Doing business and creating strategic alliances in the realm of government contracts as a subcontractor can be a considerable investment when pouring substantial resources into the bid and proposal stage. So, when a Prime decides to either decline awarding a subcontract or terminate one before the subcontractor can recoup their costs, it can be devastating.
Unfortunately, as an attorney I’ve dealt with more than my fair share of premature and unlawful terminations. As a result, I’ve noticed a few behavioral patterns by companies and individuals who then later try and terminate the prime-subcontractor relationship prematurely. Fortunately, knowing what the signs are can help the subcontractor protect themselves and plan accordingly.
So here are 5 warning signs that your Prime might be preparing to cut you out of the deal, and ways to help prevent that from happening.
#1 – They’ve gone back on their word before.
There’s a saying that states that past behavior is the best predictor of future behavior. In my experience, the same individuals that go back on their word with something small, are the same individuals that go back on their word with something big. What this might look like is if your partner originally agreed to give you a certain number of staffing positions upon a contract award, but then once it’s awarded they reduce that number without a solid explanation. Or if you’ve done business with your partner before and agreed to a certain rate for services provided, but your partner strong-arms you into a lower rate once they realized you were in a vulnerable financial position.
If your partner ever changes the deal up at the first opportunity that benefits them, warning bells should be going off in your head.
How to fix:
If possible, get everything in writing. Follow up verbal conversations with an email summarizing what was discussed. If they attempt to backtrack on small commitments, take mental notes because chances are it’s going to happen again.
Also, pay special attention if your partner mentions past instances where they had to “change direction” against the other party’s wishes, or even terminate a subcontract. If they did it before, they’ll do it again. If the Prime has terminated other subcontractors, or even attempted it, you should be very careful about doing business with them.
#2 – They’re adamant about including clauses that eliminate or seriously reduce their liability if they breach the contract
I’m all about reducing liability whenever possible, but I’m also about being fair. If when negotiating terms of a subcontract the Prime is being unreasonably one sided with their contract clauses, this should cause red flags to immediately raise. Including overly beneficial terms for themselves could mean that they are ensuring a soft landing in case they get sued for breaching the contract.
One sided terms generally give a tremendous benefit to the other party or saddle you with a disproportionate number of obligations. These terms might include clauses that make you liable for all attorney’s fees if you default on the contract, but there are no similar terms for their default. Or they may be terms that prevent or seriously limit your ability to bring a suit to court if they default.
How to fix:
Whenever possible, try to use your own lawyer-generated contracts that include terms favorable to your company. If that’s not possible, have your in-house attorney review and negotiate any of the clauses that mention legal terms such as indemnity, liability, or jurisdiction. Having a well-balanced contract, with mutual obligations and responsibilities is an important part of having a strong agreement.
Also, make sure that you and your contracts team understand what each term in your subcontract means, even the legalese. Google is awesome, and can come in handy when you don’t have your lawyer readily available for an explanation.
Including a termination for convenience clause in your subcontract essentially gives the prime contractor carte blanche to end the contract whenever it suits them. You can see how devastating this could be if your partner decides to take over your portion of the work and keep the associated profit after you’ve invested a substantial amount of resources into the proposal and initial contract ramp-up.
When contracting directly with the government, dealing with termination for convenience clauses is a way of life. But when a Prime contractor forces that clause into its subcontracts without a good reason, it always causes concern for me. For really large Prime contractors with tens or hundreds of subcontracts to monitor, including such a clause might be understandable when trying to stay agile. But even in those situations I always try to negotiate those terms out if possible.
How to fix:
Make sure that it’s understood from the very beginning that if the prime contractor is awarded a contract, the subsequent subcontract should remain intact unless you materially breach it. The best way to do this is include verbiage that speaks to this stipulation in the teaming agreement when both parties are contemplating a relationship and have equal bargaining power. Also, be sure to make that term one of the mandatory clauses that is automatically flowed down into the subcontract.
#4 – The teaming agreement language promising a contract award is vague or non-existent.
Probably 9 out of 10 standard teaming agreements that I’ve come across contain verbiage that state the Prime “may award a subcontract” to the subcontractor once the prime contract has been awarded to the Prime. This clause opens the door to the possibility of the prime using you to win the contract, but then finding a similar company to perform the subcontract for cheaper.
If you’re one of many subcontractors for that piece of work that had to submit a competitive bid, then this clause may be understandable. But if you and the prime worked closely together on a project, both invested considerable resources into the proposal, and there were no other potential subcontractors submitting quotes for the same work, including clauses in your agreements that allow the prime to award the contract to another entity is extremely risky.
How to fix:
Ensure the teaming agreement clause that addresses a subcontract award says something similar to “shall enter into a subcontract.” Avoid clauses that state that “good faith negotiations shall be entered into.” This not only is bad for you because it’s extremely vague, it could render your teaming agreement unenforceable because of the lack of commitment.
If your company starts receiving “official” notifications that your contract performance is lacking, but for minor infringements, this could mean that the other party is preparing for a termination. When something is official, it usually comes in the form of a letter PDF attachment to an email (or an actual certified letter), it contains verbiage such as “contract breach” and “poor performance,” and it comes from either the Contracts Manager/Administrator or an attorney.
How to fix:
Always, always, always tie your performance back to the subcontract. For every breach that is alleged or performance metric that you are accused of failing, make sure it references an obligation that is clearly spelled out in the subcontract. If their correspondence fails to do this, don’t acknowledge that any breach has taken place.
If there are legitimate performance issues, address them immediately. Regardless of what anybody tells you (even if it’s the prime), not meeting your performance obligations on a clearly stipulated subcontract metric, especially one that is vital to the performance of the prime contract, could be grounds for termination.
Also, if you receive any correspondence from your teaming partner’s attorney, be sure to respond in kind with your own lawyer. We lawyers are constantly gathering information for our client’s proverbial arsenal, and are always in preparation for the lawsuit that could happen down the road. So, corresponding with a lawyer should always be measured and through another attorney so you don’t accidentally say something that will come back to haunt you later.
For more tips on contracting as a subcontractor and to explore affordable legal solutions for your business, including contract review, negotiations, and execution, be sure to visit Gov Contract Support. To get full access of a Prime’s subcontractor history, get started with a free five-day trial of EZGovOpps.
-Raven Willis, esq.
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