How to Team Up to Advance in Government Contracting

Teaming and joint venture agreements are powerful tools often utilized by successful businesses in the government market. Although each agreement may seem straightforward, there are significant differences between them. The SBA has recently implemented new rules applicable to both agreements, so contractors should be aware of these essential differences.

Both teaming and joint venture agreements are federal procurement methodologies where two or more companies join forces to secure a government contract. Companies typically enter into these partnerships to bid on larger contracts. This article covers each type of partnership, the pros and cons of the agreements, and how to set up the appropriate agreement.

What is a Joint Venture?

A joint venture is defined 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.”

What is a Teaming Agreement?

Under FAR 9.601, a teaming arrangement can be:

• Horizontal Teaming Arrangement: Two or more companies form a partnership or joint venture to act as a potential prime contractor.
• Vertical Teaming Arrangement: A potential prime contractor agrees with one or more other companies to act as its subcontractors under a specified Government contract or acquisition program.

Why Team?

FAR 9.602(a) recognizes that teams may be desirable from the Government’s standpoint. Teaming may enable companies to:

• Complement each other’s unique capabilities.
• 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 provisions, especially when:
  • Requirements emphasize security or control.
  • OCI (Organizational Conflicts of Interest) could be exacerbated by teaming.
  • Government wants to evaluate all participants or exclude some participants.

Teaming Timing

• Teaming arrangements are typically formed before offers are made or proposals are submitted.
• Common for competitions where the primary advantage of teaming is expertise or past performance.
• Less common when a subcontractor’s participation is seen as a commodity.
• Can be formed after award for goods or services not part of the evaluation.
• Rare for joint ventures.

Teaming Agreement vs. Joint Venture

Liability

• Joint Venture: Partners are jointly responsible for contract performance and, except in LLCs, jointly and severally liable.
• Teaming Agreement: Subcontractor is only responsible for the portion of work it performs, with limited liability.

Control

• Joint Venture: Shared by JV partners.
• Teaming Agreement: Prime Contractor has control over the teaming relationship.

Bonding

Teaming Agreement: Prime/sub may work, but likely requires agreement of all parties to be bound and collateral from owners.

Joint Venture: Typically able to obtain bonding based on the combination of all partners.

Legal Differences

Teaming – Prime/Sub Team

• The Prime Contractor has sole interest and complete responsibility for the contract.
• The Prime Contractor controls the team.

Subcontract Management

• Subcontracts are written by the Prime Contractor.
• The Prime Contractor holds privity of contract with the Government.

Financials

• Profits and losses are earned per subcontract.
• The Prime Contractor is responsible for managing and controlling the team’s operations.

Socio-Economic Characteristics

• The socio-economic characteristics of the team are driven by those of the Prime Contractor.
• A team with a large Prime Contractor will be treated as large.
• A team with a small/8(a)/SDVOSB (Service-Disabled Veteran-Owned Small Business)/WO (Woman-Owned) Prime Contractor will generally be treated according to the Prime Contractor’s characteristics.

Qualifications and Past Performance

• The qualifications and past performance of subcontractors can contribute to the team’s evaluation but usually only in the areas assigned to the subcontractor.

Enforceability

• For a teaming agreement to be enforceable, it must be a contract.
• The best practice is to negotiate the subcontract before the proposal is submitted and include it in the business volume.

Leverage and Consent

• A subcontractor’s leverage diminishes once the solicitation closes.
• Including the executed subcontractor agreement in the proposal usually satisfies the consent-to-subcontract requirement of FAR.

Teaming – Prime/Sub Team

Joint Venture

• Separate Legal Entity: Formed with “Members” holding proportionate “interests.”
• Special Purpose Entity: Created for a specific goal or project.
• Liability: Members are usually jointly and severally liable.
• Profit and Losses: Shared proportionately among Members.

Composition

• A Joint Venture can include:
  • Only small businesses or other special classes.
  • Only large businesses.
  • A mix of both.
• Affiliation Rule: With limited exceptions, a Joint Venture of a small business and a large business cannot qualify as “small” due to “affiliation,” unless a formal Mentor-Protégé Agreement is in place.

Types of Joint Ventures

• Populated Joint Venture:
  • The JV hires employees, leases space, owns equipment, etc.
• Unpopulated Joint Venture:
  • Exists only on paper; Members provide employees, facilities, equipment, etc., as subcontractors to the JV (some unpopulated JVs may lease space).

Performance Requirements

• Unpopulated Joint Venture:
  • The protégé JV Member must perform at least 40% of the work of the JV and/or the Members as a de facto subcontractor.
• Populated Joint Venture:
  • The protégé Member is not required to perform a specific percentage of the work, but the JV must demonstrate that the 8(a) Member benefits from the allocation of work within the Joint Venture.

