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. The focus of this first article will be work share.
Limitations on Subcontracting
For any set-aside government work, both types of teams are subject to certain limitations on subcontracting, which you can read more about here. The SBA rule requires any prime contractor awarded “a full or partial small business set-aside contract with a value greater than the simplified acquisition threshold” or an 8(a), VOSB/SDVOSB, HUBZone, or WOSB/EDWOSB contract to perform a certain percentage of the contracted work. For example, for services contracts, the prime shall “not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated” (which simply means, to firms that are not also small businesses or carry the same socioeconomic designation that the contract is set aside for). Check out the SBA rule for the limitations applicable to other types of contracts, including construction, specialty trade, supplies, and mixed contracts
For the prime/subcontractor relationship, the application of the appropriate subcontracting limitation is typically pretty straightforward (that is, once you know the contract type, total amount paid by the government, and size/socioeconomic status of all subcontractors). Let’s look at a basic example of how the work share division could look for this type of team.
Let’s say that Peach Royalty, LLC, is a WOSB prime contractor on a government services contract 100% set aside for WOSBs. Peach Royalty will subcontract to its one small business contractor, Mario Transport, LLC, to perform work under this government contract. The limitation on subcontracting here would require that Peach Royalty receive at least 50% of the total amount paid by the government on this WOSB services contract. Thus, if Peach Royalty wanted to maximize its subcontracting to Mario Transport, the parties could split the work (and thus the amount paid by the government) 50/50 here.
Joint Venture Workshare
Now, the work share division calculations can get a bit trickier in a joint venture relationship. The “prime” in a joint venture relationship is actually the joint venture entity itself, made up of the venturers. For example, let’s say Peach Royalty, LLC, a WOSB, forms a WOSB joint venture with Mario Transport, LLC, a small business, and calls it Peach-Mario-JV, LLC. Under the applicable limitation on subcontracting for a WOSB set-aside government contract for services, Peach-Mario (again, the joint venture entity itself) will not be able to pay more than 50% of the amount paid by the government to its one small business subcontractor, Bowser Security, LLC.
But unlike the prime/subcontractor relationship, the work share requirements for most joint venture relationships do not stop there. In addition to the limitations on subcontracting, most joint ventures seeking set-aside government work (except for those between only small businesses seeking only small business set-asides) are also subject to certain performance of work requirements that require the qualifying venturer to perform a minimum of 40% of the work that the joint venture itself will perform.
Taking our same example of the Peach-Mario-JV WOSB joint venture from above, this means that Peach Royalty (the WOSB venturer) will be required to perform at least 40% of the work performed by Peach-Mario JV under the WOSB set-aside services contract. Since Peach-Mario JV is also subcontracting the maximum 50% of the contract work to Bowser Security, Peach Royalty would need to perform at least 20% of the total contract work. If Peach Royalty wanted to maximize its subcontracting and perform only its minimum required amount of work, the breakdown could look like this:
- Peach Royalty: 20% total contract work
- Mario Transport: 30% total contract work
- Bowser Security: 50% total contract work
And if Peach-Mario-JV decided it did not want to subcontract any part of the contract, then Peach Royalty would have to perform at least 40% of the contracted work itself, while Mario Transport could perform up to 60% of the contracted work.
So, as you can see, the amount of total contract work the WOSB, Peach Royalty, must perform on its own in each type of team varies. Importantly, in the joint venture relationship, in the prime/subcontractor relationship, and in the scenario where both types of teams would perform the contracted work, Peach Royalty, the WOSB, can always perform more than the minimum required work.
But if your company, like Peach Royalty, is hoping to maximize the amount of work that its small business team member(s) can perform under the prime government contract, then utilizing both a joint venture and a prime/subcontractor team would provide that avenue. This route allows you to perform the minimum percentage of work required by SBA’s joint venture rules and to subcontract the maximum amount of work to other parties.
Now, if you have just one small business team member, then your decision between joint venturing–versus teaming up as prime/subcontractor–to maximize your team member’s work share should (first and foremost) consider what type of contract you will be performing. For the services contracts we have focused on in this article, joint venturing would be your best avenue, as that would allow the team member to perform up to 60% of the contracted work (instead of the 50% allowed under the limitation on subcontracting rules for services contracts). But if your contract is general construction or specialty trade construction, then the much greater limitations on subcontracting applicable to those contracts (85% and 75% respectively) would provide the avenue to maximize team member participation you are looking for.
Don’t forget to keep an eye out for the second and third parts of this series, Picking Your Teams: Joint Ventures Versus Prime/Sub Teams, where we will cover some of the past performance, government relationships, and additional considerations.
If you have specific questions about your work share requirements in either type of team or under certain types of government contracts, or if you need help with a government contracting legal issue? Email us or give us a call at 785-200-8919.