Joint Venture Definition and JV Meaning

SBA Joint Venture Definition and JV Meaning - No Populated Joint VentureIs your company qualified under SBA small business joint venture regulations? Do you legally meet the joint venture definition? Understand the rules and get your company better positioned when bidding on federal government contracts. Improper joint venture relationships can lead to affiliation and contracts being revoked. In some situations, the Department of Justice (DOJ) has brought criminal charges against small businesses involving improper joint venture agreements for government contracting and mentor-protege relationships.

The legal definition of a joint venture JV for purposes of a federal government contract is an arrangement where two or more companies enter into a JV relationship and partnership agreement for the sole purpose of bidding on and performing a federal government contract. One important requirement is that each concern is small under the size standard corresponding to the NAICS code assigned to the contract, or qualify as small under one of the exceptions to affiliation set forth in § 121.103(h)(3).

Under the SBA joint venture definition, joint ventures in government contracting is regarded as a separate business entity in the eyes of the government.  In fact, when bidding on federal government contracts, it is the JV entity that is the actual bidder and not either of the venturing businesses.

What is a Joint Venture – JV Meaning? Under SBA guidelines, the rules  are allowed so that small business can take certain benefits when doing business with the government.  When bidding on federal government contracts the JV entity can use both company’s past performance, share contract costs and each company’s resources. If qualifying in an MP relationship, a mentor and its protégé can joint venture as a small business for any small business government contract, so long as the small protégé individually qualifies as small. The JV may also pursue any type of  set-aside contract  for which the protégé qualifies, including contracts set aside for 8(a), service-disabled veteran-owned, woman-owned, and HUBZone businesses.

In order for your joint venture to be able to bid on contracts reserved for small businesses, you must follow the requirements for receiving an exclusion of affiliation for contracting purposes.

Tip: SBA no longer approves joint venture agreements formed to pursue competitive 8(a) contracts. This includes joint venture agreements formed under the SBA MPP to perform a competitive 8(a) contract. SBA will continue to review and approve all joint venture agreements formed to pursue sole source 8(a) contracts.

How to set up a JV: Your joint venture agreement must be in writing and follow SBA requirements. The JV entity must be separately identified with its own name and have both a Unique Entity Identifier (UEI) and a Commercial And Government Entity (CAGE) code in the federal government’s System for Award Management at SAM.gov. In SAM, designate the entity type as a joint venture, with individual partners listed as the immediate owners. To receive an exclusion from affiliation the mentor-protégé agreement must be approved by the SBA before a mentor and its protégé submit an offer for a small business contract as a joint venture. The certificate should also be emailed to mppjvreporting@sba.gov. The protégé must provide a small business joint venture compliance certificate to SBA and the contracting officer.

Federal Limitations on Subcontracting rules for JVs: Limitations on Subcontracting rules below apply to JV arrangements. Failure to follow these rules can cause both civil and criminal penalties. As the joint venture prime of either a full or partial set-aside contract, the small business concern must agree to the following limitations on subcontractor for the respective contract types:

    • Pay no more than 50% of the amount paid by the government to non-similarly situated firms for service contracts.
    • Pay no more than 50% of the amount paid by the government to non-similarly situated firms for supplies or products contracts.
    • Pay no more than 85% of the amount paid by the government to non-similarly situated firms for construction contracts.
    • Pay no more than 75% of the amount paid by the government to non-similarly situated firms for special trade contracts.

SBA Joint Venture Workshare: Under the SBA joint venture definition, the parties must apply the following Workshare requirements to the JV. The protégé must perform at least 40% of the work done by the joint venture. Assuming the mentor and the protégé perform the minimum work share requirements, the protégé will perform 20% of the contract. However, for purposes of determining the protégé’s size, 40% of the revenues under the contract must be appropriated to the protégé.

Allocation of Receipts

  • The joint venture must submit annual evaluation reports, annual performance-of-work statements, and project-end performance-of-work to SBA and the contracting agencies explaining how the work is being performed for each contract.  Annual evaluations are due 30 days from the anniversary date on your welcome letter. Respective, annual reports and project-end reports are due 45 days after each operating year and 90 days after completion of the contract. Note, the protégé is the responsible party for reporting the evaluation under its DUNS number.

