Although this seems obvious, there are cases where small businesses submitted government bids with SDVOSB Joint Venture agreements and lost when challenged by the competition in a bid protest.
Note: SBA and OHA lack jurisdiction to decide any SDVO status protest arising from a VA procurement
For example in one case, the United States Small Business Administration Office of Hearings and Appeals (SBA OHA) agreed with the SBA, that although the company’s owner qualified as is a service-disabled veteran based on documentation from the U.S. Department of Veterans Affairs, the company was still an ineligible SDVOSB because the owner lacked ownership and control.
New Joint Venture Agreement Rules: The SBA has developed new rules that became effective on August 24, 2016. The new rules make some detailed requirements for an SDVOSB Joint Venture arrangement. For example, the rules require that joint venture agreements contain the following sections.
- Purpose, Ownership, and Control
- The performance of Work – Your joint venture agreement must demonstrate that the SDVOSB partner MUST perform least 40% of the work. The work must be more than administrative or ministerial in nature. The JV Agreement must also apply the required percentages under 13 CFR 125.
- Accounting, Banking and Reporting Requirements
- Responsibilities of the Parties
- Certification Before Starting Work: before starting work on the contract SDVOSB JV prime must certify to the contracting officer and SBA that (i) the parties have entered into a Joint Venture that fully complies with 13 CFR 125.18(b)(2) and (ii) the parties will perform the contract in compliance with the performance of work requirements set forth in paragraph 13 CFR 125.18(b)(3).
JOINT VENTURE CERTIFICATIONS AND PERFORMANCE OF WORK REPORTS (13 CFR 125.8, 13 CFR 125.18, 13 CFR 126.616, and 13 CFR 127.506)
The new SDVOSB joint venture agreement rules require all JV partners to a joint venture agreement that perform an SDVOSB, HUBZone, WOSB, or small business set-aside contract to certify to the contracting officer and SBA prior to performing any such contract that they will perform the contract in compliance with the joint venture regulations and with the joint venture agreement. A
ll parties to the joint venture are also required to report to the contracting officer and to SBA how they are meeting or have met the applicable performance of work requirements for each SDVOSB, HUBZone, WOSB or small business set-aside contract they perform as a joint venture.
SDVOSB Joint Venture Agreement Contracts – Ownership and Control Needed Under 13 CFR 125
As a small business, and to qualify as SDVOSB, the veteran owner must directly and unconditionally own at least 51% of the firm. Ownership on paper alone will not overcome control issues. See 13 CFR 125.9.
To make sure that your Joint Venture contract withstands legal scrutiny, under 13 CFR 125.10(a) business owners must:
- Control both the long-term decision-making and the day-to-day management of the firm.
- In a SDVOSB JV, the Joint Venture agreement must contain a provision designating an SDVOSB as the managing venturer, and designating an employee of the managing venturer as the project manager.
In the sample case above, OHA found that although the veteran-owned 55% percent of the company’s outstanding shares, three individuals held Secured Promissory Notes which were secured by one-third of the owner’s stock.
The lesson here is that when structuring a SDVOSB joint venture agreement, you must make sure that the basic elements for SDVOSB certification are met. In addition, you must also make sure that your SDVOSB Joint Venture places the proper key employees to oversee the contract. If the court finds that the underlying ownership and control issues are lacking, you can potentially lose the contract. See information about HUBZone joint venture requirements.
For additional help with your SDVOSB Joint Venture agreement relationships, call our government small business contracts lawyers at 1-866-601-5518 for a FREE INITIAL CONSULTATION.