On April 27th, the U.S. Small Business Administration (“SBA”) published a final rule making changes to the regulations governing the 8(a) program.  This final rule is SBA’s implementation of the proposed rules issued by the SBA on September 9, 2022 and we summarized the changes adopted by the final rule here.

While many of the SBA’s regulatory changes are intended to document existing SBA policies and practices, the SBA did implement a number of substantive changes.  Accordingly, over the next several weeks, we will be going through various parts of the final rule and conducting an in-depth discussion and analysis of the changes.  We anticipate addressing the following areas in this series:

Joint Ventures

In this update, we are addressing the changes to the joint venture rules.  Most of the changes to the joint venture rules are for clarification purposes, including restructuring the rule text to improve readability.  As part of the eligibility requirements to enter the 8(a) program and other SBA small business programs (i.e., small business set-aside, 8(a), women-owned small business (WOSB), HUBZone, and service-disabled veteran owned small business (SDVOB) contracts), or to receive a small business set-aside contract, a business entity must not exceed the SBA’s applicable size standard based on North American Industry Classification System (“NAICS”) code – size standards are typically described in terms of number of employees or annual receipts. When calculating a particular entity’s size, in most situations the SBA counts both the revenue and employees of that particular entity, and the revenue and employees of any affiliate.

While affiliation is typically found due to common ownership and management (except for Alaska Native Corporations, Tribes, and Native Hawaiian Organizations, which are exempt from affiliation based on common ownership or control), aggregation of the revenue and employees of two (or more) distinct entities for purposes of a size determination also occurs when two entities form a joint venture, unless the joint venture complies with the requirements set forth in § 121.103(h).

In the revisions effective May 27, 2023, the SBA revised § 121.103(h) to separate out some of the requirements contained in the original introductory paragraph, moving them to a new § 121.103(h)(1) for “ease of use.”

The SBA also added language clarifying when orders can be issued to a joint venture that has been awarded a multiple award contract (“MAC”) or IDIQ contract.

As defined in § 121.103(h), a “joint venture” is an association of two or more individuals and/or concerns with interests in any degree or proportion intending to engage in and carry out business ventures for joint profit over a two-year period, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally. For SBA purposes, the two-year period is determined from the date of first contract award, not the date the joint venture is actually formed.

A joint venture may be awarded further contracts (including novations) past the end of the two-year period, so long as the offers resulting in the further contracts were submitted by the joint venture prior to the end of the two-year period.  Previously, the rule provided that each joint venture entity could submit offers; “entity” is struck from the new rule, implying that only the joint venture itself (such as when the joint venture is a separate legal entity) may submit offers during that two year period.  Furthermore, the rule change also clarified that orders may be issued on awarded contracts such as MACs and IDIQ’s more than two years after award of the first contract to the joint venture.  The SBA explained that this change

capture(s) SBA’s current policy that allows orders to be issued under previously awarded contracts beyond the two-year period (since the restriction is on additional contracts, not continued performance on contracts already awarded).

The SBA also amended § 124.503(i)(1)(iv)(B) to clarify that this approach also applies where the order is a sole source order, revising the regulation to state that where an agency seeks to issue a sole source order to a joint venture, the two-year restriction for joint venture awards set forth in § 121.103(h) does not apply and SBA will not review and approve the joint venture agreement as set forth in § 124.513(e)(1).

For competitive 8(a) procurements, the SBA clarified that SBA “will determine whether the 8(a) partner to the joint venture is eligible for award but will not review the joint venture agreement to determine compliance with § 124.513.” The SBA explained that the revisions seek:

to make clear that SBA’s determination of eligibility relates solely to the 8(a) partner to the joint venture and does not represent a full review of the 8(a) joint venture under § 124.513.

The reason for this is because SBA’s regulations “do not require review of joint venture agreements with respect to 8(a) competitive awards.”  The SBA also explained, and clarified in the regulations, that this extends to sole source awards to 8(a) joint ventures pursuant to competitively awarded 8(a) MACs and IDIQs:

The underlying contract is an 8(a) competitive award. SBA’s regulations do not require review of joint venture agreements with respect to 8(a) competitive awards. Once awarded, SBA does not believe it should review joint venture agreements in connection with one or more individual sole source orders under the 8(a) multiple award contract. As such, SBA adopts the proposed language in this final rule with the added clarification regarding sole source orders to a joint venture under a previously competitively awarded 8(a) multiple award contract.

