Pitfall of Joint Ventures

Pitfalls
of Joint Ventures

Presented by:
David A. Rose
Principal Attorney
Rose Consulting Law Firm
We Build Our Relationships
One Client at a Time

Rose Consulting Law Firm - specializing in
Government & Small Business Law

What is a Teaming Arrangement?

“Contractor team arrangement,” as used in this
subpart, means an arrangement in which—

– Two or more companies form a partnership or joint
venture to act as a potential prime contractor

– A potential prime contractor agrees with one or
more other companies to have them act as its
subcontractors under a specified Government
contract or acquisition program.

FAR 9.601 We Build Our Relationships


Teaming is not an SBA Creature
• SBA regulations do not address teams where
they address joint ventures
– Joint ventures, a corollary of teaming will be
addressed next hour
• Where SBA addresses joint ventures, they
discuss exceptions and application of affiliation
• SBA case law; however, discusses several
concepts and the application of a very specific
type of affiliation referred to as an ostensible
subcontractor which we will discuss this
hour. We Build Our Relationships


What are the Benefits?

• General benefit for all concerns both large and
small:
- The team is able to compete for larger more
technically complex contracts by combining the
capabilities and past performance of various team
members.
- The large prime firm meets subcontracting
requirements
- The small prime fills in missing needs



Advantage of Teaming, cont.

• Agencies may consider an offeror’s subcontractor’s
capabilities and experience under relevant
evaluation factors, where the RFP does not prohibit
the consideration of a subcontractor’s experience in
the evaluation of proposals (Roca Management
Education & Training, Inc., January 15, 2004, GAO, B-
293067).
• The prime contractor is solely responsible for
meeting all contract requirements, including the
Limitations on Subcontracting percentage
• Must watch out for Ostensible Subcontractor
relationship with its subcontractor(s) We Build Our Relationships


Ostensible Subcontractor

• An ostensible subcontractor is a subcontractor that performs
primary and vital requirements, or a subcontractor upon
which the prime contractor is unusually reliant.

• A contractor and its ostensible subcontractor are treated as
joint venturers, and therefore affiliates, for size determination
purposes.

• 13 CFR 121.103(h)(4)



Ostensible Case Study

• Recent Case on Affiliation and Ostensible
Subcontractors –
http://www.roseconsultingllc.org/Summary_of_Mor
ris-Griffin_v.pdf
– Morris‐Griffin v. C&L Service Corporation, 2010 WL
3221975 (E.D. Va)
– Large HUD loan processing company teamed with janitorial
8(a) company to win 8(a) set-aside contact to process
loans for HUD – found to have fraudulently circumvented
the SBA rules by using a nominal 8(a) contractor.


Terms - Pitfall

• Get your Terms and Conditions Down in Writing
before you Team or Joint Venture
• Teaming and JV’ing begins as a honeymoon
• If you do not and Something goes bad, it will go
really bad
• Problems will be avoided if you address them before
you start
• Do you remember folks that roomed with their best
friend in college?


Why is this so important?

• It goes back to J Sutter’s Mill
– Or perhaps the Chubaccah defense for South Park
fans
• Two best friends go to Sacramento in 1848 to mine
for gold
• Best friends since 6 years old
• One finds gold first while panning
• Out comes Bowie knife
• Money changes everything!!!


Joint Ventures

• A joint venture is 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.
• This means that the joint venture entity cannot have more
than 3 contracts over a two year period, starting from the
date of the submission of the first offer (3-in-2 rule). New Rule
March 2011 – Not so new now, but still misused
• 13 CFR 121.103(h)


That was SBA’s Definition
• The real definition of a joint venture is a little more generic
and these are done all the time in the commercial industry:
• A joint venture is 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 specific or limited-purpose business ventures for joint
profit, for which purpose they combine their efforts, property,
money, skill, or knowledge.
• Quite often in Federal contracting, as well as in the
commercial sector, you will see large conglomerates join
forces to JV and pursue large contracts.
• Lockheed Martin and Boeing
• CH2M Hill and Clark Nexsen


