Petefish Law - Joint Venturing & Teaming Presentation

Joint Venturing and Teaming on Federal

Government Contracts

Steven J. KoprincePartner

Petefish, Immel, Heeb & Hird, LLP

Government Contracts Solutions for Small Business

• Joint Ventures v. Teams• Characteristics• Legal forms• Capabilities• Size requirements

• Joint Ventures• How to Form• Formation considerations• Required JV provisions • Recommended additional provisions

• Complying with subcontracting limits• Special 8(a) rules

• VA CVE verification requirement

• Prime/Sub Teams• How to form• Teaming agreements• Recommended provisions

• Subcontracts• Required provisions (flow-downs)• Recommended provisions

• Subcontracting limits• Ostensible subcontractor affiliation

• Mentor-Protégé Programs• SBA 8(a) mentor-protégé program• Eligibility and Requirements

• DoD mentor-protégé program• Requirements

• Other agencies’ mentor-protégé programs• Affiliation concerns?

• New mentor-protégé programs on the horizon

Joint Ventures v. Teams

• Joint Ventures– Both parties perform at

the prime contract level– Parties split profits and

losses– Parties may form a new

legal entity– Subcontracting limits

apply to JV as a whole

• Teams– Only one party performs

at the prime contract level

– Subcontractor paid on a pre-determined basis

– No new legal entity created

– Subcontracting limits apply to prime only


• Liability• JV: both parties responsible for entire contract• Team: sub responsible only for its own share of

work• Control• JV: Both parties exercise some level of control • Team: Prime should control the relationship• Ostensible subcontractor affiliation


• Advantages of a JV v. a Team:• Government can rely on two companies to

perform entire contract• Minority member may exercise more control• Individual JV members not responsible for as

much work• May receive favorable tax treatment• Helps companies stay smaller longer


• Disadvantages of a JV v. a Team:• Lead contractor surrenders substantial control• JVs may not be eligible to bid due to size

problems• Both parties liable for entire contract• Termination may be more difficult• Government or competitors may raise past

performance questions


• Size requirements• JV: sizes of joint venturers are added together to

determine small business status• See exceptions on next slide

• Team: only the size of the prime contractor is considered in determining small business status


• Size requirements• Joint venture may take advantage of “individual size

treatment” rule when:• The procurement exceeds ½ of a revenue-based size

standard, or• For an employee-based size standard, the procurement

exceeds $10 million• Note: other requirements may apply within

socioeconomic set-asides

8(a) protégé may JV with mentor based only on protégé’s size

Joint Ventures

• What is a Joint Venture?• Two or more companies• Combine resources, skills, efforts, & knowledge• Share profits and losses• Temporary basis• “Three in two” general affiliation rule

How to Form a JV

• A Joint Venture may be formal or informal.• Formal JV: separate legal entity formed with a

state government• LLC by far the most common• Can be populated or unpopulated

• Informal JV: not a separate legal entity formed with a state government• Exists as a “partnership by contract” between the

parties• Should be unpopulated

How to Form a JV

• Populated JV:• The JV has employees of its own• The JV acts, for purposes of the contract, as its

own separate company• Formation may be more difficult (e.g., employee

insurance requirements)• Unpopulated JV:• Lacks its own employees• Serves as a “legal fiction” for the partnership

How to Form a JV

• Other formation considerations:• Management structure• Facilities and resources• Project Manager• Key employees• Subcontracting

How to Form a JV

• Joint Venture AgreementsRequired contents vary by program

• Small business set-aside (no socioeconomic designation)• No required contents• BUT, recall that parties must meet size

requirements• See socioeconomic programs and later slides for

recommended provisions

How to Form a JV

• 8(a) JV Agreements• Must meet all requirements specified in 13 C.F.R.

