If you’re a minority or woman business owner, you know all too well the many challenges that MWBEs face. Of these, perhaps the most significant is capacity — even with the assistance of MWBE programs, many small companies simply don’t have the capacity to bid on large projects or to compete successfully against larger firms. That’s one reason why New York City’s Mayor’s Office of MWBEs is urging small MWBEs to pool their resources and expertise. Formally known as joint ventures, these limited partnerships can go a long way towards helping MWBEs participate in contracts they could not handle on their own.
What Is a Joint Venture?
A joint venture is a formal agreement between two or more parties to do business together for a specific period of time. Generally, the parties involved draw up their own contracts in accordance with the level of participation of each firm.
Joint ventures are not limited to partnerships between certified MWBEs. Although partnering with another certified business would certainly be ideal — providing increased opportunities to two or more disadvantaged businesses at the same time — it’s not required. In fact, many joint ventures involve a partnership between a small MWBE with limited capacity and a larger, better-established non-MWBE firm.
To clarify, the State of New York defines a joint venture in this way:
“A contractual agreement joining together two or more business enterprises, one of which is a certified minority – or woman – owned business enterprise, for the purpose of performing on a State contract. The certified minority – or woman – owned business enterprise must provide a percentage of value added services representing an equitable interest in the joint venture.”
The U.S. Department of Transportation uses similar language, emphasizing that the “joint venture partner must be responsible for specific contract items of work, or clearly defined portions thereof. Responsibility means actually performing, managing and supervising the work with its own forces.”
Obviously, forming a joint venture with a large firm that has the capacity to work on more lucrative contracts has advantages for MWBEs, who gain access not only to working capital, but also bonding opportunities and the chance to build capacity over time. At the same time, they give the non-certified firm access to contracts that are lawfully set aside for MWBEs. Thus, they are a win-win for all concerned.
Well, not necessarily. In fact, many small, disadvantaged businesses have found themselves caught up in questionable ventures because they didn’t understand the rules.
Joint Venture Means a True Partnership
City, state and local governments support the concept of joint ventures between MWBE-certified and non-certified firms. However, they also recognize that such partnerships can be used to circumvent existing MWBE rules. Thus, federal, state and local laws provide clear guidelines for the structure of joint ventures between certified and non-certified firms. These include rules around capital contributions, workforce participation, equaitable share in profits and losses, and more.
The joint venture agreement must spell out the capital or credit contribution of each party, which must be commensurate with its ownership in the venture. For example, if a minority or woman-owned business enters into a 50 percent partnership with a non-certified firm, its capital contribution should be roughly 50 percent of the budget for the work to be performed.
Similarly, all parties in the contract must supply a “percentage of value added services representing an equitable interest in the joint venture.” In other words, the minority or woman- owned business can’t simply sign the contract claiming 50 percent ownership and use the workforce of the non-certified firm to complete the work. Additionally, the MWBE firm must add specific knowledge and expertise that directly advances the performance of the contract work.
Profit and Loss
State and federal laws also clearly state that each party to a joint venture must share in the profits and losses of the venture in an amount commensurate with their ownership interest. So, if an MWBE claims 30 percent ownership of a joint venture, it should be paid 30 percent of the net profits from the job. Similarly, if the project loses money, all parties must share in the losses equitably.
The penalties for MWBE fraud, whether it’s done intentionally or as a result of ignorance of the law, can be severe. So, before entering into a joint venture, make sure you understand federal and state laws. The agency that issued your MWBE or DBE certification can guide you to the resources and information you need.
About The Carmoon Group
The Carmoon Group, Ltd. is an insurance broker headquartered in Hicksville, New York. Through our large affiliate network, we provide risk management solutions and a full suite of business insurance products to companies all across the United States. A minority-owned company with over 20 years of experience helping businesses of all sizes meet their goals, we are uniquely qualified to help your businesses grow. So why not give us a call today to discuss your needs? Or if you prefer, reach out online and we will get back to you at a convenient time.