Small businesses and government contracting

If you are a small business and are interested in government contracting work, then the most likely entry point will be an arrangement with another company. How you structure this cooperation will be a critical and significant element of success. This article discusses teaming agreements and summarizes some structures that may appeal to small businesses. A version of this article was presented at the 8th Annual Disadvantaged Business Enterprise Summit: Linking Businesses to Opportunities for Group, jointly sponsored by the U.S. Department of Transportation Federal highway Administration and Department of Columbia Department of Transportation.

Negotiating power influences structure of teaming agreement

The nature of the arrangement depends on the negotiating power of the various parties. If they are unequal parties and one company is significantly larger than the other, then usually the larger company will attempt to elicit the cooperation of smaller companies and the smaller companies have very little negotiating power. There may be an exception, however, when the small business is bidding on a small business set-aside and the larger company becomes a subcontractor. But for the purposes of this article, we are mainly talking about a small business that is new to government contracting.

Motivating forces for the larger company

There are several motivating factors that may entice a large company to engage a small business in a teaming agreement. Sometimes and the most successful relationships depend on the large company trying to leverage off the competitive advantage of a smaller company. The second primary reason for a large company to seek out a small business is if the large company is trying to meet a subcontracting target for certain socioeconioc categories such as 8(a) businesses,  historically underutilized business zone (HUBZone) businesses,  women owned small businesses, service disabled veteran businesses.

Motivating factors for small business

The motivating factors for a small business to want to engage a larger business are pretty obvious. They want an easy entrée into the multi billion dollar government market for small businesses.  The allure to the government market is great for small businesses, but sometimes the government contracting requirements are daunting. A good way to enter the market is to latch onto a larger business that has experience in the government marketplace. The smaller business has an opportunity to earn new business and they maximize their chances of winning by casting its lot with a larger business. This also allows the small business to learn from the larger business and to leverage off the skill set of the larger business.

Subcontractor at the mercy of the prime

The most common structure will be the larger company to assume the role of prime contractor and the small business to be a subcontractor. Teaming agreements under which the larger company is the prime contractor has various advantages and disadvantages. In terms of the benefits, both companies have limited obligations to the other company. It is a good way to try out a new business partner. A prime sub relationship carries with it limited obligations and is very flexible.

The disadvantages are that usually the prime wields almost all of the power. It is a one-off relationship where there is no commitment to continue the discussion. And unless you obtain the commitment of the prime contractor, you as a small business owner may not even get any work even if they prime contractor wins the contract.

Joint ventures

In some circumstances, the two companies may decide to form a new legal entity such as a limited liability company or corporation in which both companies hold an ownership share. A variant of this joint venture structure is a contractual joint venture under which the companies do not create a new entity but are contractually obligated to each other as joint venturers.

Teaming arrangements also carry with them advantages and disadvantages. If the businesses become joint venture partners there is an ongoing relationship and an ongoing commitment from one to the other. In some cases you can combine the bonding capacity of each company to bid on larger projects. If you have created a separate entity there should be limited liability for the joint venture participants. And finally the joint venture may avoid a high cost structure.

The disadvantages are that some of these joint venture agreements are unwieldy. The partners can bicker about governance and control. Your business company may be locked in with an unsavory partner and it will be difficult to extricate yourself until the end of the project. And sometimes these joint venture agreements mean that your joint venture partner is considered an affiliate for size or for qualification for a certain socioeconomic category.

Discussion points with teaming partner

If you’re small is is is considering entering into a teaming agreement or arrangement, you may want to consult with your small business attorney, particularly if the small business lawyer is conversant in government contracting. There are numerous points for discussion and negotiation between teaming partners. Some of the more common issues for discussion include:

• Due diligence including finances, ethics, past performance, prior teaming arrangements, core capabilities. Especially if you are considering a joint venture arrangement, you will want to conduct some due diligence on your prospective joint venture participant.
• Binding vs memorandum of understanding. A prime contractor may collect numerous MOUs from many small businesses, but they may not be binding. A critical consideration for the small business to determine the extent of the commitment from the large company is whether the document is binding or simply a memorandum expressing each party’s interest in the other.
• Budget: separate line item. One way to make a MOU binding is for the prime to include the subcontractor in the budget.
• Proposal preparation: The parties will discuss whether both parties are supposed to have inputs for the proposal and whether, in the case of a sub, whether the sub will be compensated for its contribution.
• Exclusive: on other proposals. For a particular contract, will the parties be allowed to participate on any other proposals.
• Governance and control: for joint ventures. Who makes the decisions and how decisions are made will be a critical subject of negotiation for joint venture agreements.
• Confidentiality: exchange of information. To what extent are the parties required to keep the information that they learn from the other party confidential?
• Intellectual property: services agreements. If the parties are creating any intellectual property, they will have to negotiate who this intellectual property belongs to.
• Term: until rejection. Especially in exclusive arrangements, the parties will discuss when the agreement will terminate.
• Liability and indemnification: liability for errors of other party. The parties will also have to discuss what happens when one of the parties commits an error and who is responsible for the error.

The government market for small business is over $100 billion every year so it is not surprising that small businesses are keenly interested in how to enter and navigate this market. This article has described one entry point for small businesses to partner with another company through a teaming agreement.