What You Need to Know When Teaming Up on Federal Work

Don Gregory, Esq.

September 2009

The American Recovery and Reinvestment Act of 2009 (also known as the "stimulus package”) authorized $140 billion in construction spending. As a result, there will be many more opportunities for contractors and subcontractors to work on federal projects, when other work is scarce. Contractors and subcontractors who possess knowledge of federal programs and their requirements will be better positioned to successfully bid for federal projects during these lean times.

There are many federal programs that encourage using disadvantaged businesses in federal contracting. The 8(a) Business Development Program, HUBZone Program and Service-Disabled Veteran-Owned Small Business Procurement Program are three such programs that allow set-asides for qualifying businesses. With the increased federal spending under the stimulus package, there is concern that there are not enough firms qualified under some federal programs to meet the percentage goals of work to be completed by disadvantaged businesses.

To reap the benefits of these programs, businesses can either seek certification themselves or, if they do not qualify, consider teaming up with a company that does qualify. Teaming arrangements allow the certified business to compete for larger, more technically complex contracts and overcome the effects of contract bundling, while giving non-certified firms access to contracts set aside for certified firms, significantly increasing contracting opportunities for both companies. Eligible small businesses can also typically receive contracting opportunities under multiple programs.

8(a) Business Development Program
One of the largest federal programs for contractors, the 8(a) Business Development Program, is designed to give assistance to small, disadvantaged businesses by providing priority for those firms on federal procurement contracts. Benefits of 8(a) status include the opportunity to receive sole-source government contracts up to certain dollar limits. Many federal agencies also set aside contracts for 8(a) businesses with a goal of achieving 5 percent of all prime and subcontracts awarded to small, disadvantaged firms.

To qualify for the 8(a) program directly, a business must be at least 51 percent owned and controlled by a socially and economically disadvantaged individual. African Americans, Hispanic Americans, Asian Pacific Americans, Native Americans, and Subcontinent Asian Americans are presumed disadvantaged, but others can also apply and present evidence of disadvantage. Qualifying individuals must have a net worth of less than $250,000, excluding the value of the business. Companies must also meet the applicable size standards set by the Small Business Administration, be in business for at least two years, display potential for success, and show good character.

Historically Underutilized Business Zone
The Historically Underutilized Business Zone ("HUBZone”) Program seeks to create jobs and stimulate economic development in certain low employment communities by providing federal contracting preferences to small businesses with HUBZone certification. Contracting preferences include set-aside and sole source contracts as well as price evaluation preference in full and open competition contracts. The government-wide procurement goal for HUBZone contracts is 3 percent per year. The U.S. Government Accountability Office has identified the HUBZone Program as a top priority, requiring federal agencies to evaluate a contract award for HUBZone set-aside before setting it aside for other types of small businesses.

In order to qualify for the HUBZone Program, a small business (1) must be "small” as defined by the SBA, (2) must maintain a principal office in a HUBZone, (3) must be at least 51 percent owned and controlled by U.S. citizens, and (4) at least 35 percent of the businesses’ employees must reside in a HUBZone. HUBZones are designated by non-metropolitan counties, qualifying census tracts, or Indian reservations. A business can determine if it is located in a HUBZone at sba.gov/hubzone. Service-Disabled Veteran-Owned Small Business Program Finally, the Service-Disabled Veteran-Owned Small Business Program provides federal contracting assistance to small businesses owned by service-disabled veterans. The program allows government agencies to award sole-source or set-aside contracts to SDVOSBs, with the goal of granting 3 percent of all prime and subcontracts to SDVOSBs.

In order to qualify as an SDVOSB, the business must (1) be at least 51 percent directly owned by a service-disabled veteran; (2) be managed and controlled by a service-disabled veteran; (3) the service-disabled veteran must hold the highest officer position in the business; and (4) the business must satisfy the SBA’s applicable size standards.

Consider This
When teaming up for federal contracting in order to take full advantage of these programs, there are a number of factors that a business must consider. First, a firm needs to determine what form the team relationship will take, taking into account any restrictions on joint work under the applicable federal program. Under the Federal Acquisition Regulation, contractor team arrangements for federal contracts are understandings 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 subcontractors under a specified government contract or acquisition program.

Under SBA regulations, a joint venture must be limited to no more than three specific or limited-purpose business ventures for joint profit over a two-year period, and cannot be on a continuing basis for conducting business generally. Sub/prime team arrangements must be limited to one specific project. While 8(a) and SDVOSB firms can enter joint ventures with non-certified firms, joint ventures on HUBZone procurements are only permitted between HUBZone firms. In order to participate in a HUBZone procurement, a non-certified firm must work as a subcontractor for a certified prime contractor.

Second, whether entering a joint venture or sub/prime team, it is critical to ensure compliance with SBA size regulations in order to not jeopardize eligibility for the contract under the applicable program. Under the regulations, a JV/team will be considered small only if the combined size of all the firms in the JV/team meet the size standard for the procurement. However, where the procurement is too large for small businesses to compete (i.e., in the case of contract bundling), a certified firm can team with other businesses, and the JV/team will be considered small so long as each firm in the JV/team considered separately meets the "small” standard for the procurement.

Third, a firm considering teaming should also determine whether establishing a mentor/protégé relationship would be beneficial. This is particularly relevant in the context of 8(a) procurements because an 8(a) protégé firm may joint venture with its mentor, regardless of the size of the mentor, and the JV will be considered small as long as the 8(a) protégé is small for the procurement. Essentially, an 8(a) firm can joint venture with its mentor for any government contract. For a large business concern, establishing a mentor/protégé relationship with an 8(a) firm is the only way to participate in 8(a) procurements. Mentors may also own up to a 40 percent equity interest in the protégé firm. Any business that demonstrates both the commitment and ability to support the 8(a) firm may serve as a mentor, which can be a large or small business and does not have to have been an 8(a) participant itself.

Finally, in drafting the "teaming” agreement, there are several specific contract provisions that should be considered. Whether forming a joint venture or a sub/prime team, the parties should negotiate the following: (a) the statement of work, in order to clearly define the roles of each party; (b) exclusivity, to consider whether the parties may be members of other teams or bid for other contracts; (c) protection of proprietary information of the parties; and (d) termination, to define when the relationship ends and the responsibilities of each party upon termination.

A joint venture agreement with an 8(a) or SDVOSB qualifying firm must also include the following: the purpose of the JV, designation of the 8(a)/SDVOSB participant as the managing venturer and an employee of the 8(a)/SDVOSB firm as the project manager, allocation of at least 51 percent of the JV profits to the 8(a)/SDVOSB participant, and various other provisions required by the regulations. A prime/sub team agreement should disclaim the creation of a joint venture and address award of the subcontract, including any escape provision for the prime contractor or guarantee for the subcontractor. With all of these agreements, the entity with the greatest assets always has the most to lose if the arrangement does not go well.

Federal contracting work is increasing significantly under the stimulus package, and contractors who team with businesses certified under these federal programs will have more opportunity to successfully bid for federal contracts. By carefully considering teaming options and creating a well-drafted teaming agreement that complies with the requirements of the applicable programs, contractors can maximize their benefits and minimize their risks in the team relationship.

Don Gregory is with Kegler Brown Hill & Ritter in Columbus, Ohio. He is general counsel to several construction industry trade associations including AWCI, and he can be reached at dgregory@keglerbrown.com. Summer Associate Nicole Orozco helped contribute to this article.