Avoid Costly Mistakes Under the New Joint Venture Rules

How Does New SBA Similarly Situated Joint Venture Rules Impact Affiliation?The new SBA joint venture agreement regulations primarily focus on broadening the exclusion from affiliation for small business size status. See 13 CFR 121.103(h).

Specifically, the new rule allows two or more small businesses to joint venture for any procurement without being affiliated with regard to the performance of that particular contract.

Whether previous joint venture agreements are exempt from the analysis under the new affiliation analysis is a common concern for many small businesses.

Reduced affiliation implications: The new SBA joint venture regulations remove the restriction on the type of contract for which small businesses may joint venture without being affiliated for size determination purposes.

SBA intended to encourage more small business joint venture arrangements. This would further the ability of small businesses to participate in government contracts without fear of affiliation.

Limitation on subcontracting: The new joint venture government contracts rule also focus on relaxing the previous limitation on subcontracting rule by exempting subcontracts to similarly situated small businesses from affiliation.

The SBA’s own language suggests that a small business prime contractor can “subcontract significant portions” of a contract to one or more other small businesses. The caveat is that the subcontractor must be similarly situated. 

Facts of each case are important: From a strategic standpoint, contractors should take a proactive approach to assessing the facts of each joint venture agreement and JV relationship. This is especially true when there could be a question about the scope of work being subcontracted and whether the subcontractor truly meets the “similarly situated” legal requirements. 

Impact of Affiliation on Joint Venture Agreement

The new rules appear to limit the exemption from SBA affiliation to work subcontracted to first-tier contractors. Prime contractors entering into a joint venture agreement should take extreme precautions to make sure that the first-tier subcontractor, who on its own merit might be determined to be similarly situated, does not also pass on a substantial amount of work to second-tier subcontractor.

Subcontract relationships still subject to scrutiny: A potential argument is a size protest could be that if the first –tier passes on a substantial amount of the first-tier subcontract to the second-tier subcontractor that such work violates the intended new rule and that the prime might be imputed with the unlawful transfer and hence no protection. 

The SBA did have some concern about work passed on from the first-tier subcontractor and shortened the analysis to only similarly situated first-tier subcontractors.  The issue becomes what penalties, if any, also flow from substantial amounts of work to a second-tier company.

These are situations that the SBA may have to address in future litigation when there is a joint venture agreement involved. However, the current rule as published could also limit the analysis to only the prime and first-tier.

Carefully plan future joint venture relationships and not be part of the initial wave of cases to address the disputes that can arise.

For help assessing your current relationships and to align your current joint venture agreement practices with the new regulations, call Watson & Associates’ government contract law attorneys at 1-866-601-5518. FREE Initial Consultation.