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64 Contract Management | December 2011
JOINT VENTURE 101: UNDERSTANDING THE TREATMENT OF JOINT VENTURES BETWEEN CONTRACTORS, PART I
established as a separate business entity,
should have its own set of books and sup-
porting documentation sufcient for an
audit trail.
16
This guidance can result in
problems for contractors and contracting
ofcers, which was directly addressed in
the bid protest case McKissack & Delcan JV II,
B-401973.2; B-401973.4 (January 12, 2010).
This case was a protest arising from a re-
quest for proposals issued by the Federal
Transportation Administration (FTA). The
joint venture identied the direct labor
rates for required personnel, listing along-
side each labor rate the joint venture
partner from which the employee would
be assignedDelcan Corporation or The
McKissack Groupand 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
partners total direct labor costs. After au-
diting the joint ventures proposal, DCAA
stated in the Government Accountability
Ofce (GAO) decision:
The proposal submitted to the govern-
ment does not show that the joint venture
is an independent entity. An independent
joint venture for government contracting
purposes would have employees committed
from each company and the indirect rate
structure would be unique to the joint ven-
ture. In addition, the indirect rate structure
proposed is Delcans; the proposal should
contain an indirect rate structure specic to
McKissack & Delcan Joint Venture II.
Utilizing the DCAA audit report, the con-
tracting ofcer determined that the joint
ventures proposal was unacceptable. The
joint venture then protested to GAO. In
responding to the protest, FTA submitted a
memorandum from the branch manager of
DCAAs Reston, Virginia, branch ofce that
stated in the GAO decision:
[T]he contractors proposal did not comply
with [Cost Accounting Standards (CAS)] 401
because the contractors proposal did not
contain a unique rate structure, which an
independent and professional operated or-
ganization would have in the regular course
of business.... The CAS/FAR noncompliance
issue is not the number of indirect rates,
[but rather that] MD-JV does not have its
own indirect rate structure for allocating
costs to government contracts.
In ruling on this protest, GAO rst observed
that FTAs rejection of the joint ventures
proposal due to evaluated problems in its
accounting system concerns a matter of a
prospective contractors responsibility, not
technical acceptability. GAO will not ques-
tion a negative determination of responsi-
bility unless the determination lacks any
reasonable basis. In this respect, while a
contracting ofcer has signicant discre-
tion 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.
Moreover, an agencys 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
Contract Management | December 2011 65
JOINT VENTURE 101: UNDERSTANDING THE TREATMENT OF JOINT VENTURES BETWEEN CONTRACTORS, PART I
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 ventures 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 arrange-
ment pursuant to the FAR.
18
As noted in FAR
9.602, team arrangements can be benecial
to both the government and the companies
involved. Looking at this from a contractors
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 nancial and management capa-
bilities 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 rat-
ing may be a signicant 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 indenite
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 litiga-
tion to resolve those disputes likely will not
be recoverable on government contracts.
20
Because joint ventures can be benecial to
the government, the FAR states that the
government will recognize the validity of
joint ventures, provided that the arrange-
ments are identied and company relation-
ships are fully disclosed in an offer or, for
arrangements entered into after submis-
sion of an offer, before the arrangement
becomes effective.
21
The FAR does not say
how this identication 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 specically 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 identication 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 certied voucher
prepared by the government payment ofce
66 Contract Management | December 2011
JOINT VENTURE 101: UNDERSTANDING THE TREATMENT OF JOINT VENTURES BETWEEN CONTRACTORS, PART I
and submitted to a disbursing ofcial, 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 obtain-
ing 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
SBA Treatment of Joint
Ventures
The principal issues relating to joint
ventures from SBAs perspective are size
(based on afliation) and the amount of
contract work that will be done by a small
business prime contractor under a set-
aside contract. Afliation is signicant be-
cause SBA has established size standards
25
that are to be applied when determining
a contractors status as a small business.