Advantages of a Joint Venture

• Increased Resources: The Government can leverage the resources of two or more companies to perform the work.
• Enhanced Control: A minority joint venture member can exert more control over contract performance to protect its interests compared to a traditional prime-sub relationship.
• Tax Benefits: Joint venture parties receive favorable partnership income tax treatment.
• Stigma Avoidance: Participating in a joint venture may allow a company to avoid any perceived stigma associated with being a subcontractor to its competitors.
• Size Flexibility: Allows firms to stay smaller for longer periods.
• Comprehensive Service: The joint venture provides “one-stop shopping” for the Government, combining the technical and other resources of the Members.
• Combined Performance History: The joint venture has a performance history that reflects the combined experience of each Member.
• Future Proposals: Each Member can cite the joint venture contract as past performance in future proposals.
• Small Business Competitiveness: Enables a small business to be competitive as a prime contractor.
• Increased Control for Small Business: The joint venture allows a Member to have greater control over prime contract performance than it would as a subcontractor.
• Broader Opportunities: Small businesses may pursue opportunities that they otherwise would not qualify for.
• Prime Performance Record: Small businesses benefit from a “prime” past performance record and can utilize the past performance record of their partners.
• Past Performance Consideration: Advantageous where solicitations state that past performance of subcontractors will not be considered.
• Extended Small Business Status: Small businesses can qualify as “small” for a longer duration.
• Receipt and Employee Count: Small businesses must include their proportionate share of joint receipts or joint employees in their receipts or headcount.
• Set-Aside Opportunities for Large Businesses: Large businesses may pursue set-aside opportunities for which they would otherwise be ineligible.
• Work Share Flexibility: Large businesses can perform up to 60% of the work, as opposed to 49% when acting as a subcontractor to a small business Prime.
• Control Over Performance: Large businesses may have greater control over contract performance compared to if they were a subcontractor.
• Affiliation Rules: For joint ventures under SBA-approved Mentor-Protégé Agreements, control over performance will not lead to “affiliation.”
• Access to New Agencies: Large businesses can gain access to new agencies or programs where the small business has existing history.

Disadvantages of a Joint Venture

• Control Loss: The lead contractor gives up substantial control over the project.
• Liability: Participating contractors become jointly and severally liable to third parties for the acts of their joint venture partners, including criminal acts.
• Government Perception: The Government may view the joint venture as lacking a clear point of contact, raising concerns regarding control, authority, and accountability.
• Termination Difficulty: Terminating a joint venture may be more complex than terminating a subcontract agreement while the prime contract is ongoing.
• Performance Questions: Competitors may raise questions about past performance.
• Familiarity Issues: Some officials may not be familiar with the joint venture model, leading to concerns about responsibility for contract performance or nonperformance.
• Communication Challenges: It can be challenging for members to “speak with one voice.”
• Work Allocation: Depending on the joint venture structure, a member may receive less work than it would as a subcontractor or a single prime contractor.
• Administrative Complexity: Setting up a joint venture involves more paperwork and can be more expensive and complicated.
• Shared Liabilities: All liabilities are shared by all members.
• Difficult Exit: Joint venture relationships are harder to exit if they do not work out.

Timing of Joint Venture Relations

• Formation Timing: Joint ventures should normally be formed before the offer is submitted.
• Agreement Specifications: The agreement should provide for performance of the contract—avoid “agreement to form a joint venture.”

About Joint Ventures

Main Characteristics

• Co-management: Joint management by the involved parties.
• Sharing Profits and Losses: Profits and losses are shared proportionately.
• Limited Duration: Typically have a specified time frame for the venture.

Competing as a Joint Venture

• Formation Timing: Joint ventures should be established before submitting an offer.
• Agreement Requirements: The agreement must provide for contract performance.
• FAR Disclosure: FAR requires disclosure of the joint venture in the proposal.

Forms of Joint Venture

• Partnership
• Limited Liability Company (LLC): Considered the best option.
• Corporation: More formalities involved.

Joint Venture Issues

• Special Requirements: Special requirements apply for a joint venture with small business members bidding on a set-aside.
• Limited Purpose Entity: A joint venture is a limited-purpose entity where individuals or companies combine resources to bid on specific opportunities.
• 3 in 2 Rule: A joint venture is limited to three awards in two years. However:
  • The joint venture may receive more than three awards if the offer leading to the fourth award was submitted before the joint venture received its third contract.
  • The joint venture may create additional ventures after receiving three awards.
• Affiliation Rules: Members of an SBA joint venture are considered affiliated unless:
  • The joint venture is between two or more small businesses and certain conditions are satisfied, or
  • The joint venture is between a “Mentor” and a “Protégé” under the SBA’s 8(a) Program or the DoD’s Mentor/Protégé Program.

SBA Mentor-Protégé Joint Ventures for 8(a)

(May Expand Same Rules to All Mentor-Protégé Participants)

• Approval Requirement: The joint venture (JV) must be approved by the SBA pursuant to an existing SBA 8(a) Mentor-Protégé Agreement.

