How to Build a Contractor Teaming Arrangement, Part 2

Minimize future disputes with this checklist of provisions.

Editor’s Note: This is the second part in a two-part series that discusses the opportunities of teaming with other contractors, how to choose the right teaming partner and what to include in a teaming agreement. For the first part, click here.

Teaming agreement relationships are often built out of expediency and political alliance. But contractors should not rely solely on an informal mutual understanding when partnering. A well-written teaming agreement will address essential elements that the two parties agree to.

Just like every contract, negotiating in a teaming agreement depends on each party’s bargaining strength. In the traditional prime contractor-subcontractor teaming agreement, the prime contractor desires maximum flexibility, while the subcontractor wants maximum certainty. In a joint venture teaming arrangement, all parties want flexibility, and the major negotiating point usually becomes management control. In the end, each teaming agreement should be carefully crafted to cover the needs of all parties.

Most courts will not uphold a teaming agreement as a contract if the agreement does not show the parties are bound to the agreement’s terms. Carefully consider any contract language that makes future contract awards open to negotiation.

Certain provisions should be addressed in every teaming agreement. Review the teaming agreement for provisions that base decision making as either “sole discretion,” “reasonable efforts” or “best efforts” – each of these phrases impose a distinctly different standard on the contracting parties.

A thoughtfully negotiated teaming agreement is the stepping stone to signing any proposed final joint venture or subcontract agreement.

Parties and Purpose

The first section of the teaming agreement should contain the contracting parties’ correct legal names and their relationship (e.g., as a team member under a prime subcontract or as a joint venture). The agreement should also identify the specific contract or proposal the parties will be bidding on and what each party will contribute.

Proposal Preparation

Who is responsible for submitting the proposal, and what responsibilities do other team members have in contributing to the proposal? Usually, the designated prime contractor has the ultimate responsibility and final authority over the submitted bid proposal.

The agreement should require the proposed subcontractor to provide his or her cost proposal on a timely and accurate basis. Often, teaming agreements obligate all parties to bear their own costs toward submitting the proposal. However, a small contractor may find the costs for a large proposal to be overly burdensome and may want to negotiate with the larger team member for some cost reimbursement.

Project Control

The agreement should address which team members will have a management role, who will select the project manager and whether the team will have a board of managers with equal representation.

Accounting and Records

Which team member prepares the accounting and maintains the team’s books and records? If one party has control over accounting and records, then the agreement should grant the other party a right to access and audit the team’s books at reasonable and regular times.

Contributions to the Team

The agreement should specify each member’s financial obligations and other contributions (e.g., personnel, equipment, office space, etc.). Team members should be careful about contributing capital without having a say over how the contributions are calculated. A teaming arrangement will usually specify if a team member will supply certain critical equipment, but often, this is done through a rental agreement to keep the equipment from becoming part of the joint venture’s assets and subject to creditor’s claims.

Profits and Losses

The arrangement is either a fixed percentage of profit and losses or a more strict direct allocation of specific line items. Profit allocations based on a percentage can also be tied to the total amount of direct work performed by a team member, and with joint ventures, this may change over the course of the project if one party does not perform a portion of work or if change orders occur for a particular party’s scheduled work.

Liability and Indemnity

A provision should address liability for both pre-bid and post-award breaches and include indemnification for third-party loss. Also, a party’s bonding and insurance coverages should be established as required minimum standards.

Confidential Information

As part of the bid submission process, a team member may disclose proprietary information to other team members. The agreement must address whether the information should be limited in use by other team members and establish how the information should be documented as proprietary and returned or destroyed when the contract is completed or the proposal is submitted.

Intellectual Property

The teaming agreement should address ownership and any intellectual property use. If one party is deemed an intellectual property owner, does the other party have a right through a license to use the intellectual property for commercial purposes?

Termination

The agreement should address the circumstances under which the teaming arrangement is terminated. This is often when the program is cancelled, the contract is awarded to another team, or a team member is disqualified or terminated. A team member may also want to terminate the agreement when the team member cannot respond timely to the proposal.

Dispute Resolution

If the parties cannot resolve their disagreements, a well-crafted dispute clause should help with this. Generally, however, teaming agreements contain several stages of conflict resolution: 

1. Project or low-level managers meet to resolve differences.
2. The board of managers or directors meet to resolve disputes not resolved by low-level managers.
3. Owners meet to resolve disputes.
4. Parties enter into mediation. 
5. Parties agree to arbitration.

Exclusivity

The agreement should state whether the parties can seek a contract award outside of the team. It is not unusual for a teaming arrangement to be exclusive for a particular proposal. If a team member wants to supply pricing information to third parties interested in submitting proposals, this option should be addressed in the agreement.

Assignment of Rights

The teaming agreement should clearly state whether any of the team members’ rights and obligations can be assigned to third parties or subsidiary companies.

Flow-Down Provisions

In a prime contractor teaming arrangement, a flow-down provision can impose all or some of the prime-contract obligations that are applicable to the subcontractor. Some large prime contractors flow down all the clauses in their prime contracts, which can exacerbate disputes with the subcontractor. Other prime contractors only flow down mandatory clauses and use a pure commercial contract to negotiate easily. A thorough understanding of FAR regulations governing flow-down clauses is necessary to determine what should be required.

Teaming agreements are a viable way to compete for federal government contracts. However, all parties must carefully consider the contractual provisions. A carefully negotiated teaming agreement will minimize future disputes and lead to a successful and rewarding teaming proce.

Construction Business Owner, August 2011