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Joint Ventures

Pros and Cons ofJoint Ventures and

Teaming Agreements

David Rose Principal AttorneyRose Consulting Law Firm

SAME National Industry Small Business Advocate of the Year Global International Magazine

Government Contracts Law Firm of the Year


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What is a small business?

Organized for profit Place of Business in the U.S., operates primarily

in the U.S., or makes a significant contribution to the U.S. economy (taxes, use of American products/labor)

Does not exceed the small business size standard for the procurement.

Each North American Industrial Classification System (NAICS) Code has a small business size standard.

13 CFR 121.105


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NAICS Codes and Size Standards

Sector 23 – Construction Subsector 236 – Construction of Buildings 236115 New Single-Family Housing Construction (except Operative Builders) $33.5 236116 New Multifamily Housing Construction (except Operative Builders) $33.5 236117 New Housing Operative Builders $33.5 236118 Residential Remodelers $33.5 236210 Industrial Building Construction $33.5 236220 Commercial and Institutional Building Construction $33.5 Subsector 562 – Waste Management and Remediation Services 562111 Solid Waste Collection $12.5 562112 Hazardous Waste Collection $12.5 562119 Other Waste Collection $12.5 562211 Hazardous Waste Treatment and Disposal $12.5 562212 Solid Waste Landfill $12.5 562213 Solid Waste Combustors and Incinerators $12.5 562219 Other Nonhazardous Waste Treatment and Disposal $12.5 562910 Remediation Services $14.0 Except, Environmental Remediation Services 500 562920 Materials Recovery Facilities $12.5 562991 Septic Tank and Related Services $7.0 562998 All Other Miscellaneous Waste Management Services $7.0


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Engineering NAICS/Size Standards

Sector 54 – Professional, Scientific and Technical Services

Subsector 541 – Professional, Scientific and Technical Services

541110 Offices of Lawyers $10.0

541191 Title Abstract and Settlement Offices $10.0

541199 All Other Legal Services $10.0

541211 Offices of Certified Public Accountants $19.0

541213 Tax Preparation Services $19.0

541214 Payroll Services $19.0

541219 Other Accounting Services $19.0

541310 Architectural Services $7.0

541320 Landscape Architectural Services $7.0

541330 Engineering Services $14.0

Except, Military and Aerospace Equipment and Military Weapons $35.5

Except, Contracts and Subcontracts for Engineering Services Awarded Under the

National Energy Policy Act of 1992 $35.5

Except, Marine Engineering and Naval Architecture $35.5

NAICS codes 221111, 221112, 221113, 221119, 221121, 221122 – A firm is small if, including its

affiliates, it is primarily engaged in the generation, transmission, and/or distribution of electric energy for

sale and its total electric output for the preceding fiscal year did not exceed 4 million megawatt hours.


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Size must include Affiliates

What is an Affiliate? When one controls or has the power to control

another. Common ownership Common control Common management Identity of Interest (family members, common

investments, dependant through contractual relationships)

Newly organized concerns Joint Ventures

13 CFR 121.103


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What other issues can create Affiliation?

The ownership Structure Who are the other owner(s) besides the 51% owner? Are they owner(s) of other companies? Are they companies themselves? Are they in the same or similar line of business?

Look at the Operating Agreement or By-Laws Are there shared control arrangements? Do managers in the LLC or board members (Inc.) share

decision making? What about negative control issues – Can a manager or board

member block a quorum by not attending a meeting? Does the firm unduly rely on another for materials or

subcontracts (like an unofficial mentor)? SBA uses a totality of the circumstances review, so generally

no one factor may determine affiliation although it can.

13 CFR 121.103


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Average Annual Receipts

Use Federal Tax Returns

Average of last three completed fiscal years

13 CFR 121.104


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Number of Employees

Count all individuals employed on a full-time, part-time, or other basis. This includes employees obtained from a temporary employee agency, professional employee organization or leasing concern.

Numbers of employees for each of the pay periods for the preceding completed 12 calendar months(running average).

13 CFR 121.106


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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).

13 CFR 121.103(h)


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Joint Venture vs. Prime/Sub Relationship

SBA affiliation regulations purposely do not define “teams” or “teaming agreements”

Joint Ventures Formal joint venture (Separate legal entity, such as LLC) Informal (no new entity formed)

Prime Subcontractor Relationships


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Teaming Arrangement: FAR 9.601

“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.

More about Teaming Agreements later


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What are the Benefits?

General benefit for all concerns, both large and small:

The joint venture or team is able to compete for larger, more technically complex contracts by combining the capabilities and past performance of various team members.

FAR 9.601


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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.

