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Small business joint venture teaming can be of great value to both the government customer and to your own business. In fact, the federal government encourages teaming agreements among small businesses to not only increase the capacity and capability of the small business prime contractor, but to also provide the government “the best combination of performance, costs, and delivery for the system or product being acquired.” FAR 9.602. Many local governments have also enacted various ordinances to encourage teaming.

Generally, there are two types of small business teaming arrangements. The first type is where a prime contractor preselects one or more subcontractors that work in a collaborative effort to prepare a bid proposal to the government. The subcontractor works exclusively with the prime contractor to establish the best pricing and delivery methods in the hope they will be the winning team for the prime contract award. In exchange, the prime contractor normally agrees to award the subcontract work to the team member that participated in this collaborative effort. This type of teaming arrangement is common in federal government contracting.

The second type of common teaming agreement is a joint venture arrangement. The Small Business Administration (SBA) defines a joint venture as “an association of individuals and/or concerns with interests in any degree or proportion by way of contract, express or implied, consorting to engage in and carry out no more than three specific or limited-purpose business ventures for joint profit over a two year period, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally.” Two or more companies can form joint ventures to act as a prime contractor and also form joint ventures to act as a subcontractor. This article focuses on small business prime contracting joint ventures.

Why joint venture as a prime contractor

Many small businesses have outstanding expertise in their industry, but simply don’t have the capacity to perform the work as a prime contractor. A small business can lack the personnel, bonding capacity, start up costs, equipment, financing, or the ability to work in other geographical areas. Other small business contractors may have that capacity but don’t have past performance or expertise in a particular area of work. However, when two small businesses form a joint venture they can pool their capabilities and capacity to perform larger and more complex projects and increase their geographical presence.

Things to look for in a prospective joint venture partner

There are numerous key questions to ask yourself and your prospective joint venture partner before you solidify the relationship. First, a firm should ask itself what they bring to the joint venture in terms of expertise and capacity, and what are they looking for in a joint venture relationship?

There must be an open and honest dialogue regarding both of the joint venturer’s financial capacity, expertise, pricing models, insurance and bonding capacity, key personnel, administrative support, and knowledge of the government customer. In addition, understanding each other’s firm corporate cultures can be crucial to the equation. If your prospective joint venture partner has a very different corporate culture than you have in addressing workmanship issues, employees, payment to vendors, or handling QA/QC, this will not be a good recipe for a joint venture relationship. Lastly, and most importantly, clearly express your expectations with your prospective joint venture partner regarding who will manage the joint venture, who will manage the project work, work share/division of labor split, addressing regulatory compliance, and sharing of profits. These issues are key to understanding whether you can have a successful relationship.

Joint venture arrangements and following the law

First, is the joint venture agreement created to pursue federal small business set-aside opportunities such as SBA 8(a), HUBZone, WOSB, or SDVOSB procurements? If so, you must comply with the strict eligibility and joint venture requirements for each joint venture type which can differ dramatically. For instance, only small businesses can joint venture as prime contractors for small business set-aside contracts, unless the joint venture is approved by the SBA under an 8(a) Mentor-Protégé arrangement. Also, while joint ventures can be developed between an SDVOSB firm and an 8(a), WOSB, or just a small business, the SBA only allows HUBZone firms to joint venture with other HUBZone firms.

The SBA and the Department of Veterans Affairs (VA) have different joint venture rules. For instance, while an SDVOSB joint venture does not have to be approved by the SBA for federal government procurements, the joint venture must still comply with the SBA definitions of a SDVOSB joint venture to be complaint. On the other hand, for all VA procurements the rules are governed by the VA regulations. The joint venture itself must be verified by the VA through VET-Biz. In addition, you need to understand and follow the SBA rules regarding affiliation in order for the joint venture to be compliant.

If you are creating a joint venture for local government work, other joint venture requirements must be met in order to comply with local procurement regulations, which can include self-performance requirements, pre-qualifications, and proof of small business size status, among other things.

Joint venture agreements

Now that you have selected the right joint venture partner, you want to get down to the business of having the joint venture agreement prepared. A joint venture is not a “one size fits all” recipe. Instead, every project is unique with distinctive risks, different team players, and different liability exposures. As such, it is recommended that you seek knowledgeable legal counsel to assist you through identifying risks and addressing them in your joint venture agreement.

While not exhaustive, the following issues should be addressed in your joint venture agreement. The percentages of work requirements (also known as limitations on subcontracting) as well as required profit percentages differ depending on the type of small business joint venture and the type of project.

Other crucial details that joint venture agreements should address, includes, but is certainly not limited to, whether or not the parties want to incorporate their joint venture as a limited liability company or a corporation or instead be an informal partnership. Another consideration is whether the parties want the joint venture to be populated with employees or unpopulated. Further, the agreement should address who is going to manage the customer relationship and subcontractors. Other important issues to address are how and when profits are distributed and in what proportion, how third party liabilities will be handled, the amount of capital contributions required to acquire a firm's ownership interests in the joint venture, how finances are controlled, the term of the joint venture, and how and where disputes will be handled, among other things.

Joint ventures are very common and can be a great avenue to grow your business, experience, and expertise. However, having the right joint venture partner and proper agreement in place will help to ensure a greater chance for success.

For more information, please contact:

Michelle F. Kantor 
312.642.6482
mkantor@mcdonaldhopkins.com

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