A recent decision from the Court of Appeals of Virginia may have companies doublechecking the workshare terms in their subcontracts. The Court held that a subcontractor's 40 percent workshare only applied to the $70 million originally awarded under the prime contract and did not apply to the additional $55 million that the government later added. This was true even though the workshare provision stated that it applied to costs "over the life of the contract." Read on to learn why the Court ruled this way and tips for avoiding controversies over federal subcontracting workshare arrangements.

How Did the Prime Contractor and Subcontractor Wind Up in Litigation Over Workshare?

In 2019, International Business & Technical Consultants, Inc. (IBTCI) and Dexis Interactive, Inc. (Dexis) agreed to pursue an opportunity with the U.S. Agency for International Development (USAID) as prime contractor and subcontractor, respectively. See Dexis Interactive, Inc. v. Int'l Bus. & Tech. Consultants, Inc., No. 0689-23-4 (Va. Ct. App. July 9, 2024). USAID awarded their team a contract valued at approximately $70 million.

Because the subcontract between IBTCI and Dexis was cost-plus-fixed-fee and completion type, it listed an estimated cost for Dexis's performance ($24,776,518) and Dexis's fixed fee ($1,238,826), for a total of $26,015,344. This was consistent with the subcontract's Statement of Work (SOW), which targeted Dexis's workshare at 40 percent, within "a range of no less than 38.5% up to 41.5%, as well as 100% of the total Direct costs associated with TDM [USAID approved Technical Directions Memorandum] for that labor over the life of the contract." IBTCI also had to "make a good faith effort to achieve the agreed-upon workshare."

Importantly, however, the subcontract also stated that "[t]otal Subcontract Costs shall not exceed the total cost and fee" and the "total cost stated above may not be adjusted without written modification signed by IBTCI."

In 2022, USAID modified the prime contract to add $55 million in new work. IBTCI and Dexis disagreed how much of the new work Dexis was entitled to perform. IBTCI offered Dexis 15 percent of the new $55 million, while Dexis argued it should receive 40 percent under the SOW's workshare.

Why Did the Court Find the Workshare Inapplicable to the Modification of the Prime Contract That Added $55 Million?

Like the Circuit Court, the Court of Appeals agreed with IBTCI, holding that by its plain terms, the subcontract did not entitle Dexis to 40 percent of the $55 million in new work.

First, the Court explained that the subcontract included a not-to-exceed amount based on the prime contract's original value and required IBTCI's written permission to raise it. "Thus, on its face, the subcontract entitle[d] Dexis to $26,015,344 (performance cost plus fixed fee) and [did] not obligate IBTCI to allocate to Dexis any portion of additional work that it may receive from USAID."

Second, the SOW placed the "good faith" and "life of the contract" workshare provisions in the context of the subcontract's initial $26 million value, which the SOW described as the "subcontract ceiling."

Third, the subcontract's Order of Precedence placed the subcontract (including the not-to-exceed clause) above the SOW and its workshare provisions, such that the former trumped the latter in the event of a conflict. To the extent of any inconsistency between the not-to-exceed value and the workshare requirement, the subcontract's ceiling governed.

What Are the Takeaways and Strategies for Workshare That Contractors and Subcontractors Should Keep in Mind?

While the Court of Appeals did not designate its decision "as having precedential value" under Va. Code § 17.1-413(A), it is instructive for prime and subcontractors alike. All parties should:

• Scrutinize subcontract terms—including those where it is easy to focus on the figures instead of the words, such as the ceiling and workshare—to ensure they are consistent;
• Be aware of the order of precedence and consider elevating key terms to sections of the subcontract that have higher priority in the event of a conflict; and
• Give particular attention to workshare guarantees, which create risks for both parties and must be considered in conjunction with the subcontract's other terms.

Workshares are key deal points because they drive revenue, but they are also prone to creating conflicts with other terms or ambiguity in the face of new circumstances. This case highlights the importance of specifying the work to which the workshare requirement applies, but other scenarios arise frequently, too. For example, what happens if the prime contractor needs to remove a subcontractor's personnel from the program due to performance issues identified by the government customer? Must the subcontractor fill the position to maintain the workshare allocation, or can the prime fill it to ensure seamless performance?

Companies doing business with the government should consider and address such questions when negotiating subcontracts and, if necessary, consult with experienced counsel to resolve difficulties that may arise.