The regulations governing joint ventures formed under SBA MPP are explained in detail in 13 CFR 125.8 and 13 CFR 125.9.

SBA Joint Venture Definition and JV Requirements: Under SBA requirements, all government contractors must have an executed agreement in place. For 8(a) certified companies, it is essential that the SBA approves the JV structure and the JV contract.  To be qualified, the joint venture agreement must contain all statutory requirements including obligations and performance assignments. Previous SBA rules automatically presume the partnering as small businesses to be affiliated. However, the new SBA JV rules reduce the implication of affiliation . 13 CFR 124 and FAR 9.6 are the fundamental laws that govern SBA JV arrangements.  

Under the guidelines and SBA application process, a small business of two or more businesses can submit an offer as a small business for federal procurement, subcontract or sale so long as each concern is small under the small business size standards corresponding to the NAICS code assigned to the contract. See more information about affiliation under new rules.

No Populated Joint Venture Structure: Having a populated JV government contracts structure means that companies could staff the JV with employees. The new SBA rules have changed allowance for different types of JVs and extinguished allowance for populated JV strategies.

  • The SBA suggests that if the JV partners form a formal separate legal entity, then the new entity cannot be populated.
  • Forming an entity that is an unpopulated joint venture would allow the small business in a mentor-protege arrangement to actually gain past performance and experience.

Formal or Informal Structure: SBA government contract regulations allow joint venture arrangements to be either formal or informal. The intent of the new regulations, 13 CFR 125.8 and 13 CFR 124.513, is to make sure that whether the small business joint venture relationship is formal or informal, there must be an executed JV contract.

Without a written JV agreement, companies would be considered non-compliant and therefore subject to affiliation rules.

  • There is no federal requirement to form a new legal business entity.

State law consequences? 

The new SBA (JV definition) regulations suggest that the SBA believes that “..state law would recognize an “informal” JV company structure with a written partnership agreement setting forth the responsibilities of the joint venture partners as some sort of partnership.”

However, it is solely the responsibility of each small business entering into a qualified JV relationship to follow the respective state laws.  When considering joint ventures’ advantages and disadvantages under SBA guidelines, and although no formal entity is required,  each business venture partner should seriously consider what type of business entity it must form (if it chooses to form a new business entity).

Breach of or Failure to Comply With SBA Joint Venture Agreement Rules

Under SBA and government contracting laws, “Failure to perform a contract in accordance with the joint venture agreement” may be deemed grounds for debarment under 13 C.F.R. § 124.513 and 13 C.F.R. § 125.8 and “SBA may consider a mentor’s failure to comply with the terms and conditions of an SBA–approved mentor-protégé agreement as a basis for debarment[.]” 13 C.F.R. § 125.9(h)(2). “[T]he remedial purpose [of debarment] is linked to specific conduct that relates to the protection of the government from fraud, neglect, nonperformance, or other conduct lacking integrity, with a focus on the ‘present responsibility’ of the contractor.” See United States v. Hatfield, 108 F.3d 67, 69 (4th Cir. 1997). A federal contractor may be debarred if, by a preponderance of the evidence, it is found to have violated the terms of a Government contract or subcontract so serious as to justify debarment or due to a history of failure to perform, or unsatisfactory performance of, one or more contracts. FAR 9.406-2(b)(1).

Avoid Criminal Liability for Joint Venture Fraud 

When companies form a small business joint venture, they must be aware of the pros and cons; they must be aware of the legal landmines that await them. For example, on April 21, 2017 in SAN DIEGO, CA – Owners of local construction and telecommunications companies were criminally charged because  that they fraudulently obtained more than $11 million in federal contracts specifically set aside for service-disabled veteran-owned businesses. The charges were primarily joint venture fraud and joint venture conspiracy to default the government. The companies – A&D General Contracting, Inc. (“A&D”) and Action Telecom, Inc. (“Action”) – were named in a fourteen-count indictment by a federal grand jury in San Diego.

The indictment alleges that the SDVOSB joint venture participated in a conspiracy to defraud the government by forming a joint venture – Action-A&D, A Joint Venture (“the JV”) – and falsely representing that Action and the SDVOSB joint venture qualified as service-disabled veteran-owned small businesses (“SDVOSB”). Based on the false claim to SDVOSB eligibility, the conspirators fraudulently obtained approximately $11 million in federal government construction contracts or task orders with the Department of Veteran Affairs (“VA”) and the Army Corps of Engineers (“ACE”).

