Understanding the Treatment of Joint Ventures between Contractors, Part I Joint Venture 101

Transcription

Joint Venture 101
Understanding the Treatment
of Joint Ventures between
Contractors, Part I
How joint ventures are defined and treated by the FAR, SBA, and
DCAA for their purposes, as well as an in-depth discussion of the
circumstances in which joint ventures can compete for government
contracts and the requirements joint ventures must meet before
receiving contracts.
By John Ford and David Lundsten
60
Contract Management | December 2011
Joint Venture 101: Understanding the Treatment of Joint Ventures between Contractors, Part I
For many procurements, the formation of a joint venture by two or
more contractors is the only feasible means by which the U.S. federal
government can obtain the required supplies or services. Similarly,
in many instances, forming a joint venture is the only way some
contractors can compete for a procurement. This is particularly true of
small businesses.
What is a Joint Venture?
The definition of a “joint venture” depends
on the context in which the term is used.
The Federal Acquisition Regulation (FAR)
does not contain a universal definition of
a joint venture. In fact, the term is used
in only four provisions in the FAR. The first
mention of a joint venture is in FAR 9.601,
where it is stated that “‘Contractor team
arrangement’…means an arrangement
in which…[t]wo or more companies form
a partnership or joint venture to act as a
potential prime contractor.”1
As this extract demonstrates, FAR 9.601
views joint ventures as a form of contractor team arrangement. For these purposes,
the FAR envisions contractors forming joint
ventures to pursue prime contract awards.
However, nothing in the FAR prevents companies from forming a joint venture in the
hopes of receiving a subcontract.
The most extensive FAR discussion of joint
ventures occurs in Part 19 and deals with
small businesses. Here, the FAR borrows
significantly from the Small Business Administration (SBA) rules on affiliation.2 In this
regard, the FAR defines a joint venture as:
…an association of persons or concerns with
interests in any degree or proportion by
way of contract, express or implied, consorting to engage in and carry out a single
published revised size standard rules to
include a new definition of a joint venture.
The revised SBA rules now define a joint
venture as:
…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 pur-
which purpose they combine their efforts,
not on a continuing or permanent basis for
conducting business generally.3
This was similar to the definition SBA gave
until January 11, 2011. At that time, SBA
Finally, we cannot overlook the fact that the
Defense Contract Audit Agency (DCAA) has
its own definition of what a joint venture
is. This definition is different from the
definitions contained in either the FAR or
SBA regulations. The DCAA’s Contract Audit
Manual (CAM) informs auditors that a joint
venture is:
pose they combine their efforts, property,
money, skill, or knowledge, but not on a
…[an] enterprise owned and operated by two
continuing or permanent basis for conduct-
or more businesses or individuals as a sepa-
ing business generally.... SBA may also
rate entity (not a subsidiary) for the mutual
determine that the relationship between a
benefit of the members of the group. Joint
prime contractor and its subcontractor is a
ventures possess the characteristics of joint
joint venture.4
control; e.g., joint property, joint liability
for losses and expenses, and joint participa-
As for when the relationship between a
prime contractor and its subcontractor may
be considered a joint venture, the SBA rules
state that a contractor and its “ostensible
subcontractor” are treated as joint venturers, and therefore affiliates, for size determination purposes.5 SBA defines an ostensible
subcontractor as a subcontractor that
performs primary and vital requirements of
a contract, or of an order under a multiple
award schedule contract, or a subcontractor
upon which the prime contractor is unusually reliant.6 All aspects of the relationship
between the prime and subcontractor are
considered in making this determination.
specific business venture for joint profit, for
property, money, skill, or knowledge, but
precedence over what is in the FAR if there is
a conflict between the two.8
It should be noted that there are significant
differences between the FAR and SBA definitions as to how to determine if a company,
including a joint venture, meets the size
standard for a particular procurement. However, because size determinations are the
exclusive province of SBA,7 SBA’s rules take
tion in profits.9
Of course, this definition is not binding on
anyone but DCAA auditors because the CAM
is not a regulation and is only intended
to be internal guidance to DCAA auditors.
Unfortunately, the CAM does not mention
either the FAR or SBA definitions. Accordingly, the failure of DCAA to base its guidance
on what is in the FAR or SBA regulations can
have adverse consequences for contractors
when dealing with DCAA auditors.
Forms of Joint Ventures
While all of the definitions discussed
above indicate that a joint venture is
an enterprise comprised of two or more
separate entities, none specify that a joint
venture must have any specific form. Thus,
theoretically, a joint venture can be in the
form of the following:
61

