By Jason Rigoli, Principal at The White Oak Group

As you may have read recently in the Washington Post or other government publications, GTSI, an IT services and solutions provider for the federal government, was suspended by the Small Business Administration (SBA) recently. Although the SBA lifted the suspension shortly after, they forced CEO Scott Friedlander and the company’s vice president and senior counsel to step down.

There have been many questions as to what GTSI had done. Essentially, the company established a joint venture with an Alaska Native-owned small business contractor where GTSI controlled 49% and the small biz controlled 51%. This allowed the company to bid on contracts that were set aside for small businesses and Alaska Native-owned companies and avoid most competition.

GTSI also received “sole-source” contracts through this joint venture that allowed the company to win work that was directed solely to them without any potential for competition at all. Technically the Alaska Native company is required to perform and deliver at least 51% of any contract, but in reality it appeared GTSI was delivering 99%.

In that scenario it was possible that GTSI received 99% of the contract revenue and then split the remaining 1% along the joint venture ownership lines of 51/49. The end result was GTSI, a large company, earning and delivering on 99.49% of the contracts awarded to the “small disadvantaged business joint venture.”

The joint venture was essentially created to win more business for GTSI, which runs completely contrary to the SBA’s mission to create opportunity for small contractors.

Unfortunately, this is not an isolated incident. We see this type of situation frequently. Many large prime contractors set up similar joint ventures with small businesses and often own 49% of the venture and 49% of the small business.

In these joint ventures, almost 75% of the financial benefit from contracts goes to the large business. The small business walks away with only about 25%. What’s worse, most of these small business contracts are non-competitive or restricted competition, so the margins are greater than the large business would have earned otherwise.

This kind of activity continues today and is completely legal. What GTSI did was likely illegal or at least inconsistent with SBA regulations, but it’s fair to say that even the legal version of this game can be somewhat unfair for small businesses.

Regardless, while these joint ventures continue to remain legal and accepted in the government, companies will look to form and profit from them. However, for companies in joint ventures, it’s becoming increasingly important to adhere to SBA and federal acquisition regulations. In addition to being the right thing to do, the SBA will most likely begin paying closer attention to these joint ventures moving forward in light of the GTSI situation.

Also, for companies looking to form a joint venture with a prime or sub, increased due diligence is mandatory. If companies have had issues like this in their history, you should look to avoid partnering with them in the future. How? There are some new tools to help alert companies to these red flags. In fact, govWin recently added “vendor verification” to the list of services.

What occurred with GTSI was just the tip of the iceberg when it comes to companies taking advantage of SBA joint venture regulations. With increased government attention, now’s the time for companies to ensure that all rules are being adhered to.