SETTING UP TEAMING & JOINT VENTURE AGREEMENTS

December 12, 2022

Teaming and Joint Venture agreements are powerful tools often utilized by successful businesses in the government market. Often, it is unclear about the difference between a teaming agreement and a joint venture agreement. Although each agreement may seem straightforward, there are many differences between the two initiatives. The SBA has recently implemented new rules applicable to both agreements. Contractors should be aware of essential differences in these rules.

Both Teaming and Joint Venture agreements are federal procurement methodologies where two or more companies join forces to secure a particular government contract. Usually, companies enter into either level of a partnership to be able to bid on larger contracts. This article covers what are each type of partnership, the pros and cons the agreements, and how to set up the appropriate agreement.

WHAT IS A JOINT VENTURE? A joint venture is:
“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.”

WHAT IS A TEAMING AGREEMENT?
Teaming under FAR 9.601 Contractor team arrangement means two or more companies coming together to form a partnership or joint venture to act as a potential prime contractor (horizontal teaming arrangement); or

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 (vertical teaming arrangement)

WHY TEAM?
FAR 9.602(a) explicitly recognizes that teams may be desirable from the Government’s standpoint May enable companies to…

Complement each other’s unique capabilities; and
Offer the Government the best combination of performance, cost, and delivery

RESTRICTIONS ON TEAMING
Permitted in all types of acquisitions (FAR 9.602)
Sometimes prohibited by solicitation provision

When requirements put heavy emphasis on security or control
When OCI is anticipated that could be exacerbated by teaming

Sometimes limited by solicitation provision or clause

When the Government wants to evaluate all participants
When the Government wants to exclude one or more participants

TEAMING TIMING
Teaming arrangements are normally formed before offers are made/proposal submitted

Very common for competitions where primary advantage of teaming is expertise or past performance
Less common when sub’s participation is seen as a commodity

May be formed after award

Common for goods or services not part of evaluation
Rare for JV’s

TEAMING AGREEMENT vs. JOINT VENTURE
Liability
JV partners jointly responsible for contract performance, and except in LLC, jointly and severally liable Subcontractor only responsible for portion of work it performs, limited liability

Control
Shared by JV partners
Prime Contractor has control over teaming relationship

Bonding
JVs typically able to obtain bonding based on combination of all partners
Prime/sub may work also, but likely requires agreement of all parties to be bound and collateral from owners

LEGAL DIFFERENCES
Teaming – Prime/Sub Team

Prime has sole interest and complete responsibility
Team controlled by
- Subcontracts written by Prime
- Teaming agreement
Prime has privity of contract
Profits and losses earned per subcontracts
Team is controlled by the Prime
Socio‐Economic characteristics of the Team are driven by those of the Prime
- Team with large Prime will be treated as large
- Team with small/8(a)/SD/WO prime will be treated as Prime alone would be (usually)
Qualifications and past performance of subs can contribute to Team evaluation, but usually only in area assigned to sub team member
To be enforceable, a teaming agreement must BE a contract
Best practice is to negotiate the subcontract BEFORE the proposal is submitted and include it in the business volume
- Sub’s “leverage” disappears when solicitation closes
- Including executed sub in proposal usually satisfies the consent to subcontract requirement of FAR

Joint Venture

Separate Legal Entity with “Members” with proportionate “interests”
“Special Purpose” entity
Members usually jointly AND severally liable
Profit and losses shared proportionately
A Joint Venture can include two or more companies and could be…
- Only small businesses or other special classes
- Only large businesses
- A mix of both
With limited exceptions, a JV of a small business and a large business cannot qualify as “small” due to “affiliation”, unless a formal Mentor Protégé Agreement is in place
A Joint Venture may be populated or unpopulated:
- A “populated” JV is where the JV hires employees, leases space, owns equipment, etc.
- An “unpopulated” JV is where the JV exists only on paper and Members provide employees, facilities, equipment etc. as a subcontractor to JV (some unpopulated JVs do lease space)
- If “unpopulated”, protege JV Member must perform at least 40% of the work of the JV and/or the Members as a de facto subcontractor
- If “populated”, protege Member not required to perform any specific percentage of the work, but JV must be able to show that the 8(a) Member benefits from the allocation of work within the Joint Venture

ADVANTAGES OF A JOINT VENTURE?

