Compliance With SBA Rules for UnPopulated JV and Populated Joint Ventures

The SBA has made it clear that populated joint venture government contracts will no longer be allowed. This change came about when the SBA issued its final rule about the Mentor Protégé Program.

The new unpopulated joint venture rule says that when a joint venture is formed as a separate legal entity it may not have its own separate employees (populated joint venture) to perform contracts awarded to the company. By comparison, the would mean that the populated joint venture rule would not apply if the two separate entities only formed by operation of law (without a separate legal entity).

What is a Populated Joint Venture?

A populated joint venture has employees of its own directly performing the labor.  

What is an Unpopulated Joint Venture?

An unpopulated joint venture does not use its own employees to perform contracts. Instead, an unpopulated joint venture serves as a vehicle by which the joint venture’s members can collectively serve as the prime contractor, with each joint venture member performing work with its own employees.

What Are Costly Mistakes You Want to Avoid?

Populated joint ventures resulted in affiliation issues between the joint venturers. The SBA has made it clear that populated joint venture government contracts will no longer be allowed. Porblems with joint venture formations typically occur with government staffing contracts. This change came about when the SBA issued its final rules for the Mentor Protégé Program.

The new unpopulated joint venture rule says that when a joint venture is formed as a separate legal entity it may not have its own separate employees (populated joint venture) to perform contracts awarded to the small business. By comparison, this would mean that the populated joint venture rule would not apply if the two separate entities were only formed by operation of law (without a separate legal entity).

Administrative Personnel Allowance to Populated JV Rules

The SBA regulations allow small businesses to populate only with administrative personnel but not for direct labor, but the regulations allow a joint venture to have “its own separate employees to perform administrative functions.”  13 CFR 121.103(h). If challenged, you must be prepared to show that you meet the legal standard for populated joint venture entities.

• By having administrative employees, your business entity will still be considered an unpopulated joint venture.

Other Changes to the SBA Joint Venture Rules

The new rule is more aggressive as to the requirements for government contracts to ensure that non-disadvantaged contracting firms do not unduly benefit from the 8(a) SBA Small BD program.

The JV Agreement can either be informal or formal (separate business structure). The agreement must be in writing.  The JV may not be awarded more than three contracts over a two-year period without a finding of general affiliation. However, the parties can still form a new unpopulated joint venture and start the clock over again. Be mindful of JV issues with government staffing contracts.

GET A COMPLIANT JOINT VENTURE AGREEMENT AND AVOID LIABILITY

Unpopulated – Percentage of Work Allowed

When there are joint ventures with small businesses in the  8(a) BD program, the 8(a) partner to the JV must perform at least 40% of the work performed by the JV. The rule differentiates between populated and unpopulated joint ventures and applies different requirements.
For the unpopulated JV (or JV populated only with administrative personnel) an employee of 8(a) managing venturer must be project manager. For the JV Populated with individuals intended to perform contracts, the JV must demonstrate how the performance of the contract is controlled by the 8(a) managing venture.

For the unpopulated joint venture (or populated only with administrative personnel) the amount of work done by all the partners will be aggregated and 8(a) partner must perform at least 40% of all work done by JV (includes all work done by non-8(a) partner and any of its affiliates at any subcontracting tier). For the JV Populated with individuals intended to perform contracts, the non-8(a) JV partner, or any of its affiliates, may not act as a subcontractor to the JV or any subcontractor of the JV. Get additional information about the three in two rule.

Issues Related to Unpopulated Joint Venture Security Clearances

There appears to be a few situations and cases related to unpopulated joint ventures and the government’s requirements in solicitations. Under the SBA’s new rules, the Federal Register seems to make it clear that the SBA is moving away from populated ventures except for administrative functions. However, companies should watch out for solicitations where the agency is still somehow requesting the venture to acquire the security clearance when the members of the joint venture already have the security clearances individually.

