Although the SBA has new rules addressing joint venture agreements and affiliation, if you have a JV agreement that does not meet the regulatory requirements, your company can still be affiliated and lose the contract.

Joint Venture Advantages and DisadvantagesIn federal government contracting, there are many joint venture advantages and disadvantages (JV). However, there are some joint venture disadvantages that can cripple a company. Small businesses especially have to be aware of the tricky rules and laws that impact joint venture relationships.

When making your decision to enter into JV agreement, make sure that you thoroughly understand the legal requirements for both proper execution, and to avoid affiliation (whether or not approved by the SBA).

When making your decision to enter into JV agreement, make sure that you thoroughly understand the legal requirements for both proper execution, and to avoid affiliation (whether or not approved by the SBA).

Joint Venture Definition (JV)?

Federal procurement law allows two or more businesses to pool their efforts and resources together for bidding and performing a specific project. However, in the case of a small business that is the prime contractor, a joint venture agreement does not allow the large business or non-awardee, to control the contract.

The legal relationships should be structured where the benefits of the joint venture relationship must go to the small business awardee. SBA regulations governing relationships between 8(a) companies, small businesses, and large businesses set the tone for how joint venture relationships must be.

Common Joint Venture Advantages and Disadvantages

Advantages of Joint Ventures, Federal Joint Venture Pros and Cons

There are many merits of joint venture relationships with another experienced company. An advantage of forming a joint venture is: that

  • Two or more ventures partners can combine their efforts and resources to reach a market that neither could accomplish on its own.
  • Having a joint venture contractual agreement could potentially create new jobs and allow companies to show innovative capabilities to federal government markets.
  • If done correctly, forming a joint venture relationship can allow the partners and managers to use employees (populated or unpopulated) to leverage lucrative government contracts.
  • If formed correctly, the joint venture agreement can avoid costly litigation due to a violation of affiliation rules under SBA regulations.
  • Government contracting laws allow for companies to use the joint venture agreement for more than one contract.

Disadvantages of Joint Venture Relationship

  • Small businesses are automatically affiliated if their relationships or documents do not comply with regulations – unless they meet the statutory exceptions to having a joint venture.  When considering the disadvantages of joint venture relationships, companies must carefully look at the relevant small business size standards because a successful size protest can cost you the contract.
  • Small businesses and other joint venture participants have to spend time vetting and deciding who is the best partner to engage in a Joint Venture Agreement (often, companies wait until an RFP is publicized, then quickly find a JV partner –- hazardous)
  • Many joint venture agreements do not adequately explain the roles and responsibilities. This leaves room for increased disputes and litigation.
  • Government contracting regulations are not always clear. Therefore, companies not properly advised about the relevant joint venture agreement laws find themselves open to bid protests, procurement fraud allegations and sometimes criminal exposure. See also the difference between a teaming agreement and a joint venture agreement.

Understanding the 3-in-2 Rule

One the many confusing parts of the joint venture regulations in the 3-in-2 rule.  To properly take advantage of this joint venture rule, it is very important for small businesses to understand the analysis of the rule because if it violated not only can you lose the contract but your company might be deemed other than small. You would not be able to bid for small business contracts using the NAICS code in question.

The 3-in-2 rule provides, in pertinent part:

A joint venture is an association of individuals and/or concerns with interests in any degree or proportion 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. More specifically, a  joint venture entity generally may not be
awarded more than three contracts over a two year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for all purposes. Once a joint venture receives one contract, SBA will determine compliance with the three awards in two years rule for future
awards as of the date of initial offer including price. 

An individual joint venture may be awarded more than three contracts without SBA finding general affiliation between the joint venture partners where the joint venture had received two or fewer contracts as of the date it submitted one or more additional offers which thereafter result in one or more additional contract awards. The same  entities may create additional joint ventures, and each new joint venture entity may be awarded up to three contracts in accordance with this section.  See 13 C.F.R. § 121.103(h).

Forming New Joint Venture vs Restructuring

Getting around the 3-in-two regulation could mean that the parties can form another joint venture and start getting more government contracts. So far there appears to be appellate decisions that say otherwise.  This can be a benefit to small businesses who may otherwise think that the rules have the parties trapped to perform only two contracts. Having the right government contracts attorney on board may benefit you and avoid making some of the common mistakes made by other companies.

International Joint Ventures – Understanding the Legal Implications is Critical

 Companies engaged in performing federal contracts overseas should carefully assess the merits of the relationship and look at the risks and mistakes made when doing business with the government. International joint venture advantages and disadvantages are somewhat the same as when performing domestic contracts. 

The relationships can lead to lucrative ventures when going after federal government contracts. However, disaster can occur when the government or a competitor decides to challenge the relationship. See also the difference between a teaming agreement and a joint venture agreement.

For help with drafting joint venture agreement and exploring joint venture advantages and disadvantages, call our joint venture agreement lawyers at 1-866-601-5518.

See How We Can Help You Avoid Costly Mistakes With Federal JV Agreements

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