Federal contractors often ask: “It is better to team up for government work with a prime-sub arrangement or with a joint venture?” Well, (spoiler alert) the answer is: it depends. But I won’t leave you with just that. This three-part series will provide insight on some of the major differences between these two types of “teams” that offerors should consider when making the decision between a joint venture or prime/subcontractor team in competing for and performing federal contracts. While this series will not provide a comprehensive list of all the differences between these two types of teams, it will cover some of the big ones that seem to come up more frequently in this decision-making process. Our first article focused on workshare, and our second, on past performance. This final article of the three-part series will discuss the parties’ relationship with the government and with each other in both types of teams.
Relationship with the Government
In a joint venture relationship, the venturers are both parties to the government contract (although one of the parties must be designated as the managing venturer under the various joint venture regulations if it is a mentor-protégé joint venture or a joint venture with any kind of socioeconomic designation). In a joint venture, the parties are jointly liable for the obligations and requirements under the contract and also jointly entitled to the rights that arise thereunder.
In a prime contractor/subcontractor team, the prime contractor is the only party in privity of contract with the government. Don’t worry, that is just a fancy way of saying that the prime contractor is the only one in a contractual relationship with the government and entitled to the obligations and rights that arise under it. In fact, a subcontractor actually has no rights or obligations under a federal government prime contract (although they do have rights and obligations under a subcontract). This is precisely why subcontract agreements for work performed under federal government prime contracts may often have a mandatory “pass-through claim” provision (requiring the prime to submit subcontractor claims to the contracting agency)–as well as a bevy of FAR flow-down clauses listing the subcontractor’s responsibilities and rules for performing work under the federal contract (since those terms don’t apply directly to the subcontractor through the prime contract).
Now, you may be wondering why this matters. And it is potentially not a deciding factor for some contractors in picking their teams. But this factor may come into play sometimes, including, during the following circumstances:
- Where the “non-lead” contractor (which here, will simply refer to the potential non-managing venturer or subcontractor) is new to the federal contracting realm and is looking to establish a relationship with a specific government agency, it may be wiser to push for a joint venture so a working contractual relationship between the contractor and the agency can begin to develop; or
- Where the non-lead contractor already has a long-standing working relationship with the contracting agency, it can be beneficial to name that contractor as part of the joint venture team, rather than as a subcontractor, in competing for the work.
Additionally, while all contractors hope there will be no issues with the government during their performance of a team project, those issues can and certainly do arise sometimes. This may also be something to consider in making your teaming decisions–or at least, in drafting your various teaming agreements. With a joint venture relationship, the parties can jointly bring claims against the government based on performance issues. But with a prime-subcontractor team, only the prime can bring claims against the government for performance issues. This is why–as I briefly mentioned above–it is vital to a subcontractor that the subcontract agreement include a pass-through clause allowing the prime to submit any subcontractor claims to the contracting agency on its behalf.
Now that we have discussed a few potential considerations regarding teaming partners’ relationship with the government, let’s take a quick look at the other important relationship to consider in picking your team–the teaming partners’ relationship with each other.
Team Members’ Relationship
Some aspects of the partners’ relationship with each other that should be considered in deciding between a joint venture team and a prime-subcontractor team are the anticipated longevity of the teaming relationship and frequency of the teaming projects to be pursued. This is due to SBA’s notorious affiliation regulations, and the potential for two contractors to be found affiliates if they work together too closely, too many times, or for too long.
The affiliation rules do provide some protection from affiliation for joint ventures–so long as the joint ventures only bid within the prescribed time frame of two years from date of first award (per each joint venture) and follow the other regulatory requirements for joint venture performance. Regarding joint ventures, SBA’s affiliation rules say the following:
Once a joint venture receives a contract, it may submit additional offers for a period of two years from the date of that first award. An individual joint venture may be awarded one or more contracts after that two-year period as long as it submitted an offer including price prior to the end of that two-year period. SBA will find joint venture partners to be affiliated, and thus will aggregate their receipts and/or employees in determining the size of the joint venture for all small business programs, where the joint venture submits an offer after two years from the date of the first award. The same two (or more) entities may create additional joint ventures, and each new joint venture entity may submit offers for a period of two years from the date of the first contract to the joint venture without the partners to the joint venture being deemed affiliates. At some point, however, such a longstanding inter-relationship or contractual dependence between the same joint venture partners will lead to a finding of general affiliation between and among them.
So this means, two contractors can jointly bid on as much government work as their hearts desire, so long as they only bid within the two-year period following the first award (and also, follow SBA’s other rules). And even then, the venturers could execute a second or third joint venture after that two-year period to continue jointly bidding work. But as the rule ever-so-vaguely notes, too many of these joint venture agreements between two contractors can eventually lead to affiliation. So again, the protection is limited.
The prime-subcontractor relationship does not provide this same protection from affiliation, however. Even if a prime and subcontractor perform contract work in accordance with the limitations on subcontracting, they could still be found affiliates if the subcontractor performs too much of a certain contract or if the subcontractor gets too much of its revenue from the prime contractor (the details of these specific affiliation rules are outside the scope of this article, but you can read more about them here). Although this is not to say there is automatic affiliation from working with a subcontractor repeatedly; that sort of affiliation depends on looking at the entirety of the relationship.
For purposes of this article, the takeaway from this comparison is merely this: if the two contractors are looking to work together on several projects within the next few years, it may be wise to take advantage of the guaranteed affiliation protection that the joint venture relationship can provide.
The final aspect of the partners’ relationship with each other that should be considered in deciding between a joint venture team and a prime-subcontractor team that we will discuss in this article is payment of the team members. Again, both contractors hope there will be no issues with payment for their part of the performance on behalf of the government–or the other team member. But these things do happen. And depending on the parties’ relationship with one another and prior dealings, that may be something to consider in picking your team as well.
For a joint venture relationship, the rules say that the venturers will share in the profits in proportion to their workshare. They also require the establishment of a separate bank account which “must require the signature or consent of all parties to the joint venture for any payments made by the joint venture to its members for services performed.”
But for a prime-subcontractor relationship, the government pays the prime–only–and then, the prime pays the subcontractor for their share of the work in accordance with the subcontract agreement. Prime-subcontractor teams should avoid any “profit-sharing” arrangements, as the SBA’s Office of Hearings and Appeals have found that it may be a factor giving rise to affiliation. This means, the subcontractor would need to ensure its payment terms are clearly expressed in the subcontract agreement. In the event the subcontractor was not paid, it would have to take that up directly with the prime–as it does not have access to a shared operating account or a direct share of the profits.
As indicated at the beginning of this article, and further demonstrated herein, there is no clear-cut best choice for which type of team you should choose. But hopefully, you now have some big picture considerations to mull over in making your own decision under your specific circumstances.
Questions about this post? Or need help with a government contracting legal issue? Email us or give us a call at 785-200-8919.