Joint Ventures & Teaming Agreements Opportunities 2018 Making Dollars and Sense Selling to the Government

Transcription

1 Joint Ventures & Teaming Agreements Opportunities 2018 Making Dollars and Sense Selling to the Government Gregg Funkhouser, Partner 1

2 Speaker Information Gregg Funkhouser, Partner Dixon Hughes Goodman, LLP (703) Bill Walter, Director Dixon Hughes Goodman, LLP (703) The information in this presentation is based upon the internal revenue code and other relevant legal authority as of a specific point in time. These authorities are subject to change or modification retroactively and/or prospectively and such changes may affect the validity or correctness of this information. Additionally, the information contained within the presentation may be tailored to a specific audience and therefore may not be applicable to all taxpayers or all situations. This presentation does not constitute tax advice by DHG. 2

3 Discussion Topics What is a JV and how does it work? Understanding legal requirements Finding the right partners Identifying the ideal opportunities Practical considerations and pitfalls 3

4 What is a JV and How Does it Work? 4

5 In General... Contract opportunities are growing in size and complexity Recent SBA changes were aimed at allowing small businesses to aggressively establish teaming partners to remain competitive Forms of teaming: Prime-Sub Relationship Teaming Agreement Joint Venture (JV) 5

6 Teaming allows... Complimenting member company unique capabilities Strengths / Capabilities / Qualifications Expertise / Staffing Financial / Bonding Offer best combination of: Performance Cost Delivery Recognized as appropriate for complex R&D procurements 6

7 Teaming versus JV Teaming Generally a prime / subcontractor agreement Subcontractors are responsible for subcontracted work limited liability Prime contractor has control over the teaming Intended to lock-in parties, pricing, scope Joint Ventures Separate legal entity to bid and perform contract Contract privity between JV and government Can be populated or unpopulated Members of JV jointly responsible for contract performance and for liability jointly and severally liable (except for LLC) JV members can be subcontractors Neither quick nor easy 7

8 JVs SBA Requirements A JV is an association of individuals and/or concerns with: Interests in any degree or proportion Purpose to engage in and carry out no more than three specific or limited-purpose business ventures for joint profit Desire to combine efforts, property, money, skill, or knowledge NOT generally a permanent basis for conducting business A specific joint venture entity generally may not be awarded more than three contracts over a two year period (3-in-2 Rule) SBA may determine that the relationship between a prime contractor and its subcontractor is a JV and that affiliation between the two exists 8

9 Joint Ventures The same two (or more) entities may create additional joint ventures, and each new joint venture entity may be awarded up to three contracts. BEWARE - such a longstanding inter-relationship or contractual dependence between the same joint venture partners will lead to a finding of general affiliation between them. 9

10 JV Formation A joint venture must: be in writing do business under its own name. It may (but need not): be in the form of a separate legal entity, and if it is a separate legal entity it may (but need not) be populated (i.e., have its own separate employees) 10

11 Affiliation Affiliation results in JV members combining revenues and headcounts for SB determination Affiliation is all about control (13 CFR ) Stock ownership, stock options, convertible securities and merger agreements Common management Identity of interest Joint ventures Newly organized concerns Ostensible subcontractor arrangements Franchise and license agreements Totality of the circumstances 11

12 Fundamentals Primary considerations Co-management of the entity Sharing of profits and losses Duration is limited Competing as a JV Form JV before submitting offer JV agreement should address contract performance FAR requires the proposal to include nature of JV Legal forms Partnership (An informal JV per the SBA) LLC Corporation 12

13 JV Pros & Cons Pros: JV can be established and used to bid on multiple programs Award criteria can be satisfied through complimentary team approach Management, control and profit sharing addressed up front (usually) B&P costs are generally allowable Potential tax benefits Cons: Members possess liability for obligations of the JV Management challenges often difficult to mitigate Could be locked into a bad marriage for longer than intended Members can be generally slow to address statement of work issues until time of contract award 13

14 Teaming Pros & Cons Pros Generally less expensive to set up Minimal Corporate filings and tax implications Prime - less commitment to sub Sub liability limited to subcontract Cons Requires good drafting to help enforcement Generally not enforceable till start of contract Prime structure less useful Project management Dispute avoidance and resolution Sub less commitment from prime 14

15 Understanding legal requirements 15

16 Teaming Arrangement: FAR 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. 16

17 What are the Benefits? FAR Contractor team arrangements may be desirable from both a Government and industry standpoint in order to enable the companies involved to Complement each other s unique capabilities; and Offer the Government the best combination of performance, cost, and delivery for the system or product being acquired. Contractor team arrangements may be particularly appropriate in complex research and development acquisitions, but may be used in other appropriate acquisitions, including production. The companies involved normally form a contractor team arrangement before submitting an offer. However, they may enter into an arrangement later in the acquisition process, including after contract award. 17

18 JV Size Exemption Combined size of the JV members must meet the size standard in the RFP unless: The procurement is bundled or it is a large procurement where the dollar value of the procurement exceeds ½ the size standard value or $10 million for headcount standards If exception applies, the joint venture is small if each joint venture partner is small JVs between an 8(a) and small business mentor protégé 18

19 Mentor Protégé Extended to All Small Business 2016 To obtain technical, management, financial or contracting assistance Waive affiliation Mentor One protégé/up to three if no adverse affects Three year program with one extension Can own 40% of protégé Protégé Secondary NAICS code exception Perform 40% of work 19

20 Joint Venture Requirements Written with responsibilities detailed Unpopulated Certifications and annual report SBA approval Register SAM/DUNS and CAGE numbers 20

