Many DBEs or MWBEs starting out don’t understand what joint ventures are, how they work or why they’re important. This lack of knowledge can get you into big trouble and make joint ventures a dangerous proposition.
You may have a vague sense of what “joint venture” means—working together with someone else on something—but if you’ve never been involved in one, it’s hard to know the risks and rewards or whether the arrangement is right for your business. This article (and the next), we hope, will expand your understanding of joint ventures so that you can see the possibilities they hold, see them in the context of a larger strategic business plan, comply with strict DBE/MWBE regulations concerning joint ventures, weigh your options, engage in meaningful discussion with colleagues and associates, and, when it comes down to negotiating the terms of a joint venture, be smart about them and have a firm grasp of the important issues.
Essentially, joint ventures function as a partnership but for a specific purpose and usually for a limited period of time. They exist by voluntary agreement with another person or business, and have as their aim the accomplishment of certain concrete, defined objectives. In our industry those objectives are the successful and complete performance of contracts. How to properly structure your joint venture will depend largely on what those objectives are, what the subject matter of your contract is. By subject matter, we mean—are you performing public construction? Perhaps it’s research and development? Professional services? Supply?
In any case, there are some basic elements to joint ventures, and very importantly, special requirements for non-DBE/DBE or non-MWBE/MWBE joint ventures—strict regulations that must be complied with, regulations designed to circumvent fraud—the situation where the DBE/MWBE is not really bringing anything to the table besides its certification and the preference to contract award that come with that certification. Beware of the non-DBE that wants to join up and bid a contract but doesn’t ask anything of you—already has all the capability to perform the contract itself. That’s a recipe for criminal liability.
With joint venture agreements, as with any agreement, the devil is in the details. If your joint venture is more of a long term arrangement, where you’ll be bidding or working on multiple contracts with your partner for an extended period of time, you may wish to consider creating a new business entity with your partner. Other arrangements include special purpose vehicles, joint marketing agreements, license agreements and subcontracts, among others. But basically all of these arrangements boil down to written language—whether in the form of a partnership agreement or LLC operating agreement, for example—the terms of which are negotiable. The following is a checklist of topics you should consider at the beginning of these negotiations:
- Clear business objectives
- Communication arrangements between organizations/teams
- Financial structure
- Protection of your interests (trade secrets, customer lists)
- Daily/strategic decision making responsibilities
- Dispute resolution procedures
- Legal structure for your joint venture (contractual co-operation for a defined project, partnership or unlimited partnership, limited liability company)
- Bank account arrangements will depend on the legal model chosen, although a new account can be set up for a single project.
- Single point of contact for client communication
- Sales and marketing activities
- New business generation (if applicable)
- Termination procedures—how and when will the joint end?
- Ownership of assets in the joint venture
- Allocation of any profit and liabilities resulting from the joint venture
So, there’s a lot to think about, a lot to think through in structuring any joint venture. Plus, with joint ventures between DBEs and non-DBEs, there’s the added pressure of regulatory compliance. Non-DBEs are strongly encouraged by regulations and procurement agency policy, to partner with DBEs or MWBEs on public work. And in many instances, a non-DBE’s inability to secure such partnerships has cost them contracts. In this context, joint ventures become an important tool. They function in the arena of public contracting to unlock the door to big contracts.
Federal regulations define them as “an association of a DBE firm and one or more other firms to carry out a single, for-profit business enterprise, for which the parties combine their property, capital, efforts, skills and knowledge, and in which the DBE is responsible for a distinct, clearly defined portion of the work of the contract and whose share in the capital contribution, control, management, risks, and profits of the joint venture are commensurate with its ownership interest.” (See 49 CFR 26.5 – What do the terms used in this part mean?)
Notice the emphasis here on the DBE bringing something to the table, and being “responsible,” for certain, specified work. So, in your joint venture agreement, do you think that it might be good to clearly delineate, spell out separately, the DBE and non-DBE’s respective scopes of work? Of course it would. And do you think it would be smart to layout in clear detail the duties and responsibilities of both the DBE and non-DBE partners? Yes, obviously.
Our regular readers will see similarities here to the regulatory requirement that a DBE perform a “commercially useful function.”
We’ll have more on joint ventures in the next article. Stay tuned.