Mentor-Protégé Agreements

• Mentor:
  • Must be a large business.
  • Generally cannot have more than three protégés.
• Protégé:
  • Must be a small business in SBA’s 8(a) Program.
  • Can generally have only one mentor; however, a second mentor is allowed if it operates in a different NAICS industry.
  • Must be in good standing with the 8(a) Program.
  • Must not be within six months of completing its nine-year program term.
  • Should be in the developmental stage of the 8(a) program (first four years), have never received an 8(a) contract, or be half the size of its primary NAICS code.

Structuring a Joint Venture

Form of Joint Venture

Traditional Joint Venture (Partnership)

• Characteristics:
  • Can be informal.
  • No employees for the joint venture itself.
  • Legal risk involved.

Alternative: Limited Liability Company (LLC)

• Advantages:
  • Easy to form.
  • Provides limited liability for partners.
• Disadvantages:
  • Requires capitalization.
  • Operates as a separate entity.

Corporation

• Characteristics:
  • Rarely used for joint ventures.
  • Not recommended for the JV to use the corporation model.
  • Formation involves extensive formalities, including meeting requirements, state filing requirements, etc.

Other Considerations

• Limitations on Subcontracting: Ensure compliance with regulations regarding subcontracting limitations.
• Avoiding “General” Affiliation: Take care to avoid affiliations that could affect eligibility.
• Written Agreement: The joint venture agreement must be in writing.
• Special Bank Account: Establish a special bank account with both members’ signatures required to release funds.
• Obligations: Both parties are obligated to perform 8(a) contracts, even if a member withdraws.
• Ownership and Profits: The Protégé must own 51% of the joint venture and receive 51% of the profits.
• Unpopulated JV: If unpopulated, the JV acts as a pass-through entity with no profits remaining in the JV.

Joint Venture: Management Structure and Labor

• Management Structure:
  • What will be the management structure of the joint venture?
  • Will there be a management committee?
  • Who will be the project manager?
• Contract Negotiations:
  • Which party will be responsible for negotiating contracts?
  • Which party will be responsible for negotiating subcontracts with subcontractors?
• Labor Sources:
  • 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: Clearly define the purpose of the joint venture.
• Designation of Protégé: Designate the Protégé as the managing venturer.
• Profit Distribution: Specify that a certain percentage of net profits earned by the joint venture will be distributed to the Protégé participant.
• Responsibilities: Outline the responsibilities of the parties involved.
• Contract Performance: Oblige the parties to ensure the performance of the government contract.
• Accounting and Administrative Records:
  • Designate that accounting and administrative records are kept by the managing venturer.
  • Require the managing venturer to retain records of contracts completed by the joint venture.
• Performance of Work: Detail how work performance will be managed.
• Inspection of Records: Include provisions for the inspection of records.

Pros and Cons

Limited Liability Company (LLC)

Pros:

• Liability: Members are not liable beyond their capital contributions for the actions of the LLC.
• Taxes: May be treated as a partnership (or like an S Corp) for tax purposes.
• SBA: Recognized by the SBA as a structure through which to operate a joint venture.

Cons:

• Liability: Individual members remain responsible to the government for contract performance 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 consideration of members’ past performance history.
• SBA: Regulations do not specifically contemplate the LLC structure, which can make compliance challenging.

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 for the debts of the partnership.
• Documentation: Joint Venture Agreement necessary for 8(a) purposes; serves as the partnership agreement.
• Past Performance: No past performance record of its own unless the solicitation allows consideration of members’ past performance history.

Joint Ventures: Small Business Set-Asides

• Contracts: The Joint Venture may receive up to three contracts within two years.
• Size Standards:
  • Individual size treatment rule if the contract:
    • Exceeds half of the revenue-based size standard; or
    • Exceeds $10M (employee-based size standard).

Joint Ventures: 8(a) Set-Asides

• Eligibility: Government can award 8(a) contracts to a Joint Venture if:
  • One firm is 8(a) certified and meets half the size standard.
  • All partners are small businesses, unless in a Mentor-Protégé arrangement.
  • The SBA must approve the Joint Venture agreement.
  • The 8(a) firm must manage and furnish the project manager.
  • The 8(a) firm must receive profits commensurate with its work.
• Best Practices:
  • JV should be formed before submitting the offer.
  • Agreement should provide for contract performance.

Joint Ventures: HUBZone Contracts

• Requirements:
  • All partners must be HUBZone-certified.
  • All partners must be small businesses.
  • The contract must meet certain size requirements.

Joint Ventures: SDVOSB Contracts

• Requirements:
  • The managing partner must be a Service-Disabled Veteran-Owned Small Business (SDVOSB).
  • All partners must be small businesses.
  • At least 51% of the profits must go to the SDVOSB.
  • The LLC option is no longer questionable.

Subcontract Limitations

• Performance of Work: Work performed under joint ventures counts towards subcontracting limitations.
• Division of Work: Division of work within the joint venture must adhere to subcontracting limitations.