Government Contracts Monitor

Mentor/Protégé Joint Venture Agreements – The Devil Is in the Details

August 31, 2015

Over the past year, the Small Business Administration (SBA) has begun to require a greater deal of specificity in proposed Joint Venture Agreements (JVAs) between Mentors and their Protégés, and in at least two instances both the cognizant SBA Area Offices and SBA’s Office of Hearings & Appeals (OHA) have rejected such Agreements and found the respective joint ventures ineligible for the Mentor/Protégé exception from SBA’s affiliation rules and thus not “small.” In a just-issued decision, the U.S. Court of Federal Claims (COFC) has affirmed OHA and rejected the Joint Venture’s challenge. IEI-Cityside JV v. U.S., COFC No. 15-673C, issued Aug. 25, 2015. SBA program participants need to be aware of these decisions and ensure that any proposed JVAs are sufficiently detailed to pass muster under this more rigorous scrutiny. This is particularly important as SBA looks to expand its Mentor-Protégé programs beyond the current 8(a) Business Development context. Moreover, SBA program participants submitting other agreements for SBA review also should heed this new SBA emphasis on greater specificity.

SBA ordinarily considers joint venturers to be affiliated and aggregates their revenues (or employees) for size purposes. However, one exception to this rule is for Mentor/Protégés entering into a joint venture where the Protégé qualifies as small for the specific procurement and the JVA meets the requirements of 13 C.F.R. §§ 124.513(c) & (d). In 8(a) procurements, the JV must submit the JVA to the cognizant SBA District Office prior to contract award for review and approval. This prior approval is not required as to non-8(a) procurements. However, the requirement to comply with 13 C.F.R §§ 124.513(c) & (d) still applies, and such compliance is reviewable if the JV’s size is protested.

In Inspection Experts, Inc. (IEI), an 8(a) program participant entered into a JVA with its SBA-approved Mentor, Cityside Management Corp. (Cityside), to compete on a non-8(a) small business set-aside for IDIQ service contracts. The JVA provided, among other things, that (i) IEI’s President would serve as the JV’s Managing Director and be responsible for negotiating the original contract, (ii) IEI and Cityside would each perform 50% of the JV’s work, and (iii) upon award the Managing Director would purchase, in the JV’s name, “facilities and equipment for the proposed operation of this contract.”

Interestingly, IEI’s SBA District Office approved this JVA. However, when the JV’s size status was protested after the JV was selected for award, the Area II Office of Government Contracting disagreed and found that the JVA lacked sufficient specificity. Specifically, the Area Office found that the JVA (i) did not include an itemization of all major equipment, facilities and other resources to be furnished by each JV partner, with a detailed schedule of cost or value of each, and (ii) did not specify the partners’ respective responsibilities with regard to contract performance, including ways that the parties would ensure meeting the performance of work requirements, as required by 13 C.F.R. §§ 124.513(c)(6) & (7). The Area Office also found that it was not clear from the JVA how the JV would meet the work requirements of 13 C.F.R. § 124.513(d). The Area Office therefore found that the affiliation exception requirements were not met, and that IEI and Cityside were affiliated and thus not small.

OHA affirmed the Area Office. See Size Appeal of IEI-Cityside, JV, SBA No. SIZ-5664, decided June 16, 2015. OHA specifically held that the JVA’s mere statements that the Managing Director would, in the future, buy facilities, equipment and other resources, and that the venturers would each perform 50%, did not suffice to meet SBA’s JVA requirements or explain how the JV would meet the performance of work requirements. OHA expressly rejected the JV’s argument that it would have been impossible here, given the IDIQ nature of the proposed contract and uncertain geographic award areas, to provide greater specificity, stating (1) that SBA’s regs do not authorize an exception for situations where a JV “may have difficulty providing detailed information,” and (2) that it was not evident from the record here that it would have been “impossible” for the JV to have complied, noting that the RFP described the type of work and that the JV could have described “the types of work each joint venture partner would perform, and the resources each partner would contribute for each region awarded ….”

The COFC, noting specifically the “substantial deference” due to SBA in interpreting its own regulations, rejected the JV’s court bid protest challenge to OHA’s decision. The Court found that all aspects of OHA’s decision were reasonable, and that the JVA did not contain the specificity required by SBA’s regulations. In sustaining OHA’s determination that the JV could have provided further detail, the Court noted that the “indefiniteness” aspect of this procurement went to the specific geographic areas and number of properties an awardee would manage, and not the work that would be performed and equipment, facilities and other resources necessary to perform such work. The Court further noted that both IEI and Cityside were experienced HUD contractors and indeed touted in the JV’s proposal the JV’s readiness to perform from “day one.” The Court also cited the detail that the JV provided both in its technical proposal and in a separate document that the JV had provided to the SBA District Office, but not incorporated in the JVA.

As stated at the outside above, SBA program participants need to pay careful attention to these decisions and ensure that they include sufficient detail in their future JVAs and other agreements, so as to satisfy SBA’s new, more demanding, review and avoid risking losing awarded contracts, as happened here.