed $650K ($1.5 Mil for construction) that has subcontracting possibilities requires the apparently successful offeror to submit an acceptable subcontracting plan; if agreement cannot be reached with Govt, offeror will be ineligible for the contract. Sealed bid contests: similar. Noncompliant bidder will be ineligible. FAR 19.702. 3

4 Definitions FAR 19.701: “Subcontract” means any agreement (other than employer/employee) entered into by a Govt prime contractor or subcontractor calling for supplies and/or services required for performance of contract, contract modification, or subcontract. Additional definitions for subcontracting (e.g., re: purchase orders, changes and modifications, commercial items): See FAR Subpart 2.1; FAR 44.101; FAR 12.001 4

5 Notable Subcontract Content Reference to prime contract –Base period –Option periods –Extension periods –Scope of Work –Schedule –Price –Payment terms –Clauses and Flowdown Clauses 5

6 Prime Contractor Choices – Sub or Not ? Try to hire away valued employees of other contractors (e.g., prior incumbents). Note: “inevitable disclosure” doctrine may require caution to prevent incoming employees from revealing or utilizing proprietary information gleaned from former employer. Former company should insist on non-disclosure agreement with departing employees. Hiring company should also insist new employee arrive “bare”. 6

7 Possible pre-proposal steps Determine need for subs Check possible conflicts of interest: PCI/OCI Structure of cooperating team: E.g., joint ventures versus teaming agreements. If JV structure is elected and receives award, the JV itself becomes the contractor absent agreement to have one company be prime and the other a sub within the JV structure; also each co-venturer is responsible for acts and omissions of the other. 7

8 Avoid confusing language Thus, if a teaming agreement is NOT intended to create or operate like a joint venture or partnership, the agreement must NOT include language such as “the parties shall jointly propose, jointly perform”, etc. Big no-no! Example from actual contract performed in Germany: misdeeds by team member’s employee. 8

9 Government Consent Project may need Govt consent to prime contractor awards to subs. See generally FAR part 44 as to various requirements in this regard, including as to types of subcontracts that may be awarded. Primes are also looked to (in first instance) for determinations as to “responsibility” of their prospective subcontractors. 9

10 Restrictions Services contracts awarded to “Section 8(a)” small businesses can be restricted to prevent the 8(a) contractor from further subcontracting out the work to be done without the approval of the SBA and the agency contracting officer. FAR 52.219- 12. 10

11 More Restrictions FAR clause 52.219-14, “Limitations on Subcontracting”, applies to contracts reserved for small businesses or 8(a) concerns. Requires certain stated limitations on how much of the work can be further subcontracted down by the original contractor (and, e.g., possibly performed by large business employees). For a non-construction services contract, at least 50 % of the cost of contract performance incurred for personnel must be expended for employees of the small concern. 11

12 Flowdowns Types –Mandatory (required) –Necessary (not required, but in best interest of one or both parties) –Unnecessary Best Practices –Determine what clauses are mandatory or necessary 12

13 Flowdowns Some Common Practices –NOT necessarily recommended !! –Flow down all prime contract clauses –Cookie cutter uniform flowdown list for all subcontracts 13

14 Flowdowns Primes must flow down into subcontracts certain clauses that the Govt deems important for policy reasons (e.g., anti- kickback procedures clause at FAR 52.203-7; social policy clauses such as prohibitions against trafficking in persons; minimum wage and other labor standards provisions) and for general administration and pricing of work – (e.g., cost or pricing data submission requirements)- sometimes only down one level, sometimes all the way down the chain. 14

15 Flowdowns Incorporated by full text, reference, or otherwise Some clauses specify HOW it is to be done “incorporate the substance of this clause” FAR 52.203-7(b)(5), Anti-Kickback Procedures “insert this clause” FAR 52.226-6(e), Promoting Excess Food Donation to Nonprofit Organizations “include the requirements of this clause” FAR 52.222-54(e), Employment Eligibility Verification “include a clause containing all the provisions of this clause” FAR 52.214-26(e) 15

16 Common Practices –Flowdown all prime clauses –Default: cookie cutter for all subcontracts -- Not necessarily recommended 16

17 Streamlining Flowdowns Flowdowns for Commercial Item Prime –FAR 52.212-4, Commercial terms and conditions – commercial items –FAR 52.212-5, Contract terms and conditions required to implement statutes or executive orders – commercial items Even if prime contract is not for commercial items, the subcontract could be written as a commercial item subcontract. FAR 52.244-6, Subcontracts for commercial items. –Maximize use of commercial item subcontracts 17

18 Not required for flowdown ?? A number of clauses required to be placed in prime contracts are not expressly stated to be required in subcontracts awarded by the prime. Examples: “Changes,” FAR 52.243-1; “Termination for Convenience”, FAR 52.249 series. Prime would be stupid to not flow those clauses down, however. Prime needs sub’s cooperation in administration of such clauses. Data Rights – again, Prime should flow down Disputes -- Suggest parties submit their versions and discuss Termination for Default -- prime needs this for SURE! 18

19 Teaming Agreements Such agreements (also called “Team Arrangements”, as in FAR Subpart 9.6) can be used as a structure for prime and sub to cooperate toward award of the prime contract, and to help govern the relationship between prime and sub thereafter. IF THE AGREEMENT IS CAREFULLY DRAFTED ! 19

