It’s Better Together With Joint Ventures
Please feel free to re-post this article, use icons below:
The following article appeared in Bloomberg Government November 4, 2022, Author Chelsea Meggitt
There’s a better way for small business to win big government contract money. Chelsea Meggitt talks about joint ventures, a trending type that small contractors are using to size up the large competition.
Who is the prime, you ask?
“We are” is an increasingly common answer. It might confuse some who are versed in other well-known types of “Contractor Teaming Agreements” (CTAs) such as the prime contractor/subcontractor structure.
There’s another handy teaming tool that’s long been lurking in the shadows. The Joint Venture (JV) is a lesser used CTA that enables the participants to function and maneuver autonomously, a trait that the traditional prime/sub relationship doesn’t offer.
The answer to the question “who is the prime?” isn’t just one company. It’s the entire JV.
The common definition of a JV is an association of individuals and/or concerns with interests in any degree or proportion intending to engage in and carry out 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.
Simply stated, a JV is a group of two or more companies, entities, or individuals that have joined forces under the umbrella of a separate legal entity to pursue work together over a two-year period.
JVs can be formed by any combination of large or small businesses and can include two or more companies. The biggest difference from a traditional prime/sub relationship is that a JV involves the formation of a separate, unpopulated legal entity, often an LLC.
Why Not Just Go With Prime/Sub?
Coming together to form a JV offers measurable benefits over the hierarchical prime/sub relationship, especially for small businesses. Structured like LLCs, the companies participating in a JV are all considered members. They all serve as prime contractor to the government, share the responsibility for ensuring delivery, and reap the benefits of prime contractor past performance.
In a JV, the members are equals. A separate legal entity is established to ensure each member company maintains independent operating authority in the JV and doesn’t rely solely on the JV for work.
Each member company brings its unique offering to the relationship to deliver a complete platform as the JV. The result is a completely modular vehicle that’s cheaper, lower risk, and often delivered faster than the traditional top-down prime/sub system. Utilizing this approach has resulted in some big wins for groups of small businesses teaming up to bid large government contracts.
Of course there are nuances. The composition of the JV matters.
If all member companies of the JV qualify as small businesses under the Small Business Administration, the JV itself is then considered small. That means it qualifies for set-asides awarded only to small businesses.
If one of the small businesses has a socio-economic certification that warrants its own set-aside, the JV also holds that designation.
If each member of an all-small JV holds a different socio-economic certification (like being women-owned, service disabled veteran-owned, or located in an economically underutilized region), the JV retains all of their designations.
In all small JVs, companies can pool their set-aside statuses and compete for bigger contracts as a group while maintaining other operations independently.
Large businesses entering JVs have fewer collective benefits across the board. But they can access set-aside contracts as a large business in a JV by being part of the SBA Mentor Protégé Program. In this way, JVs offer bonus points for large businesses mentoring small businesses in an SBA-approved mentor protégé relationship.
The JV formed between the large company and the small business protégé retains the set-aside status of the small business.
Why Not Use JVs All the Time?
It can be tricky for JVs pursuing set-aside opportunities. If one of the members is a large business, the JV might not be able to pursue set-aside contracts unless the members have an SBA-approved Mentor Protégé relationship.
Also, the rules surrounding the two-year time limit are vague. The two-year period is an arbitrary timeframe put in place to ensure the companies that are entering the agreement don’t intend to rely on the JV alone for revenue.
Even though there is a two-year limit on a legal JV entity, the members can choose to form another legal entity and continue working together. The JV legal entity must be registered in government databases, which means delays in processing registrations can potentially prevent JVs from winning awards.
The two-year time frame can also serve as a helpful exit plan for JV members that have a dispute. Knowing it is only a two-year headache can make unpleasant relationships easier to bear compared to other longer duration, higher commitment prime/subs teams.
The decision to form a JV should be made on a case-by-case basis, but the agreement type offers groups of small businesses flexibility and power of scale. By giving them a chance to play with the bigs, and in some cases compete against them, multi-party JVs are showing the true strength and power that small business collaborations have in the federal market.