A Joint Venture in Government Contracting is Good for Growth

Are you interested in exploring more federal contracting opportunities? Joint venture procurement with other businesses is a great way to grow your small business and expand your reach to larger federal contracting opportunities. A joint venture, or JV, is a type of business arrangement where two or more parties make an agreement to pool all of their talent and resources to achieve a specific goal. The goal can be a task, a new project, or another form of a business activity. The JV participants are responsible for all the costs, profits, and losses associated with it and ensuring that all the work gets completed even if a member of the JV withdraws from the agreement

The JV is a separate entity, with a separate federal tax status and number, from the parties’ other businesses. Corporations, partnerships, LLCs, and other types of businesses can all form joint ventures and there can be more than two parties to a JV. While these arrangements may be used for research purposes, they can also be used for other purposes including bidding on government contracts or accessing new consumer markets.

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Maintaining Set-Aside Preference

If one business is eligible for socioeconomic set-asides, e.g., woman owned, SDVOSB, VOSB, HUBZone, it must maintain at least a 51 percent – majority -- ownership in the joint venture. Certain contracting opportunities have been set-aside that only these businesses may bid on in the federal procurement process.

While joint ventures are like a partnership, the main difference is that a JV is used for one single business activity for only a specified period of time. A partnership is a long-term relationship that is ongoing. SBA regulations provide that JVs may only be awarded three contracts within a two year period. If they are awarded more than that, they may be considered “affiliated” and could potentially lose their small business status.

The Small Business Administration (SBA) has joint venture templates to download and use and offers guidance on the Code of Federal Regulations (CFR) and and how to comply with federal regulations.

JV Agreement

The actual terms of a joint venture need not be overly complicated. There are certain elements that must be included to protect both parties and to ensure that the smaller business is protected from being subsumed by the larger business. The SBA wants to ensure that that venture is actually that and that the work is being completed by both parties. The agreement should identify the following:

  • The names, addresses, and business forms (LLC, partnership, etc.) of each member.

  • The fictitious business name of the joint venture.

  • A full description of the business venture and what it does including NAICS codes if possible.

  • A statement declaring the parties as joint venturers with their intent to fulfill all contracts.

  • The signing of all venture related documents by both parties

  • A clause stating the duration of the joint venture.

  • The ownership interest of each party in the joint venture with the small business maintaining at least 51 percent ownership.

  • Acknowledgement that management remains with the majority owner.

Financing of the joint venture should be clear and laid out in the joint venture agreement. This should include the following:

  • The funding each party will contribute mirroring the ownership interest.

  • A designated bank for contributed funds, other incomes, and payments.

  • How additional funds will be contributed when necessary.

  • How shared profits will be distributed, and losses broken down by percentages.

  • A clause addressing equipment and other resource contributions.

  • Records will be maintained and retained by majority owner.

  • Financial reports will be made quarterly to SBA.

Formal vs. Informal JV

While some JVs can be informal, for purposes of submitting for government bids according to SBA rules, the JVs must be in writing. In the past, fraud has been an issue, which is why the federal government scrutinizes these joint ventures. The resource contributions and ownership by majority small business owner must be at least 51 percent performing 40 percent of the work. This is to ensure that the joint venture is not just a shell organization enabling the larger or non-SBA set-aside entity to use the disadvantaged business’ status to gain an advantage without actually benefitting the disadvantaged business. “Shell companies” are frowned upon and may constitute fraud that could land the parties in legal tangles. Penalties for falsifying records to obtain government contracts may include disbarment and federal prosecution with fines and jail times.

There are, of course, numerous federal regulations that govern certain aspects of joint ventures if you own an 8(a), Service Disabled Veteran Owned Small Business (SDVOSB) or wish to pursue a more formal Mentor-Protégé relationship before entering a JV with a larger business.

Examples of productive JVs pooling resources and expertise include United States based electric car companies partnering with Chinese based companies to access that burgeoning market. Delta Airlines entered into numerous JVs with smaller regional airlines to access new foreign consumer markets. A brewery entering into a JV with a Chinese beer company to access that market.

Of course, those are examples of more expansive joint ventures, but JVs can be reached on much smaller scaler to provide services to the Dept. of Veterans Affairs or General Services Administration for contracts that an 8(a) or SDVOSB wouldn’t necessarily be eligible to bid on by themselves but would if they have the combined expertise of another business.

The GSA states on their website that, “for those willing to create a joint venture, there are many benefits.

  • Represent Past Performance collectively, as a prime contractor (rather than as a subcontractor)

  • Share costs

  • Share resources

  • Leverage other partners’ experience and market share.”

     

    If you need assistance with your business, contact the experienced lawyers at Whitcomb, Selinsky Law PC.  

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