The SBA also took action to prevent 8(a) entities that are members of more than one joint venture from using those joint ventures to compete for the same procurement.  Specifically, SBA amended § 124.513(a) to provide that

[a] Program Participant cannot be a joint venture partner on more than one joint venture that submits an offer for a specific 8(a) contract or for an 8(a) order under a multiple award contract that is not itself an 8(a) contract.

The SBA explained that this restriction does not apply to offers in response to solicitations for MACs or IDIQs; it only applies to offers in response to a specific 8(a) contract or 8(a) order.  Notably, however, this restriction only applies to each 8(a) entities.  It should be note that, for ANCs, Tribes and NHOs that may have multiple 8(a) subsidiaries, each separate 8(a) subsidiary can still join separate joint ventures that are submitting offers in response to the same solicitation under this new rule.

The SBA also made an additional revision to § 124.103(h) that, while slight, may have significant impact.  § 124.103(h) explains that the entities comprising the joint venture may form additional joint ventures, each of which can separately obtain contracts and provide solicitations during the aforementioned two-year period.  Each new joint venture must do business under its own name and be identified as a joint venture.  Thus, a given set of entities could create a new joint venture every two years to extend the ability to obtain contracts past the two-year limit.  However, the SBA revised § 103(h) to state that repeatedly doing so may result in the entities comprising the joint ventures being determined to be generally affiliated.  Previously, the rule provide that such repeated relationship will result in a finding of general affiliation.  This change to a more discretionary “may” could mean that a given set of entities can maintain non-affiliated status in some cases if, in the SBA’s assessment, the repeated inter-relationship nevertheless does not warrant a finding of general affiliation.

The SBA also made changes to the regulations governing populated joint ventures.  The SBA revised the regulations to clarify that when a joint venture is formed as a separate legal entity, such as an LLC, it cannot be populated with persons who perform contracts awarded to the joint venture, unless all entities that comprise the joint venture are similarly situated, e.g. all entities have the same socio-economic status, such as two 8(a) entities.  A populated joint venture whose entities are not similarly situated is not eligible for contracts that are set aside for small businesses.  The joint venture is allowed to have employees that perform only administrative functions without all entities being similarly situated.

The SBA also revised the regulations governing populated joint ventures to address how the size of the populated joint venture will be determined.  The revised regulations provide that SBA will aggregate the revenues or employees of all partners to the joint venture and where two parties form a populated joint venture, the joint venture will qualify as small only where the parties to the joint venture meet the applicable size standard in the aggregate.

Finally, some joint ventures can be formed under a mentor-protégé arrangement, where the mentor entity may not qualify for 8(a) contracts, but the protégé entity does.  As mentioned above, § 124.513(a)(3) requires that the managing entity of a joint venture must meet applicable size requirements.  The revisions to § 125.8 clarify when a non-managing entity may have control over joint venture activities.  Specifically, a joint venture agreement may only grant a non-managing entity negative control (e.g. the ability to veto decisions, or to require the non-managing entity to approve actions related contract performance) to the extent such provisions “would otherwise be commercially customary for a joint venture agreement for a government contract outside of SBA’s programs.”  The amended rule further provides non-limiting examples of such negative control, such as initiating litigation on behalf of the joint venture or selecting a contract opportunity to pursue.  The SBA explained that:

SBA believes that requiring the concurrence of a non-managing joint venture partner in deciding what contract opportunities the joint venture should seek is also something that would be commercially customary. The partners to a joint venture have formed a joint venture in order to seek contract opportunities. Since the parties will be jointly and severally liable for any contracts awarded to the joint venture, it makes sense that all parties to the joint venture should have a say in what opportunities the joint venture pursues.

The SBA, however, also made it clear that these revisions are “not meant to be the only decisions in which a non-managing member may participate but is merely illustrative of corporate governance activities and decisions of the joint venture that SBA believes non-managing venturer participation is commercially customary.”

