Editor’s note: For more information, check out our updated post on Joint Ventures.
In the age of consolidated contracts and increased competition, small business federal contractors are searching for a way to improve their odds of winning the next opportunity. One of the most important tools for doing so is to form a joint venture.
Here are five things you should know about small business joint ventures:
1. What is a joint venture?
A joint venture is an association of two or more businesses to jointly bid on and perform work (for profit), through their combined efforts, property, money, skill, or knowledge.
Under the SBA’s regulations, the joint venture must be a separate legal entity that is unpopulated—in other words, the joint venture will not actually employ the workers that will perform the substantive work under the contract (though it may have employees who perform administrative functions). Because it is a separate legal entity, the joint venture must be registered and identified as a joint venture in SAM.gov (prior to the bid submission deadline).
2. Can your business participate in a joint venture?
Most likely. The general rule is that both joint venture members must be small businesses in order for the joint venture itself to qualify as a joint venture. Moreover, if the joint venture wants to qualify for solicitations set-aside for a particular a socio-economic designation, the joint venture’s managing member must hold that socio-economic designation. For example, if the joint venture wishes to bid on work set aside for WOSBs, the joint venture’s managing member must itself be a WOSB and the non-managing member must be a small business (though it could also hold its own designations).
An important exception to this general rule exists: if an SBA-approved mentor and protégé form a joint venture, the joint venture will be eligible for any opportunity for which the protégé itself qualifies. Stated differently, even if a mentor is a large business, it can form a joint venture with its protégé to bid on work reserved for small businesses so long as its protégé qualifies. That’s a powerful incentive to motivate large businesses to participate in the mentor/protégé program.
3. What are the requirements to forming a joint venture?
As mentioned earlier, the joint venture must be organized as a separate legal entity and registered in SAM. Beyond that, it needs to have a written joint venture agreement.
The requirements for the joint venture agreement itself can be exacting, and vary depending on the particular socio-economic designation for which the joint venture wishes to qualify. This post isn’t intended to provide a detailed discussion of those requirements—nor should it be considered as a substitute for reviewing the applicable regulations or seeking legal help in preparing a compliant joint venture agreement. But in general, the regulations require:
- The purpose of the joint venture be explained.
- 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 project manager.
- That the joint venture’s profits be split commensurate with the work that each party performs—not according to the parties’ ownership percentages.
- That 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.
- For 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.
- For 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).
- That each member be obligated to complete the joint venture’s performance, even if the other member withdraws.
- That the joint venture establish compliant record keeping and reporting processes.
Though these requirements might sound simple, they’re not. There are several decisions finding that a joint venture agreement did not meet one (or more) of these requirements and, as a result, the joint venture wasn’t eligible. For this reason, we encourage joint venture members to understand the requirements and attempt to follow them exactly.
4. What are the benefits of participating in a joint venture?
A joint venture can be a powerful tool to help a small business improve its odds of winning a federal contract. It allows two or more companies to combine their best attributes and develop a plan for potentially winning work.
One of the biggest incentives allowed for a joint venture comes during a past performance evaluation. Sometimes, a business might lack the experience needed to convince the government that it will be able to successfully perform the effort.
The joint venture regulations, however, require an agency to consider not only a joint venture’s past performance in the evaluation, but also the past performance of the individual members to the joint venture. In other words, a small business might joint venture with another company to take advantage of its past performance, then gain valuable experience performing through the joint venture that will help the small business develop its own past performance.
Beyond experience, a joint venture is a combination of companies’ resources, equipment, facilities, and skills. If one company lacks any of these, it might form a joint venture to help offset that potential weakness.
5. Are there any other requirements to keep in mind?
I’m glad you asked! There are a few more requirements to keep in mind:
Joint Venture Agreement Approval: In general, a joint venture agreement does not need to be pre-approved for the joint venture to be eligible for the work. Instead, the agreement will be reviewed after the award, if the joint venture’s eligibility is challenged.
But again, exceptions to this general rule exist. For work that is set-aside under the 8(a) Program, a joint venture agreement must be pre-approved by the managing member’s 8(a) office. Pre-approval is also required for work that is set-aside for SDVOSBs or VOSBs by the VA—in that case, CVE must approve the agreement before bids are submitted.
As you might imagine, approval can take time. It’s best to plan ahead and submit the agreement for approval as early as possible.
The 3-in-2 Rule: A joint venture is not designed to be a permanent or long-standing entity. So under the regulations, a joint venture may not be awarded more than three contracts over a two-year period, starting from the date of the first contract award, without the members being considered affiliates. This rule—the “3-in-2 Rule,” as it’s known—can be a little tricky. But the SBA’s regulations provide a way around it: just form a new joint venture, which itself will then be subject to the 3-in-2 Rule.
The Performance of Work Requirement: If the joint venture is awarded a small business set-aside contract, the joint venture collectively will likely be subject to the applicable limitation on subcontracting.
Beyond that, however, the joint venture faces another work-related limitation: the managing member must perform at least 40% of the work that the joint venture itself performs (that is, of the work that the joint venture doesn’t subcontract). This work, moreover, must be substantive so that the managing member gains valuable experience.
Compliance with this requirement sounds relatively straightforward, but it might not be. Again, the joint venture must first make sure that it’s complying with any applicable limitation on subcontracting. Then, of the work that the joint venture doesn’t subcontract, it must make sure that the managing member is performing at least 40%. Because compliance can be tricky, joint venture members are wise to monitor their work percentages closely and, if necessary, adjust the workshare throughout performance.
Affiliation: Sometimes, companies think that a joint venture agreement might excuse or immunize them from a finding of affiliation. That’s not true. If a basis exists to find affiliation outside a joint venture, the parties should consider ways to fracture that affiliation.
Joint ventures, as I mentioned, are valuable tools to help small businesses augment their capabilities and increase their competitive position. If you’d like to learn more about joint ventures, or need help setting up a compliant joint venture relationship, please email us or give us a call at 785-200-8919.