A Little Teamwork: Issues To Watch For When Negotiating Teaming Agreements

This article is reprinted with permission from the December 2005 issue of Pittsburgh TEQ.

Parties often enter into "teaming agreements" in an effort to pool their respective resources and talents in order to secure certain large contracts requiring the resources and/or services of both parties. A common scenario is where parties join together to submit a proposal to secure a contract. One party acts as the prime (and actually submits the proposal), and the other party provides information (and sometimes contributes to the cost of preparation) necessary to prepare the proposal and promises services once the proposal is chosen by the ultimate customer. In advising companies with respect to entering into teaming agreements, we routinely deal with the following issues:

1. Responsibilities of Parties: When parties join together in a teaming agreement, the respective responsibilities and obligations of the parties should be clearly set forth in the agreement. For example, the agreement should specify who is responsible for submitting the bid or proposal, and who is responsible for preparation costs. In addition, if an agreement with respect to the actual performance of services and sharing of responsibilities of the contract is awarded has not already been negotiated, the teaming agreement should specify the procedure and timeline for such negotiations. Allowances should be made for what happens if a party terminates the teaming agreement, if that is even an option. Termination in the middle of preparation of the proposal will likely jeopardize the other party’s ability to complete the proposal by the required submission date.

2. Exclusivity: It is important to document whether or not this is an exclusive arrangement between the parties. Can one of the parties explore other alternatives (i.e., work with other companies or independently submit a proposal) to try to secure the contract contemplated under the teaming agreement? Can a party pursue on its own any business that may compete with the products or services to be offered under the proposal submitted to the customer based on the teaming agreement? Any such restrictions should be clearly set forth in the teaming agreement. Additionally, does the prime contractor have to use the proposed subcontractor once the contract has been awarded? This must be clearly spelled out and should never be agreed to by the prime contractor unless already agreed to in writing by the proposed customer. Instead, language should be inserted that states that the prime contractor will use the subcontractor (subject, of course, to the parties coming to an agreement on the terms of the subcontract), subject to the approval of the ultimate customer.

3. Confidentiality and Intellectual Property: The agreement should contain a confidentiality provision restricting the disclosure by a party of confidential information disclosed by the other party in the process of preparing the proposal. Additionally, the parties may also want the existence of the teaming agreement (and any resultant contract) to be kept confidential. If possible, the confidentiality obligations should survive the termination or expiration of the teaming agreement. If it is possible that intellectual property will be used or created in connection with the teaming agreement, ownership of such developments should be clearly spelled out in the Agreement.

4. Clarity of Obligations Upon Achievement of Prime Contract: A common pitfall in setting forth parties' responsibilities in teaming agreements is “agree to agree” language. Since the ultimate contract has not yet been awarded, it is common for parties to insert language stating that if the contract is awarded, they will use “good faith efforts” to work together to negotiate the subcontracting agreement and associated pricing. Although the parties may be satisfied with this language at the time the teaming agreement is entered into, it does not actually obligate either party to do anything, and could hold up and/or impair the process and the prime contractor’s ability to perform under the contract it just secured. The prime contractor is usually obligated to perform the contract based on the proposal, and the inability to come to agreement with a subcontractor will not limit the prime contractor’s liability to provide the goods and services at the price specified in the proposal. We recommend that the parties agree on the terms of the subcontractor’s obligations in as much detail as possible before submission of the proposal (subject to the requirement that the customer consent to the subcontractor if such consent is required under the prime contract). Also, the request for proposal will often include the terms and conditions, which will apply if the prime contract is awarded. Both parties should work together to specify any objections to the terms and conditions as part of the proposal since many of the provisions will be required to be passed down to the subcontractor.