124.513.• Eligibility: • At least one JV member must be 8(a) program

participant• Parties must meet size requirements (note mentor-

protégé exception)

How to Form a JV

• 8(a) JV Agreements• Must contain a number of required provisions specified in

13 C.F.R. 124.513(c), including:• Description of purpose of JV• Naming 8(a) participant as managing venturer• Naming employee of 8(a) as project manager• Distribution of profits based on performance of work• Creating special bank account• Several others

• Note: some requirements differ for populated v. unpopulated JVs

How to Form a JV

• 8(a) JV Agreements• 8(a) JV agreements must be approved by the SBA

prior to contract award• In addition to JV agreement, parties must submit

a great deal of additional documentation called for by the SBA 8(a) Standard Operating Procedure

• Bottom line: 8(a) JVs take a lot of work to form, so start early (and get help if you need it)

How to Form a JV

• SDVOSB JV Agreements• Must meet all requirements of 13 C.F.R. 125.15(b)• Eligibility:• At least one member of JV must be a SDVOSB• Parties must meet size requirements• SBA OHA has overturned prior case law stating that a

SDVOSB JV cannot be a separate legal entity (e.g., LLC)

How to Form a JV

• SDVOSB JV Agreements• Must contain provisions required by 13 C.F.R.

125.15(c), including (but not limited to): • SDVOSB must be named managing venturer• A specific employee of the SDVOSB must be named

project manager• SDVOSB must be entitled to at least 51% of profits• SDVOSB must retain final records

How to Form a JV

• SDVOSB JV Agreements• SBA’s prior approval is not necessary for SDVOSB

JV agreements• SBA will review after an eligibility protest• See special rules for VA CVE (next slide)

• No additional documentation required

How to Form a JV

• SDVOSB JV Agreements• For VA SDVOSB set-aside contracts only:• The JV must be a separate legal entity (no joint venture

by contract)• The JV must be verified by the VA’s Center for Veterans

Enterprise

How to Form a JV

• HUBZone JV AgreementsEligibility:• Both joint venture partners must be HUBZones• As a result, joint venturing relatively unpopular for

HUBZone set-asides

The good news:• Because both parties must be HUBZones, SBA not

worried about HUBZone control• Few requirements for content

How to Form a JV

• WOSB JV AgreementsEligibility:• One party must be a WOSB or EDWOSB• Parties must meet size requirements

• JV Agreement contents:• Must demonstrate control by WOSB• Similar to SDVOSB JV requirements• See 13 C.F.R. 127.506

JVs and Subcontracting

• The JV itself, as prime contractor, is subject to the subcontracting limits

• Where the JV is unpopulated, the “legal fiction” applies the subcontracting limits to the JV parties

• For most JVs, no rule regarding work split among JV members• The 8(a) participant must perform at least 40% of

the JV’s work in an unpopulated 8(a) JV

How to Create a Team

• A prime/sub team should be formed well in advance of proposal submission by way of a teaming agreement

• Teaming agreement: binding agreement to pursue a specific government contract as a prime/sub team

How to Create a Team

• A teaming agreement should include (recommended):• Specific identification of project• Division of labor—who will do what?• Ostensible subcontractor risk factor

• Exclusivity provision• Non-disclosure• Termination provisions• Dispute resolution

Subcontracts

• Subcontract supersedes/replaces the teaming agreement

• Much more detailed than teaming agreement• Must include mandatory FAR provisions (flow-

downs)• Consider an incorporation by reference clause• Consider specific identification of (at minimum) key

flow-downs• Provide the sub with a copy of the prime contract, less

any confidential information about your company

Subcontracts

• Recommended provisions to include in subcontracts (not required):• Termination for convenience• Pass-through dispute resolution• “Pay-when-paid” clause• Robust reps and certs (OCIs, suspension and

debarment, etc.)

Limits on Subcontracting

• Every set-aside contract contains subcontracting limits (FAR 52.219-14)

• Limits vary depending on type of contract• Contrary to common perception, limits are

not based on the total value of the contract


• “Ordinary” subcontracting limits:• Services: 50% of the cost of the contract incurred for

personnel• Specialty trade construction: 25% of cost of the

contract (excluding materials)• General construction: 15% of the cost of the contract

(excluding materials)• SDVOSB & HUBZone set-asides:

Prime can meet limits by subbing to other SDVOSBs/HUBZones


• Best practices:• State in proposal, teaming agreement and

subcontract that subcontractor will perform no more than allowable percentage of work• “Up to” larger number may violate the regulation

• Include ongoing compliance mechanism in subcontract to reduce sub’s work share if sub begins performing in excess of limit

