Understanding the joint venture procurement rules when submitting a JV business proposals for government contracts can be very tricky. Although the FAR allows for this type of company formed relationship, companies submitting a bid proposal must be very aware of the underlying affiliation rules that frequently apply.
When small businesses enter into JV contracts, they are generally automatically affiliated unless there is a special exception. An example of such an exception is to have an SBA-approved mentor protege agreement.
SBA’s size regulations recognize that joint venture procurement offers may have formal or informal business entities. The proposed rule amended 13 CFR 121.103(h) to clarify that all requirements, whether a separate legal entity or an “informal” arrangement that exists between two (or more) parties, must be in writing.
There is more protection for small businesses when they for a JV with similarly situated businesses or when the JV subcontracts to a similarly situated entity. In addition, the new rules now avoid the three contracts in two years requirement. Instead, you can acquire as many contracts as you care so long it is done within the two year period.
Do you have to set up a separate business entity with the secretary of state?
The SBA final rule adopts the proposed language and specifies the requirement that a JV may be a formal or informal partnership or exist as a separate limited liability company or other separate legal entity. However, regardless of form, the Venture must be reduced to a written agreement.
Tip: The new rules about JV agreements with government contracts explain the requirement that a entity may be a formal or informal partnership or set up a separate limited liability company or other separate legal entity. However, regardless of form, the relationship must be reduced to a written agreement.
Does my JV agreement have to meet a specific format?
Tip: As a general practice, you may want to stay away from informal joint venture agreements because although you are not required to form a separate entity, you MUST still have a formal written JV agreement the meets the statutory guidelines. See information about Signs of Being Under Investigation (Federal).
SBA Joint Venture Procurement Requirements for Performance of Labor
Avoid common costly pitfalls with JV and division of labor requirements
Tip: For any small business set-aside contract or procurements reserved for small business that is to be performed by a joint venture between a small business protégé and its SBA-approved mentor authorized by 13 CFR 125.9, the JV contract firm must perform the applicable percentage of work required by 13 CFR 125.6, and the small business partner to the joint venture must perform at least 40% of the work performed by the joint venture.
- The work performed by the JV small business partner must be more than administrative or ministerial functions so that it gains substantive experience.
- Each agreement must be for a specific joint venture procurement
The amount of work done by the partners in the JV will be aggregated and the work done by the small business protégé partner must be at least 40% of the total done by the partners. In determining the amount of work done by a mentor participating in a joint venture with a small business protégé, all work done by the mentor and any of its affiliates at any subcontracting tier will be counted. See also, information about Service Disabled Veteran Government Contracts & SDVOSB Teaming Arrangements.
Basic Joint Venture Procurement Requirements for Limitation on Subcontracting
Your joint must still meet the limitations on subcontracting requirements
- If your contract is for supplies or products not from a nonmanufacturer of such supplies, the prime contractor (JV) cannot pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted.
- If your contract is for general construction in a federal joint venture construction contract, you cannot pay more than 85% of the amount paid by the government to it and to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards your 85% subcontract amount that cannot be exceeded. See FAR 52.219-14.
Tip: Do not get your contract taken away simply because mentor-protégé joint venture agreement fails to meet the requirements of 13 CFR 125.18(b)(2)(vi) and (vii) because it does not: (i) itemize the equipment to be used in the performance of the contract etc. See Size Appeal of KTS Solutions, Inc., SBA No. SIZ-6049 (2020)
The small business partner must annually submit a report to the relevant contracting officer and to the SBA, signed by an authorized official of each partner to the joint venture agreement, explaining how the performance of work requirements are being met for each contract set aside or reserved for small business that is performed during the year.
When complying with joint venture procurement requirements, you still have to meet the detailed requirements of 13 CFR 124.513(d), which requires the 8(a) protégé to perform at least 40% of the work performed by the JV and that the protégé’s work consists of “more than administrative or ministerial functions.”
- Your agreement cannot simply make “broad” and “generic” representations that you will perform at least 40% of the work without any details or plan.
- Your bid must articulate the parties’ actual responsibilities.
- If the government increases the scope during performance, you must still meet the statutory requirements
Furthermore, if the JV agreement or business proposal does not articulate the detailed requirements and obligations under the contract, you could find yourself affiliated. In other words, by missing the detailed requirements in the agreement itself, it may then void any protection under the Mentor Protégé exception.
If you are looking to form a JV contract when bidding on federal projects in the United States, need help with joint venture construction contracts, call our government contract procurement lawyers at 1-866-601-5518 for a free initial consultation.