Exception, a joint venture is considered small, when each joint venture partner is small and if: 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 procurements having an employee based size standard, the dollar value of the procurement exceeds $10 million.

13 CFR 121.103(h)(3)


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Points for Prime/Sub Relationships

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).


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What is an 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)


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When is one Ostensible? The SBA originally came up with what we refer to as the 7 factor test.

Although they use the “Totality of the Circumstances” test now, we will see in decisions by the GAO, Claims Courts and others grappling with the Ostensible Subcontractor issue, the 7 factor test being frequently referred to. So, to give you some point of reference, I am going to list the 7 factors here.

(1) who will manage the contract (2) which party possesses the background and expertise necessary for

contract performance (3) which party chased the contract (4) the degree of collaboration in preparation and submission of the

competitive proposal (5) whether there are discrete tasks to be performed by each of the

teaming partners, or whether there is instead commingling of personnel and resources

(6) the relative amount of work to be performed by each teaming partner (7) which party will perform the more complex and costly contract

functions.

D.P. Associates, Inc., No. 2719, Aug. 7, 1987These factors are not weighed equally, and not one of them is a conclusive

test of unusual reliance.


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Morris-Griffin v. C&L Service Corporation = Ostensible Subcontractor

Recent Case on Affiliation and Ostensible Subcontractors – http://www.roseconsultingllc.org/Summary_of_Morris-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 contract to process loans for HUD – found to have fraudulently circumvented the SBA rules by using a nominal 8(a) contractor.


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Points for Joint Ventures

Do not violate the “3-in-2 rule” – three contracts won in a 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.


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Formal 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 size of at least one 8(a) member of the joint venture must be less than ½ the

size standard for the procurement.


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Formal 8(a) Joint Ventures (cont’d)

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)


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Formal 8(a) Joint Ventures (cont’d)

For any 8(a) joint venture between 8(a) business and another firm to perform an 8(a):

If the JV is populated, then 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), then 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)

* This is separate from the Limitations in Subcontracting at 13 CFR 125.6, which can require the JV as a whole to perform 15, 25 or 50% of the work with its own employees.


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Lets Talk about the VA

For anyone who has tried to re-verify or get a joint venture verified, this should not be surprising.

The average time to process a CVE package right now is 90 days – maybe. Understand how that is counted.

If you are going to put together a JV, the rules are similar to a JV for an SBA venture; however!!! If you are going to pursue a Veteran’s First Procurement – there are some bad

templates out there! It must be verified by VA prior to submittal of the proposal It does not have to be verified to pursue other than the VA but must still be

properly drafted The VA is very picky about ownership and control issues – even more so than

the SBA and it is far more difficult to reach a human than it is with the SBA. A verification, as of an interim final rule effective June 27,

2012, is good for 2 years.


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Lets Talk about HUBZone JVs

A HUBZone can only joint venture with another HUBZone You do not need to go through formalization of the HUBZone

process for the JV The same rules apply so far as size of each business The aggregate of the HUBZone firms in the JV must meet the

applicable Limitations on Subcontracting .

13 CFR §126.616


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Lets Talk about WOSB JVs

51% of the net profits earned by the joint venture must go to the WOSB

Final Records to be retained by the WOSB A copy of the JV must be provided to the CO. WOSB partner must be managing member

Employee of WOSB must be the project manager Specify the responsibilities of the Parties with respect to contract

performance, sources of labor and contract negotiation Meet applicable Limitations on Subcontracting

13 CFR § 127.506(c)


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Lets Talk about Mentor Protege

There are 14-15 Mentor Protégé Programs in the Federal Government SBA by far has the one with the greatest benefits but it is the toughest club to join

3 best parts of theirs: Exemption from affiliation for JVs between the mentor and protégé for pursuit

of any federal procurement Mentor may own up to 40% equity investment in protégé Mentor may bond the protégé’s jobs for them if written into the MP agreement

By and large the next best is DOD DoD allows for reimbursement of some expenses of the mentor, or

subcontracting credit and also sets aside some procurements for those in the program.

The rest all contain provisions for extra small business credit in the Mentor’s small business plan for being a mentor, some have reimbursement of expenses to some extent for assisting a protégé, etc. Warning – Only SBA’s mentor protégé program

has an affiliation exemption and allows for a JV to exist between a

large and small business.


