Accounting for Mentor-Protégé Joint Ventures

At a glance:

• The main takeaway: Mentor-protégé joint ventures can be very beneficial to the protégé in the arrangement, but there are some important considerations to remember.
• The impact on your business: Mentor-protégé JV arrangements come with unique accounting, legal, tax and expense sharing considerations that should be planned for and considered before starting the venture.
• Next steps: Developing strategies for managing shared administrative costs, indirect costs, expenses, and accounting practices is an ideal first step toward establishing a successful mentor-protégé joint venture arrangement.

Schedule a consultation with Aprio’s GovCon specialists today.

The full story: 

There are numerous benefits to entering a Small Business Administration (SBA) mentor-protege joint venture arrangement (JV). The benefits associated with SBA mentor-protégé program are primarily centered around leveraging past performance, experience and resources, as well as small business set-aside status benefits. The mentor is typically an experienced federal contractor who brings assistance to a qualified small business with strategic planning, business development and often administrative support. In return, when partnering with the protégé in pursuit of contracts, the joint venture can be considered a small business for contract awards.

The small business protégé must be the majority owner in the JV. This relationship can last up to six years and drastically impact your business, so it is imperative to identify each participant’s role and contribution to the effort. This crucial step is often overlooked at inception of agreements and can result in significant unplanned costs for a lean-running small business. Make sure you have a clear understanding of JV participant roles like the division of labor and receipts. 

The rules for the minimum percentage of work which must be performed by the JV parties, the allocation of receipts and limitations on subcontracting to third parties are detailed on the list of SBA rules for JV work percentages. 

Populated vs. Unpopulated JVs

JVs exist in two primary states: “populated,” in which they have their own workforce, and more
commonly, “unpopulated,” in which they have no employees and use the labor and resources of the
respective parties for both direct contract activities and administrative support.

Some practical considerations for an unpopulated JV are:

• Creating a separate set of books. A JV may be a separate legal entity, requiring its own accounting records. Even if a mentor performs the accounting functions by arrangement between the parties, the responsibility of keeping records in unpopulated joint venture accounting falls on the protege. Alongside maintaining books for tax purposes, periodic reporting to SBA is needed as well as recurring managerial reports to monitor the performance of the business and contracts. 
  
  Without employees of its own, unpopulated joint venture accounting may be simpler, but it still needs to practice FAR-compliant accounting procedures. This includes separating direct, indirect and unallowable costs; accrual accounting; and capturing direct costs by project. 
  
  The chart of accounts not only must incorporate direct and indirect cost categories, but it also needs accounts for investments and intercompany transactions to and from the JV owners. 

• Determining indirect responsibilities and pricing. In an unpopulated JV, each party functions as a subcontractor to the JV. The entities agree on intercompany pricing to be charged to the JV for supplying their resources. A protege must anticipate the potential oversight and management of the JV and its projects.
  
  The prices charged must cover the need for any additional overhead project management, software tools, subcontractor handling, recruiting, human resource needs, business development and proposal costs that fall under their responsibility. It is not uncommon for a well paired JV team to obtain substantial contracts, and companies need to be prepared for the additional administrative cost.
  
  It is crucial that the JV parties are in full agreement on the division of duties, ideally at the formation of the JV, but at minimum, in advance of bidding on work together. Proteges must continually monitor and update the cost of JV management and determine intercompany prices accordingly. 
  

Accounting processes requiring special focus 

Billing

On the respective owners’ books, the JV is treated like other projects. A contract/customer is created, to which direct labor and costs are recorded. Each side issues an invoice to the JV, where it is booked as a subcontractor cost and the JV in turn bills its ultimate government customer. 

Indirect costs allocation in JVs

Anticipated recurring costs, such as project management and business development, are typically built into the indirect rates and resulting intercompany pricing in joint ventures. Care must be taken to ensure that specifically identifiable costs are correctly and equitably allocated to the respective entities. These may be individual items, staff or in the form of a home office allocation. Each method must conform to FAR guidelines. 

General & Administrative costs

There are usually minimal General & Administrative (G&A) costs in JVs that are directly incurred, such as local taxes, legal and accounting fees and software expenses. The JV will use these expenses to derive a small G&A rate, which may be applied on billed indirect costs on the contract, as allowed. 

Distributing profit in joint ventures

After third party subcontractors are paid by the JV, residual cash is regularly distributed to the respective parties as much of the cash outlay occurs at the owners’ end. The categorization of these payments and tax treatment must be consistent with the tax entity type. (Proactive tax planning is always a wise business decision!)

Joint Ventures can be both simple and complex at the same time! Aprio accounting experts and advisors are happy to help you strategize to meet your financial reporting challenges. 

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