20 Agreement Drafting TA can cover expected duties of would-be prime and would- be sub: pre-proposal; during negotiations with Govt; post- award of prime contract; roles of key officers of the two (or more) companies, etc. Prime contractor most typically holds more of the marbles; sub(s) may need to closely monitor the drafting of the TA and amendments to it, and be alert to ramifications of possible changes to the agreement and other signs of potential trouble in the relationship. 20

21 Preserving Parties’ Rights Both parties, but Sub especially, should closely review the draft subcontract offered by prime. This could be last chance to ensure the subcontract is logical, fair and accurately tuned to the special skills and duties of the parties. 21

22 Important drafting flaw! It is common to see provisions in TAs that recite when the TA expires – e.g., “if the Govt abandons the project and makes no award”; or “if the Govt refuses to exercise an option to renew the term of the contract”; or upon the award of the contract to another competitor or the prime becoming ineligible to receive the contract. These make some sense. BUT: 22

23 WHAT ABOUT THIS? TAs often state that certain events will terminate the TA – such as Govt deciding not to go through with the procurement, or the award going to another company. Many teaming agreements say that they will expire “upon execution of the subcontract contemplated by this Agreement”. In other words, “we’re done with the TA now. Let’s perform the subcontract.” This can be very dangerous ………………. 23

24 WHY? A common problem: the subcontract drawn up by the TA parties, when examined closely, does not contain all the recitations and promises made by the prime during TA negotiations and drafting. E.g., as to add-on work; as to parts of the work reserved for the sub; as to roles of company officers; as to sub’s ability to participate in decisions impacting the sub’s scope of work, etc. 24

25 Remedy? Ideally, go back and draft or revise TA better! That failing, sub should request amendment of subcontract to expressly include the “missing” duties and promises of the prime toward the sub that were included in the TA. Can be a difficult argument to make ex post facto. Caveat subcontractor! Situation may not have been caused by fraud. If it WAS, prime might be liable in a variety of ways. 25

26 Can Govt Direct Dissolution of Team Arrangements? FAR 9.603: Govt will recognize integrity and validity of TAs if arrangements are identified and company relationships are fully disclosed. Govt will not “normally” require or encourage the dissolution of contractor team arrangements. Have there been exceptions to this? 26

27 Dickson remembers one 23 March 1983 (I think): Reagan’s speech regarding setting up the Strategic Defense Initiative. Shortly thereafter, SDI Director Jim Abrahamson told interested companies in the space and missile business to break up their teaming agreements and compete independently to suggest ideas and technical approaches to enhance chances of tech breakthroughs. By and large, the aerospace companies cooperated with General Abrahamson’s wishes. [Short digression story illustrating hectic first months of the SDI] 27

28 Other Issues Judicial enforcement: Some courts say TAs are “mere agreements to agree” and are thus not true contracts. Other courts have upheld teaming agreements as viable ways to gear up to performing Govt contracts. Other legal issues: choice of law views of prime and sub; choice of venue for suits between teaming partners. Get your lawyers on board before executing the agreement! 28

29 Subs’ claims against Govt Ordinarily, no direct privity with Govt – can’t sue it. –The Government does not deal directly with subs. FAR 44.203(b)(3) “Severin Doctrine”, if carefully invoked, allows subs in proper circumstances to show that prime owes them on the project, especially as result of Govt action affecting both prime contract and subcontract. [In actual Severin case in 1943, Ct of Claims noted that the subcontract expressly NEGATED prime liability to sub for losses caused by the U.S.] Thus, subs should avoid clauses that exculpate prime from liability. 29

30 Claims Contract Disputes Act applies to disputes between Government and prime –Does not apply to subs because no privity with govt. Subject to False Claims Act –Sub may be liable under FCA for causing a false claim or reverse false claim –Privity not required for FCA liability Sub or Prime could be a relator against the other 30

31 Claims “Pass through” claim sponsored by prime to government –Or by lower tier sub to higher tier sub, etc. –Sponsored claim only allowed if prime is liable to sub and cost can be charged to the Government in turn (Severin) –No pass through claim where prime has not been harmed and there is no resulting Government liability 31

32 Claims The prime must certify the sub’s claim –Sub may be asked to certify that there is good ground for the claim Absent an exculpatory clause in the subcontract, Sub has the right to pursue a good faith claim against the Government in the name of the prime even if the prime did not acknowledge the sub’s claim, or pay it or even recognize that the prime itself could claim against the Government. 32

33 Claims – Subcontract Clause: Right of Indirect Subcontractor Appeal -- Means assertion by the sub of the prime’s right to appeal or to prosecute an appeal on the sub’s behalf (FAR 44.203(c)) –Clause may state that prime and sub are equally bound by CO or Board decision –Sub might use this where it is affected by a dispute between the prime and the govt. (e.g., assignment of delay fault, defective work, etc.) 33

34 Termination A subcontractor has no direct contractual rights against the Government upon the termination of a prime contract. A subcontractor may have rights against the prime contractor or intermediate subcontractor with whom it has contracted. Upon termination of a prime contract, the prime contractor and each subcontractor are responsible for the prompt settlement of the settlement proposals of their immediate subcontractors. FAR 49.108-1. FAR Part 49 contains extensive guidance. 34

35 Thank You, South Bay !! Alan Dickson, Partner, Holland & Knight LLP 35

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