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The NDAA of 2013 Passed on January 3, 2013

This date is very important as will become clear

Significant legislation affects small businesses in many areas Over 250 pages of the NDAA changes the

Small Business Act Very common way of changing law – using

stronger legislation to push the change


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The new Mentor Protégé Program

Or Is It! The Administrator is authorized to establish a mentor-protege

program for all small business concerns. The mentor-protege program established under paragraph (1)

shall be identical to the mentor-protege program of the Administration for small business concerns that participate in the program under section 8(a)

except that the Administrator may modify the program to the extent necessary given the types of small business concerns included as proteges.

REGULATIONS- Not later than 270 days after publ.


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The New Mentor Protégé Program

270 days after this act is passed the Administrator shall: issue, subject to notice and comment, regulations with respect to mentor-protégé

programs which shall address, at a minimum, the following

(A) Eligibility criteria for program participants, including any restrictions on the number of mentor-protégé relationships permitted for each participant.(B) The types of developmental assistance to be provided by mentors, including how the assistance provided shall improve the competitive viability of the protégés.(C) Whether any developmental assistance provided by a mentor may affect the status of a program participant as a small business concern due to affiliation.(D) The length of mentor-protégé relationships.(E) The effect of mentor-protégé relationships on contracting.(F) Benefits that may accrue to a mentor as a result of program participation.


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The New Mentor Protégé Program

What does all this mean? The NDAA further expands the mentor-protégé program by

permitting all small business concerns to qualify for protégé status. This newly-expanded program must function identically to the program established for the 8(a) companies. While the SBA has not yet issued regulations on the mentor-protégé program created in the Jobs Act, the NDAA directs the SBA to issue, subject to notice and comment, regulations pursuant to the even broader mandate of section 1641 within 270 days from the enactment of the NDAA.

It’s the “Exception” language that may allow the Mentor Protégé Program for other businesses to differ

How much remains to be see but it will be a fight


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Teaming Agreements

Unlike Joint Ventures, a Teaming Agreements (TA) requires one company (or entity) to act as a Prime contractor and all other members of the team are subcontractors.

What does this mean legally? The prime is the only one who has privity (is on the hook) with the

client. The subcontractors do not have a Federal contract but have a

commercial subcontract with the Prime – if the Prime opts to award one once the contract is awarded – only to the Prime

So there is a great deal of risk to the Team if the TA is poorly drafted, is unenforceable, or is not clear in what is expected from the Parties.


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Teaming Agreements

So how do we obtain equity (share the pain) with the Prime in our Teaming Agreement (TA) in a Federal Contract? First – Be aware of the FAR Flow-down Clauses.

Note: FAR flow downs will vary with type of contract There are mandatory flow-down clauses

Clearly define roles of the Parties – who leads, who assembles proposals, contacts with client

Clearly identify the project Clearly identify what each member of the team will get

if you win – Attachment “A”


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Teaming Agreements

If proprietary information is to be furnished for the proposal to the prime, and they are normally a competitor, state it will be provided in a sealed or confidential manner, not to be opened. Protect yourself.

Do you desire exclusivity? If orals are to be given, does the sub(s) wish/need to

participate? State whether costs of proposal preparation are borne by

each Party or will be charged against the team should the proposal be successful (not normally done)

Make sure there is some agreement on how a subcontract will be negotiated/awarded to sub(s)


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Teaming Agreements

What are the agreements regarding news releases/publicity among the team members?

Non-Disclosure/Confidentiality provisions Events that terminate the Agreement (do not want this

thing hanging out there if we lose or decide not to work together)

What provisions shall survive the termination of the agreement (e.g. confidentiality) Man this is dry AND boring isn’t it!!!

Where will notices be sent to for each party – ensure adequate communications – keep any debates at a minimum


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Teaming Agreements

In order to assist in avoiding charges of affiliation insert a comment stating this agreement is not intended to form a joint venture …

Non-assignment clause Do not restrict the right of a Party to negotiate with the

client on unrelated or pre-existing matters (careful drafting required)

No Poaching of employees***Understand that provisions in TAs between two

sophisticated Parties (large businesses) can be much more onerous than between a large and small business


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Where Can I Find the CFR?

Federal Regulations (CFR) on-line: http://ecfr.gpoaccess.gov

Size regulations -- 13 CFR Part 1218(a) & SDB regulations -- 13 CFR Part 124

Government Contracting Programs – 13 CFR Part 125.6HUBZone Program – 13 CFR Part 126

Service Disabled Veteran Program – 13 CFR 125Women-Owned Small Business Program-13 CFR 127


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David A. Rose [email protected]

Principal Attorney (678) 854-0222

Rose Consulting Law Firm http://www.roseconsultinglawfirm.com

If you have additional questions, please contact Dave directly:

SAME National Industry Small Business Advocate of the Year Global International Magazine

Government Contracts Law Firm of the Year (GA)

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