What Clauses in Your Teaming Agreements Are Enforceable?

If teaming agreements are not enforceable, are they worth the time and effort government contractors spend negotiating them? Ideally, every clause in a procurement staple like a teaming agreement should be enforceable in every courtroom in the country. That is not the case, however. Recently, a judge on the Fairfax County Circuit Court in Virginia refused to enforce a standard teaming agreement clause calling for post-award good faith negotiation of a subcontract between team members.

Government contractors, however, should not misinterpret this decision from one state court dealing with one teaming agreement clause. The decision applies only Virginia legal precedent. The court’s interpretation of the teaming agreement’s post-award “subcontract negotiation” clause did not involve interpretation of pre-award teaming agreement clauses like those protecting a team member’s proprietary bidding information, or requiring team cooperation in preparing a potentially winning proposal. Thus, the decision does not mean that all the terms of any teaming agreement are unenforceable in every court.

The critical take-away here is that a teaming agreement remains a valuable document:

• A teaming agreement’s pre-award provisions are enforceable in Virginia and other states. 
• A teaming agreement’s post-award provisions are enforceable in other jurisdictions including Delaware, New York, D.C. 

In addition, the value of teaming agreements to both the government and contractors is acknowledged in FAR 9.602(a):

Contractor team arrangements may be desirable from both a Government and industry standpoint in order to enable the companies involved to (1) complement each other's unique capabilities and (2) offer the Government the best combination of performance, cost, and delivery for the system or product being acquired. 

Teaming agreements will continue to be valuable documents. The lesson the Virginia decision teaches is that government contractors need to know the limits of a teaming agreement in their jurisdiction and understand how to work within these limits.

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.

New Rules Create Opportunities for Government Contractors

In the last several months, the government issued new regulations that can benefit all government contractors and especially small businesses. Berenzweig Leonard wanted to summarize them so government contractors can take advantage of these opportunities as well as be aware of the two “Cautions” we describe at the end.  

NEW SBA RULES

The SBA adopted new rules that (1) let a small business prime use the work of another small business to meet the 50% performance of work requirement; and (2) let all small businesses qualify as protégés to joint venture with large business for small business set-aside work.  

1. Now, when complying with the performance of work requirements in the Limitation on Subcontracting clause:  

• A small business prime does not have to reach that 50% on its own. A small business first-tier subcontractor may contribute to the prime’s 50% performance requirement so long as both are the “same” kind of small business; e.g., an 8(a) prime and an 8(a) first-tier sub, HUBZone prime and HUBZone first-tier sub, now called “similarly-situated entities.”
  
• Compliance must be year-by-year. Compliance cannot be met over the total life (e.g., base year plus options years) of the contract.  
  
• The total contract award (cost plus profit) will be used to measure compliance. Gone is compliance based on the cost of personnel.

2. Now, under the greatly expanded Mentor-Protégé program:

• Any small business can be a protégé. Thus, a large business mentor may joint venture with any small business protégé to compete for small business contracts. However, to be eligible to joint venture for a HUBZone contract, for example, the protégé must be a HUBZone small business.
  
• Any small business can be a mentor. Not only a large business can be a mentor; any small business can also be a mentor. Thus, a small business may joint venture, for example, with a HUBZone small business to compete for a HUBZone contract.     

NEW FAR RULES

New FAR rules penalize large businesses that abuse small business subcontractors.

Large businesses must report “bait-and-switch” of small business subcontractors. The large business’s Small Business Subcontracting Plan must contain “assurances” that it will make a good faith effort to use a small business during contract performance as its solicitation promised; failure to use small business subcontractors must be reported to the contracting officer at the end of performance, apparently for the contracting officer’s use in the contractor’s past performance evaluation.

Large businesses cannot silence small businesses. The Subcontracting Plan must also contain assurances that the contractor will not prohibit a subcontractor from discussing payment or utilization issues with the contracting officer.

TWO CAUTIONS 

First, although government contractors must pay close attention to these changes because they affect future contract opportunities, retroactivity should not be a concern. These new regulations will not change existing contracts.    

Second, delay in applying to the SBA for the Mentor-Protégé program can be costly. Because the SBA expects a flood of applications, the SBA itself has raised the possibility of closing the application process down temporarily. Contractors should file Mentor-Protégé applications as soon as possible after August 24, 2016, the effective date of the new regulations.

