For small federal government contractors like SBIR, Small Business Innovation Research, contract holders often the goal is to grow so the business will be purchased by another company.
When these contractors are in this growth phase, the founders are doing everything: drafting code, drafting engineering specs, developing business, identifying subcontractors, hiring employees, answering the phone, building an IT infrastructure for the company, looking for office space, negotiating contracts – all while they perform a federal government contract. During this phase, lawyers pitch as well – drafting contract templates, drafting policies and procedures, negotiating with subs or primes, and any other advice needed to make sure the ship does not sink.
While I could go on about the policies and procedures that a small, growing federal government contractor should get in place and the types of contract templates it should have, I am not going to in this post. Instead, we need to talk about something so basic that it does not seem worthy of attention, and, in fact, most companies, large or small, don’t pay attention to this until…acquisition due diligence or until a contract dispute with the government, with a prime contractor or with a subcontractor.
The issue: WHERE IS THAT DARN CONTRACT? That’s it – it is that basic – it is 8:00 a.m. on any given Wednesday morning – do you know where your contracts are?
From my experience, working with the biggest of the big organizations as well as the smallest of the small organizations – it’s the same story: no one knows where their contracts are.
I will ask a client to see one of their contracts. More than half the time the response is: “Don’t you have it?” Or, this “Remember that subcontract template you sent us? Do you know if we ever got the subcontractor to sign it because we can’t find a signed contract and now they say we don’t have a contract.”
Since locating contracts has been on my mind, I asked a general counsel of a publicly traded defense contractor, if she knows where her contracts are. She laughed and explained that her business folks can’t lose their contracts because they don’t ever save them in the first place to even be able to lose them later. Another lawyer friend told me that at the company where she works the legal team and the finance team, when preparing for acquisition due diligence, got into a spat over who would pay to scan all the contracts into the data room because her business team had the strange habit of printing all their contracts and filing them in actual file cabinets in a room in the basement of the businesses headquarters. She did not know this until it came time to produce the contracts for due diligence. And, she too was unable to locate all the contracts.
I have been thinking about finding contracts because I have been thinking about the acquisition due diligence process or investor due diligence. Specifically, when a company is being considered for acquisition, during the due diligence process those conducting due diligence the buyer’s business team and the buyer’s lawyers want to review all material contracts. Generally, when the target company is a defense contractor, the possible buyer wants to review the defense contracts because those contracts are usually material since they are the essences of the business. The information gathered from reviewing contracts during due diligence is part of what the buyer company will consider in deciding whether to acquire a company and it informs the price a buyer is willing to pay.
To that end, the target company is asked to turn over its federal government contracts for review. The buyer’s lawyers and business team conducting due diligence expect to get a complete set of government contract documents: the proposal, the executed contract, task orders, licensing agreements, and any modifications. Often, recently closed contracts are reviewed as well. If it turns out that the target does not know where its contracts are; if it can’t produce a complete set of contract documents; if contracts are filed in the wrong folder; if the target does not have a complete list of its contracts and mods; or any other situation that makes it challenging to locate the contracts for review there are ramifications for the deal.
- It will take more time to conduct due diligence than it would have if the contracts were organized and available because the lawyers will waste time searching the electronic due diligence room trying to find the contracts they need to review.
- The extra lawyer time will result in more legal fees.
- Not being able to locate contracts suggests to buyers/investors that the target company really does not know its performance obligations and therefore may not be performing as required by the contracts. This indicates a risk of breaching the contracts. How would a company know its performance obligations if it can’t even find the contracts?
- It’s a sign that the seller company is not complying with the information management and information security regulations related to its government contracts because it is supposed to secure and maintain government information especially, classified information and controlled unclassified information – to include contracts.
- Not having contracts organized and accessible is just bad business, it presents as sloppy, undisciplined and unsophisticated.
- If the seller’s lack of contract management is bad enough, that is it can’t r produce the contracts during the due diligence, it’s a risk for the buyer/investor because the buyer/investor won’t get all the information they want about the contracts during due diligence and as mentioned above is a sign that the seller is not in compliance with its contractual or legal requirements.
- Finally, it causes the price the buyer/investor is willing to pay to go down.
What’s a company to do to make sure it does know where its contracts are?
- Keep a basic list of your contracts which should include the name used for the contract, the government agency, the contract number, the date of award, who your subs or prime contractors are.
- Keep one folder for each of your government contracts. The folder should include: your proposal, the contract, task orders, modifications, and all attachments and any subcontracts.
- Make sure your folder and file names reflect the name and number of the contract.
- Always be sure to get a signed, by both parties, copy of the contract – that is the version you want to keep.
- Have naming conventions for your contracts so that you name them all the same way. This helps in locating them.
- Make sure multiple people in your company know where your contracts are.
Even small companies without a sophisticated document management system and without a contracts manager can undertake basic steps to control your contracts and can create a simple excel spreadsheet of contracts. And, when in doubt, ask your lawyer for your contracts – if you work with them on your contracts.
Out of all the things I have lost, I miss my mind the most. Mark Twain