These size standards vary depending on
the North American Industry Classica-
tion System (NAICS) code applicable to a
procurement.
In determining the size status of a con-
cern, SBA generally examines the revenue
or number of employees of the contractor
and all its afliates.
26
SBA regulations
state that, with certain limited exceptions,
concerns submitting offers on a particular
procurement as joint venturers are afli-
ated 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 with-
out regard to afliation 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:
The procurement qualies 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
For a procurement having an
employee-based size standard, the
dollar value of the procurement, in-
cluding options, exceeds $10 million.
Another issue that is signicant 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
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 so-
called 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.
Contract Management | December 2011 67
One nal point of interest to small busi-
ness 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 proportion-
ate share of joint venture employees.
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 qualies as a small busi-
ness 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 accept-
able to the contracting ofcer.
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 nd small business
concerns that enable the large businesses to
meet their subcontracting goals. However, it
should be noted that because the exceptions
to the afliation rule described above do not
apply to subcontractors, the members of a
joint venture are likely to be considered afli-
ates under such arrangements.
While the foregoing applies to most joint
ventures that involve small businesses,
SBA has promulgated specic rules that
apply to joint ventures involving HUBZone
small business concerns; service-disabled-
veteranowned 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
ABOUT THE AUTHORS
JOHN FORD is a senior consultant with
Cherry Bekaert & Holland and a member of
the rms Government Contractor Services
Group. He can be reached at jford@cbh.com.
DAVID LUNDSTEN is a partner with Cherry
Bekaert & Holland and a member of the rms
Government Contractor Services Group. He
can be reached at dlundsten@cbh.com.
Send comments about this article to
cm@ncmahq.org.
ENDNOTES
1. FAR 9.601.
2. In determining the size of a concern, SBA con-
siders the receipts or employees of a concern
and all its afliates. Thus, determining
whether rms are afliated 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 ofce, 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 (Febru-
ary 25, 2010).
8. MCS Portable Restroom Service, B-299291
(March 28, 2007).
9. CAM 7-1802(b)1.
10. FAR 4.102(d).
11. FAR 4.102(a)(c).
12. 13 C.F.R. 121.103(h).
13. CAM 7-1802(b)1.
14. CAM 7-1803(a).
15. CAM 7-1803(b).
16. CAM 7-1808.1(a).
17. In a related protest arising from the same solic-
itation but involving a joint venture that quali-
ed as a small business, GAO noted that if a
small business was denied a cost reimburse-
ment contract because it had an inadequate
accounting system, the agency was required to
refer that matter to SBA for a Certicate of
Competency determination. See, PMO Partner-
ship Joint Venture, B-401973.3; B-401973.5 (Jan-
uary 14, 2010).
18. FAR 9.601.
19. In this regard, forming a joint venture can
reduce the cost and risk of proposal prepara-
tion and contract performance.
20. FAR 31.205-47(f)(5)(I) makes litigation costs
between joint venture participants expressly
unallowable.
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 necessar-
ily mean that it is exempt from paying taxes.
Therefore, it is advisable to have a joint ven-
ture agreement examined by a competent tax
attorney or accountant as well as a competent
business attorney to ensure that the agree-
ment 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 reve-
nue the contractor has received during its last
three completed scal 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).
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 SBAs
MentorProtg program.
28. For these purposes, bundling refers to the con-
solidation of two or more procurement require-
ments 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 con-
tracts that have previously been performed by
one or more small business concerns or was
suitable for award to one or more small busi-
ness concerns.
29. See, generally, FAR 52.219-14.
30. See 13 C.F.R. 126.200 for a discussion of what
a concern must do to become a qualied HUB-
Zone small business concern.
31. As per FAR 19.702.
32. FAR 19.001.
JOINT VENTURE 101: UNDERSTANDING THE TREATMENT OF JOINT VENTURES BETWEEN CONTRACTORS, PART I