SmallGovCon: Picking Your Team: Joint Ventures Versus Prime/Subcontractor Teams (Part Three, Relationships)

“Federal contractors often ask: ‘It is better to team up for government work with a prime-sub arrangement or with a joint venture?’ Well, (spoiler alert) the answer is: it depends. But I won’t leave you with just that. This three-part series will provide insight on some of the major differences between these two types of ‘teams’ that offerors should consider when making the decision between a joint venture or prime/subcontractor team in competing for and performing federal contracts. While this series will not provide a comprehensive list of all the differences between these two types of teams, it will cover some of the big ones that seem to come up more frequently in this decision-making process. Our first article focused on workshare, and our second, on past performance. This final article of the three-part series will discuss the parties’ relationship with the government and with each other in both types of teams…”

“Some aspects of the partners’ relationship with each other that should be considered in deciding between a joint venture team and a prime-subcontractor team are the anticipated longevity of the teaming relationship and frequency of the teaming projects to be pursued. This is due to SBA’s notorious affiliation regulations, and the potential for two contractors to be found affiliates if they work together too closely, too many times, or for too long…”

“So this means, two contractors can jointly bid on as much government work as their hearts desire, so long as they only bid within the two-year period following the first award (and also, follow SBA’s other rules). And even then, the venturers could execute a second or third joint venture after that two-year period to continue jointly bidding work. But as the rule ever-so-vaguely notes, too many of these joint venture agreements between two contractors can eventually lead to affiliation. So again, the protection is limited.

The prime-subcontractor relationship does not provide this same protection from affiliation, however. Even if a prime and subcontractor perform contract work in accordance with the limitations on subcontracting, they could still be found affiliates if the subcontractor performs too much of a certain contract or if the subcontractor gets too much of its revenue from the prime contractor (the details of these specific affiliation rules are outside the scope of this article, but you can read more about them here). Although this is not to say there is automatic affiliation from working with a subcontractor repeatedly; that sort of affiliation depends on looking at the entirety of the relationship…”

“For a joint venture relationship, the rules say that the venturers will share in the profits in proportion to their workshare. They also require the establishment of a separate bank account which ‘must require the signature or consent of all parties to the joint venture for any payments made by the joint venture to its members for services performed.’

But for a prime-subcontractor relationship, the government pays the prime–only–and then, the prime pays the subcontractor for their share of the work in accordance with the subcontract agreement. Prime-subcontractor teams should avoid any ‘profit-sharing’ arrangements, as the SBA’s Office of Hearings and Appeals have found that it may be a factor giving rise to affiliation. This means, the subcontractor would need to ensure its payment terms are clearly expressed in the subcontract agreement. In the event the subcontractor was not paid, it would have to take that up directly with the prime–as it does not have access to a shared operating account or a direct share of the profits…” Read the full article here.

Source: Picking Your Team: Joint Ventures Versus Prime/Subcontractor Teams (Part Three, Relationships) – By Nicole Pottroff, February 3, 2022. SmallGovCon.

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