A partnership,
c.
A corporation,

A limited liability corporation,

Any combination of these business
forms, or
Corporations. A contract with a
unincorporated joint venture can be a part-
corporation shall be signed in the
nership or teaming arrangement between
corporate name, followed by the
two or more corporations usually involved
word “by” and the signature and
in large research and development and/or
title of the person authorized to
major weapon systems contracts. Usually in
sign. The contracting officer shall
this type of joint venture, the joint venture
ensure that the person signing for
is the contracting entity and is designated
the corporation has authority to
to act as the prime contractor.13
bind the corporation.11

None of the above.
This is recognized in FAR 4.102 when discussing who can sign a contract on behalf of
a joint venture. Specifically, FAR 4.102(d)
states:
[A] contract with joint ventures may involve
any combination of individuals, partnerships, or corporations. The contract shall
The SBA rules have more specific guidance
on the form a joint venture may take. The
rules state that a joint venture must be in
writing and must do business under its own
name, and it may (but need not) be in the
form of a separate legal entity, and if it is a
separate legal entity it may (but need not)
be populated (i.e., have its own separate
employees).12
In regard to incorporated joint ventures,
the CAM states that they normally have
characteristics common to a corporation, in
that they are separate legal entities and act
as a contracting party.14 However, the CAM
does not acknowledge that a separate legal
entity joint venture may be unpopulated as
specified in the SBA rules, and there is the
implication that such a joint venture needs
to have its own business systems.
be signed by each participant in the joint
venture in the manner prescribed in paragraphs (a) through (c) above for each type
of participant.10
For these purposes, FAR 4.102(a) through (c)
mandates contractor signatures as follows:
a.
Individuals. A contract with an
individual shall be signed by that
individual. A contract with an
individual doing business as a
firm shall be signed by that individual, and the signature shall be
followed by the individual’s typed,
stamped, or printed name and
the words, “an individual doing
business as
”
[insert name of firm].
It must be observed that the SBA regulations do not place any restriction on what
kind of separate legal entity may be used
to create a joint venture. Thus, as long
as the separate legal entity is one that is
recognized by law in the state where it
is created, it should be acceptable as an
appropriate legal entity for a joint venture
by SBA. Another noteworthy point about
the SBA rule is that a separate legal entity
joint venture does not have to have its own
employees. Finally, neither the FAR nor SBA
requires a separate legal entity joint venture
to have its own business systems. Accordingly, it would appear that a separate legal
entity joint venture can utilize the business
systems, such as the accounting systems, of
its component entities.
In contrast to an incorporated joint venture,
the CAM provides the following description
of an unincorporated joint venture:
An unincorporated joint venture usually is
either a partnership or a teaming arrangement and most often has:

