Many of our readers are familiar with a number of the nuances of joint ventures. In fact, in the past few years, many of you have utilized this nifty little concept! That said, for those of you newer to the government contracting business (and as a refresher for those who have been in this for a while), here is a short rundown of the basics of joint ventures in government contracting.
What is a joint venture?
Generally, it is an association between two or more businesses to act in concert for some common purpose. In the world of SBA regulations, it is that, but more. For small-business set asides, the joint venture is a separate, unpopulated legal entity (by “unpopulated,” we mean, it lacks its own employees that will perform the contract, although SBA allows such entities to have employees who perform purely administrative functions). Considering this, joint ventures must be registered in SAM before the bid submission deadline for any contracts for which businesses wish to bid on together.
Can I form a joint venture?
Whether you can form a joint venture that is eligible for small-business set-asides will turn on whether your business, and the business you wish to partner with, are small businesses with regards to the solicitation you are applying for, under the SBA’s standards. However, if two companies are party to an approved mentor-protégé agreement, then the mentor can be a large business and still form a joint venture with a small-business protege. The rules for joint ventures (with regards to small business set asides) can be found at 13 C.F.R. § 125.8. One aspect of joint ventures worth noting here is that, per the language of section (a) of that regulation just cited, while each business must be small under the applicable solicitation’s size standard, their receipts are not combined for the purpose of said size standards. Therefore, for a solicitation with a $10 million size standard, if two businesses with average annual receipts of $8 million each form a joint venture, that is fine to the SBA. This is important as, absent the small business joint venture rule, two businesses that have a joint venture together are treated as affiliated (13 C.F.R. 121.103(h)).
Are there specific requirements for forming a joint venture?
As you might have already gathered, for joint ventures to qualify for small-business set asides (either under the mentor-protégé exception or to qualify for a socioeconomic set-aside), the joint venture agreement forming them must include certain provisions, some of which are highlighted below (check the appropriate SBA regulation for the entire list):
- Explaining the purpose of the joint venture;
- Stating the small business (or 8(a), SDVOSB, WOSB, or HUBZone entity, as the case may be) must own at least 51% of the joint venture, serve as its managing member, and designate one of its employees as the joint venture’s responsible manager (Use the phrase “Responsible Manager” not “project manager”);
- Stating the joint venture’s profits be split to commensurate with the work that each party performs—not according to the parties’ ownership percentages;
- Stating the joint venture establish a separate bank account, in its name, into which all payments owed to the joint venture be deposited and from which all payments be made. The account must also require the signature of both members for any withdrawal;
- Stating the joint venture agreement to itemize the major equipment, facilities, and resources (and the value of each) that each member will provide to the joint venture, where practical;
- Stating the joint venture agreement to specify the responsibilities of the members regarding contract negotiation, source of labor, and contract performance (including a discussion on how the joint venture will meet the performance of work requirement);
- Stating that each member be obligated to complete the joint venture’s performance, even if the other member withdraws; and
- Stating that the joint venture establish compliant record keeping and reporting processes.
It is worth noting that there are special requirements when it comes to joint ventures seeking set-asides for one of the socio-economic programs (such as WOSB or 8(a)) and these can be found here:
8(a): 13 C.F.R. § 124.513
WOSB/EDWOSB: 13 C.F.R. § 127.506
SDVOSB: 13 C.F.R. § 125.18
HUBZone: 13 C.F.R. § 126.616
Why form a joint venture?
Joint ventures, in the small-business set aside context, basically allow businesses to combine their attributes, experience, and capabilities while retaining their small status. Agencies have to consider not only the joint venture’s past performance when conducting an evaluation, but the past performance of each business that is a member of the joint venture. This means that two businesses that, by themselves, lack the past performance for a contact can join together and potentially meet the requirement jointly. It also allows businesses to access their partners’ capabilities (to the extent the businesses agree to, of course). Of course, check the specific solicitation requirements if you wish to bid as a joint venture.
There are other things. Joint ventures do not require pre-approval by any federal agency EXCEPT if the contract being sought is an 8(a) Program sole-source award or if it is an SDVOSB or VOSB set-aside through the VA. Small business joint ventures can perform as many contracts as they are able to acquire without the members being considered affiliated, but only for a two-year period beginning on the date the joint venture receives its first award; after that the parties can form an additional joint venture arrangement. There are also certain performance of work requirements for the joint venture, and, if it is a joint venture that utilizes one business’ socio-economic status (such as SDVOSB or HUBZone), that member has certain performance requirements of their own.
Additionally, if you’re not a small business, you can’t gain the exemption from affiliation by entering a joint venture with a small business, EXCEPT if you have a mentor-protégé agreement with that small business.
Joint ventures can be powerful tools. This post has a summary of the main considerations and rules for joint ventures, but there are additional wrinkles. Please be sure to review the joint venture regulations and the particular solicitation closely to ensure to meet the various requirements.
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