Frenemies: The Story of a Prime Contract/Subcontract Relationship

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2 Frenemies: The Story of a Prime Contract/Subcontract Relationship Breakout Session # B-13 William Weisberg Partner Law Offices of William Weisberg PLLC Date: July 28, 2014 Time: 2:30 p.m. 3:45 p.m.

3 Agenda Introduction the Big Picture The First Phase: Potential Positives and Red Flags Mutual Courtship: The Teaming Agreement Meeting the Parent: The Proposal Phase Signing on for Life: The Subcontract Disagreements with or Without Divorce: Disputes Case Study 2

4 Introduction: The Big Picture Is this even a Government Contract? The Role (and Rules) of Privity of Contract. Who is a Subcontractor? And What About Vendors and Suppliers? False Claims and Debarment. 3

5 The First Phase: Signs of Attraction History Between the Companies Good, Bad, or Indifferent? History Between Other Subcontractors Can Everyone Get Along? Corporate Experience: What It Is, and How to Get It? Responsibility (per FAR part 9): A Good Template To Use. History with the Customer Beyond Past Performance. History with the Customer: Some Past Performance Is More Important Than Others. 4

6 Signs of Attraction. Some Guideposts: 1. The Last Contract(s): If You Don t Have Them, Get Them. 2. Any Protests Last Time? What Was Important and What Was Not. 3. Draft Solicitations: Sections L&M, Changes Between Drafts, and Beyond. 4. Early Thoughts: LPTA or Best Value? Or Both, or Neither. 5

7 Signs of Attraction. Socio-Economic Issues. Small Business or Other Status: How Will It Impact the Procurement? Status: How Will It Be Impacted By the Procurement? Any Other Likely Scored Evaluation Criteria, Beyond the Norm? 6

8 First Phase: Potential Red Flags Standard Stuff That Most Firms Ignore: 1. D&B and Basic Corporate Diligence. 2. All Past Performance Reports. 3. Protests and Claims Wining and Losing. 4. DCAA/DCMA/GSA Audits. 5. Qui Tam Actions and Outliers. 7

9 Red Flags Potential OCI/PCI Issues. 1. Examine from Prime and Subcontractor Perspective. 2. Examine from Current and Contingent Hire Perspective. 3. Assume OCI: What is the Mitigation Plan? Are There Any Non-Disclosure or Non-Compete Issues, or Exclusive Teaming Agreements Hanging Around? 8

10 Courtship: The Teaming Agreement Always keep in mind that Teaming Agreements are construed under state, not federal law. The FAR provides guidelines for Contractor Team Arrangements (FAR part 9.6); these are different from GSA MAS Contractor Team Arrangements. Teaming Agreements may become evidence in prime/sub disputes, GAO or Court of Federal Claims bid protests, and particularly in SBA or VA size or other status protests. 9

11 Teaming Agreements Choice of law is important: pick a state that has hosted government contract disputes, and know what the law there says. The government customer doesn t want to get involved, and won t enforce the agreements for you, nor keep them from being enforced. There has to be something to enforce at all are the parties being committed to do something, or not do something? Does the Teaming Agreement violate provisions of any other agreement (i.e. an existing subcontract or non-compete)? Key Issue: Work Allocation. Other Key Issue: Do you include a subcontract at this stage? 10

12 Teaming Agreements Cyberlock Consulting, Inc. v. Info. Experts, Inc., 2013 WL (E.D. Va., April 3, 2013). Information Experts ( IE ) was the prime, Cyberlock was the sub. Pretty generic Teaming Agreement, with a 51/49 work split. No subcontract was attached; agreement would terminate if the parties failed to agree on a subcontract. Parties couldn t agree; Cyberlock sued to get a 49% subcontract. 11

13 Teaming Agreements The Virginia court first held agreements to agree were not contracts. The court held that the standard this agreement supersedes everything else language meant what it said. The court found that the enter into a subcontract later language meant that they did not intend the Teaming Agreement to be binding. They key element appears to be the fact that with no subcontract attached, and several conditional elements, there was not enough to create a stand-alone, enforceable contract. The case is currently on appeal. 12

14 Teaming Agreements Exclusivity provisions tend to be enforced. It is possible to enforce an oral promise to team together. Whether or not the parties start performance in advance of a prime or subcontract can have a significant impact. Including an actual subcontract as an attachment to the Teaming Agreement makes it more likely to be enforced. Agreement should be otherwise legal (i.e. not violate an set-aside or other regulations). Detail, detail, detail (pricing, SOW, duration). Explicit language around obligations 13

