8a Joint venture Agreements
Learn How To Comply With SBA 8a Joint Venture Agreements
By: Theodore Watson, Attorney and Consultant
Once you have fulfilled the SBA certification requirements and gone through the 8a application process, most small businesses look to adopt joint venture agreements with other small or large businesses. Special care must
be taken before you proceed.
The Small Business Administration (SBA) 8a Program allows small business to form a joint venture (JV) with other small companies. This is allowable when the 8a cannot complete the federal contract by itself. The guidelines for operating under a joint venture should not be overlooked. When relationships go sour, the 8a company should be concerned about such problems as termination (if it cannot finish the project).
The SBA must approve the Joint Venture (and the Joint Venture Agreement). If the project is for a total small business set aside the SBA does not have to approve the JV simply because an 8a company is involved. Furthermore, any amendments to the agreement must also be approved by the SBA. However, it is wise to always inform the SBA about the joint venture and see if that particular regional office wishes to approve the joint venture agreement. Under the 8a participation agreement, you always have to inform the SBA about all relationships that could possibly impact you in the 8a program.
Key points for approval include:
- Substantial benefit to the 8a company
- The 8a company must manage and be responsible for the contract
- The agreement must be fair and equitable
- For a size standard based upon employees, the procurement must exceed $10 Million
- For size standards based upon revenues, the project must be over one half the size standard amount
Good Business Judgment When Entering into a Joint Venture Contract
Choosing a JV partner needs careful consideration and due diligence. Given the tough economy, government contracts are becoming more competitive. As a result small businesses are seeking creative ways to acquire federal projects. Large businesses are also seeking out small businesses as joint venture partners. If you choose to pursue a JV partner, you should consider the following.
- Ensure that you have someone on your team that understands the ins and outs of JVs
- Have a government contract attorney review or draft your joint venture agreement
- Thoroughly perform your due diligence on the potential JV partner (past performance, financial strength etc.)
- Ensure that the responsibility of each joint venture partner is clearly spelled out
- Ensure that you have a well thought out quality assurance plan to minimize risk of nonperformance
If you are not familiar with this aspect of federal procurement, you should consider hiring an experienced government contract consultant or government contract lawyer.
8a Joint Venture Approval From the SBA
The SBA must only approve a JV agreement if there is an 8a set aside. Oftentimes contractors wait until the government advertises a contract to then find a JV partner. This sometimes is too late and the SBA has no responsibility to ‘speed things up’ for you. This creates problems for proposal submission. You simply cannot get around SBA approval for 8a companies. However, the SBA is ONLY required to approve agreements for 8a set asides. The Office of Hearing and Appeals made this clear in Size Appeal Diversified Global Partners JV LLC, SBA No. SIZ-4967 (2008). The following are some of the key points for JV approval:
- SBA must approve a joint venture agreement prior to the award of an 8(a) contract on behalf of the joint venture
- Contract execution. Where SBA has approved a joint venture, the procuring activity will execute an 8(a) contract in the name of the joint venture entity
- Amendments to joint venture agreement. All amendments to the joint venture agreement must be approved by SBA
- Inspection of records. SBA may inspect the records of the joint venture without notice at any time deemed necessary
In one case OHA ruled that neither SBA area offices nor OHA have authority to review mentor/protégé eligibility issues, including mentor/protégé and joint venture agreements. The Court analyzed a recent decision, Size Appeal of White Hawk/Todd, A Joint Venture, SBA No. SIZ-4950 (2008),which held that only SBA’s Office of Business Development has authority to review a mentor-protégé agreement. Thus, concerns regarding whether a mentor/protégé relationship fully complies with the applicable regulations should be dismissed if raised in a size protest to an SBA area office or on appeal to OHA.