Few or no employees hired and
paid by the joint venture,

Little or no assets or separate
facilities,

No separate financial statements,
and

Little or no [general and administrative], [bid and proposal], or
b.
Partnerships. A contract with a
partnership shall be signed in
the partnership name. Before
The CAM does not differ greatly from the
FAR or SBA rules in regard to the form of a
joint venture. Again, the CAM provides that:
contract work is performed by
the venturing organizations or
other subcontractors. Employ-
signing for the government, the
contracting officer shall obtain
Joint ventures can be either incorporated
ees are paid by their respective
a list of all partners and ensure
or unincorporated. The incorporated joint
companies.15
that the individual(s) signing for
venture involves the issuance of stock and
the partnership have authority to
is most common on large construction type
bind the partnership.
contracts. These joint ventures possess the
typical characteristics of a corporation. The
62
material handling expenses. All
Despite the foregoing characteristics of
an unincorporated joint venture, the CAM
asserts that a “joint venture, proposed and
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established as a separate business entity,
should have its own set of books and supporting documentation sufficient for an
audit trail.”16 This guidance can result in
problems for contractors and contracting
officers, which was directly addressed in
the bid protest case McKissack & Delcan JV II,
B-401973.2; B-401973.4 (January 12, 2010).
The proposal submitted to the govern-
This case was a protest arising from a request for proposals issued by the Federal
Transportation Administration (FTA). The
joint venture identified the direct labor
rates for required personnel, listing alongside each labor rate the joint venture
partner from which the employee would
be assigned—Delcan Corporation or The
McKissack Group—and calculated a total
direct labor cost for each partner. The
joint venture provided a labor overhead
rate for each joint venture partner that
was applied to each of the joint venture
partner’s total direct labor costs. After auditing the joint venture’s proposal, DCAA
stated in the Government Accountability
Office (GAO) decision:
contain an indirect rate structure specific to
issue is not the number of indirect rates,
is an independent entity. An independent
[but rather that] MD-JV does not have its
joint venture for government contracting
own indirect rate structure for allocating
purposes would have employees committed
costs to government contracts.
from each company and the indirect rate
structure would be unique to the joint venture…. In addition, the indirect rate structure
proposed is Delcan’s; the proposal should
McKissack & Delcan Joint Venture II.
Utilizing the DCAA audit report, the contracting officer determined that the joint
venture’s proposal was unacceptable. The
joint venture then protested to GAO. In
responding to the protest, FTA submitted a
memorandum from the branch manager of
DCAA’s Reston, Virginia, branch office that
stated in the GAO decision:
In ruling on this protest, GAO first observed
that FTA’s rejection of the joint venture’s
proposal due to evaluated problems in its
accounting system concerns a matter of a
prospective contractor’s responsibility, not
technical acceptability. GAO will not question a negative determination of responsibility unless the determination lacks any
reasonable basis. In this respect, while a
contracting officer has significant discretion in this area, GAO noted that a negative
responsibility determination will not be
found to be reasonable where it is based
primarily on unreasonable or unsupported
conclusions.
[T]he contractor’s proposal did not comply
with [Cost Accounting Standards (CAS)] 401
because the contractor’s proposal did not
contain a unique rate structure, which an
independent and professional operated organization would have in the regular course
64
of business.... The CAS/FAR noncompliance
ment does not show that the joint venture
Moreover, an agency’s reliance upon
the advice of DCAA does not insulate the
agency from responsibility for error on the
part of DCAA. In this case, GAO observed
that, except for the foregoing conclusory
statements, neither FTA nor DCAA provided
any analysis or legal authority as to why the
joint venture indirect rate structure violated
CAS 401. Moreover, GAO stated that it had
found no other authority that prohibited the
joint venture’s proposed dual overhead rate
structure. Accordingly, GAO held that the
FTA had not provided a reasonable basis for
its conclusion that the joint venture did not
have an adequate accounting system.17
FAR Treatment of Joint
Ventures
As mentioned above, joint ventures are
considered to be a form of teaming arrangement pursuant to the FAR.18 As noted in FAR
9.602, team arrangements can be beneficial
