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My small business has been approached by a large business that claims they can get me a contract with a federal agency in exchange for a hefty commission to the large business. Is this proper or can I get into trouble for entering into such arrangements?

CCS offers the following from our Chief Problem Solver, Tom Reid:

FAR contains a required certification by all contractors that they have not paid a consultant a contingent fee based on the award of a contract. This appears at FAR 52.205-5 “Covenant Against Contingent Fees.” By its terms it appears to prohibit ANY fee paid to a non-employee based solely on the award of a contract, but that is not the strict view employed by GAO and the courts. In a GAO decision that came out last year, Kola Nut Travel, Inc., B-296090.4, August 25, 2005, GAO made clear distinctions between those arrangements that would violate law and those that would not. Citing many of its past decisions, GAO said “the prohibition applies only to situations where an agent agrees ‘to solicit or obtain’ a contract from a procuring agency…

The fact that an agent’s fee is contingent upon the contractor’s successful performance of the contract, or even upon receiving the contract award, is not sufficient, by itself, to bring a fee agreement under the contingent fee prohibition; rather, the regulation contemplates a specific demonstration that an agent is retained for the express purpose of contacting government officials, where such contact poses a threat of the exertion of improper influence to obtain government contracts.”

Thus, the offer to assist in obtaining government contracts where a fee would be paid to the consultant will not be found to violate applicable law and regulation unless there is also some indication that the means for obtaining that contract will involve improper influence over government officials.

The second aspect of this question, however, goes to the issue of whether a small business may link with a large business for purposes of obtaining business. The short answer is yes, and it happens all the time. Large businesses are encouraged to work with small businesses and, given their greater resources, often have the ability to identify opportunities better than small businesses. So long as the ultimate arrangement between the companies meets all applicable requirements for the specific procurement, there is generally no prohibition to these arrangements.

For example, if the procurement is a small business set-aside, then the small business must perform at least 51% of the work, and it must provide products manufactured by small businesses, unless those products are on SBA’s list of non-available products. See http://www.sba.gov/GC/approved.html. The nature of the arrangement between the companies should be one that is reached through arms-length negotiations, and should be structured in a way that benefits both companies. We have seen some clients who treat all arrangements as teaming arrangements when some other form of organization might be more beneficial to the parties.

Since each case is fact-specific, the parties should call on the resources of both their legal and accounting staffs, or outside consultants to determine the proper structure. Often a straight prime-sub relationship works best, and that relationship may be preceded by a teaming agreement for proposal purposes. Sometimes a mentor-protégé arrangement is better suited to the circumstances. In other cases a formal joint venture may be appropriate and, generally, a joint venture (as an entity separate from its members) may need its own CCR registration, DUNS number, and state registration. Again, professional advice is necessary to guide you through the specific facts of your situation.

NOTE: CCS is not authorized to practice law or accounting. This information should not be relied on in any particular facts you may have without checking with a properly licensed professional.