A joint venture can give your company the winning edge it needs in the competitive government contracting market. Combining resources with one or more firms can help you conquer current GovCon trends that challenge small businesses, including consolidated contracts (even across agencies) and large indefinite-delivery/indefinite-quantity (IDIQ) contracts and task orders.
It can be tricky, however, to comply with the complexities of joint venture requirements. Read on for advice on how to steer clear of compliance issues.
Satisfy FAR and SBA
Federal Acquisition Regulations (FAR) recognize two types of teaming arrangements when bidding on government contracts. One is the prime contractor/subcontractor(s) relationship. The other is a joint venture.
The Small Business Administration (SBA) defines a joint venture (JV) as two or more companies that pool their resources—including effort, property, money, skill, or knowledge—to successfully and cost-effectively bid on and perform for-profit work for government agencies. In other words, firms combine their best attributes to win government contracts!
Regulations governing JVs can vary according to specific small business program designations [e.g., 8(a), Service-Disabled, Veteran-Owned Small Business (SDVOSB); HUBZone; Women-Owned Small Business (WOSB)/Economically Disadvantaged (EDWOSB)]. Before embarking on a JV bid to capture a small business set aside opportunity, it pays to consult an experienced GovCon professional to ensure you’ve set up the venture correctly and taken advantage of all benefits.
General requirements for a joint venture include:
- Member companies must be small businesses as defined by SBA. The exception is when companies enrolled in SBA’s mentor-protégé program form a joint venture as a prime contractor. In this case, even if the mentor is a large business, it can form a “small business” JV with its protégé.
- Your JV must be registered as a separate legal entity on SAM.gov, The System for Award Management (SAM). SAM is the government-run website that serves as the central registration point for government contractors. Your JV must be registered before the bid deadline on the contract for which you’re competing.
- A joint venture must be “unpopulated.” That means it does not employ the people who will perform the substantive work under the contract. The joint venture may, however, have employees and/or consultants who perform administrative functions.
- If you bid on contracts set aside for a particular small business socio-economic designation (see above), the JV’s Managing Member must be classified under that designation.
- Your joint venture may not be awarded more than three contracts over two years, starting from the date of the first contract award. This is known in the GovCon world as the ‘3-in-2 Rule.’ If you exceed this restriction, SBA considers all JV members as affiliated for purposes of size standards and other small business qualifications. There is an exception that may apply related to the use of an 8(a) mentor-protégé joint venture (MP JV).
Get It On Paper
Your JV agreement must be in writing and explain the purpose of the joint venture.
As emphasized above, rules can become complicated, and we recommend that an experienced advisor guide you through the hoops. That said, here are the main provisions of a JV agreement:
- Designate one JV member as a “Managing Member” that will be the legal controller of the JV. Typically, this is done with one member being designated with 51% ownership, but it may be accomplished through other terms (such as 50/50 Co-Managing Members).
- Designate an employee of that company as a project manager. This person need not be an employee at the time your JV submits a bid, but there must be a letter of intent that he/she will be employed if you win the bid.
- The Managing Member must perform at least 40% of the contract work of the JV (work that it does not subcontract). Also, make sure you adhere to any limitation on subcontracting.
- In the case of an SBA mentor-protégé arrangement, the small business must own 51% of the JV, serve as the Managing Member, and employ the project manager. Mentors, however, may own up to 40% of the protégé.
- Your JV must open a bank account in its name. All payments due to the joint venture will be deposited in the account, and all expenses incurred under the contract will be paid from the account.
- Compliant record-keeping and reporting include an itemization of all major equipment, facilities, and other resources to be furnished by each party in the JV and the value of each resource, where practical.
- The agreement should specify the responsibilities of members for contract negotiation, labor, and the performance of work requirements.
- Each JV member must accept the obligation to complete contract work even if other members withdraw.
Look Before You Leap
A joint venture arrangement is not a fit for every small GovCon. Consider the following factors before you decide what’s right for your firm:
You lose the power of the prime contract base. The indirect rate is tied only to the work actually performed in the JV, not the overall revenue of the contract. While this allows very competitive pricing at the JV level, it appears in your company’s indirect rates as another small subcontract.
You take on responsibilities of a corporate marriage. Creating a JV involves a great degree of professional, personal, and legal trust. Companies are in it together for many years. Clearly designating roles and responsibilities in the operating agreement helps, but the union is bound to go through rocky times. Work through relationship issues away from the eyes of the customer. And keep your legal team in the loop from the beginning.
The SBA size standard calculation considers your pro-rated share of the JV’s revenue as your revenue. Let’s say you perform 20% of the work, but own 55% of the JV. For the sake of determining small business designations, the SBA will consider that you had 55% of the JV’s revenue. This may put you over the small business threshold quickly if the JV has a lot of subcontractor labor or material purchasing.
The JV may have an adverse impact on corporate valuation. Those looking to acquire a firm view JVs differently and may assign more value to JVs with controlling interests. You would also be asking an acquirer to take your place in a complicated legal and interpersonal relationship. The interested party may not think it’s worth the effort and risk.
When your firm is ready to explore how a joint venture may help you win more contracts, contact the GovCon accounting experts at CAVU. Our years of experience with the federal market and agency regulations can guide you through the best decisions for more competitive bids in the new year.