The criminal indictment also stated that the fraudulent conspiracy involved set-aside contracts that could only be bid upon by legitimate service-disabled veteran-owned small businesses – a designation that did not apply to Otero or A&D. To appear qualified, Otero (on behalf of A&D) and Ramsey (on behalf of Action) initially executed an agreement to create the JV (“the JV Agreement”), which stated that Ramsey’s company (Action) would be the managing venturer, employ a project manager for each of the set-aside contracts, and receive the majority of the JV’s profits.

13 CFR 125.8 What requirements must a joint venture satisfy to submit an offer for a procurement or sale set aside or reserved for small business? Under 13 CFR 125.8 a joint venture of two or more business concerns may submit an offer as a small business for a federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract, or qualify as small under one of the exceptions to affiliation set forth in § 121.103(h)(3).

13 CFR 124.513 Under what circumstances can a joint venture be awarded an 8(a) contract? Under 13 CFR 124.513, an 8(a) participant may enter into a joint venture agreement with one or more other small business concerns, whether or not 8(a) Participants, for the purpose of performing one or more specific 8(a) government contracts. A JV agreement is permissible only where an 8(a) concern lacks the necessary capacity to perform the contract on its own, and the agreement is fair and equitable and will be of substantial benefit to the 8(a) concern. However, where SBA concludes that an 8(a) Participant brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status, SBA will not approve the joint venture to receive an 8(a) sole source contract award and will find the joint venture to be ineligible for a competitive 8(a) award if it is determined to be the apparent successful offeror.

The SBA’s page was fortunate enough to answer the below questions.

Does a HUBZone Joint Venture (JV company structure) need to be certified as such? Since it is unlikely that it would meet the ownership and control requirement, the HUBZone regulations do not provide for approvals of HUBZone Joint Venture agreements. Business venture companies are generally owned by one or more business concerns and therefore are not directly owned 51% by individuals who are United States citizens as required by 13 FR 126.200(b)(1).

There is one exception to this general rule.  By statute, a HUBZone small business can be:

  1. an ANC owned and controlled by Natives (determined pursuant to section 29(e)(1) of the ANCSA); or
  2. a direct or indirect subsidiary corporation, joint venture, or partnership of an ANC qualifying pursuant to section 29(e)(1) of ANCSA, if that subsidiary, joint ventures, or partnership is owned and controlled by Natives (determined pursuant to section 29(e)(2)) of the ANCSA).

One of the firms in the HUBZone joint venture is not currently certified. Can you submit bids on HUBZone set-asides? Following the Joint Venture definition under SBA rules, a HUBZone-certified firm may enter into a joint venture agreement with one or more other small businesses, or with an approved mentor authorized by 13 CFR 125.9 (or, if also an 8(a) BD Participant, with an approved mentor authorized by 13 CFR 124. The JV company itself need not be certified as a qualified HUBZone small business.

Avoid criminal charges for procurement fraud because of an improper joint venture structure: Many small businesses find themselves facing government contractor fraud because of improper joint venture relationships in federal contracting. Examples include violation of the limitations on subcontracting, and misuse of 8(a) BD, HUBZone or SDVOSB small businesses. Having a government contractor fraud defense attorney that understands the rules can avoid conspiracy charges.

If all firms in the joint venture model are HUBZone certified at the time of award in a Multiple Award contract, but in year 2, one of the companies of the JV is no longer considered HUBZone, how would that affect the option years?

It will be considered a HUBZone Joint Venture for each order issued against the contract unless a contracting officer requests a new HUBZone certification in connection with a specific order. Where a concern is later decertified, the procuring agency may exercise options and still count the award as an award to a HUBZone SBC. Exceptions apply. See 13 CFR 126.601(h) for details. See information about HUBZone JV requirements.

The SBA’s comments mentioned the possibility of forming a limited liability company. However, the comment still suggests that companies make the appropriate decision.  Essentially, what the SBA is saying is to get legal advice on the matter.

For help drafting compliant SBA joint venture government contracts agreements,  and meeting the SBA small business joint venture definition under the new rules that eliminate the need for populated JVs, call Watson & Associates’ JV lawyers at 1-866-601-5518 .