15 Compliance Issues Never Too Early To Think About Compliance Issues. The False Claims Act Applies to Subcontractors. Trend in Debarments: All Contractors on the Program. There is a Rebuttable Presumption that any Problems with Subcontractor invoices, Deliverables, etc. are done with the Full Knowledge and Consent of the Prime Contractor. AND VICE VERSA! Prime Contractors are Entitled to Rely in Good Faith on the Representations, Certifications, and Warranties of their Subcontractors. AND VICE VERSA! There is a real-life Smell Test at Work Here. 14

16 Compliance. Prime contractors should require all subcontractors to have a FAR part 3.10 Compliance Program, and to flow that requirement down to their subcontractors. Prime contractors should get explicit reps and certs from subcontractors. Subcontractors should get comfortable with the prime contractor s Compliance Program (that rebuttable presumption works both ways). In case of a problem, taking these steps will help show that you were an innocent conduit (i.e. dupe) rather than a co-conspirator. 15

17 The Proposal (Process) What to do If You Are Competing On Other Programs Against Your Team Members. How Much Mutual Review Does the Proposal Get? How Specific Are the Work Allocations or Other Subcontractor-Specific Promises? What Does the Solicitation Say About How You Meet Corporate Experience Requirements? Who Makes the Protest Decision? Do Your Raise OCI Mitigation at this Stage? 16

18 The Proposal. Dissect Sections L&M, and List Any Other Evaluation Factors You Find (Hint: Look Inside and Beyond the Solicitation). What are the Clearly Scored Factors, and What are Risk Factors That May Not Be Scored? Can You Deduce What the Agency Really Wants from the generic LPTA or Best Value Language? 17

19 Special Issue: Set-Aside Subcontracting The prime contractor is certifying its eligibility for the particular type of set-aside contract. Besides the bright line tests (stock ownership, status of the owner, etc.), the relationship with subcontractors can impact whether or not the prime is eligible for the contract. The subcontractor can be a co-violator of an improper certification. How does this come up? Protests and/or investigations. 18

20 The Subcontract The Earlier the Subcontract Is Negotiated, the Better for Everyone. Always Remember This Is A State Law Agreement Between Two Private Parties. There is NO MASTER LIST OF FLOW DOWN CLAUSES RIGHT FOR EVERY SITUATION. 19

21 The Subcontract Think through the implications of wherever it says Government insert contractor and wherever is says contractor insert subcontractor. Do self-deleting FAR and DFARS clauses self-delete when floweddown in bulk? It depends on what a state court judge says, and she will say Not necessarily. Want to be the subcontractor who finds itself certifying to cost or pricing data it didn t think it had submitted on a FFP contract? Just accept all the boilerplate flow downs. The Commercial Item flow downs at FAR part are the only ones that are required to flow down the parties can agree on more. Does the prime get the same rights the government gets through a flow down clause (i.e. termination for convenience, data rights, audits)? 20

22 The Subcontract The Three Bucket Approach (for Both Sides): 1. Must Have: Due to Law, Regulation, or Critical Corporate Policy/Judgment. (Clue: You Can t Indemnify Against a Problem.) 2. Important, But A Business Issue. 3. Nice to Have. Tip: Can a Side Communication Bridge The Gap? 4. The Christian Doctrine Probably Doesn t Apply Here (Yet). 21

23 Disputes In disputes between primes and subs, state law will likely apply. Choice of law: law of the State of Whatever, and, where applicable, the federal common law of government contracts. Other choice of law issues: pick the place with predictable laws. The Key Element: The diligently perform language out of the prime contract (FAR) Disputes clause. Arbitration (or other ADR) vs. litigation: the pros and cons. Note the interplay of federal and state law, particularly in labor and employment issues. 22

24 Disputes Privity of contract: Subcontractors are NOT in privity with the government. Bid protests: subcontractors can generally not protest to GAO or the Court of Federal Claims. Most subcontractor selection processes are not protestable, except if it is by or for the government (usually GOCO contracts). Contract Disputes Act: lack of subcontractor privity and the need for a Sponsorship Agreement. Key Point: Who Has the Final Say on Filing A Claim? 23

25 Case Study: Check Your Hand-Outs. 24

26 Contact Information William Weisberg Law Offices of William Weisberg PLLC 1750 Tysons Boulevard, Suite 1500 McLean, VA T: (703) F: (703)