We have found that many companies are confused by changes to SBA’s Joint Venture rules, particularly concerning the contracts for which each joint venture may bid and receive before the parties must establish a new, separate, joint venture. Such confusion results in companies either losing bidding opportunities or incurring unnecessary costs to set-up successive new joint ventures prematurely. This article explains and clarifies the rules, and provides clear, simple, principles to be considered in making future business decisions in this area.
By way of background, SBA’s old rule limited joint ventures to engaging in and carrying out no more than three specific or limited purpose projects for joint profit over a two-year period. 13 C.F.R. § 121.103(h) (2010) (before the February 11, 2011 amendment). Directly addressing the issue as to how many offers a joint venture could submit, SBA explained:
“This means that the joint venture entity cannot submit more than three offers over a two year period starting from the date of the submission of the first offer.” (Id.; emphasis added.)
This rule was very limiting, since the mere submission of offers did not assure that the joint venture would actually get any work. Indeed, if the first three offers submitted by a joint venture were unsuccessful, that would be the end of the joint venture and it would terminate without ever having won a single contract. Thus, a small business could go through the process of setting-up a joint venture (which can be costly, particularly for a joint venture set-up as a separate legal entity) without any assurance of a return on investment if the first three submitted offers were unsuccessful.
SBA heard and responded to these criticisms in its comprehensive 2009-11 overhaul of the SBA 8(a) Business Development (“BD”) program and joint venture rules. See Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations, 76 Fed. Reg. 8222 (Feb. 11, 2011) (final rule).
Specifically, SBA changed the rule to focus on awards, rather than offers. Thus, the SBA now allows a single joint venture to be awarded up to three contracts in a two-year period, starting from the date of the first award. Moreover, SBA provided that the parties to a joint venture can form a second joint venture and be awarded up to three more contracts, and a third joint venture to be awarded three more contracts.
Thus, the SBA regulation now in effect (since March 4, 2011), defines “joint venture” as:
an association of individuals and/or concerns with interests in any degree or proportion consorting to engage in and carry out no more than three specific or limited purpose 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.
13 C.F.R. § 121.103(h) (2012).
As SBA further explained:
This means that a specific joint venture entity may not be awarded more than three contracts over a two year period, starting from the date of the first contract, without the partners of the joint venture being deemed affiliated for all purposes.
Id.
Moreover, SBA has stated that, for purposes of the “three awards in two years” rule, it will focus on the date of the submission of initial offers, including price, and that an offeror would be permitted to accept one or more awards pursuant to validly outstanding offers as of the expiration of the two-year period, even if such awards resulted in the joint venture getting more than three contracts arising out of the two-year period. Thus, SBA’s new rule continues as follows:
Once a joint venture receives one contract, SBA will determine compliance with the three awards in two years rule for future awards as of the date of initial offer including price. As such, an individual joint venture may be awarded more than three contracts without SBA finding general affiliation between the joint venture partners where the joint venture had received two or fewer contracts as of the date it submitted one or more additional offers which thereafter result in one or more additional contract awards.
Id. This language is particularly important given the lengthy time that it is now taking the government to make some award decisions.
In addition, and as noted above, SBA now explicitly permits successive joint ventures between the same parties, each subject to the same three awards in two years rule:
The same two (or more) entities may create additional joint ventures, and each new joint venture entity may be awarded up to three contracts in accordance with this section.
Id. However, consistent with the new “joint venture” definitional language quoted above, SBA has cautioned that at some point too much of a good thing would be too much, and the parties would risk being found to be affiliated:
At some point, however, such a longstanding inter-relationship or contractual dependence between the same joint venture partners will lead to a finding of general affiliation between and among them.
Id.
In summary, the following principles can be derived from SBA’s new joint venture rules:
- The two year-period starts upon the date of the first contract award to the joint venture, not upon the creation of the joint venture or the submission of the first joint venture offer;
- The joint venture can keep submitting new, additional, proposals up until the joint venture receives three awards or the expiration of two years from the date of the first award, whichever comes first;
- The joint venture may not submit any further offers once the joint venture receives three contract awards or hits the two-year mark;
- The joint venture may receive more than three awards, if the initial offers, including price, for those awards were validly submitted prior to the joint venture receiving three awards or hitting the two-year mark;
- While the joint venture may not submit any new offers after the receipt of three awards or the expiration of two years from the date of the initial award, this does not mean that the joint venture ends at that point; to the contrary, the joint venture will continue until performance under all awarded contracts is complete, including any post-performance close-out; and
- The same joint venturers may establish separate additional joint ventures to pursue more work, each subject to the same three awards in two years rule; however, at some point continuation of such relationship will risk a finding that the relationship between the parties has turned into a more-lasting general relationship warranting a finding of affiliation, such that the exception from affiliation will no longer apply.
In conclusion, by eliminating the principal drawbacks of the old rules, SBA’s new joint venture rules greatly enhance the value and flexibility of joint ventures as a tool for competing for Government contract business.
Hopewell Darneille is the attorney responsible for the content of this article.