How to Build a Contractor Teaming Arrangement

Employ this strategy to win federal contracts.

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

In this tricky economy, contractors struggle with getting bonded, getting jobs and getting paid. To get past these issues and achieve success while reducing risks, contractors have considered teaming with other contractors.

Forming a contracting team is a new strategy to win government contracts. The government not only supports but encourages teaming as a way to reduce costs.

According to Federal Acquisition Regulations (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.”

While teaming brings many opportunities, choosing the wrong team member can result in disastrous disputes.  A successful teaming relationship starts with all parties recognizing why teaming is important and making sure every team member has the same expectations.

The Benefits

A teaming arrangement can be the start of a new long-term relationship.

Solid reasons for teaming include:

• The desire to share a contractual or financial risk
• The need to obtain complementary capabilities or skill sets
• Responding to a competitor’s expansion into a market

For example, a subcontractor with narrow but highly valued expertise (e.g., an electrical contractor who can build high voltage substations) may team with a large prime contractor to combine technical expertise with the prime contractor’s bonding and large contract management capabilities. Or a company with strong financial resources will often team with a smaller company to gain an advantage in winning small business set-asides offered under the Small Business Administration (SBA). Some teaming arrangements can violate SBA affiliation rules. See the SBA’s 8(a) Business Development Program Compliance Guide at www.sba.gov for more details on qualifying as a small business 8(a) or HUBZone contractor.

If two parties can complement each other technically, and their arrangement will not violate the government program offering the work, teaming is a possibility.

How to Choose Partners

All parties should first be sure they can work together on both a technical and business level. Before a teaming agreement is negotiated, parties should discuss the team’s goals. Project team members should also discuss the team’s overall philosophy and everyone’s management style. Several structured planning sessions should be conducted as well.

Even if a team’s technical and management capabilities are compatible, each partner should carefully research the other party’s business and financial condition. Too often, a team member gets comfortable with his partner’s style and does not perform a detailed background check. The detailed financial due diligence that each party should conduct will help determine not only whether the team will get the work but if it can actually complete the work.

When forming a teaming arrangement, remember that the federal government does not accept all contractors. FAR 9.103(a) states “that purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only.” The standards under FAR 9.104-1 clarify what a teaming partner must bring to the table, including adequate financial resources, compliance with the delivery schedule, a satisfactory performance record, a satisfactory record of integrity and business ethics, organizational and operational control and the necessary production, construction and technical equipment and facilities.

Since the entire team’s performance and experience (not just the prime contractor’s experience) must be highlighted in any proposal, it is critical to determine if each teaming partner will be acceptable to the government. Past performance is a reliable indicator of future practices. Past terminations and claims that have not been addressed (through operational or management changes) indicate a partner who may be unable or unwilling to change.

When performing due diligence, each company should see if its potential partner has been barred from bidding on federal contracts, at the very minimum.

A partner’s inadequacies, temperament and financial well-being can sometimes be measured by how often he sues (or has been sued) and whether he has any unsatisfied judgments. A search can be conducted by using public records, working with a public search firm or hiring an attorney. Some commonly known search companies include CT Corporation, KnowX and Experian.

Reviewing a potential party’s financial statements is also important. If a company does not have audited financial statements, this reflects its limited size and resources to be a successful partner.

A simple financial ratio analysis will show a potential partner’s health in critical areas, including its short-term liquidity and debt collection. A detailed analysis into a team member’s cash on hand and current ratio indicates if the team member pays its debts. And reviewing a team member’s debt-to-asset ratio (total liabilities divided by total assets) indicates how much debt the team member has.

It is critical that team members select ethical partners. New government regulations require that all contractors with more than $5 million of government contracts should have a code of business ethics, provide ethics training to employees and have internal controls (see FAR 52.203-13). A history of legal problems and ethical lapses can lead to suspension or debarment from government contracts.

One final note of caution: Many teaming agreements contain a provision in which a party warrants its present responsibility. However, be cautious about allowing another team member the right to predetermine its responsibility. Instead, require the government contracting officer to determine each party’s responsibility.

Teaming in government contracts is a great way to gain access to new markets, leverage existing successes into larger contracts and reduce financial and contractual risk.

Construction Business Owner, July 2011