Prime – Sub Relationships in Government Contracting

June 1, 2018 on 4:05 pm | In Contract Interpretation, Contract Types | Comments Off

In the commercial world, under the Uniform Commercial Code (UCC), contracting can be very flexible and given the policies of the UCC, parties can find themselves in a contractual relationship with much less formality. Occasionally one of the parties is surprised that they are in a contractual relationship, but when the processes are much less formal, that can happen.

There is also a legal principle involved known as privity of contract. This principle reflects that two parties are in a direct relationship; there is no third party between them that holds a contractual relationship with them both. Thus the government has privity with the prime, and the prime has privity with the sub, but the government and the sub do NOT have privity as between them. The two of them are not in a direct contractual relationship with each other. Among other things, this prevents the buyer from going to the seller’s subcontractor and making changes of which the seller is unaware. It maintains a legally enforceable relationship between the parties actually in a contract with each other.

It is rare when an adjudicative body appeals to the privity of contract rules, but the GAO found it necessary in a May 18, 2018 decision. The current procurement, an IDIQ solicitation, led to the award of 80 contracts with a variety of contractors. One of the requirements was that if the offeror proposed subcontractors, the prime offeror had to demonstrate that they had successfully performed with that subcontractor in an identical relationship previously.

The protestor here submitted documentation to show that they had worked with the proposed sub under a different solicitation. That requirement was different and the government, which has extremely broad discretion on how to define its needs, dictated that all subs would be given PRIME contracts and deal directly with the government. In that case, this offeror’s “team” (there was a formal teaming agreement, which is NOT a subcontract) won the contract and each of them got separate prime contracts. Thus, in addition to other differences, the government provided specific contract direction to these separate entities and each billed its own costs and the government paid them directly. The protestor tried to argue that as the “team lead,” it served an identical role as a prime with subcontractors. The GAO disagreed.

Contracting in a loose manner in never advisable. You should never treat basic contracting principles in a cavalier manner. What you name an agreement may, on some occasions and some circumstances, reflect what the parties believed the nature of the relationship to be, but from a legal perspective a contract is different than a teaming agreement, which is different than a joint venture, which is different than a partnership, which is different than a corporation, which is different than a limited liability company, which is different from any number of other relationships that people or entities might have between or among themselves. A court will look to the terms of the agreement and how it functioned to determine the true nature of the arrangement.  In this case, the parties on the prior contract called what they did a team. And most commonly, upon winning a contract, the prime is awarded a contract and each other teammate then assumes a role as a subcontractor at some tier. In that case, however, due to government demands in meeting its reasonable requirements, each of the teammates became a prime contractor. Thus the protestor here had NEVER been in a prime/sub relationship with the currently proposed subcontractor.

The GAO determined that the agency had been correct in removing points from the protestor’s evaluation, thus dropping them below the level at which contracts were awarded. It pays to understand the variety of contractual relationships, and never try to call an apple a kumquat.

Amyx, Inc., B-415789.4, May 18, 2018.

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