Joint Ventures: Risks and @DHG GovCon @PilieroMazza Rewards€¦ · Joint Ventures: Risks and @DHG_GovCon Rewards Megan Connor, Attorney, PilieroMazza Bill Walter, Partner, DHG. government

1government contracting

@PilieroMazza@DHG_GovConJoint Ventures: Risks and

RewardsMegan Connor, Attorney, PilieroMazzaBill Walter, Partner, DHG


@PilieroMazza@DHG_GovConSpeaker Information

BillWalterDixonHughesGoodmanLLP(703)[email protected]

MeganConnorPilieroMazza PLLC(202)[email protected]


@PilieroMazza@DHG_GovCon

Understanding the Legal Requirements



@PilieroMazza@DHG_GovConTeaming Arrangement: FAR 9.601

4

• “Contractor team arrangement,” is an arrangement in which—§ Two or more companies form a partnership or joint venture to

act as a potential prime contractor;

§ A potential prime contractor agrees with one or more other companies to have them act as its subcontractors under a specified Government contract or acquisition program.


@PilieroMazza@DHG_GovConJV Basics

• Main characteristics§ Co-management§ Sharing profits and losses§ Limited duration

• Competing as a JV§ JV should be formed before submitting offer§ JV agreement should provide for contract performance§ FAR requires disclosure of JV status in the proposal

• Legal forms for JVs§ Partnership – referred to by SBA as “informal” JV§ Limited liability company (“LLC”)§ Corporation


@PilieroMazza@DHG_GovConHow JVs Qualify as Small

• Combined size of the JV partners must meet the size standard for the contract, unless an exception applies

• Exceptions:§ The JV is small as long as each JV partner is small (or as long

as 8(a) protégé is small)

§ JVs between an 8(a) protégé and an SBA-approved mentor

§ Coming soon: mentor-protégé exceptions for all other small businesses, including HUBZone firms


@PilieroMazza@DHG_GovConThe “3-in-2 Rule”

• JV may not be awarded more than three contracts over a two-year period without a finding of general affiliation

• JV may ultimately receive more than three contracts, as long as the JV submitted the winning proposals before it won its third contract and before expiration of the two-year period§ Two-year period begins with the award of the first contract to

the JV§ Same two entities may form additional JVs and each may be

awarded three contracts over two years§ Caution: multiple JVs and contracts may lead to a general

affiliation over time



Find the Right JV Partner



@PilieroMazza@DHG_GovConDo Your Due Diligence

• History of being a good teaming partner• Attitude of mutual dependence and benefit• Unblemished reputation with the agency• Strong technical capabilities to fulfill elements of the

Statement of Work (SOW)• Proven record of covering elements of the SOW• Positive name recognition with the customer• Cost competitiveness• Proposal support resources• Strong infrastructure support


@PilieroMazza@DHG_GovConTrust, But Verify

• Confirm proposed JV will meet the applicableset-aside JV requirements

• Ask your prospective JV partner to certify to you in writing that it is a small business and any other relevant status, and check SAM.gov to confirm

• Presumed loss rule considerations



Choosing the JV’s Legal Form



@PilieroMazza@DHG_GovConOptions

• LLC• Partnership• Corporation

§ Double taxation

§ Almost never used


@PilieroMazza@DHG_GovConLLC

• Pros:§ Members not liable (beyond capital contributions) to third

parties for actions of the LLC

§ May be treated as a partnership (or like an S Corp) for tax purposes

§ SBA recognizes LLC structure

• Cons:§ Requires capitalization

§ Filing/annual LLC fees, plus preparation of documents to obey corporate formalities

§ Operating agreement


@PilieroMazza@DHG_GovConForming a JV as an LLC

14© PilieroMazza PLLC 2016

• File articles of organization with state• Draft a joint venture/operating agreement

§ In some cases, you may want or need the joint venture agreement to be separate from the operating agreement

• Obtain a federal tax ID and DUNS number• Register at SAM.gov• Establish a bank account• Register to do business in other states (if necessary)


@PilieroMazza@DHG_GovConPartnership

• Pros:§ Simple to set up

§ Informal

• Cons:§ Partners are jointly and severally liable for debts of the

partnership


@PilieroMazza@DHG_GovConForming a JV as an Partnership

• Typically, no state filing requirement to form the partnership

• Draft a joint venture/partnership agreement§ In some cases, you may want or need the joint venture

agreement to be separate from the partnership agreement

• Obtain a federal tax ID and DUNS number• Register at SAM.gov• Establish a bank account• Register to do business in other states (if necessary)



Determine the JV’s ManagementStructure



@PilieroMazza@DHG_GovConQuestions to Ask

• How will the parties manage the JV?§ Management committee

§ Members

§ Project Manager

• Which party will be responsible for negotiating contracts and subcontracts?