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.

SBA Opens $2 Billion Market to Expanded Mentor-Protégé Program

An estimated $2 billion annual government contract market has been opened up to an estimated 2,000 small businesses, according to the SBA, as a result of its recently-expanded Mentor-Protégé program.

All small businesses, and not just 8(a) firms, may now become protégés to joint venture with large businesses – and even other small businesses – competing for small business set-aside contracts as part of the SBA’s “all small business” Mentor-Protégé program.

The SBA has expanded the reach of the new program even wider, to include specific types of small business: HUBZone small businesses, Service Disabled Veteran Owned Small Businesses, 8(a) firms and Woman Owned Small Businesses. For example, a HUBZone small business can joint venture with a non-HUBZone firm (large or small) on a HUBZone set-aside solicitation.

Getting these benefits requires, at minimum, that the Mentor-Protégé team submit an application to the SBA for approval. Modeled after the 8(a) Mentor-Protégé program application, the all small business Mentor-Protégé application must describe the protégé’s needs, the assistance the mentor will provide (e.g., management and/or technical assistance, loans and/or equity investments, cooperation on joint venture projects, or subcontracts under prime contracts being performed by the mentor), and how this assistance will meet the protégé’s needs.

Also modeled after the 8(a) Mentor-Protégé program is the written joint venture agreement that the SBA requires to allow mentors and protégés to get the expanded contract benefits described above.

Berenzweig Leonard is well equipped to help its clients apply for the expanded Mentor-Protégé process as well as execute compliant JV agreements because we have helped our clients through the 8(a) Mentor-Protégé program on which the new Mentor-Protégé program is modeled.

We add one caution: SBA expects that the significant opportunities opened up by the new Mentor-Protégé program will lead to a flood of applications, and has raised the possibility of closing the Mentor-Protégé application process temporarily to deal with any backlog.

For that reason, we are urging interested clients to file Mentor-Protégé applications as soon as possible after the October 1, 2016 start of SBA acceptance of applications. Delay in applying can seriously delay benefitting from the new Mentor-Protégé program.

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.

New Laws May Not Impact Your Existing Contract

Government contractors trying to cope with the current flood of new laws, executive orders, and regulations need to remember that these changes generally do not re-write their existing government contracts. Although the President may sign new Executive Orders and federal agencies may adopt new regulations, the terms and conditions of an existing contract do not automatically change. A “deal is a deal” even with the government.

This stability may seem strange to contractors familiar with the various FAR Changes clauses that allow the government to make unilateral changes to existing contracts. Those clauses, however, do not allow the government to unilaterally re-write a government contract. The standard FAR Changes clause in a non-commercial item contract typically allows unilateral changes to the contract’s drawings and specifications but the terms and conditions are generally considered not part of the contract’s “specifications” subject to the Changes clause. New FAR clauses can, of course, be inserted into non-commercial item contracts if the contractor receives consideration.

Nor can the government unilaterally change the terms and conditions of a commercial-item contract. The standard Changes clause in those contracts requires both the government and the contractor to agree to any changes.  Again, new FAR clauses can be inserted into commercial item contracts if the contractor receives consideration.

What are the rules for FAR clauses in a pending solicitation? According to FAR, new FAR regulations generally apply only “to solicitations issued on or after the effective date of the change.” FAR 1.108(d)(1). New FAR provisions, however, can apply to a solicitation if they were in a solicitation issued before that effective date and the contract was awarded after that effective date.

This “effective date” rule is also followed by the SBA. The SBA regulations in effect on the date the government issues the solicitation are the applicable SBA regulations according to the SBA’s Office of Hearings and Appeals. Size Appeal of VMD-MT Security, LLC, SBA No. SIZ-5380 (2012).

Finally, the Executive Orders issued over the past several years also focus on the date a solicitation was issued. For example, Executive Order 13658, Establishing a Minimum Wage for Contractors applies to contracts for which the solicitation was issued on or after January 1, 2015.

Bottom line: although you have to pay close attention to this deluge of changes because they affect your future contract opportunities, retroactivity should not be a concern. The deal you have already made with the government stays unchanged.  

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.

