Legal Insights: Basics of Contractor Team Arrangements
Spring 2007

Competition for government contracts is increasingly being carried on by teams, not companies. Teams offer important advantages both to prospective contractors and to the government. Before entering into a contractor team arrangement, however, it is important to understand what they are, why they are formed, limitations on their use and their benefits and risks. Part One of this two part series on contractor team arrangements reviews the basics of these arrangements.

Definition
The legal framework defining contractor team arrangements for federal contracts is spelled out in Subpart 9.6 of the Federal Acquisition Regulation. Under the FAR, a contractor team arrangement means an arrangement in which (1) two or more companies form a partnership or joint venture to act as a potential prime contractor; or (2) a potential prime contractor agrees with one or more other companies to have them act as its subcontractors under a specified government contract or acquisition program. FAR 9.601.

A leading commentator, Michael Mutek, notes in his book, Contractor Team Arrangements, that the situation where a prime contractor agrees to subcontract a portion of the work to one or more subcontractors is the most common type of contractor team arrangement. There are, he says, many advantages to parties utilizing this type of model. The prime contractor can incorporate the capabilities of its team members into its proposal effort. The major benefit to the subcontractor is that it will obtain a qualified commitment that if the prime contractor is awarded the contract, the subcontractor will obtain a defined scope of work.

A joint venture can be a partnership or incorporated to form a separate legal entity. Mr. Mutek notes that the use of a joint venture, particularly one that takes the form of a corporation, can protect the venturer companies from liability. Joint ventures may also result in tax savings. Furthermore, forming a joint venture can be a method of avoiding the high cost structure of the individual venturers.

Purpose
The FAR affirms that contractor team arrangements are often desirable from both a government and industry standpoint. They enable the companies involved to compliment each other’s unique capabilities. They also offer the government the best combination of performance, cost and delivery for the system or product being acquired. FAR 9.602(a). Contractor team arrangements are particularly appropriate in complex research and development acquisitions, but may be used in other acquisitions, including production contracts. FAR 9.602(b).

Normally, the companies involved form a contractor team arrangement before submitting an offer. However, the FAR does permit companies to enter into such an arrangement later in the acquisition process, including after contractor award. FAR 9.602(c).

The policy of the federal government is to recognize the integrity and validity of contractor team arrangements. This is provided that the arrangements are identified and the company relationships are fully disclosed in an offer or, for arrangements entered into after submission of an offer, before the arrangement becomes effective. The government does not normally require or encourage the dissolution of contractor team arrangements. FAR 9.603.

Limitations
Contractor team arrangements are not a means of avoiding legal obligations to which a contractor might otherwise be subject. Accordingly, nothing in the FAR authorizes arrangements in violation of antitrust statutes. Further, a team arrangement does not limit the government’s right to:

  • Require consent to subcontracts.
  • Determine, on the basis of the stated contractor team arrangement, the responsibility of the prime contractor.
  • Provide to the prime contractor data rights owned or controlled by the government.
  • Pursue its policies on competitive contracting, subcontracting and component breakout after initial production or at any other time.
  • Hold the prime contractor fully responsible for contract performance, regardless of any team arrangement between the prime contractor and its subcontractors. FAR 9.604.

Benefits and Risks
Contractor team arrangements are often beneficial to companies because they allow them to pursue contracts that they otherwise would not have the capability to perform. By means of a team, companies can:

  • Combine the capabilities of more than one contractor to present a stronger proposal to the government.
  • Spread the financial risk of a contract.
  • Help themselves enter a new market.
  • Enhance their experience or past performance.
  • Assure access to critical components or services early in the bidding process.
  • Seek out lower costs.
  • If a small business, draw upon the capabilities of a large business.
  • If a large business, propose in conjunction with a small business to perform contracts set aside for small business.

On the other hand, contractor team arrangements also present risks to companies. These risks include:

  • Loss of proprietary information disclosed to a team member.
  • Reduced profits resulting from sharing of revenues.
  • If a team forms a joint venture, the risk of one company binding the rest of the venture to unanticipated commitments or liabilities.

In a competitive environment, contractor team arrangements are an important vehicle for achieving success. Companies must consider the potential of these arrangements while protecting themselves and ensuring they make sense in a particular endeavor.

This article is intended for general information only and should not be construed as legal advice or opinion. Any questions concerning your legal rights or obligations in any particular circumstance should be directed to your lawyer.

View the entire article in PDF format here.

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