Despite the SBA’s new affiliation rules reducing the possibility of affiliation, small businesses must still be aware of the costly legal mistakes made during the bidding process as well as day-today operations. Your company can lose government contracts if correctly challenged in a small business size protest.
Companies consistently run into disastrous landmines with violation of SBA affiliation rules regarding, stock ownership, common management, identity of interest and other common legal theories associated with SBA regulations.
As a rule of thumb, and to avoid SBA affiliation Rules and SBA joint venture agreement violations, 8(a) certified companies must get an approval of joint venture agreements from the SBA before contract award.
Small businesses should understand that by entering into a joint venture relationship with another company, both will become affiliated unless the partners meet the limitation on subcontracting rules and are similarly situated.
What is Affiliation? Affiliation under SBA regulation exists when one business controls or has the power to
control another or when a third party controls or has the power to control both
businesses. Control may arise through ownership, management, or other business or contractual relationships or interactions between the parties. SBA’s regulations on affiliation are contained in
13 CFR 121.103.
SBA affiliation often occurs when a firm is trying to acquire a contract that is outside of its business plan or primary focus. When bidding on federal government contracts, be mindful of the RFP requirements and how each JV partner will move forward and actually perform the contract.
The SBA Office of Hearings and Appeal reversed an SBA decision merely on a technicality (since the contract was not awarded, and the SBA had already approved the JV agreement, it was estopped from later denying the Joint Venture relationship).
- Failure to follow the statutory requirements of a JV agreement can still lead to SBA affiliation violations.
- Companies that violate the spirit of the limitation on subcontracting requires can be suspended or debarred.
Generally, two firms that form a joint venture to perform a contract will be considered affiliates for purposes of that contract if they are not similarly situated. 13 CFR 121.103(h).
Both the SBA and appeals court tend to still look at over-reliance on prime contractors on their subcontractors and teaming partners. Although there is more leniency on affiliation for small businesses under the new rules, companies must still look further and assess the actual relationship.
Be Extra Careful When You Use SBA Joint Venture Agreements to Go After Government Projects: Given our day-to-day practice, and the pressure of government oversight, the SBA is finding reasons to terminate 8(a) participants because of misuse of SBA joint venture agreements.
The name of a case in which the SBA affiliation analysis was reversed is SBA No. SIZ-5315 (Jan. 24, 2012) (overturns SBA Area Office’s size determination because 8(a) firm’s joint venture agreement was approved prior to award of 8(a) contract and Area Office lacks authority to review mentor-protege agreements in the context of 8(a) procurements).
Predecessor companies: A small business firm and its predecessor company will be treated as one business concern if a substantial portion of its assets and/or liabilities are the same. Then, the annual receipts and employees of the predecessor company will be taken into account by the SBA in determining size of the new business concern.Find out more about affiliation SBA rules.
Exceptions to SBA Affiliation Rules for Joint Ventures
The SBA rules and joint venture agreement regulations recognize several exceptions to the general rule. One such exception is afforded to joint ventures formed by 8(a) BD program mentor and protégé firms. Based upon OHA case precedent and the updated SBA joint venture regulations, the court found that the Area Office has no authority to review the substance of an 8(a) mentor-protégé and SBA joint venture agreements in connection with an affiliation size protest.
There are obviously additional exceptions to the SBA affiliation rules. However, now that the new regulations are on the books, companies will need to look at the fine detail, and the SBA’s input in order to avoid costly mistakes.