The article on teaming arrangements in the last issue of the Pulse discussed the basics of contractor teaming arrangements. This article looks at documenting those arrangements. There are a series of documents that together can constitute a teaming arrangement. Not all teaming arrangements will include all of these documents but potentially they could consist of an initial agreement concerning disclosure of proprietary information, a letter of intent to form a team, a memorandum of understanding concerning a potential teaming relationship, a teaming agreement and either a subcontract or some form of joint venture agreement. A teaming arrangement that is unsuccessful in obtaining a contract may wish to conclude the matter with a dissolution agreement.
The key document defining a teaming arrangement is the teaming agreement. This agreement usually provides that in the event of a contract award, the parties will enter into a contractor/subcontractor relationship. Alternatively, the teaming agreement may provide that if a team is successful in obtaining a contract, the parties will enter into a joint venture. A joint venture can take the form of a partnership, limited partnership, corporation or a limited liability company.
Whether they anticipate formation of a contractor/subcontractor relationship or a joint venture, there are several critical terms that the parties must consider in negotiating a teaming agreement. These provisions include the following:
• Statement of Work: The parties should define the work that each intends to perform under the anticipated contract. As noted by commentator Michael W. Mutek in his book, Contractor Team Arrangements, parties generally want to know what kind of work they will be doing before committing resources to a team effort. However, where the parties plan to enter into a prime contractor/subcontractor relationship, the prime contractor may wish to keep its options open by not allocating work until the contract is awarded.
• Exclusivity: Normally, both parties will seek an exclusive relationship because it is difficult for a company to be a member of more than one team. Further, multiple allegiances may raise questions as to whether the parties are contributing their best efforts and if proprietary information might improperly be disclosed. An exclusivity provision also serves to define the limits of exclusivity so as not to preclude either party from bidding or contracting independently on matters unrelated to the subject contract.
• Intellectual Property Rights: Intellectual property rights may be addressed in a teaming agreement as well as any subsequent agreement between the parties. Such a provision might indicate that each party shall retain title to its own intellectual property and that the other parties are authorized to use the party’s intellectual property but only to accomplish the objectives of the agreement. In addition, the clause could allocate title to any intellectual property developed during performance of the contract independently by one of the parties and by the parties jointly. The provision might also address how intellectual property provided by one party to the other for performance of the contract is to be handled and, after expiration of the contract, how this information will continue to be protected.
• Alternative Dispute Resolution: The agreement should include some provision for alternative dispute resolution so that if the parties cannot agree on the terms of a subsequent subcontract or joint venture agreement, there will be a procedure for resolving the impasse instead of simply ending the relationship. This clause could include a dispute escalation procedure by which the parties agree that if negotiation is not succeeding, then the parties would progress to mediation followed by, if necessary, arbitration to resolve the dispute.
• Termination: The agreement should be clear as to when the relationship between the parties terminates and what obligations, such as those relating to protection of intellectual property rights, survive the termination. Termination can occur upon the failure of the team to receive contract award, upon cancellation of the program by the customer and/or after an agreed period of time unless renewed by the parties. It is also important the agreement not terminate prematurely. When a contract is awarded, the team should stay in place not only through the contract term, but during any option periods as well.
Certain terms of a teaming agreement are of particular importance to parties contemplating a prime contractor/subcontractor relationship. These include the following:
• Award of Subcontract: Depending on whether a party anticipates being the prime contractor or subcontractor, their views on this provision may differ. A prime contractor may wish to include some kind of escape provision allowing it not to award the subcontract to the other party. Such a clause might be necessary for several reasons, for example if the Government does not approve the subcontract, the parties are unable to negotiate the terms of a subcontract, the statement of work has changed or the capabilities of the subcontractor have declined. On the other hand, the intended subcontractor will want a definite commitment from the prime contractor that it will receive the subcontract since its credentials and experience may have been critical in winning award of the contract. In addition, the subcontractor may seek to obligate the prime contractor to exert its best efforts to obtain the Government’s consent to the subcontract, not just reasonable efforts. Should the statement of work change at the time of contract award, the subcontractor will want the prime contractor to agree to find other suitable work for the subcontractor.
• Disclaimer of Joint Venture: Because a joint venture has a substantially different impact on the parties’ relationship, where a prime/subcontractor arrangement is anticipated, the teaming agreement should clarify that the parties are not entering into a joint venture. Among the consequences of a joint venture, one venturer can bind the other venturer contractually. In addition, joint venturers may combine assets, employees or materials and share in profits and losses. The teaming agreement should also be clear that the prime contractor is responsible for performance of the contract and has overall management authority and responsibility for the project.
A teaming agreement anticipating formation of a joint venture has its own critical provisions, such as:
• Type of Entity: As noted above, a joint venture can take various forms. The teaming agreement should specify the kind of business entity the parties intend to create should they receive an award of the contract. Choice of entity depends on many business considerations, including preferred management structure, tax consequences, limitation of liability and protection of assets.
• Allocation of Resources and Returns: The agreement should describe what resources, in terms of capital, employees, facilities and materials each party will contribute to the venture. The parties also have to decide how profits and losses will be allocated. Where a joint venture includes an 8(a) Business Development Program Participant for purposes of receiving award of an 8(a) contract, the 8(a) Participant must receive no less than 51% of the net profits in addition to having management control of the venture.
A successful teaming agreement requires the parties to carefully consider how they will structure their relationship in advance of making legal commitments. Attention to these issues will not only enhance the chances of the team receiving and successfully performing a contract but will also help avoid the serious, and sometimes catastrophic, consequences of an unsuccessful relationship.
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