pitfall of joint ventures

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Pitfalls

of Joint Ventures

Presented by:

David A. Rose Principal Attorney

Rose Consulting Law Firm

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

http://www.ncmbc.us/2012FEDCONSummit.php



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

Rose Consulting Law Firm - specializing in

Government & Small Business Law



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.




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)




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_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 contact to process loans for HUD – found to have fraudulently circumvented the SBA rules by using a nominal 8(a) contractor.


http://www.roseconsultingllc.org/Summary_of_Morris-Griffin_v.pdf






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…




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)




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

Rose Consulting Law Firm - specializing in

Government & Small Business Law



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




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 [email protected]

Principal Attorney (678) 854-0222

Rose Consulting Law Firm http://www.roseconsultingllc.org


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