to both the government and the companies
involved. Looking at this from a contractor’s
perspective, the reason for forming most
joint ventures is to enhance the participants’
chances of receiving an award.19 Therefore, in
determining whether to form a joint venture,
the starting point is the solicitation. Each
potential participant must examine its own
capabilities in light of the requirements of
the solicitation. This examination should not
be limited to the technical capabilities, but
also to the financial and management capabilities required for the potential contract.
Another issue that should be examined is
the past performance record of potential
participants. Because of the emphasis
placed on past performance today, being
able to enhance your past performance rating may be a significant factor in deciding
whether to form a joint venture. In addition,
be sure to consider the marketing abilities
of potential participants. This would be a
major consideration in regard to indefinite
delivery contracts under which orders can
be placed by differing activities.
Last but certainly not least, it is essential
that potential joint venture participants
be able to work together. If the parties
to a joint venture cannot work together,
contract performance can be jeopardized.
Moreover, if there are disputes between the
joint venture participants, the cost of litigation to resolve those disputes likely will not
be recoverable on government contracts.20
Because joint ventures can be beneficial to
the government, the FAR states that the
government will recognize the validity of
joint ventures, provided that “the arrangements are identified and company relationships are fully disclosed in an offer or, for
arrangements entered into after submission of an offer, before the arrangement
becomes effective.”21 The FAR does not say
how this identification and disclosure are
to be made. However, it would seem that it
would be prudent to include a copy of the
joint venture agreement with the proposal
to which it applies.
Although not specifically addressed toward
joint ventures, there are two issues that
may not receive appropriate attention when
forming a joint venture. First is the issue of
receiving a taxpayer identification number
(TIN). FAR 4.902 observes that 31 U.S.C.
§7701(c) requires each contractor doing
business with a government agency to
furnish its TIN to that agency. Additionally,
31 U.S.C. §3325(d) requires the government
to include, with each certified voucher
prepared by the government payment office
65
and submitted to a disbursing official, the
TIN of the contractor receiving payment
under the voucher. There is no exception
to these requirements for joint ventures.
Thus, if a joint venture is to be a contractor
(i.e., the contract will be issued to the joint
venture), then the joint venture must obtain
a TIN.22 Whether the joint venture will be
taxed is yet another issue that must be
researched.23
Closely related to the necessity for obtaining a TIN is the issue of registration in the
Central Contractor Registry (CCR). For these
purposes, FAR 9.1102 generally requires
contractors to be registered in the CCR as a
prerequisite to award of a contract. Thus, if
a contract will be issued to a joint venture,
that joint venture must be registered in the
CCR before it can receive a contract unless
an exception listed in FAR 4.1102 applies.24
the North American Industry Classification System (NAICS) code applicable to a
procurement.
In determining the size status of a concern, SBA generally examines the revenue
or number of employees of the contractor
and all its affiliates.26 SBA regulations
state that, with certain limited exceptions,
concerns submitting offers on a particular
procurement as joint venturers are affiliated with each other with regard to the
performance of that contract.27 However,
a joint venture may submit an offer as a
small business for a procurement without regard to affiliation so long as each
participant in the joint venture is small
under the size standard corresponding to
the NAICS code assigned to the contract,28
provided that:
SBA Treatment of Joint
Ventures
66
For a procurement having an
employee-based size standard, the
dollar value of the procurement, including options, exceeds $10 million.
Another issue that is significant to joint
ventures relates to the limitations on
subcontracting when a contract is awarded
to a small business concern on a set-aside
or sole-source basis. In general, 13 C.F.R.
§125.6 provides that:
In the case of a contract for services (except
construction), the [small business] concern
will perform at least 50 percent of the
cost of the contract incurred for personnel
with its own employees…. In the case of
a contract for supplies or products (other
than procurement from a nonmanufacturer
in such supplies or products), the [small
business] concern will perform at least 50