But for Our Purposes…
• Let’s stick with SBA’s version, as it is these
Rules we are playing by and
• SBA makes the rules
• Given SBA makes the rules:
• What do we have to do to qualify to do one of
these joint ventures?
• Well first, to participate ourselves, we must be
small. As many of you know this is the first
pitfall – Small in SBA terms is like to ask
• What shape is a cloud? Let’s discuss… We Build Our Relationships


So we will form a joint Venture then
• Joint Ventures
– Formal joint venture (Separate legal entity, such as
LLC)
– Informal (no new entity formed)
• Which is Best?
– An informal joint venture provides no protections
between the parent companies, but we can give
different percentages of profit that ownership.
– A formal joint venture (Inc or LLC) at least shields
the parent from liability from the subs.


Why is this so important?

Joint Venture exceptions to Affiliation
• A joint venture is a small business concern when the
combined revenue/employees of all joint venture
partners do not exceed the small business size standard.
General rule – all joint ventures are affiliated! Pitfall.
• Exception, a joint venture is considered small when each
joint venture partner is small, and:
• The procurement is bundled; or
• For a procurement having a receipts based size standard, the
dollar value of the procurement exceeds ½ the size standard; or
• For a procurements having an employee based size standard, the
dollar value of the procurement exceeds $10 million.
• CHART available at roseconsultingllc.org
13 CFR 121.103(h)(3) We Build Our Relationships


Major Pitfalls for Joint Ventures

• Do not violate the “3-in-2 rule” – three contracts
won in two year period, by the same joint
venture entity.
• If you violate the rule, general affiliation will be
found.
• 13 CFR 124.513(a) requires formal approval by
SBA of all joint ventures pursuing 8(a) contracts.
• Performance of work requirements apply to
cooperative efforts of the joint venture entity.



8(a) Joint Ventures
• For competitive 8(a) procurements that meet 13 CFR
124.513(b)(1)(ii):
– 8(a) firm can joint venture with one or more other
businesses and the joint venture is considered
small, so long as each is small under the size
standard for the procurement, and;
– The first pitfall here is in knowing the rules – first
rule about the rules is that they change and many
are exercised with discretion – Let’s discuss what
that means….


Mentor Protégé 8(a) JV
• For joint venture between 8(a) protégé and SBA
approved mentor:

• The joint venture is considered small, so long as the 8(a)
protégé is small for the procurement.
• 13 CFR 124.513(b)(3)

• The joint venture may bid as a small business on any federal
prime procurement.
13 CFR 121.103(h)(3)(iii)

PITFALL – HUBZONES!!!
13 CFR § 126.616(a) – HUBZones can only JV
w/ HUBZones We Build Our Relationships


8(a) Joint Ventures

• For any 8(a) joint venture between 8(a) business and another
firm to perform an 8(a) contract (new 40% rule):

• If the JV is populated the 8(a) firm must perform 40% of the
work of the JV and none of the work may be subcontracted
out to JV members

• If unpopulated (other than admin personnel), the 8(a)
prime must perform 40% of the work performed by the
total amount of work subcontracted to members of the JV.

13 CFR 124.513(d)


What have we learned about JVs?
• All Joint Ventures are affiliated – Be aware of
exceptions
• The affiliated joint venture may qualify for an
exception under SBA – Be careful who drafts JV
agreement - Pitfall
• A small business can never joint venture with a large
business, unless it is an approved SBA 8(a) mentor
protégé relationship – Pitfall – Only SBA approved
M/P
• SBA makes up the rules we play by here
– Pitfall – Can be exercised w/ discretion We Build Our Relationships


The Rules

• Here are the rules
• Size regulations -- 13 CFR Part 121
• 8(a) & SDB regulations -- 13 CFR Part 124
• Government Contracting Programs – 13 CFR Part 125.6
• HUBZone Program – 13 CFR Part 126
• Service Disabled Veteran Program – 13 CFR 125
• Women-Owned Small Business Program-13 CFR 127

• Questions about Joint Ventures?


Questions?

David A. Rose drose@roseconsultingllc.org
Principal Attorney (678) 854-0222
Rose Consulting Law Firm http://www.roseconsultingllc.org



Pitfall of Joint Ventures

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