Joint Venturing and Teaming on Federal
Government Contracts
Steven J. KoprincePartner
Petefish, Immel, Heeb & Hird, LLP
Government Contracts Solutions for Small Business
• Joint Ventures v. Teams• Characteristics• Legal forms• Capabilities• Size requirements
• Joint Ventures• How to Form• Formation considerations• Required JV provisions • Recommended additional provisions
• Complying with subcontracting limits• Special 8(a) rules
• VA CVE verification requirement
• Prime/Sub Teams• How to form• Teaming agreements• Recommended provisions
• Subcontracts• Required provisions (flow-downs)• Recommended provisions
• Subcontracting limits• Ostensible subcontractor affiliation
• Mentor-Protégé Programs• SBA 8(a) mentor-protégé program• Eligibility and Requirements
• DoD mentor-protégé program• Requirements
• Other agencies’ mentor-protégé programs• Affiliation concerns?
• New mentor-protégé programs on the horizon
Joint Ventures v. Teams
• Joint Ventures– Both parties perform at
the prime contract level– Parties split profits and
losses– Parties may form a new
legal entity– Subcontracting limits
apply to JV as a whole
• Teams– Only one party performs
at the prime contract level
– Subcontractor paid on a pre-determined basis
– No new legal entity created
– Subcontracting limits apply to prime only
Joint Ventures v. Teams
• Liability• JV: both parties responsible for entire contract• Team: sub responsible only for its own share of
work• Control• JV: Both parties exercise some level of control • Team: Prime should control the relationship• Ostensible subcontractor affiliation
Joint Ventures v. Teams
• Advantages of a JV v. a Team:• Government can rely on two companies to
perform entire contract• Minority member may exercise more control• Individual JV members not responsible for as
much work• May receive favorable tax treatment• Helps companies stay smaller longer
Joint Ventures v. Teams
• Disadvantages of a JV v. a Team:• Lead contractor surrenders substantial control• JVs may not be eligible to bid due to size
problems• Both parties liable for entire contract• Termination may be more difficult• Government or competitors may raise past
performance questions
Joint Ventures v. Teams
• Size requirements• JV: sizes of joint venturers are added together to
determine small business status• See exceptions on next slide
• Team: only the size of the prime contractor is considered in determining small business status
Joint Ventures v. Teams
• Size requirements• Joint venture may take advantage of “individual size
treatment” rule when:• The procurement exceeds ½ of a revenue-based size
standard, or• For an employee-based size standard, the procurement
exceeds $10 million• Note: other requirements may apply within
socioeconomic set-asides
8(a) protégé may JV with mentor based only on protégé’s size
Joint Ventures
• What is a Joint Venture?• Two or more companies• Combine resources, skills, efforts, & knowledge• Share profits and losses• Temporary basis• “Three in two” general affiliation rule
How to Form a JV
• A Joint Venture may be formal or informal.• Formal JV: separate legal entity formed with a
state government• LLC by far the most common• Can be populated or unpopulated
• Informal JV: not a separate legal entity formed with a state government• Exists as a “partnership by contract” between the
parties• Should be unpopulated
How to Form a JV
• Populated JV:• The JV has employees of its own• The JV acts, for purposes of the contract, as its
own separate company• Formation may be more difficult (e.g., employee
insurance requirements)• Unpopulated JV:• Lacks its own employees• Serves as a “legal fiction” for the partnership
How to Form a JV
• Other formation considerations:• Management structure• Facilities and resources• Project Manager• Key employees• Subcontracting
How to Form a JV
• Joint Venture AgreementsRequired contents vary by program
• Small business set-aside (no socioeconomic designation)• No required contents• BUT, recall that parties must meet size
requirements• See socioeconomic programs and later slides for
recommended provisions
How to Form a JV
• 8(a) JV Agreements• Must meet all requirements specified in 13 C.F.R.
