10th Annual Defense Trade Show

1. 1
Teaming and Limitations on
Subcontracting in Federal
Contracts
Jennifer M. Miller
Wyrick Robbins Yates & Ponton LLP
Raleigh, North Carolina

2. 2
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

3. 3
Why Team?
• Combined capabilities
• Access to set-aside contracts
• Past performance and experience in a
new area

4. 4
Joint Venture or Subcontract?
• Key indicator is the sharing of • Cannot share profits and losses
profits and losses
• Both companies can deal with • Subcontractor has no privity
the Government with the Government
• Both parties can have relatively • Subcontractor cannot “control”
equal control (subject to some the contract
limitations when certain
“preference companies” are
involved)
Where a “preference company” is involved, SBA requirements
may dictate the form that your team must take

5. 5
Joint Venture Requirements
Where One JV Partner Is a
“Preference Company”

6. 6
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

7. 7
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

8. 8
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

10. 10
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

11. 11
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)

13. 13
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)

14. 14
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)

15. 15
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”

17. 17
Subcontracting Limitations: SB, 8(a),
WOSB, EDWOSB, or SDB Price Preference
Service (non- General construction Special trade Supplies or products
construction) contractor
construction
Prime must perform Prime must perform Prime must perform Prime must perform
50%+ of cost of the 15%+ of the cost of 25%+ of the cost of 50%+ of the cost of
contract incurred for the contract (not the contract (not manufacturing (not
personnel with its including the cost of including the cost of including cost of
own employees materials) with its materials) with its materials) must be
own employees own employees performed by the
Prime

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Subcontracting Limitations: SDVOSBCs
Service (non- General construction Special trade Supplies or products
construction) contractor
construction
Prime must perform Prime must perform Prime must perform Prime must perform
50%+ of cost of the 15%+ of the cost of 25%+ of the cost of 50%+ of the cost of
contract incurred for the contract (not the contract (not manufacturing (not
personnel with its including the cost of including the cost of including cost of
own employees or materials) with its materials) with its materials) must be
employees of other own employees or own employees or performed by the
SDVOSBCs employees of other employees of other Prime or other
SDVOSBCs SDVOSBCs SDVOSBCs

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Subcontracting Limitations: HUBZone
SBC (Set-Aside or Price Preference)
Service (non- General construction Special trade Supplies or products
construction) contractor
construction
Prime must perform Prime must perform Prime must perform Prime must spend at
50%+ of cost of the 15%+ of the cost of 25%+ of the cost of least 50% of the
contract incurred for the contract (not the contract (not manufacturing costs
personnel with its including the cost of including the cost of (not including the
own employees or materials) with its materials) with its cost of materials) in
employees of other own employees. own employees. a HUBZone. One or
HUBZone SBCs 50% of the cost of 50% of the cost of more HUBZone SBCs
the contract incurred the contract incurred may combine to
for personnel with its for personnel with its meet this
own employees or own employees or requirement.
employees of other employees of other
HUBZone SBCs. HUBZone SBCs.

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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

22. 22
Teaming Agreements – Key Provisions
1. Identify the contract at issue
2. Identify whether the parties will form a JV
or prime/sub relationship
3. 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 provision
11.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

32. 32
Joint Venture Agreements – Key
Provisions
1. Parties' respective shares of the JV
2. Name of the JV
3. JV's place of business
4. Business opportunities to be pursued (3 contract
awards over 2 years rule; possibility of forming
additional JVs)
5. Management structure of JV
6. 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 activities
8. Veto rights
9. Banking
10. Insurance
11. Administrative procedures for invoicing, payment,
etc.
12. Responsibility for preparing and executing proposals,
claims, etc.

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Questions?
Jennifer M. Miller
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina
(919) 781-4000
jmiller@wyrick.com
www.wyrick.com