Teaming arrangements between contractors are commonplace in federal procurement as the Government often requires solutions encompassing complementary capabilities from multiple contractors to meet its procurement needs. Federal Acquisition Regulation (FAR) § 9.601 describes two types of contractor teaming arrangements. The first involves an agreement between two or more companies to join forces to act as a prime contractor on a federal contract. This is commonly known as a joint venture (JV). The second type of arrangement is between a prime contractor and a subcontractor to perform under a specified Government contract or acquisition program. Before entering teaming agreements, contractors conduct due diligence reviews on their potential teammates to identify and mitigate risks. Savvy contractors understand that to ensure mutually beneficial arrangements, due diligence reviews must be tailored individually for each procurement, accounting for factors such as contract requirements, potential team members, type of arrangement, and the proposed solution. Comprehensive due diligence reviews may be particularly important when entering a teaming arrangement with a company for the first time. Similarly, due diligence reviews are crucial when prospective contractors from different countries come together to form a team. Contractors can streamline such reviews by focusing on some critical areas when conducting due diligence activities.

The Federal Acquisition Regulation (FAR) requires prospective contractors to be deemed responsible before they are awarded federal contracts. FAR subpart 9.1 prescribes policies, standards, and procedures for determining whether prospective contractors and subcontractors are responsible. FAR 9.103 requires contracting officers to make an affirmative determination of responsibility before award. This affirmative determination must be reasonable and factually supported. Prime contractors may also be required to demonstrate the responsibility of their proposed subcontractors when necessary. FAR 9.104 states general and special standards that prospective contractors must meet to demonstrate responsibility to receive contracts.

General Standards

The general standards listed in FAR 9.104 require prospective contractors to:

• Either have adequate financial resources to perform the contract at issue or have the ability to obtain them.
• Have the ability to comply with the required or proposed performance or delivery schedule, taking into consideration all existing commercial and governmental commitments.
• Have a satisfactory past performance record. Notably, the responsibility determination of prospective contractors cannot solely be made based on a lack of relevant performance history, subject to exceptions of FAR 9.104–2.
• Have a satisfactory record of integrity and business ethics.
• Possess or have the ability to obtain the necessary organization, experience, accounting and operational controls, and technical skills.
• Be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Subcontractors under U.S. federal contracts cannot generally sue the government directly as they lack privity of contract with the government. Privity refers to a legal concept describing a relationship or nexus between contracting parties. The government often utilizes a two-tiered contracting system for procurements where it enters into a contract with the prime contractor that, in turn, contracts with subcontractor(s) to fulfill contractual requirements. Thus, in a federal contract, the government only has a privity of contract with the prime contractor, creating a legal buffer between the government and the subcontractor. Since subcontractors are not in privity with the government, the government does not waive its sovereign immunity, and subcontractors may not bring direct claims against the government.

However, as with most rules in U.S. federal contracting, the no subcontractor privity rule has its exceptions. These exceptions require that subcontractors looking to bring direct claims against the government must first establish a privity of contract with the government. That is, the contractor must successfully demonstrate that it explicitly or implicitly entered into a contract with the government.

As a sovereign and a contracting party, the government holds the prerogative to terminate a government contract, either partially or completely, whenever it is in its best interest. While a contractor may pose certain challenges to the CO’s decision to terminate a contract, it is generally accepted that the government’s rights in this regard are practically limitless. The Federal Acquisition Regulation (FAR) outlines the methods through which the government may settle contracts it terminates for its convenience. Specifically, under FAR § 49.103, the government may settle contracts terminated for convenience through negotiated agreement, CO’s determination, costing-out under vouchers for cost-reimbursable contracts, or through a combination of these methods. Typically, when the government exercises its right to terminate a contract for convenience, it enters into a settlement agreement with the prime contractor. In turn, prime contractors are required to settle any subcontractor termination settlement proposals.

Once the government issues a notice terminating a contract for convenience, the prime contractor must terminate all subcontracts related to the terminated portion of the prime contract. Under FAR § 49.104, prime contractors are required to settle all outstanding liabilities that arise out of the termination of subcontracts and promptly notify the CO of any legal proceedings that may be instituted by a subcontractor. Additionally, FAR § 49.108 generally outlines the parties’ rights, obligations, and procedures pertaining to subcontractor settlement proposals. Notably, FAR § 49.108-2(b) makes it abundantly clear that the government’s rights to terminate the contract for convenience are unaffected by a prime contractor’s failure to include an appropriate termination clause in a subcontract. Therefore, contractors should review the termination clause of their subcontract agreements to ensure their rights are adequately protected in case of a termination for the government’s convenience.