124.513.• Eligibility: • At least one JV member must be 8(a) program
participant• Parties must meet size requirements (note mentor-
protégé exception)
How to Form a JV
• 8(a) JV Agreements• Must contain a number of required provisions specified in
13 C.F.R. 124.513(c), including:• Description of purpose of JV• Naming 8(a) participant as managing venturer• Naming employee of 8(a) as project manager• Distribution of profits based on performance of work• Creating special bank account• Several others
• Note: some requirements differ for populated v. unpopulated JVs
How to Form a JV
• 8(a) JV Agreements• 8(a) JV agreements must be approved by the SBA
prior to contract award• In addition to JV agreement, parties must submit
a great deal of additional documentation called for by the SBA 8(a) Standard Operating Procedure
• Bottom line: 8(a) JVs take a lot of work to form, so start early (and get help if you need it)
How to Form a JV
• SDVOSB JV Agreements• Must meet all requirements of 13 C.F.R. 125.15(b)• Eligibility:• At least one member of JV must be a SDVOSB• Parties must meet size requirements• SBA OHA has overturned prior case law stating that a
SDVOSB JV cannot be a separate legal entity (e.g., LLC)
How to Form a JV
• SDVOSB JV Agreements• Must contain provisions required by 13 C.F.R.
125.15(c), including (but not limited to): • SDVOSB must be named managing venturer• A specific employee of the SDVOSB must be named
project manager• SDVOSB must be entitled to at least 51% of profits• SDVOSB must retain final records
How to Form a JV
• SDVOSB JV Agreements• SBA’s prior approval is not necessary for SDVOSB
JV agreements• SBA will review after an eligibility protest• See special rules for VA CVE (next slide)
• No additional documentation required
How to Form a JV
• SDVOSB JV Agreements• For VA SDVOSB set-aside contracts only:• The JV must be a separate legal entity (no joint venture
by contract)• The JV must be verified by the VA’s Center for Veterans
Enterprise
How to Form a JV
• HUBZone JV AgreementsEligibility:• Both joint venture partners must be HUBZones• As a result, joint venturing relatively unpopular for
HUBZone set-asides
The good news:• Because both parties must be HUBZones, SBA not
worried about HUBZone control• Few requirements for content
How to Form a JV
• WOSB JV AgreementsEligibility:• One party must be a WOSB or EDWOSB• Parties must meet size requirements
• JV Agreement contents:• Must demonstrate control by WOSB• Similar to SDVOSB JV requirements• See 13 C.F.R. 127.506
JVs and Subcontracting
• The JV itself, as prime contractor, is subject to the subcontracting limits
• Where the JV is unpopulated, the “legal fiction” applies the subcontracting limits to the JV parties
• For most JVs, no rule regarding work split among JV members• The 8(a) participant must perform at least 40% of
the JV’s work in an unpopulated 8(a) JV
How to Create a Team
• A prime/sub team should be formed well in advance of proposal submission by way of a teaming agreement
• Teaming agreement: binding agreement to pursue a specific government contract as a prime/sub team
How to Create a Team
• A teaming agreement should include (recommended):• Specific identification of project• Division of labor—who will do what?• Ostensible subcontractor risk factor
• Exclusivity provision• Non-disclosure• Termination provisions• Dispute resolution
Subcontracts
• Subcontract supersedes/replaces the teaming agreement
• Much more detailed than teaming agreement• Must include mandatory FAR provisions (flow-
downs)• Consider an incorporation by reference clause• Consider specific identification of (at minimum) key
flow-downs• Provide the sub with a copy of the prime contract, less
any confidential information about your company
Subcontracts
• Recommended provisions to include in subcontracts (not required):• Termination for convenience• Pass-through dispute resolution• “Pay-when-paid” clause• Robust reps and certs (OCIs, suspension and
debarment, etc.)
Limits on Subcontracting
• Every set-aside contract contains subcontracting limits (FAR 52.219-14)
• Limits vary depending on type of contract• Contrary to common perception, limits are
not based on the total value of the contract
Limits on Subcontracting
• “Ordinary” subcontracting limits:• Services: 50% of the cost of the contract incurred for
personnel• Specialty trade construction: 25% of cost of the
contract (excluding materials)• General construction: 15% of the cost of the contract
(excluding materials)• SDVOSB & HUBZone set-asides:
Prime can meet limits by subbing to other SDVOSBs/HUBZones
Limits on Subcontracting
• Best practices:• State in proposal, teaming agreement and
subcontract that subcontractor will perform no more than allowable percentage of work• “Up to” larger number may violate the regulation
• Include ongoing compliance mechanism in subcontract to reduce sub’s work share if sub begins performing in excess of limit
Ostensible Subcontractor Affiliation
• What is it?• SBA considers a small prime contractor affiliated
with its subcontractor for purposes of a set-aside contract where:• The prime is “unusually reliant” upon the sub, and/or• The sub will perform the primary and vital portions of
the contract
• Why does it matter?• If sizes of prime and sub, combined, exceed size
standard, prime is ineligible for award
Ostensible Subcontractor Affiliation
• SBA evaluates ostensible subcontractor affiliation on a case-by-case basis, looking at “totality” of relationship between the parties
• Best practice: reduce/eliminate number and severity of ostensible subcontractor risk factors as identified in regulation and SBA OHA cases
Ostensible Subcontractor Affiliation
• Risk factors:• Incumbency• Sub is an ineligible incumbent for the prime contract
(outgrew size standard or lost 8(a) certification)
• Division of work• The greater the sub’s share, the more likely it is to be
an ostensible subcontractor– Even if meets the subcontracting limits
• Sub more likely to be an ostensible subcontractor if it performs more complex or key functions
Ostensible Subcontractor Affiliation
• Risk factors:• Management responsibilities• If top contract manager (e.g., project manager) is sub’s
employee, almost certain to be affiliated• Other management roles may contribute to a “totality”
finding
Experience/expertise• Is prime relying on sub for all/most of its past
performance or relevant experience?
