Pursuant to Federal Acquisition Rule (“FAR”) 9.603, the U.S. Federal Government (the “Government”) will recognize the integrity and validity of contractor team arrangements. The Government uses the phrase “contractor team arrangement,” to describe two (2) types of procurement teams: (1) a joint venture or (2) a contractor team, which most people refer to as a “teaming agreement.” See FAR 9.601.
A joint venture is a business relationship entered into by two or more independent business entities to create a completely new partner relationship for a specific purpose or project. Each of the two or more business entities invests capital in the venture, provides management support for the venture, and participates in the profit or loss of the venture. See 13 CFR 121.103(h).
A contractor team, on the other hand, is a prime contractor/subcontractor relationship agreed upon prior to the submission of a bid proposal for the express purpose of working on a specific project as a group or team. The potential prime contractor agrees with one or more companies, who would serve as subcontractors, to cooperate to pursue, secure, and perform government contracts.
While both joint ventures and contractor teams offer businesses opportunities to bid and compete for government contracts that they otherwise might not have, the two teaming arrangements have some “big” differences.
There are five major differences between a contractor team and a joint venture: (1) Formation; (2) Control; (3) Risk; (4) 3/2 Rule; and (5) Privity with the Government.
Forming a successful joint venture requires more time than the formation of a contractor team. Unlike contractor teams, joint ventures must be a formal legal entity – typically either a partnership, limited liability company or corporation. And various required forms, fees and other requirements go along with the creation of a legal business entity. Also, the two or more businesses coming together to form the joint venture must create a joint venture agreement which will need to specify the following, among other things: ownership, approval and management, profit sharing, contributions, exit strategy, and termination.
To form a contractor team, a prime and subcontract need only determine the scope of the subcontractor’s performance and any other details required by the solicitation and memorialize those details in a teaming agreement. But a contractor team should be sure to avoid falling under the ostensible subcontractor rule if bidding for award of a contract that has size requirements, such as contracts “set aside” for small businesses. An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract, or of an order under a multiple award schedule contract, or a subcontractor upon which the prime contractor is unusually reliant. 13 CFR 121.103(h)(4). A contractor and its ostensible subcontractor are treated as affiliates for size determination purposes, meaning that the revenues and employees of both companies are combined. If a losing bidder protests a winning contractor team based on the ostensible subcontractor rule, and the awarding agency finds that the prime and subcontractor were affiliated, then the contractor team will probably lose their government contract for failing to meet the size requirements of the set aside procurement.
In a contractor team, the prime controls the team. The prime must control the team or risk violating the ostensible subcontractor rule – and open the door for ostensible subcontractor protests in a small business set aside solicitation. While the subcontractor will essentially control their portion of the project, the prime must maintain control of the project in its entirety.
Unlike a contractor team, a joint venture is an actual partnership arrangement in which ownership of the entity is owned by and divided between the members. In a contractor team, the prime contractor has direct control over the teaming members and each party remains its own separate and independently controlled entity. Contractor teams wherein primes and subcontractors have equal control may be seen and/or treated as a form of informal joint venture. Such a structure can disqualify a prime for award of a contract that is set aside for small businesses with owners meeting particular preferred designations – like Woman-owned, Minority-owned, Veteran-owned, etc. When determining how much control a subcontractor has on a contractor team, the Small Business Administration considers the extent to which the prime is subject to the “negative control” of its subcontractor. One example is bonding. If the prime can only bond the job through the subcontractor or with the subcontractor guaranteeing the bond, the SBA has ruled that the prime is subject to the subcontractor’s discretion to withdraw the bond or the guarantee and as such the SBA has found the prime to lack sufficient control and deemed the arrangement a joint venture.
Although both types of team arrangements involve risk, the risks shouldered by joint ventures differ from the risks carried by contractor teams.
Because a prime is in control of the contractor team, the prime bears most, if not all, of the responsibility for the contract performance. The prime is ultimately responsible for ensuring that the contractor team performs the contract obligations in line with the contract and any rules or regulations related to the contract. So if a subcontract does not perform properly or violates a governing rule or regulation, the prime will likely suffer as a result. If there is a financial loss on the project, the prime will bear the majority of the loss.
The joint venture members share the loss in accordance with the joint venture agreement. Joint ventures also deal with the risks inherent in any merger or acquisition. It may be more difficult than imagined to join two existing businesses with different goals or cultures or to have all entities contribute an amount of resources that all entities deem fair.
The 3/2 Rule
Unlike a contractor team, a joint venture cannot submit more than three (3) offers on federal procurements over a two (2) year period starting from the date of the submission of the first offer. A contractor team may bid together on an unlimited amount of projects.
Upon award of a contract, a prime contractor has privity of contract with the Government. The subcontractor(s) in the contractor team does not. A joint venture does not have this issue as the joint venture has privity of contract with the Government.
While the majority of small businesses feel most comfortable with a contractor team arrangement, primarily because of the investment and liability concerns, both types of team arrangements can be profitable approaches to government contracting. Each procurement and each team arrangement present unique opportunities and challenges that should be examined from both a business and a legal perspective before choosing the right vehicle to use.