The Government can look to the resources of two (or more) companies to perform the work;
A minority joint venture member can exert more control over contract performance to protect its interests than in a traditional prime-sub relationship
The joint venture parties receive favorable partnership income tax treatment
Participating in a joint venture may allow a company to avoid any perceived stigma associated with being a subcontractor to its competitors
Allows firms to stay smaller longer
JV provides “one stop shopping” to the Government for the combined resources of the Members (technical and other)
JV has performance history that combines that of each Member
JV allows each Member to cite the contract as past performance in future proposals
JV allows small business to be competitive as a prime contractor
JV allows Member greater control over prime contract performance than it would have as a sub
Small business may pursue opportunities broader than otherwise would qualify for
Small business gets “prime” past performance record and may use past performance record of partners
- Advantageous where solicitation says past performance of subs will not be considered
Small businesses qualify as “small” longer
- Small businesses must include in receipts or headcount its proportionate share of joint receipts or joint employees
Large business may pursue set‐aside opportunities for which it is otherwise ineligible
- Large business can perform up to 60% of the work as opposed to 49% as a sub to the small business Prime
Large business may have control over contract performance than if it were a sub
- For JVs under SBA‐approved M/P Agreement, control over performance will not lead to “affiliation”
Large business can gain access to new agency or program where small business has history

DISADVANTAGES OF A JOINT VENTURE?

Lead Contractor gives up substantial control
The participating contractors become joint and severally liable to third parties for the acts of their joint venture partners, including criminal acts
The Government may view the JV as lacking a clear point of contact, thus raising concerns regarding control, authority, and accountability
Terminating a JV may be more difficult than terminating a subcontract agreement while the prime contract is being performed
Competitors may raise past performance questions
Some officials not familiar with the model; concerns arise about responsibility for contract performance or nonperformance
Can be a challenge for Members to “speak with one voice”
Depending on JV structure, a Member may get less work than it would as a sub or a single Prime
More paperwork and more complicated to set up a joint venture – can be more expensive
ALL the liabilities are shared by ALL the Members
Joint Venture relationships are harder to exit if they don’t work

TIMING OF JOINT VENTURE RELATIONS

Joint Ventures should normally be formed before the offer is submitted.
Agreement should provide for performance of the contract – avoid “agreement to form a joint venture”.

ABOUT JOINT VENTURES

Main Characteristics:
- Co-management
- Sharing profits and losses
- Limited duration
Competing as a joint venture:
- Joint ventures should be formed before submitting offer
- Agreement should provide for contract performance
- FAR requires disclosure in the proposal
Forms of Joint Venture:
- Partnership
- Limited Liability Company (best option to consider)
- Corporation (more formalities)

JOINT VENTURE ISSUES
Special requirements for a Joint Venture with small business Members bidding on a set‐aside

JV is a Limited Purpose Entity ‐ individuals or companies that combine resources to bid on specific opportunities
3 in 2 rule ‐ JV limited to three awards in two years
- May receive more than 3 awards if offer leading to 4^th award submitted prior to JV receiving third contract
- May create additional JVs after receiving 3 awards
Members of an SBA Joint Venture are affiliated unless –
- JV is between two or more small businesses and certain conditions are satisfied, or
- JV is between a “Mentor” and a “Protégé” under SBA’s 8(a) Program or DoD’s Mentor/Protégé Program

SBA MENTOR PROTÉGÉ JV’s for 8(a) (may expand same rules to all Mentor Protégé participants)

