Joint-venture shams, D.C.-style

Harry C. Alford | 9/19/2012, 5 p.m.

Sometimes the best intentions can be shattered by unforeseen consequences. Such is the case with the Washington, D.C.'s Department of Small and Local Business Development. One of the missions of this department is to stimulate participation from D.C.-based business, particularly small- and minority-owned firms. It has become popular for this department to encourage minority/majority joint ventures seeking construction contracts.

This sounds noble, but it could become a disaster if all of the parties are not genuine and noble in their motivation.

Each joint venture must be screened and certified by the Certified Business Enterprise? CBE? office. To qualify, the minority portion has to have at least 51 percent ownership in the joint venture and must reside within the District. The majority portion must have less than 50 percent and does not have to reside within the District. That is a major flaw.

The two companies come together under the formal incorporation application to the government. Bylaws governing the joint-venture arrangement explain how they are going to work on a particular bid, providing they win that bid.

They present their application for CBE certification. The CBE office reviews their papers and makes a decision. Those with CBE certification will get a gift of 12 percent preference points. This gives them an advantage over other bidders. They can even bid higher than a non-certified company as long as they land within the 12 percent gift.

The above advantage is enticing to those White-owned firms living outside the District and wishing to get those plum D.C. projects, so they begin to break the rules. They contact the Department of Small and Local Business Development to get a recommended list of potential minority contractors. To some of these sneaky prime contractors, this becomes a sucker list.
They begin surveying the contractors on the list and may end up with the most naive business they can find. Together they work on the Joint Venture Agreement and execute all of the needed paper work, including signature cards for the joint-venture bank account. The minority/local owner will usually declare 51 percent ownership. The out-of-town majority owner will declare the remaining 49 percent. They get certified and go after that designated bid.

If they win, then all hell will break loose. Quickly, the White out-of-town firm will sit his joint-venture partner down and start dictating how things are going to be on the project. The minority partner's signature card at the bank has disappeared. Instead of 51 percent local minority and 49 percent out-of-town majority, it's now around 10 percent minority and 90 percent out-of-town majority. If the minority starts to protest he will get threatened with firing. Firing? Yes, it is like he is becoming an employee. Thus, the promising joint venture has become more like "Front and Flunky." The bylaws are mysteriously amended and the whole agreement is breached.

The leverage the front has is the bid bond for the project. The bond is in his company's name.

The minority firm has very little bonding capacity and could not have done it on his own. Thus, the front controls the whole project. He will self-perform as much of this work to himself, which makes it very profitable, plus he probably overbid the project, which adds even more profit at the expense of the District.