To Joint Venture or not to Joint Venture, that is the Question!

It is becoming more and more common for government contractors to form Joint Ventures (JV) to bid on and perform government contracts. This paper will describe the two types of JV’s, how contractors can benefit from forming JV’s and some possible disadvantages.

A JV is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a JV, each of the participants is responsible for profit and losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.

There are two types of JV’s, populated and unpopulated. A populated JV is one where the employees are employed by the JV. An unpopulated JV does not have employees, and instead uses employees of the JV members to accomplish the work. The unpopulated JV obtains these employees by awarding subcontracts to each of the JV members.

Populated JV’s are usually formed by contractors, who together are qualified to win a sizeable contract, but whose respective cost structures, in a prime/sub relationship, are not cost-competitive. This is in part because the prime contractor has to burden the subcontractor’s costs. The cost structure of a populated JV can be designed to align with the price-to-win for that specific opportunity. Due to the complexity and cost of formation, populated JV’s are suitable for large contract awards.

Unpopulated JV’s are simpler to create and usually result from the SBA’s mentor-protégé program. Per that program, a large business can form an unpopulated JV with a small business. As long as the small business protégé owns at least 51% of the JV and performs at least 40% of the work, a mentor-protégé JV is eligible to bid on small business set-aside contracts despite the affiliation with a large business. The support of a large business in a mentor-protégé JV enables small businesses to win contracts that the small business could not have won on their own. And the large business benefits by being able to participate in small business set-aside contracts.

Populated JV’s perform the contract, including administrative tasks such as accounting and contracts, with their own employees. Little to no support is provided by the JV Members. Conversely, the contract direct work in an unpopulated JV is performed by employees of the JV Members in response to subcontracts issued by the JV. In addition, one of the members must provide the unpopulated JV with accounting, contracts, purchasing, B&P and other “back office” support on an “outsourced” basis. Member employees that provide this administrative support to the unpopulated JV must charge their time to the JV. Consequently, despite having no employees, unpopulated JV’s need a typically modest G&A rate. (Please note, in some cases, the SBA will allow unpopulated JV’s to employ a Facility Security Officer).

The increasing use of JV’s is because, as described above, they allow contractors to win contracts they would otherwise be unable to win. This is a huge benefit, but there are also some disadvantages.

• It can be difficult to extricate yourself from a JV. If you have chosen an “unsuitable” Member, an “innocent” contractor may suffer reputational and financial damage due to their Member’s poor behavior.
• The JV’s revenue does not necessarily increase the Member’s G&A base, and thus decreases its G&A rate.
• Depending on the RFP, a JV’s past performance may or may not count as past performance for the Members.
• It can be expensive to form a populated JV, which can be quite a financial hit to the Members if the JV does not win the contract.
• Contractor employees may be unhappy if they are transferred to a populated JV that offers less generous pay/fringe benefits.
• A JV is a temporary organization. Populated JV’s only exist as long as the contract is being performed. The SBA allows mentor-protégé unpopulated JV’s to win three contracts over a two- year period.

All things considered, performing as the prime contractor is probably the best option for most contractors, but if that is not possible, JV’s offer an alternative that should be considered.

Got questions? Connect with an experienced Aprio advisor today.

Schedule a Consultation