21 Is a Teaming Agreement a JV? Factors that could lead to a teaming agreement being treated as a JV (subsequent SBA determination of affiliation and SB size requirement is breached): Language used in the Teaming Agreement Proposal wording Other circumstances: Reliance on Bonding Who is in control/managing contract Division of work (clear delineation) Role in pursuit of contract Whether subcontractor was the incumbent 21

22 Points for Prime/Sub Relationships Agencies may consider an offeror s subcontractor s capabilities and experience under relevant evaluation factors where not prohibited by the RFP The prime contractor is solely responsible for meeting all contract requirements, including the Limitations on Subcontracting percentage Ostensible Subcontractor relationships 22

23 Ostensible Subcontractor A subcontractor is an ostensible subcontractor if: The subcontractor performs the primary and vital requirements, or The prime contractor is unusually or unduly reliant upon the subcontractor. A contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes. 13 CFR (h)(4) 23

24 Limitations on Subcontracting Apply to cooperative efforts of the joint venture entity Applies to full or partial small business set-aside contract, an 8(a) contract, a WOSB or EDWOSB Supplies: 50% cost of manufacturing excl mat l Services: 50% with its own employees General Construction: 15% with its own employees Specialty Construction 25% with its own employees 13 CFR 125.6(a) 24

25 8(a) Joint Ventures Can be awarded an 8(a) set-aside if: One firm is 8(a) certified All members are SB (unless approved Mentor/ Protégé) The SBA must approve the JV: 8(a) firm must manage 8(a) firm must furnish project manager 8(a) firm must receive at least 51% of profits 25

26 SDVO Guidelines SDVO SBC must be the managing member Project manager must be an employee of the SDVO SBC SDVO SBC must get 51% of net profits JV agreement must set forth responsibilities with respect to performance SDVO SBC subcontractors may be used to meet limitations on subcontracting percentages 13 CFR 125.6(b) and 13 CFR (b) 26

27 HUBZone All members must be HUBZone All members must be small The contract must meet certain size requirements The HUBZone that is a prime contractor on a HUBZone contract may team with and subcontract work to its mentor. The mentor may not perform the primary and vital requirements of the contract. Agricultural commodities may not purchase from subcontractor if the subcontractor will supply the commodity in substantially the final form 13 CFR 125.6(c) 27

28 Finding the right partners 28

29 Do Your Homework Check out past performance on being a teaming partner Check on culture member attitude of mutual dependence and mutual benefit Evaluate reputation with client/agency Confirm past technical performance Validate: Name recognition with client Proposal (B&P) resources Bonding capacity & financial resources Price and cost competitive culture Suspension or Debarrment 29

30 Validate... Check... Cross-check... Confirm proposed JV will meet set-aside size and technical requirements Validate data from System for Award Management (SAM) Get written certification regarding small business and other statuses claimed Consider the presumed loss rule 30

31 Identifying the ideal opportunities 31

32 BD Strategy Long game 2 years out find the client and work with them to gain an understanding of their aches and pains, their wants and needs and their suppliers and competition Mid-game 6 months out be aware of what is expected out in the coming months start to work your strategy identify JV members to help you ease their pain, satisfy their wants and bring the right people to the table shape the requirement Short game 2 months out FedBizOpps announcement Finalize the proposal 32

33 Practical considerations and pitfalls 33

34 Management of the JV Management structure of JV Management committee Project Manager Who will negotiate contracts? Who will negotiate with subcontractors? Where will the labor be sourced? Division of labor on contracts? 34

35 Type of JV Populated vs. Unpopulated Entity type Limited Liability Company (LLC) JV Partnership 35

36 Populated JV Pros: Single entity to perform work one face to client Reduces confusion during source selection The JV subcontracts directly Cons: SBA JV regulations are not consistent with populated JV structure Approval of JV agreement could be delayed Minority member may not be able to exercise control over workforce 36

37 Unpopulated JV Pros: Each member performs independently as a subcontractor to the JV Simpler structure potential for simpler for approval of JV JV may have handling fee for managing/administering subcontracts and JV Cons: Pricing potential for increased cost with members subcontracting to 2nd tier and below (middlemen) Client can be confused regarding who is actually performing work 37

38 Limited Liability Company Pros: Members third party liability limited Tax benefits LLC recognized by the SBA for JV Cons: Members remain responsible for contract performance Legal documentation Articles of Organization and Operating Agreement Past performance only allowed if RFP allows member s past performance to be considered Challenging to operate within SBA regulations 38

39 JV Partnership Pros: Taxes B&P Cost is allowable to the individual members SBA familiar with structure review process easier Cons: Partners are jointly and severally liable on debts of the partnership JV Agreement serves as partnership agreement No past performance record of its own unless the RFP allows 39

40 Role of the Attorney Ensure Is are dotted and ts are crossed Consistent with SBA, FAR and RFP requirements Evaluate benefits and drawback of teaming Getting the best deal for the respective client Drafting the agreement that: Reflects roles and responsibilities of team members Takes into consideration the dynamics of the member Helps to set the stage to build and develop trust 40

41 General Provisions Purpose & Scope of the JV Designation of the SBC as managing member Division of work responsibilities Not less than 51% of profits will be distributed to SBC member Reference to NDA Protection/Assignment of technical data / inventions / patents / etc. Duration of agreement and termination provisions Exclusivity / Noncompete No assignment without consent Managing member to maintain records accounting and administrative Obligation of JV members to ensure performance of government contract 41

42 Role of the Accountant Help identify & mitigate potential financial impacts Financial statement impact Impact on cost accounting and rates Loan covenant impact Tax impact Other impacts Increased financial disclosure Potential increase in audit fees Use of equity method of accounting and consolidation 42

43 Thank you and time for Questions? 43