Non-Prime Relationships in Federal Procurements
When doing business with the U.S. government through federal procurements, contractors typically need secondary relationships with other entities to effectuate performance. Meaning, in many instances, particularly when the size and scope of the requisition is large, a contractor cannot alone fulfill all of the deliverables of a single contract and will utilize other organizations to satisfy the order. These partnering relationships appear in various forms, each of which has its own nuances and rules. This article surveys the main secondary relationships that contractors employ in federal procurements.
Vendor is the most basic type of relationship. While the Federal Acquisition Regulation (FAR) uses the term interchangeably with subcontractor and contractor and is inconsistent in its use of the term across clauses, in federal procurements vendor usually refers to a person or organization that sells to a contractor. For clarity, contractor is the entity that holds the prime contract with the government. In federal procurements, vendors can and are subcontractors. In grants and cooperative agreements, however, which are different forms of government contracts, the term vendor is more clearly defined, although the distinction between vendor and subcontractor can be tricky, and a secondary organization’s classification as a vendor can alleviate it from some of the most onerous prime contract flow down requirements.
The prime/subcontractor relationship is widely prevalent in federal procurements. The most utilized form of fulfilling orders, a subcontract is an agreement between a supplier and contractor to furnish supplies or services in performance of the prime contract or another subcontract. FAR 44.101. Subcontract may also mean a transfer of commercial items between divisions, subsidiaries, or affiliates of a contractor or subcontractor. FAR 12.001. Oftentimes, particularly in large procurements, there are multiple levels of subcontracts known as tiers. A first tier subcontractor is an entity that sells directly to the prime whereas as second tier subcontractor sells to the first tier subcontractor. If a prospective contractor intends to utilize subcontractors to fulfill performance, regulations require that the government be notified of such, the specificity of the notification dependent on the type of procurement vehicle being employed by the ordering concern. Of particular significance to primes and subs alike are the flow down provisions outlined in the FAR. Flow down provisions are clauses in the prime contract that must be applied to the subcontractor. The FAR outlines which provisions are mandatory flow downs, and then practitioners may advise clients on a variety of other recommended flow down clauses depending on the facts of a given situation.
Organizations competing for federal procurements also often employ teaming arrangements to combine complementary capabilities for a total solution. Unlike a subcontract where one party is simply buying products or services from another party, a teaming arrangement involves a closer relationship between the organizations. In teaming, the parties work collaboratively to prepare and compete in bids as well as in performance of any award. Per the FAR, a contractor team arrangement means an arrangement 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 its subcontractors under a specified Government contract or acquisition program. FAR 9.601. Again, contractors may find more overlap in that a subcontractor can also be a team member. Like subcontracting, teaming must be disclosed to the government. FAR 9.603.
Joint ventures in federal procurements arise when two or more concerns form a separate legal entity for the limited purpose of securing and performing a procurement contract. Not exactly a prime/secondary relationship in that the new organization itself is the bidding and performing entity, joint ventures can have a structure where one partner is the lead and another partner is a minority participant. Regardless of the corporate structure of the joint venture, however, the government takes the position that all partners in the venture are responsible for contract performance. Joint ventures should be formed prior to offer submission and like the other secondary contractual relationships mentioned above must be disclosed to the government.
GSA Federal Supply Schedules are a unique contracting vehicle in federal procurements and impact some of the secondary relationships outlined here. Teaming in the GSA MAS program must be between two entities that each have secured GSA MAS contracts. Additionally, subcontractors and vendors are allowed in GSA Schedules. Vendors are simply disclosed on an offeror’s pricing submissions. Subcontractors in the MAS program are treated like subcontractors in more traditional federal procurements. Unlike teaming arrangements in the GSA MAS context, subcontractors are not required to have a GSA schedule, but they must only provide supplies or services that are on the prime’s GSA contract. A secondary relationship unique to the GSA MAS regime is dealers. Dealers are other organizations that do not have a GSA contract with the government, but may sell to the government off of the prime’s contract. A variety of rules exist governing this relationship, but like the others mentioned in this article must be disclosed to the government.
Finally, a critical distinction to make regarding these secondary relationships in federal procurements is that are all commercial contracts or arrangements, not public contracts. The prime contract holder is the entity with the direct relationship with the government; the party with the public contract and therefore privity of contract with the government. Vendor agreements, subcontracting agreements, teaming arrangements, joint ventures, and dealer agreements are all effectuated and governed by commercial contracts that set for the terms of the arrangement and which are subject to state statutory and common law, not the rules around federal acquisitions. What makes this arrangement even more complicated is that aspects of all of these secondary relationships while governed by the rules of applicable state statutory and common law, flow downs, and privity in the case of teaming and joint ventures, create federal government obligations to the non-prime parties. An even further complication in the secondary relationships of federal procurements is that more than one of these arrangements may be used in any single opportunity. Many procurements, as well as grants and cooperative agreements, will have multiple parties at various levels working to satisfy the obligations of the award. As such, sophisticated contractors should ensure that the appropriate agreements and understandings of roles, rights, and obligations are in place before partnering with other entities in a federal procurement.