Reports of New Balance's "Bribe" Claim Are Off Balance

As government contractors are well aware, media efforts to accurately report government procurement issues are often unsuccessful. A Washington Post article inaccurately reported in 2013 that “Fewer than 15” GAO  protests, about 1% of the roughly 1600 GAO protests filed in 2010, resulted in the protester winning the contract. However, detailed studies by government contract experts put the number much higher at approximately 20-29%.

This week, several media reports have suggested that shoe manufacturer New Balance decided to publicly oppose the U.S. government’s proposed trade deal, the Trans-Pacific Partnership (TPP), because the Department of Defense (DoD) has so far refused to award New Balance a contract for military shoe business. One story led with “The Obama administration offered the American shoe company New Balance government contracts so that they wouldn’t call foul on the Trans-Pacific Partnership.” Another referred to the Obama Administration “bribing” New Balance with the promise of a DoD contract in exchange for New Balance not opposing TPP.

In reality, New Balance had specifically denied that there had ever been any bribe. The reported stories grew out of a press conference New Balance CEO Rob DeMartini held on April 12th at which he discussed New Balance’s recent opposition to TPP. However, unreported is his statement denying any bribe: “There was no quid pro quo deal. We didn’t want an earmark contract,” DeMartini said at the press conference. “We wanted to compete for a piece of business we’re very confident we can win.”

So the “bribe” part of these reports is fiction.

Other outlets added helpful context. Although DeMartini expressed an interest in competing for the work, Fox News reported that New Balance has in fact competed – unsuccessfully so far. Fox quoted an Obama administration trade official saying that New Balance “has not yet been able to provide a model that meets DoD’s requirements for our servicemembers.” Another outlet reported that “none of the three New Balance shoes offered for consideration met the agency’s cost requirements and one did not meet durability standards.”

In sum, New Balance has had the opportunity to compete but few media outlets discussed the procurement concepts of best value to the government and war fighter. The complexity of the procurement process makes our profession an easy target for sensational claims. Where are the fact-checkers when we need them?

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.

If an Agency Does Not Answer Your Questions, Keep Asking

If used wisely and persistently, the Q & A part of the solicitation process can mitigate numerous contractor risks. One of those risks is the risk of winning a contract with a vague statement of work that exposes a contractor to overruns; another is the risk of losing a contract because a bidder misinterpreted ambiguous solicitation instructions to bidders.

As a recent GAO decision shows, it pays for a bidder to keep asking the agency to clarify a vague solicitation if the Q&A fails to do so and even, as another decision holds, if the government has said it will take no more questions.

In a solicitation that limited offerors to giving past performance references on no more than 3 projects, the RFP’s instructions were unclear about whether the offeror’s involvement in the 3 projects had to be as a prime or as a subcontractor. During the Q&A, several offerors asked for clarifications, but the government’s answers only confused things more. One offeror wanted a clear answer so, six days before the offer due date, it asked the government to further clarify its previous answer. After the government failed to do, the offeror submitted its offer but lost to a company that, under the vague instructions to offerors, the agency concluded had better past performance references and a slightly lower price.

The offeror protested to GAO and won in two ways. First, GAO recommended that the agency clear up the ambiguous past performance requirements via an amendment and get new offers, giving the protester a second chance to win the work. Second, GAO said the protester – a small business – was entitled to get protest costs and attorneys’ fees from the agency.

GAO’s decision is consistent with other protest decisions, one of which held that an offeror should keep asking the government questions even if the government has said it would not accept any more.

This persistence the case law demands seems to run against the business instincts of many offerors; they are reluctant to challenge the agency in the middle of a solicitation because it seems like a bad business strategy and may cause offense.

It is not. Keeping after the government for a clear answer can benefit a government contractor, win or lose. If it wins the work, its pre-award attempt to clear up an ambiguity generally entitles it to an equitable adjustment to pay for the work the government had only vaguely described in the solicitation. On the other hand, if it loses the work, it can argue that its continued questioning protects its right to protest.

In addition, bidders sometimes must take bidding risks because the risk of not bidding seems unacceptable. Especially in these cases, persistent questioning is a must and can help protect the company in an already challenging environment.  

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.

Don’t Hedge Your Bets on a Fixed-Price Bid

Because a firm fixed-price contract commits a contractor to paying for overruns and unexpected performance costs, a bidder might be tempted to hedge its bets when submitting a bid for a fixed-price contract. For example, a bidder might “reserve all rights” to a future equitable adjustment if some costly, unexpected event occurs.