The principal issues relating to joint
ventures from SBA’s perspective are size
(based on affiliation) and the amount of
contract work that will be done by a small
business prime contractor under a setaside contract. Affiliation is significant because SBA has established size standards25
that are to be applied when determining
a contractor’s status as a small business.
These size standards vary depending on
•

The procurement qualifies as a
“bundled”29 requirement, at any dollar
value; or
The procurement is other than a
“bundled” requirement and:
•
For a procurement having a
receipts-based size standard, the
dollar value of the procurement,
including options, exceeds half
the size standard corresponding
to the NAICS code assigned to the
contract; or
percent of the cost of manufacturing the
supplies or products (not including the
costs of materials).30
If the concern is a joint venture, the socalled “50-percent rule” applies to the joint
venture, not the individual members of the
joint venture. However, if the joint venture
is an unpopulated joint venture comprised
of an 8(a) participant and its mentor, in
accordance with 13 C.F.R. §125.513, then
the 8(a) participant is required to perform
at least 40 percent of the work done by the
joint venture.
One final point of interest to small business concerns that needs to be addressed
concerning joint ventures is how to treat
revenue generated by the joint venture or
the number of employees employed by the
joint venture. For these purposes, 13 C.F.R.
§121.103(h)(5) states that a concern must
include in its receipts its proportionate
share of joint venture receipts, and in its
total number of employees its proportionate share of joint venture employees.
veteran–owned small business concerns;
8(a) participants, including joint ventures
between an 8(a) participant and its mentor;
and women-owned small business concerns.
These rules will be discussed in the second
part of this article in the January 2012 issue
of Contract Management. CM
16.
CAM 7-1808.1(a).
17.
In a related protest arising from the same solicitation but involving a joint venture that qualified as a small business, GAO noted that if a
small business was denied a cost reimbursement contract because it had an inadequate
accounting system, the agency was required to
refer that matter to SBA for a Certificate of
Competency determination. See, PMO Partnership Joint Venture, B-401973.3; B-401973.5 (January 14, 2010).
About the Authors
18.
FAR 9.601.
19.
In this regard, forming a joint venture can
reduce the cost and risk of proposal preparation and contract performance.
20.
FAR 31.205-47(f)(5)(I) makes litigation costs
between joint venture participants expressly
unallowable.
JOHN FORD is a senior consultant with
While most issues relating to joint ventures
between small business concerns will be
of interest only to small business concerns,
there is one issue that has relevance to
large businesses. That issue is the role a
joint venture that qualifies as a small business may play in regard to a large business
meeting its small business subcontracting
goals.
In accordance with the FAR, a large business
receiving a contract that exceeds $650,000
($1.5 million for construction) must prepare
a small business subcontracting plan acceptable to the contracting officer.31 As a part
of that plan, and in accordance with FAR
52.219-19, the contractor must establish
goals for the percentage and dollar amount
of subcontracts to be awarded to each of six
categories of small business concerns. For
these purposes, the FAR states that a joint
venture may qualify as a small business
concern.32
Thus, small businesses should not overlook
the possibility of receiving subcontract
awards through the formation of joint
ventures and large businesses should not
ignore this opportunity to find small business
concerns that enable the large businesses to
meet their subcontracting goals. However, it
should be noted that because the exceptions
to the affiliation rule described above do not
apply to subcontractors, the members of a
joint venture are likely to be considered affiliates under such arrangements.
While the foregoing applies to most joint
ventures that involve small businesses,
SBA has promulgated specific rules that
apply to joint ventures involving HUBZone
small business concerns; service-disabled-
Cherry Bekaert & Holland and a member of
the firm’s Government Contractor Services
Group. He can be reached at [email protected].
DAVID LUNDSTEN is a partner with Cherry
21.
FAR 9.603.
22.
See also, FAR 52.204-5 and FAR 52.204-7 and
their prescriptive language.
23.
As discussed above, joint ventures do not have
to be in any particular form. Thus, the fact
that a joint venture is not a separate legal
entity or does not have any employees or
assets other than a contract does not necessarily mean that it is exempt from paying taxes.
Therefore, it is advisable to have a joint venture agreement examined by a competent tax
attorney or accountant as well as a competent
business attorney to ensure that the agreement does not inadvertently cause the joint
venture to be subject to taxation.
24.
Generally, see 13 C.F.R. §121.101. These size
standards are based either on the average revenue the contractor has received during its last
three completed fiscal years (13 C.F.R.
§121.104) or the average number of employees
the contractor has had during each pay period
for the previous 12 months (13 C.F.R. §121.106).
Bekaert & Holland and a member of the firm’s
Government Contractor Services Group. He
can be reached at [email protected].
Send comments about this article to
[email protected].
Endnotes
1.
FAR 9.601.
2.
In determining the size of a concern, SBA considers the receipts or employees of a concern
and all its affiliates. Thus, determining
whether firms are affiliated with each other is
a key issue in computing the size of a concern.
3.
FAR 19.101(7)(i).
4.
13 C.F.R. §121.103(h).
5.
13 C.F.R. §121.103(h)(4).
6.
Ibid.
7.
Dynalantic Corp., B-402326 (March 15, 2010)
(“SBA, not our office, has conclusive authority
to determine the size status of an offeror for
federal procurement purposes, including
whether the offeror is a manufacturer under
the small business size standards. See 15 U.S.C.
§632(a)(2).”); Accord, White Hawk Group, Inc.,
Todd Construction, LP, and Whitehawk/Todd, a
Joint Venture v. U.S., COFC No. 09-374C (February 25, 2010).
8.
MCS Portable Restroom Service, B-299291
(March 28, 2007).
25. 13 C.F.R. §121.103.
26. 13 C.F.R. §121.103(h)(2).
27.
As will be discussed later, special rules apply in
this regard to joint ventures comprised of an
8(a) participant and a mentor under SBA’s
Mentor–Protégé program.
28.
For these purposes, bundling refers to the consolidation of two or more procurement requirements for goods or services previously provided
or performed under separate, small contracts
into a solicitation of offers for a single contract
that is likely to be unsuitable for award to a
small business concern. Further, the phrase
“separate, smaller contracts” refers to contracts that have previously been performed by
one or more small business concerns or was
suitable for award to one or more small business concerns.
9.
CAM 7-1802(b)1.
10.
FAR 4.102(d).
29.
See, generally, FAR 52.219-14.
11.
FAR 4.102(a)–(c).
30.
See 13 C.F.R. §126.200 for a discussion of what
a concern must do to become a qualified HUBZone small business concern.
31.
As per FAR 19.702.
32.
FAR 19.001.
12. 13 C.F.R. §121.103(h).
13.
CAM 7-1802(b)1.
14.
CAM 7-1803(a).
15.
CAM 7-1803(b).
67