Comparison of the Prior Rule with the New Rule:

(h)  Receipts/employees attributable to joint venture partners. For size purposes, a concern must include in its receipts its proportionate share of joint venture receipts (whether that joint venture is populated or unpopulated), unless the proportionate share already is accounted for in receipts reflecting transactions between the concern and its joint ventures (e.g., subcontracts from a joint venture entity to joint venture partners). In determining the number of employees, a concern must include in its total number of employees its proportionate share of joint venture employees (whether the joint venture is populated or unpopulated) Affiliation based on joint ventures. A joint venture is an association of individuals and/or concerns with interests in any degree or proportion intending to engage in and carry out business ventures for joint profit over a two-year period, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally. This means that a specific joint venture generally may not be awarded contracts beyond a two-year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for the joint venture. However, a joint venture may be issued an order under a previously awarded contract beyond the two-year period. Once a joint venture receives a contract, it may submit additional offers for a period of two years from the date of that first award. An individual joint venture may be awarded one or more contracts after that two-year period as long as it submitted an offer including price prior to the end of that two-year period. SBA will find joint venture partners to be affiliated, and thus will aggregate their receipts and/or employees in determining the size of the joint venture for all small business programs, where the joint venture submits an offer after two years from the date of the first award. The same two (or more) entities may create additional joint ventures, and each new joint venture entity may submit offers for a period of two years from the date of the first contract to the joint venture without the partners to the joint venture being deemed affiliates. At some point, however, such a longstanding inter-relationship or contractual dependence between the same joint venture partners will may lead to a finding of general affiliation between and among them. A joint venture: Must be in writing; must do business under its own name and be identified as a joint venture in the System for Award Management (SAM) for the award of a prime contract; may be in the form of a formal or informal partnership or exist as a separate limited liability company or other separate legal entity; and, if it exists as a formal separate legal entity, may not be populated with individuals intended to perform contracts awarded to the joint venture (i.e., the joint venture may have its own separate employees to perform administrative functions, including one or more Facility Security Officer(s), but may not have its own separate employees to perform contracts awarded to the joint venture). SBA may also determine that the relationship between a prime contractor and its subcontractor is a joint venture pursuant to paragraph (h)(23) of this section. For purposes of this paragraph (h), contract refers to prime contracts, novations of prime contracts, and any subcontract in which the joint venture is treated as a similarly situated entity as the term is defined in part 125 of this chapter.

[Examples omitted.]

(1)  Form of joint venture. A joint venture: must be in writing; must do business under its own name and be identified as a joint venture in the System for Award Management (SAM) for the award of a prime contract or agreement; and may be in the form of a formal or informal partnership or exist as a separate limited liability company or other separate legal entity.

(i)   If a joint venture exists as a formal separate legal entity, it cannot be populated with individuals intended to perform contracts awarded to the joint venture for any contract or agreement which is set aside or reserved for small business, unless all parties to the joint venture are similarly situated as that term is defined in part 125 of this chapter (i.e., the joint venture may have its own separate employees to perform administrative functions, including one or more Facility Security Officer(s), but may not have its own separate employees to perform contracts awarded to the joint venture).

(ii)  A populated joint venture that is not comprised entirely of similarly situated entities will be ineligible for any contract or agreement which is set aside or reserved for small business.

(iii) In determining the size of a populated joint venture (whether one involving similarly situated entities or not), SBA will aggregate the revenues or employees of all partners to the joint venture.

(2) Size of joint ventures.

(i)   A joint venture of two or more business concerns may submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract. For a competitive 8(a) procurement, a joint venture between an 8(a) Participant and one or more other small business concerns (including two firms approved by SBA to be a mentor and protégé under § 125.9 of this chapter) must also meet the requirements of § 124.513(c) and (d) of this chapter as of the date of the final proposal revision for negotiated acquisitions and final bid for sealed bidding in order to be eligible for award.

(ii)  Two firms approved by SBA to be a mentor and protégé under § 125.9 of this chapter may joint venture as a small business for any Federal government prime contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement, and the joint venture meets the requirements of § 124.513 (c) and (d), § 125.8(b) and (c), § 128.402(c) and (d), § 126.616(c) and (d), or § 127.506(c) and (d) of this chapter, as appropriate. Except for sole source 8(a) awards, the joint venture must meet the requirements of § 124.513(c) and (d), § 125.8(b) and (c), § 125.18(b)(2) and (3), § 126.616(c) and (d), or § 127.506(c) and (d) of this chapter, as appropriate, as of the date of the final proposal revision for negotiated acquisitions and final bid for sealed bidding. For a sole source 8(a) award, the joint venture must demonstrate that it meets the requirements of § 124.513(c) and (d) prior to the award of the contract.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

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