Today’s contracting environment is forcing contractors to become more price competitive. One such strategy to help achieve this is to form a Joint Venture (JV) with another entity or entities to bid an indirect rate structure that is lower than under a typical prime/subcontractor approach. Joint ventures also provide for the opportunity to combine past performances of the venture members. The following is a general overview of JVs.

Description

A JV is usually a separate legal entity that is formed to pursue contracts. As a separate legal entity, a JV must have its own tax identification number, be registered with the System for Award Management--although classified contracts may be exempt--and have an operating agreement to govern the entity and members. There are two types of JVs: unpopulated and populated. In the unpopulated type, employees remain with their respective companies and subcontract agreements providing for the work effort. In the populated type, the employees become employees of the JV, and the JV is responsible for the payroll, payroll taxes and employee benefits.

JVs and Size Standards

Small business set-aside procurements define the small business size by the NAICS code assigned to the procurement. Most NAICS codes are revenue-based, though some are employee-based. Normally, because of the affiliation rules, the revenues of the JV members are combined to determine the JV’s size. These affiliation rules prevent a large business from organizing into several small businesses under common control or ownership for the purpose of qualifying for small business set-aside awards.

The SBA created exceptions for a JV formed by small businesses. The JV is considered a small business as long as each JV member is a small business based upon the size standard in the procurement. The procurement must be a bundled procurement or the total value of the procurement must exceed half the NAICS value assigned to the procurement.

Limitations on Subcontracting

The Limitations on Subcontracting clause requirements will flow down to the JV for set-aside awards. The percentage of work performed by a small business JV, usually 50%, is based on the JV and the percentage of work performed by an 8(a) JV is based on the 8(a) firm or firms. The 8(a) firm must perform the majority of the contract, usually more than 50%. There are separate and similar control and profit-sharing rules for service-disabled veteran-owned small businesses, and for women-owned small businesses.

Additional SBA rules

The same JV may receive up to three contract awards in a two-year period, though the JV participants may form another JV and pursue up to three more contract awards.

The SBA must approve an 8(a) JV agreement that is established solely for pursuing an 8(a) contract. The JV must submit all required information to the SBA District Office at least 20 business days prior to the scheduled contract award date. The SBA will approve an 8(a) JV only if the 8(a) firm documents that it lacks the necessary resources to perform on the contract and the JV will substantially benefit the 8(a) firm.

The 8(a) firm must own 51% of the JV and manage the JV as the designated “managing venturer”. Managing the JV usually involves maintaining the accounting and business records in the offices of the 8(a) firm. The 8(a) firm must also demonstrate that performance of the contract is controlled by the 8(a) firm. Control includes hiring the Project Manager. The 8(a) firm must receive a distribution of profits based on the work performed or a greater percentage as defined by the ownership percentage if the JV is a separate legal entity.

The 8(a) JV partner, or partners, must be small businesses for the JV to qualify as a small business concern. Each small business must meet the size standard requirements identified in the NAICS code assigned to the procurement.

An exception to the small business partner rule is the Mentor Protégé program. Here the 8(a) firm can include a large business in the JV as long the 8(a) firm meets the small business size standard criteria and the Mentor Protégé arrangement is approved. The ability to include the capabilities of a large business when pursuing a federal contract can be a huge competitive advantage.

The JV agreement with the SBA includes SBA reporting requirements that include quarterly financial statements, an annual description of how the performance requirements for each contract performed under the JV are being met, and a final contract profit and loss statement that includes the final profit distributions to the JV members.

Summary

A JV strategy can used to combine past performance, technical, financial capabilities when pursuing larger contracts or as a means to bid a lower price. Be sure to understand your responsibilities, rights and compliance requirements when bidding work under a JV.

Wayne Clark, CPA is a Senior Manager with Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, forensic accounting and expert testimony to the government contracting industry. He can be reached via email at WayneC@FedStrat.com.