Software subcontractors swim with the sharks

Stephen M. Ryan

Is the federal government a customer from which all information technology companies should be seeking business?

The Federal Acquisition Reform Act and Federal Acquisition Streamlining Act were designed to make the answer to that question affirmative. Congress wanted to encourage IT companies to enter the government marketplace.

FARA and FASA caused significant changes in regulations, but that doesn't mean the waters aren't treacherous for newcomers.

Consider a hypothetical situation. A state-of-the-art software company'let's call it SDC'is tempted to bid on government projects. Because of the company's expertise, a federal customer who will hire SDC tells it to go through government contractor XYZ, which has a series of convenient task order contract vehicles. XYZ will charge 10 percent for managing the work performed by SDC.

XYZ receives welcome news of a new task order in a telephone call from the contracting officer, and, of course, agrees to take it on.

But should SDC also agree to subcontract? In truth, using an existing government contract as a pass-through vehicle for the convenience of a federal customer, when the prime contractor will receive a fee, is an accepted but ethically ambiguous part of government contracting. For an outsider such as SDC, it may be a poorer deal than it first appears.

The upside of creating such a contractual relationship is that it permits a company to receive government work almost immediately and build a performance record. The downside can be equally profound. The 10 percent prime contractor, XYZ, actually controls the contractual relationship. XYZ will always be unusually sensitive to the government agency and not particularly concerned with the 90 percent subcontractor, SDC.

Now suppose the agency customer refuses to accept the software developed under the task order'a common occurrence with custom software development efforts. XYZ may merely pass the message down to SDC and let SDC live with the resulting problems. If a real disaster occurs, the government knows how to play on the business interests of XYZ, which can afford to walk away from its 10 percent fee'a fee it has done little to earn.

SDC will also be terrified of a default that would hinder future work from its key customer, the government. A prime such as XYZ can unilaterally cut off all the subcontractor's rights under the Contract Disputes Act, leaving a subcontractor with the unsatisfactory remedy of suing the prime contractor, not the government. Agencies often provide willing assistance to the supine prime contractor. If this describes your agency, ask yourself if it should.

This scenario has occurred, with variations, so often that any type of 10 percent relationship should be viewed with suspicion by a company that has not played in the government contract arena or that lacks a long-term commitment to the market. The truth is that the government market, despite FARA and FASA, continues to harbor pockets of behavior'such as use of 10 percent companies'that don't have private sector analogs.

They are unethical and dysfunctional. The government has become a good market for companies selling standard products but remains a perilous place for custom software development work.

Federal naifs

Companies that get most of their business from commercial customers or that lack a dedicated federal effort often gravitate to the role of subcontractor. The companies naively expect too much from the prime contractor, perhaps not realizing that along with the buffer of a prime, they lose control of the dispute process.

As a customer, you ought to be aware of potential unfairness when letting a prime contractor turn over customer development to such corporate neophytes. In fact, you ought to be aware of the treatment primes sometimes give subs. If they're content to let subs twist in the wind, what kind of service is that going to buy you?

Several software companies have been burned by this type of experience. The result is that a company capable of good work stays away for good. That hurts both the taxpayers and the government.

Stephen M. Ryan is a partner in the Washington law firm of Brand, Lowell & Ryan.

E-mail him at

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