Contents of the Joint Venture Agreement
It is common for contractors to copy JV templates from the Internet, rather than having a government contract attorney to draft a solid document. Choosing such shortcuts can be costly in the end. You must remember that SBA templates may contain the minimum requirements for SBA approval. This has nothing to do with issues that may arise during litigation of the JV relationship. Every joint venture agreement to perform an 8(a) contract, including those between mentors and protégés authorized by Sec. 124.520, must contain a provision:
Setting forth the purpose of the joint venture
Designating an 8(a) Participant as the managing venturer of the joint venture, and an employee of the managing venturer as the project manager responsible for performance of the 8(a) contract
Stating that not less than 51 percent of the net profits earned by the joint venture will be distributed to the 8(a) Participant(s)
Providing for the establishment and administration of a special bank account in the name of the joint venture. This account must require the signature of all parties to the joint venture or designees for withdrawal purposes. All payments due on joint venture contract for performance on an 8(a) contract will be deposited in the special account
- all expenses incurred under the contract will be paid from the account as well
- Itemizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each
- Specifying the responsibilities of the parties with regard to contract performance, source of labor and negotiation of the 8(a) contract
- Obligating all parties to the joint venture to ensure performance of the 8(a) contract and to complete performance despite the withdrawal of any member
- Designating that accounting and other administrative records relating to the joint venture be kept in the office of the managing venturer, unless approval to keep them elsewhere is granted by the District Director or his/her designee upon written request
- Requiring that the final original records be retained by the managing venturer upon completion of the contract
- Stating that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to SBA not later than 45 days after each operating quarter of the joint venture AND
- Stating that a project-end profit and loss statement, including a statement of final profit distribution, must be submitted to SBA no later than 90 days after completion of the contract
Joint Venture Performance
For any SBA 8a Joint Venture Contract, including those between mentors and protégés authorized by 13 C.F.R. Sec. 124.520, the joint venture must perform the applicable percentage of work required by Sec. 124.510, and the 8(a) partner(s) to the joint venture must perform a significant portion of the contract. Your 8a certification requirements strictly adopt this policy.
Problems During Contract Performance
Oftentimes, the joint venture partners will encounter disputes during the performance period. The managing partner must be very cautious in this scenario because he controls the venture. Sound decisions must be made simply because liability may arise for nonperformance. Common disputes can include:
- The non-managing joint venture partner wants to control the project
- The partners do not agree upon how a specific part of the contract should be performed
- One of the partners wants to amend the terms of the joint venture agreement
The key to resolving disputes in a joint venture relationship is to know who is in control. The 8a firm must be in control of the joint venture relationship. Many companies believe that after the initial agreement is approved, then it is not important what happens afterwards. Nothing can be far from the truth. This is where having an experienced government contract attorney can help. He or she should be able to advise you when problems of control arise.
Arbitration Clauses
A highly complex situation arises when arbitration clauses are involved. It is important that the arbitration clause in a joint venture agreement is intended to resolve disputes during contract performance.
For example, an arbitrator may step in to assign duties and responsibilities with a focus on getting the contract performed while the dispute is settled.
However, the arbitrator does not have jurisdiction to amend the joint venture agreement. Under 13 C.F.R 124.513 (g), ONLY the SBA can approve an amendment to a joint venture agreement. The legal analysis here is that this section provides exclusive jurisdiction to the SBA.
Therefore, any arbitrator decisions that amends the terms and conditions of the original joint venture agreement must be struck as void. A decision that allows the non 8a company to make controlling decisions arguable changes the terms and conditions of the original agreement.
Government contract attorneys should be aware of this subtle but concise rule of law. It is important to note that the SBA approved Joint Venture Agreement contemplates that partnerships may dissolve or end for whatever reason. For example, the rules address wing up of the JV and what should happen to accounting information etc. If another authority besides the SBA attempts to amend or change the rules, an argument for lack of subject matter jurisdiction should arise.
Avoid Fraud
As previously mentioned, the 8a firm must be in control and derive a substantial benefit from the contract. In the event that either party (or both) submits a proposed agreement and with the intent of later allowing the non-8a firm to control the contract, then each may be subject to fraud claims from the government. This is particularly common when large businesses enter into a JV agreement with a small business. The most prevalent industry is in construction where the large business brings bonding to the table.
The congressional intent as set forth in the law is to create “substantial benefit to the 8a certified firm, and to have the 8a company control the project.
If you seek a government contract lawyer to help with JV agreements or to review or draft your joint venture agreement, contact Watson & Associates, LLC at 720.941.7200.
Tags: agreement, agreements, government contract, joint venture