Ostensible Subcontractor Affiliation
• Risk factors:• Management responsibilities• If top contract manager (e.g., project manager) is sub’s
employee, almost certain to be affiliated• Other management roles may contribute to a “totality”
finding
Experience/expertise• Is prime relying on sub for all/most of its past
performance or relevant experience?
Ostensible Subcontractor Affiliation
• Risk factors:• Transferred personnel• SBA OHA recently recognized executive order on right
of first refusal• BUT, does not apply to management or non-SCA
personnel• And is it effective?
Ostensible Subcontractor Affiliation
• This stuff matters!• October 2010: GTSI (top-100 contractor)
suspended from all government contracting• Allegations: violation of subcontracting limits and
ostensible subcontractor affiliation rules• Two of GTSI’s prime contractors also suspended• Suspension lifted, but GTSI pays heavy price
• Morris-Griffin case: federal judge tosses breach of contract suit• Contract illegal and fraudulent due to violations
Mentor-Protégé Programs
• 8(a) Mentor-Protégé Program• Who can participate?• Protégé (8(a) company):• Be in “developmental” stage; or• Have never received an 8(a) contract; or• Have a size less than half its primary NAICS code
• Mentor: • Any company (including large business) with favorable
character, financial profile.
Mentor-Protégé Programs
• 8(a) Mentor-Protégé Program• Benefits: • 8(a) and mentor are not affiliated based on
assistance provided by mentor to protégé under agreement
• 8(a) and mentor may JV as a small business for any federal contract for which the 8(a) protégé qualifies as small
Mentor-Protégé Programs
• 8(a) Mentor-Protégé Program• Requirements:• Parties must submit a written agreement setting forth
the assistance to be provided• In recent years, SBA looking for very detailed MP
agreements• Parties must submit certain supporting documentation• SBA must approve agreement• Agreement must be re-approved annually, or benefits
are lost
Mentor-Protégé Programs
• DoD Mentor-Protégé Program• Who can participate?• Protégé: • Self-certified SDB• SDVOSB• HUBZone• WOSB
• Mentor: must have at least one active DoD subcontracting plan
Mentor-Protégé Programs
• DoD Mentor-Protégé Program• Benefits:• Mentor and protégé not affiliated on basis of
assistance provided by mentor to protégé under agreement
• Mentor may receive credit against its subcontracting plans for assistance (credit agreement) or reimbursement of funds expended (reimbursement agreement)
• BUT, no joint venturing capability
Mentor-Protégé Programs
• DoD Mentor-Protégé Program• Requirements:• Mentor must submit an application to serve as a
DoD mentor• Parties must then submit a mentor-protégé
agreement for approval• Like SBA, DoD has required great detail in recent years
Mentor-Protégé Programs
• DHS• State• Treasury• NASA• GSA• HHS
• FAA• USAID• Energy• VA• EPA• DOT (proposed)
Mentor-Protégé Programs
• Affiliation risks?• March 2011: SBA adopts new size regulations• New regulations provide that exception from
affiliation only allowed when mentor-protégé program has been approved by SBA or created by Congress
• Currently, only SBA 8(a) and DoD comply
Mentor-Protégé Programs
• New SBA mentor-protégé programs on the horizon:• SDVOSB• HUBZone• WOSB
• Congressional directive: programs should be similar to 8(a)• May include JV capability
Questions?
Thank you!
Questions?
Steven Koprince785-655-0450 (mobile)785-843-0450 (office)
www.petefishlaw.comwww.smallgovcon.com
www.governmentcontractsbook.com