Are You Meeting SBA HUBZone Joint Venture Requirements Under 13 CFR 126.616?

Theodore P. Watson, Esq.

Historically Underutilized Business Zones / HUBZone joint venture rules are very specific and can be complex. The Small Business Administration (SBA) has initiated some new twists to the joint venture regulations that your company should be aware of.  Failure to follow them can lead a small business down a serious path that harms the company’s future. The new rules have what appear to be simple compliance terms. However, there are some tricky legal nuances that can cause a government contractor to face serious consequences. 

In one case, a small business ended up losing its contract simply because it misapplied the governing regulations. See Size Appeal of C.E. Garbutt Construction Co., SBA No. SIZ-5083 (2009) (firm violates ostensible subcontractor rule when its only contribution to the project is HUBZone status and the contract is essentially a pass-through).

The new SBA joint venture rules change the statutory framework for joint venture companies that submit an offer on a HUBZone set aside to the government that are SBA HUBZone participants.  For example, the SBA wants to make sure that only HUBZone companies can participate in a joint venture contract. The goal is to make sure that only HUBZones get the federal dollars.

What else does this mean? Large DOD contractors and non-certified small businesses would not be encouraged to participate in mentor-protégé relationships. All joint ventures must comply with the FAR limitations on subcontracting regulations and still must not violate the Ostensible contractor rules.

Do You Meet the Basic Joint Venture HUBZone Requirements to Avoid Contract Forfeiture

Tip: The SBA HUBZone regulations do not provide for approvals of HUBZone Joint Ventures. Therefore, when two HUBZone small business concerns form a JV (in accordance with 13 CFR 126.616), the SAM profile does not list its HUBZone status. If your company is qualified as a HUBZone, you can enter into a joint venture agreement with one or more other small businesses or with an SBA approved mentor authorized 13 CFR 125.9. 

If you are not an 8(a) company, but you are a HUBZone company seeking to execute a joint venture, then you would not necessarily get approval from the SBA but you must still meet the requirements of 13 CFR 124.513(c). Many companies run afoul of the rules but only find out during a small business size protest.

If you are an 8(a) certified small business you can also enter into a JV agreement with an approved mentor authorized under 13 CFR 124.520 and submit a bid for a HUBZone contract. See also 13 CFR 124.513.

The joint venture itself need not have HUBZone Certification. You can be a HUBZone JV if at least one of the venturing companies is HUBZone qualified but both have to be small businesses under the corresponding  NAICS code assigned to the HUBZone procurement or sale.

A serious problem can arise if your agreement does not contain the proper clauses. This can also be a reason to invalidate the contract. Every small business joint venture agreement to perform a HUBZone contract, including those between a mentor protégé firm that is a certified HUBZone small business, must meet the HUBZone joint venture requirements.

Difference in HUBZone Joint Ventures When Forming a Mentor Protege Relationship?

HUBZone companies can certainly form a joint venture. However, everyone knows that when forming a mentor-protege relationship with another company, they also form a joint venture agreement in connection with the mentor-protege.

Do the parties have to form a separate business entity to develop a HUBZone joint venture?

There is a huge dispute about this. Even some government agencies are confused about whether a joint venture has to through a new legal entity. According to the SBA’s own comments, the joint venture does not have to be a separate legal entity.

” SBA’s size regulations recognize that joint ventures may be formal or informal. The proposed rule amended § 121.103(h) to clarify that every joint venture, whether a separate legal entity or an “informal” arrangement that exists between two (or more) parties, must be in writing. SBA never meant that an informal joint venture arrangement could exist without a formal written document setting forth the responsibilities of all parties to the joint venture. SBA merely intended to recognize that a joint venture need not be established as a limited liability company or other formal separate legal entity.”

“If the joint venture partners do not want the associated consequences of being considered a partnership, then it might be beneficial for the joint venture to be formed as a limited liability company. Therefore, this final rule adopts the proposed language and specifies that a joint venture may be a formal or informal partnership or exist as a separate limited liability company or other separate legal entity. However, regardless of form, the joint venture must be reduced to a written agreement.”

Id.

The above is the language from the SBA comments. It would suggest that HUBZone joint ventures do not have to be a separate legal entity. 

In order for your joint venture to be able to bid on contracts reserved for small businesses, you must follow the requirements for receiving an exclusion of affiliation for contracting purposes.

Avoid Liability For Violating 13 CFR 125.6 Limitations on Subcontracting

For any HUBZone program contract to be performed between two qualified HUBZone businesses, the aggregate of the qualified HUBZone businesses to the joint venture, not each concern separately, must perform the applicable percentage of work required under 13 CFR 125.6.  Under the limitations on subcontracting rules, the work performed by the HUBZone SBC partner to a joint venture must be more than administrative or ministerial functions so that it gains substantive experience.

Do You Meet the Employee Requirements?

Many challenges to your HUBZone Status lurk in the weeds. However, the general rule is that 35% percent of your employees must reside in any HUBZone. The term reside means to live in a primary residence at a place for at least 180 days, or as a currently registered voter, and with intent to live in a primary residence indefinitely.  As parties to the joint venture, and the owner of a HUBZone company, you should be mindful that the employee can live in any HUBZone. This is a misconception that the employees must live in the specific HUBZone that the principal office is located.

How do You Avoid Possible Suspension and Debarment?

If the contracting officer has reason to believe that your company is willfully not complying with the joint venture requirements, he or she may recommend your company for suspension and debarment. This is a very slippery slope when it comes to SBA mentor protégé programs. All Contractors involved in a HUBZone Joint Venture can be more exposed because it takes two companies to comply with the SBA’s joint venture requirements. For example, if you are the managing JV partner and the other company has contributed false invoices that end up to the government for payment, then both companies may be subject to punishment or even an investigation. As a result, the joint venture, plus the participants, may be subject to suspension and debarment.

Reasons can include:

• Failure to enter an agreement that complies with 13 CFR 126.616 part c.
• Failure to perform a contract in accordance with the joint venture agreement or performance of work requirements 13 CFR 126.616 part d; or
• Failure to submit the certification required by 13 CFR 126.616 parts e or h
• Any person with information concerning a joint venture’s compliance with the performance of work requirements may report that information to SBA and/or the SBA Office of Inspector General

HUBZone Joint Venture Certification of Compliance

New SBA HUBZone joint venture regulations require offerors to self-certify that the parties’ JV agreements meet the statutory requirement. Failure to comply with this requirement could mean that the contract will be taken away. The onus is on the parties to prove compliance and not the federal government to show that they did not.

• HUBZone joint venture participants must also meet the limitations on subcontracting requirements.

As you can see, the HUBZone requirements and joint venture rules are very specific and can be complex. Failure to follow them can lead a small business down the road of being suspended or debarred.

For immediate help complying with the SBA HUBZone joint venture regulations under 13 CFR 126.616 and 13 CFR 125.6, call our government joint venture agreement lawyers at 1-866-601-5518.