The SBA gave many reasons for moving away from populated joint ventures to include the fact that the small business can now represent its own past performance in the future. It seems counterintuitive to now require to the JV itself to apply for a separate joint facility clearance when the two companies already have clearances. In addition, it would to against the SBA’s overall plan that each participant of the joint venture carry its own weight but still the joint venture (with only administrative type employees) to carry its own facility clearance.

Under 13 CFR 121.103(h)) of the SBAs size regulations, joint ventures may be formal or informal. Every venture, whether a separate legal entity or an informal arrangement that exists between two (or more) parties, must be in writing. This clearly shows that companies have a choice to either form a new entity (formal company) or operate under a non-formal arrangement. If they choose the latter, then companies must still have a written JV agreement that complies with the regulations.

GAO has evaluated whether the requirement for a facility clearance was unduly restrictive as applied to unpopulated joint ventures. Upon review of prior GAO decisions and the National Industrial Security Program Operating Manual, GAO determined that the clearance requirement was not unduly restrictive.

GAO has taken the position that, while the facility clearance requirement for an unpopulated joint venture may be onerous, there is no exception (at least not yet) to accommodate the unique situation of a mentor protégé business venture.  This requires carefully crafting a JV arrangement to comply with both rules that are not quite in sync with each other. Management and Technical Services Alliance Joint Venture, B-416239, June 25, 2018.

There is an argument to be made that the decision is partially in contradiction to what the SBA publicly stated in the Federal Register. That is, since the SBA is moving away from populated JV to allow the participants to carry their own weight and claim past performance for the individual companies in future contracts, then the agency’s requirement that the JV by itself must acquire and maintain past performance and facility security clearances tends to rub against the grain of where the SBA is going. Not to mention, the SBA cases seem to address solicitation requirements as being too restrictive. Whereas, the real problem comes to light when the agency is silent in the solicitation but uses its own analysis after bid submission.

The bottom line is that the new rule goes to show that a joint venture need not be established as a limited liability company or other formal separate legal entity.

How Can Populated Joint Ventures Become a Problem with the SBA Mentor Protégé Program?

A populated joint venture can become a problem with the SBA Mentor Protégé Program because, when executing a Joint Venture, 13 CFR 121.103 (h) does allow a JV business to have its own separate employees to perform administrative functions. In other words,  as an issue in government staffing contracts, the JV can be populated but with employees for administrative functions only. Therefore, employees that are actually performing the contract cannot belong the JV but instead be an employee of the individual companies.

Companies should watch out for solicitations where the agency is still somehow illogically requesting the joint venture to acquire the security clearance when the members of the JV already have the security clearances individually. 

The SBA gave many reasons for moving away from populated joint ventures to include the fact that the small business can now represent its own past performance in the future. It seems counterintuitive to now require the jvitself to apply for a separate joint facility clearance when the two companies already have clearances. In addition, it goes against the SBA’s overall plan that each participant of the business venture to carry its own weight but still the joint venture (with only administrative type employees) to carry its own facility clearance.

• This is problematic when GAO takes a narrow view of Solicitation criteria requiring the Offeror to have security clearance.
• Be mindful of how you construct management and technical services alliance jv agreements

How Do You Get Started on Mentor Protégé JVs?

• Per SBA policy, the protégé and mentor must make an appointment to meet together face-to-face with the SBA Business Opportunity Specialist (BOS) that is assigned to service the 8(a) Participant;
• The purpose of the meeting is for the BOS to brief the proposed mentor and protégé on the Regulations and the SBA JV review, evaluation revisions and approval/decline process; and

• The BOS will also provide the parties the SBA Checklist and template forms for the JV application.  But do not make the mistake of thinking that the template is a fill-in-the-blank, as it must be more carefully tailored to fully meet the regulations.
• Timing of Creating the JV: When a Solicitation is identified.

GET A COMPLIANT JOINT VENTURE AGREEMENT AND AVOID LIABILITY

For additional questions or help complying with the SBA’s ban on populated JV relationships, call Watson & Associates, LLC joint venture lawyers and SBA attorneys. Call 1-866-601-5518 for a FREE Initial Consultation.