When a solicitation states that the offer must provide evidence of an adequate DCAA approved cost accounting system and the offeror is an SBA Joint Venture under the Mentor Protege Program, is it acceptable for just the Mentor to have an approved cost accounting system or must both Mentor and Protege have an approved system, or must the JV, itself, have an approved system?
In your question, there are three key issues that must be addressed: (1) Does the offer that is a Joint Venture (JV) under the Mentor Protégé Program must provide evidence of an adequate DCAA cost accounting system, (2) Is it acceptable for just the mentor to have an approved accounting system and (3) Must both Mentor and Protégé within the JV must have an approved accounting system. JVs are recognized under FAR Subpart 9.6—Contractor Team Arrangements, as a form of contractor teaming arrangement (CTA). Joint Ventures are owned and operated by all parties with a particular percentage of ownership as well as a share of risks and combined property, resources, capability and expertise. The Mentor Protégé Program has separate guidance and is normally a three year program. Also, it depends on the type of SBA Mentor Protégé program which may require approval levels and reviews. (Is it a Service Disabled Veteran Owned Small Business (SDVOSB)? Is it an 8a? Both of these joint ventures require approval by the Small Business Administration (SBA)). If the Mentor Protégé relationship is now entering a Joint Venture (not a Prime/Subcontracting teaming or partnering relationship (which would be separate entities), then the accounting considerations of a joint venture should have proposed and established as a separate business entity forming one business, and have its own set of books and supporting documentation sufficient for an audit trail. Transactions should be recorded consistent with the joint venture agreement, and specific guidelines in the agreement must be taken to ensure that the joint venture bears its equitable share of the costs. Therefore, the type of teaming arrangement must be fully established to determine who would be responsible for the DCAA cost accounting system. Please also note that whether a separate business, prime, or subcontractor, it is still valuable information to understand as a business seeking large dollar government contracting opportunities the importance of an adequate cost accounting system. A DCAA cost accounting system should exclude unallowable costs per FAR 31, limitation of costs if FAR clauses 52.232-20 and 21 and 52.216-16 regarding limitation on payments are in the government solicitation.
Once a Joint Venture is established, it forms one business unit. According to Defense Contract Audit Agency (DCAA), an incorporated Joint Venture will usually account for incorporated joint ventures using one of three methods: the equity method, the cost method, or the fair value method. The accounting for teaming arrangements should be consistent with the form of business organization that the teaming contractors have agreed to and disclosed in their proposal(s). For example, if the agreed-to arrangement is in the form of a joint venture, then this should be disclosed in the proposal(s) and the accounting principles applicable to a joint venture should be followed. In accordance with FAR 9.603 requires contractors to fully disclose all teaming arrangements in their offers. When the characteristics of joint control (i.e., joint property, joint liability for losses and expenses, and joint participation in profits) are evident, then the business arrangement is a joint venture. If the characteristics of joint control are not evident, then the terms of the business arrangement should be reviewed to see if a prime contractor/subcontractor relationship exists between the parties. Therefore, does your Mentor Protégé agreement outline any Joint Venture language and how it will be established as a separate business unit (one entity doing business) or a Prime/Subcontractor relationship?
It is therefore necessary to understand the purpose for and characteristics of a joint venture when reviewing the Joint Venture in the FAR, specifically the FAR cost principles on allowable costs (Far Part 31). There is no one cost allocation model which covers contracts issued to all joint ventures and teaming arrangements. Additionally, DCAA has established that it is necessary when a joint venture or teaming arrangement is established as a CAS 403 segment with the venturing companies acting as intermediate home offices for their share of the venture costs. Such arrangements usually involve the adoption of a “special” method of allocating residual home office expenses wherein each Joint Venture Company allocates a portion of its residual expenses to their portion of the joint venture costs. For a contractor not subject to CAS, although not required to comply with CAS 403, the CAS may be used as a model in determining contractor compliance with FAR 31.201-4 and FAR 31.203. Therefore, the Contracting Officer and their team must determine if CAS compliance is applicable. Joint Ventures and Mentor Protégé Programs have completely separate rules. For any information listed in a Request For Proposal (RFP) is the responsibility of the Contracting Officer during the solicitation process and all questions are filtered through their office. Any information and processes regarding CAS compliant can also be obtained through the DCAA website: www.dcaa.mil.
Remember, depending on the language set forth in your agreement as a Joint Venture and Mentor Protégé provides all of the cost allocation and administrative processes on the business unit. The information above provides general guidance regarding cost requirements and joint ventures; however, it is very important to seek clarification on any active solicitations from the Contracting Officer regarding the acceptability of the DCAA CAS compliant requirement and verify if the CAS compliant requirement is applicable to your Joint Venture. CAS compliant requirements and cost allocations are allowable or unallowable are based on the cost regulations for specific CAS compliance.
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