• How will you communicate with the customer?• How will you obtain the JV’s workforce?• How do the parties envision the division of labor?


@PilieroMazza@DHG_GovConCommon Terms

• Purpose of the JV• Designation of small business as managing partner and

its employee as project manager• For certain set-asides, not less than 51% of net profits

earned by the JV must be distributed to the small business participant

• Responsibilities of the parties • Both parties must ensure performance of the prime

contract, even if the other party withdraws


@PilieroMazza@DHG_GovConCommon Terms

• Designation that accounting/administrative records are kept by managing venturer and requirement that managing venturer retain records of contracts completed by JV

• Performance of work requirements• Disputes• Joint bank account


@PilieroMazza@DHG_GovCon“Permitted Transfers” of Ownership Interests

• “Permitted Transfers” generally refer to a set of exceptions to restrictions on transfers of LLC membership interests set forth in an operating agreement

• Such exceptions often include transfers of membership interests to company affiliates as a result of an internal corporate reorganization or for transfers of membership interests by individuals who wish to make transfers for estate planning purposes

• “Permitted Transfer” provisions should be included in operating agreements if the 8(a) owner contemplates that there may be a need for such transfers in the future

• Recertification of size when transfer occurs


@PilieroMazza@DHG_GovConRecent SBA Proposals for JVs

• HUBZone firms may JV with non-HUBZone firms• Eliminate populated JVs • Require all JVs to be formed as separate legal entities• Annual certifications of compliance from JVs, with

possibility of suspension/debarment for noncompliance


@PilieroMazza@DHG_GovConRecent SBA Proposals for JVs

• Uniform requirements for all small business programs regarding content of JV agreement§ Comparable to existing 8(a) JV requirements

§ Small business would need to perform at least 40% of the work, provide the project manager, etc.

§ Size protests permitted, including 8(a) JVs

• Require “JV” or something similar in name of JV


@PilieroMazza@DHG_GovConJV Provisions in 2016 NDAA

• NDAA = National Defense Authorization Act• Amends Small Business Act to require agencies to

evaluate proposals from JVs in the same manner as other offerors§ Agencies must give due consideration to the capabilities of all

JV members

§ If the JV itself does not demonstrate sufficient capabilities or past performance, the agency must consider the capabilities and past performance of each JV member

§ Applies to any consolidated and bundled contracts



Accounting Issues



@PilieroMazza@DHG_GovConRole of the Accountant

• Help identify & mitigate potential financial impacts§ Financial statements

§ Cost accounting and indirect cost rates

§ Loan covenants and bonding

§ Taxes

• Other impacts§ Increased financial disclosures

§ Potential increase in audit fees

§ Use of equity method of accounting and consolidation


@PilieroMazza@DHG_GovConGov Con Accounting Issues

• Right to inspect to books and records• DCAA and other government audits

§ Impact on G&A allocations

§ CAS implications

• Impact on annual incurred cost submission


@PilieroMazza@DHG_GovConOther Accounting Issues

• The VIE – To Consolidate on Not to Consolidate• Calculation of profit and sharing • Distributions • Capital contributions

§ Mandatory for minority owners?§ Dilution of minority owners’ interest in lieu of making

additional capital contributions?

• JV Agreement should be reviewed by the venturers:§ Tax advisor to make sure that the agreement satisfies the

members’ overall tax objectives§ Accountant/Auditor to make sure it is consistent with

disclosed/established accounting practices



Questions?

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Joint Ventures: Risks and @DHG GovCon @PilieroMazza Rewards€¦ · Joint Ventures: Risks and @DHG_GovCon Rewards Megan Connor, Attorney, PilieroMazza Bill Walter, Partner, DHG. government