Ostensible Subcontractor Affiliation

• What is it?• SBA considers a small prime contractor affiliated

with its subcontractor for purposes of a set-aside contract where:• The prime is “unusually reliant” upon the sub, and/or• The sub will perform the primary and vital portions of

the contract

• Why does it matter?• If sizes of prime and sub, combined, exceed size

standard, prime is ineligible for award


• SBA evaluates ostensible subcontractor affiliation on a case-by-case basis, looking at “totality” of relationship between the parties

• Best practice: reduce/eliminate number and severity of ostensible subcontractor risk factors as identified in regulation and SBA OHA cases


• Risk factors:• Incumbency• Sub is an ineligible incumbent for the prime contract

(outgrew size standard or lost 8(a) certification)

• Division of work• The greater the sub’s share, the more likely it is to be

an ostensible subcontractor– Even if meets the subcontracting limits

• Sub more likely to be an ostensible subcontractor if it performs more complex or key functions


• Risk factors:• Management responsibilities• If top contract manager (e.g., project manager) is sub’s

employee, almost certain to be affiliated• Other management roles may contribute to a “totality”

finding

Experience/expertise• Is prime relying on sub for all/most of its past

performance or relevant experience?


• Risk factors:• Management responsibilities• If top contract manager (e.g., project manager) is sub’s

employee, almost certain to be affiliated• Other management roles may contribute to a “totality”

finding

Experience/expertise• Is prime relying on sub for all/most of its past

performance or relevant experience?


• Risk factors:• Transferred personnel• SBA OHA recently recognized executive order on right

of first refusal• BUT, does not apply to management or non-SCA

personnel• And is it effective?


• This stuff matters!• October 2010: GTSI (top-100 contractor)

suspended from all government contracting• Allegations: violation of subcontracting limits and

ostensible subcontractor affiliation rules• Two of GTSI’s prime contractors also suspended• Suspension lifted, but GTSI pays heavy price

• Morris-Griffin case: federal judge tosses breach of contract suit• Contract illegal and fraudulent due to violations

Mentor-Protégé Programs

• 8(a) Mentor-Protégé Program• Who can participate?• Protégé (8(a) company):• Be in “developmental” stage; or• Have never received an 8(a) contract; or• Have a size less than half its primary NAICS code

• Mentor: • Any company (including large business) with favorable

character, financial profile.


• 8(a) Mentor-Protégé Program• Benefits: • 8(a) and mentor are not affiliated based on

assistance provided by mentor to protégé under agreement

• 8(a) and mentor may JV as a small business for any federal contract for which the 8(a) protégé qualifies as small


• 8(a) Mentor-Protégé Program• Requirements:• Parties must submit a written agreement setting forth

the assistance to be provided• In recent years, SBA looking for very detailed MP

agreements• Parties must submit certain supporting documentation• SBA must approve agreement• Agreement must be re-approved annually, or benefits

are lost


• DoD Mentor-Protégé Program• Who can participate?• Protégé: • Self-certified SDB• SDVOSB• HUBZone• WOSB

• Mentor: must have at least one active DoD subcontracting plan


• DoD Mentor-Protégé Program• Benefits:• Mentor and protégé not affiliated on basis of

assistance provided by mentor to protégé under agreement

• Mentor may receive credit against its subcontracting plans for assistance (credit agreement) or reimbursement of funds expended (reimbursement agreement)

• BUT, no joint venturing capability


• DoD Mentor-Protégé Program• Requirements:• Mentor must submit an application to serve as a

DoD mentor• Parties must then submit a mentor-protégé

agreement for approval• Like SBA, DoD has required great detail in recent years


• DHS• State• Treasury• NASA• GSA• HHS

• FAA• USAID• Energy• VA• EPA• DOT (proposed)


• Affiliation risks?• March 2011: SBA adopts new size regulations• New regulations provide that exception from

affiliation only allowed when mentor-protégé program has been approved by SBA or created by Congress

• Currently, only SBA 8(a) and DoD comply


• New SBA mentor-protégé programs on the horizon:• SDVOSB• HUBZone• WOSB

• Congressional directive: programs should be similar to 8(a)• May include JV capability

Questions?

Thank you!

Questions?

Steven Koprince785-655-0450 (mobile)785-843-0450 (office)

[email protected]

www.petefishlaw.comwww.smallgovcon.com

www.governmentcontractsbook.com

Petefish Law - Joint Venturing & Teaming Presentation

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