Doing so, however, can be fatal to winning the contract. A bidder trying to hedge its bets can end up submitting a “contingent offer” that disqualifies the bidder from winning the work. In one case, a bidder’s offer to provide professional radiology services at a government clinic was a disqualifying conditional offer because the bidder required “reimbursement for the full cost of adequate malpractice insurance coverage, whatever this cost may be, during the life of any contract awarded.” GAO concluded that the bidder had not submitted a firm, fixed-price offer.

A more subtle example of a disqualifying conditional offer involved a contract where, according to the solicitation, most of the work would be performed at the contractor’s site although some work would be done at the government site. The bidder’s offer was found to be a disqualifying conditional offer because its bid was based on more work being done at the lower-priced government site than the solicitation anticipated.

Whether a bid is firm or conditional depends on the precise wording a bidder uses. A recent GAO decision distinguished between a disqualifying “right to receive a price adjustment” vs. an allowable “right to request a price adjustment.” According to GAO, a bidder can properly reserve the right to negotiate an equitable adjustment or the right to ask the Government to consider a specific extra cost because the agency in turn could refuse any increase.

Hedging bets in any way, however, is risky. A reservation that seems proper to a bidder might be considered improper by GAO. A recent GAO decision concluding that a bidder’s “reservation” was proper involved this bidder statement: “It is assumed that as the Technical Landscape changes over time and the team requires new or additional skills, the pricing of the team can be renegotiated.” Does that statement sound more like a right to “receive” or a right to “request” an increase?

Moreover, although winning the protest at GAO was good news for the bidder, the win was costly. The bidder’s language needlessly gave a competitor an argument for a protest that the bidder then had to spend money to defend.

In the end, although reservations of rights might make a bidder feel better, they are risky and often unnecessary. Contractors always have the right to request an equitable adjustment for changes. The most prudent approach, therefore, is to avoid altogether using any language that could be construed as qualifying your bid or giving a competitor a protest argument. Hedging your bid with a conditional offer is risky business and could cost you the contract.

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@BerenzweigLaw.com.

The Best Way to Negotiate a Fair Profit on Equitable Adjustments

When the government changes a contractor’s work, the contractor is entitled to an equitable adjustment under the Changes clause for not only any increased costs but also for profit on those costs.

Negotiating a fair profit presents a problem. The typical contractor is reluctant to harm its relationship with its customer, particularly in this time of dwindling agency budgets. The result is often that the contractor agrees to profit being based on one of two low-profit approaches: the loss-leader profit percentage the contractor used to win the contract or the profit percentage a contracting officer says is typical and not controversial for the agency.

FAR, however, rejects both approaches: “Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance.” FAR 15.404-4(a)(3).

Case law agrees with FAR, explaining that, even though a contractor wins with loss-leader profit figures, “a contractor is not then generally bound to those markups for all and any subsequent changed work…a change is priced separately as an equitable adjustment and as such is to reflect the normal costs and markups for the work.” Flathead Contractors, LLC, v. USDA, CBCA No. 118-R, October 2, 2007.

FAR demands, instead, that profit act as “a motivator for efficient and effective contract performance” and makes profit depend generally on contractor effort and contract cost-risk.

For example, there is more “contractor effort” required for removing asbestos from a room than for painting the room. Profit then should be higher on an equitable adjustment for the asbestos removal work. There is also more “contract cost-risk” in fixed-price work than in cost-plus-fixed-fee work because the contractor is responsible for any overruns on a fixed-price contract. Profit, therefore, should be higher for fixed-price work.

Moreover, although federal law limits profit on a cost-reimbursement contract’s estimated costs, there is no federal law limiting profit on fixed-price work.

Clearly, profit is not a dirty word in FAR. The government is supposed to use profit to motivate quality contractor performance based on contractor effort and contract cost-risk. When it bases equitable adjustment profit on loss-leader percentages or agency-accepted percentages, the government does not motivate contractors nor comply with FAR.

Contractors should use the FAR profit principles in negotiating a fair profit on an equitable adjustment. These principles provide a profit rationale that the government must by law consider.  

Terrence O'Connor is the Director of Government Contracts for Berenzweig Leonard, LLP, a business law firm in the D.C. region. Terry can be reached at toconnor@berenzweiglaw.com.