Ostensible Subcontractor Pitfall in Teaming Agreements

It is common for contractors to join together to compete for government contracts under teaming agreements. Teaming arrangements allow companies to compete for government contracts that they might not be able to obtain and perform individually. A properly structured teaming arrangement allows the participating companies to work together in seeking an award, but avoids the companies being deemed “affiliated” for purposes of size standards. Improperly structured teaming arrangement, however, can cause the companies to be deemed “affiliated” and lose their ability to compete for the government contract.
Subpart 9.6 of the Federal Acquisition Regulations (“FAR”) recognizes that teaming agreements enable offerors to complement each other’s capabilities, and to offer better performance, deliveries, and cost structures. Agencies must recognize the integrity and validity of teaming agreements if the agreements are fully revealed in competitive proposals or before the teaming agreement becomes effective.

A properly structured teaming arrangement must vest control and daily management in the proposed prime contractor, and the proposed prime contractor must be solely responsible for performance. The government may find parties of a teaming arrangement to be “affiliated” for purposes of size standards, where the would-be prime contractor is overly reliant on its teaming partners or the tasks and areas of responsibility of the parties are not clearly delineated.

The Small Business Administration (“SBA”) decides whether parties to a teaming arrangement are deemed “affiliated.” If the parties are deemed “affiliated” their revenues and personnel will be combined by the SBA in making its decision of whether the affiliated companies are small for purposes of the procurement at hand.

Under the Ostensible Subcontractor Rule, 13 C.F.R. 121.103 (h)(4), a would-be prime contractor and its subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes if the subcontractor has too great of a role under the teaming arrangement. More specifically, “an ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract, or of an order under a multiple award schedule contract, or a subcontractor upon which the prime contractor is unusually reliant. All aspects of the relationship are considered, including, the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance or the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation.”

With proper planning and structuring of teaming arrangements, companies can reap the benefits of teaming and avoid the pitfall of being deemed “affiliated.”

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