JV must be approved by SBA pursuant to an existing SBA 8(a) Mentor/Protégé Agreement
Mentor/Protégé Agreements
- Mentor is a large business and generally cannot have more than three Protégés
- Protégé is a small business in SBA’s 8(a) Program and can generally have only one Mentor – two, if the second is in another NAICS industry
- Protégé must be in good standing with 8(a) Program
- Protégé is not within 6 months of nine year program term
- Protégé is in developmental stage of 8(a) program (first 4 years), has never received an 8(a) contract or is half the size of its primary NAICS code

STRUCTURING A JOINT VENTURE
Form of Joint Venture
Traditional Joint Venture (partnership)

Can be informal
No employees for JV itself
Legal Risk

Alternative

Limited liability company
Advantages – easy to form; limited liability for partners
Disadvantages – requires capitalization and operation as separate entity

Corporation (more formalities)

Rarely used (not recommended for the JV to use the Corporation model)
The formation of a corporation requires the most formalities including, meeting requirements, state filing requirements, etc

Other considerations:

Limitations on Subcontracting
Avoiding “general” affiliation
JV agreement must be in writing
JV must establish special bank account with both Member signatures required to release funds from account
Both parties obligated to performance of 8(a) contracts even upon withdrawal of a Member
Protégé must own 51% of the JV and receive 51% of the profits
- If unpopulated, JV is really a pass through and no profits remain in JV

JOINT VENTURE: MANAGEMENT STRUCTURE AND LABOR
What will be the management structure of the Joint Venture?
Management Committee?
Project Manager?

Which party will be responsible for negotiating contracts?
Which party will be responsible for negotiating subcontracts with subcontractors?
What are the sources of labor to be employed?
How do the parties envision the division of labor on contracts?

GENERAL PROVISIONS THAT MUST BE INCLUDED IN MOST JOINT VENTURE AGREEMENTS
Purpose of the Joint Venture.

Designation of Protege as managing venturer.
Certain percent of net profits earned by Joint Venture will be distributed to the Protege participant.
Responsibilities of the parties.
Obliging parties to Joint Venture to ensure performance of government contract.
Designation that accounting/administrative records are kept by managing venturer and requirement that managing venturer retain records of contracts completed by Joint Venture.
Performance of Work.
Inspection of Records.

LIMITED LIABILITY COMPANY
PROS:

Liability – Members not liable (beyond capital contributions) to third parties for actions of the
LLC.
Taxes – May be treated as partnership (or like an S Corp) for tax purposes.
SBA – recognizes LLC as structure through which to operate joint venture.

CONS:

Liability – individual members remain responsible to government for performance of contract under SBA regulations.
Documentation – Articles of Organization and Operating Agreement need to be drafted.
Past Performance – no past performance record of its own unless the solicitation allows members past performance history to be considered.
SBA – the regulations do not contemplate LLC structure, making it difficult to operate within regulations.

JOINT VENTURE PARTNERSHIP PROS

Taxes – Treated as a partnership (or like an S Corp) for tax purposes.
Bid and Proposal Costs – recoverable by individual members.
SBA – Structure with which the SBA is most familiar, making the review process less time consuming.

CONS:

Liability – Partners are jointly and severally liable on debts of the partnership.
Documentation – Joint Venture Agreement necessary for 8(a) purposes; serves as partnership agreement.
Past Performance – no past performance record of its own unless the solicitation allows members past performance history to be considered.

JOINT VENTURES: SMALL BUSINESS SET ASIDES

The Joint Venture receive up to three contracts within 2 years
“Individual size treatment rule” if contract:
- Exceeds ½ of revenue-based size standard; or
- Exceeds $10M (employee-based size standard)

JOINT VENTURES: 8(a) SET ASIDES

Government can award 8(a) contracts to JV if:
- One firm is 8(a) certified and ½ the size standard
- All partners are SBs, unless in Mentor-Protégé
The SBA must approve the JV agreement
- 8(a) firm must manage
- 8(a) firm must furnish project manager
- 8(a) firm must receive profits commensurate with work
Competing as a JV – best practices
- JV should be formed before submitting offer
- Agreement should provide for contract performance