Never Guess At the SBA Affiliation Rules, You May be Wrong.
SBA joint venture rules can be confusing the say the least. Yet, many companies tend to roll the dice and then late become subject to a small business size protest and lose the profits and revenues from the awarded government contracts.
When it comes to the Three in Two Rule rule, or 3-in-2 rule, associated with joint venture arrangements, the regulations are not always clear and unambiguous. First, you must understand, and not guess, what is a joint venture under SBA small business regulations. Second, making legal mistakes as those made in a recent OHA Size Appeal, can highlight the tricky rules that government contractors and small businesses have to deal with. The following tips may help you in future federal procurement planning.
- You should always get the proper professional help when putting together your proposed team of contractors, teaming partners or qualified joint ventures.
- Do not wait until after the bid is submitted to then spend tens of thousands in litigating SBA size protests or appeals to SBA OHA.
- If you have to litigate, then find the right attorneys that understand the rules.
What is a Joint Venture Under SBA Regulations?
The definition of a joint venture for purposes of getting federal government contracts under SBA regulations means:
A joint venture is an association of individuals and/or concerns with interests in any degree or proportion consorting to engage in and carry out no more than three specific or limited-purpose business ventures for joint profit over a two year period, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally.
The usual problem is that many companies may not understand when the two years ends or begins. Guessing is where it gets costly as seen in the recent case of Size Appeal of Excellus, LLC, SBA No. SIZ-5999 (2019).
How Many Contracts Can Your Qualified Joint Venture Agreement Cover? Three in Two Rule Rule (3-in-2 Rule)
The three-in-two rule really means that your already-formed (and SBA approved) joint venture entity, if 8(a) certified) can only be awarded no more than three contracts over a two-year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for all purposes.
- If you violated this rule then your company will be affiliated and may lose the awarded contract (unless there was a full and open or unrestricted solicitation).
- The question is whether your specific set of facts allow for you to be awarded more than three contracts.
The joint venture regulations that set out the 3-in-2 rule provides, in pertinent part:
A joint venture is an association of individuals and/or concerns with interests in any degree or proportion consorting to engage in and carry out no more than three specific or limited-purpose business ventures for joint profit over a two year period, for which purpose they combine their efforts, property, money, skill, or
knowledge, but not on a continuing or permanent basis for conducting business generally.
This means that a specific joint venture entity generally may not be awarded more than three contracts over a two year period, starting from the date
of the award of the first contract, without the partners to the joint venture being deemed affiliated for all purposes. Once a joint venture receives one contract, SBA will determine compliance with the three awards in two years rule for future awards as of the date of initial offer including price.
As such, an individual joint venture may be awarded more than three contracts without SBA finding general affiliation between the joint venture partners where the joint venture had received two or fewer contracts as of the date it submitted one or more additional offers which thereafter result in one or more additional contract awards.
- The same two (or more) entities may create additional joint ventures, and each new joint venture entity may be awarded up to three contracts in accordance with this section. See13 C.F.R. § 121.103(h).
Once your qualified joint venture receives one federal government contract, SBA will determine compliance with the three awards in two years rule for future awards as of the date of the initial offer including price.
- Under this SBA joint venture regulation, you violate the 3-in-2 rule if your JV entity receives “more than three contracts over a two year period, starting from the date of the award of the first contract.”
Possible Solutions to Getting Caught Up in the Three in Two Rule (3-in-2 Rule)
(Not all creative arguments will be convincing on appeal)
The bottom line is that to be a qualified joint venture and receive more contracts under the three-in-two Rule, you cannot be awarded government contracts
In the Size Appeal of Excellus, mentioned above, the Appellant argued to SBA OHA that its transformation over time renders it a new joint venture entity for purposes of compliance with the Three in Two Rule. Specifically, in the two years applicable to the 3-in-2 rule had elapsed and then the company acquired another federal contract. See also SBA Mentor Protege Joint Venture Rules 13 CFR 124.513 & 13 CFR 121.103.
The question becomes developing a strategy that allows for form additional qualified joint venture agreements and business entities and to legally take advantage of getting more government contracts.
- The regulations do not allow for automatically regaining your status as a joint venture simply because the first two years have passed.
- As SBA emphasizes in its response to the appeal, however, the regulation clearly indicates that parties to a joint venture must establish a new joint venture if they wish to be awarded additional contracts beyond those permitted under the Three in Two Rule rule. I therefore cannot conclude that merely altering the composition of an existing joint venture is sufficient to comply with the rule.
What Happens If Your Analysis is Wrong?
There is no discretion for OHA or the SBA for that matter is to grant mercy dues to the confusing rules. OHA ruled in the Size Appeal of Excellus case, the small business awardee “still would not qualify as a small business for the instant procurement. This is true because parties to a joint venture are affiliated with one another for any procurement performed by that joint venture, unless an exception applies.” Citing 13 CFR 121.103(h)(2).
OHA stated that joint venture affiliation exception exists when each member of a joint venture is small. Citing 13 CFR 121.103(h)(3)(i).
In Size Appeal of Excellus, one of the joint ventures was not a small business. The real question is:
- How do you set up a joint venture that still has a fail-safe in place when there is a problem?
- The facts of each case, if planned correctly can avoid potential revocation of the contract award under SBA affiliation rules.
Avoid SBA Affiliation Rules
Common Problems to Avoid in Litigation and Appeals
When you try to litigate an adverse SBA size determination on appeal to SBA Office of Hearings and Appeals (SBA OHA) OHA only reviews is the evidence in the administrative record at the time the SBA Area Office made its determination. Size Appeal of Taylor Consultants, Inc., SBA No. SIZ-4775, at 10-11 (2006).
If you or your appellate lawyer attempts to introduce new evidence on appeal, then you leave yourself open to OHA’s wrath and deadly application of the “new evidence on appeal rule.
The bottom line is that evidence that was not previously presented to the Area Office at the small business protest level is generally not admissible on appeal. OHA will not consider such new evidence. See Size Appeal of Maximum Demolition, Inc., SBA No. SIZ-5073, at 2 (2009) (“I cannot find error with the Area Office based on documents the Area Office was unable to review.”) Read more about the Ostensible Subcontractor Rule.
- Planning ahead at the bid submission stage and when forming the relationship is critical to minimizing the impact of SBA affiliation rules.
- Always investigate your JV partner’s size and not just rely on its representation
- Can you get a valid exception by getting an approved mentor protégé agreement in place?
- Avoid getting held hostage when the agency suggests that get SBA approval for a joint venture or mentor protégé before bid submission.
- Assess whether you are teaming or forming a qualified joint venture with a similarly situated small business.
Exception to OHA’s New Evidence Rule 13 CFR 134.308(a)
New evidence may be admitted on appeal at the discretion of the administrative judge if “[a] motion is filed and served to establish good cause for the submission of such evidence.” 13 CFR 134.308(a).
If you have a small business size protest appeal lawyer, then he or she must be able to show that “the new evidence is relevant to the issues on appeal, does not unduly enlarge the issues, and clarifies the facts on the issues on appeal.” Size Appeal of Vista Eng’g Techs., LLC, SBA No. SIZ-5041, at 6 (2009).
- If you were supposed to or should have submitted the evidence initially at the size protest level then OHA “will not accept new evidence when the proponent unjustifiably fails to submit the material to the Area Office during the size review.” Size Appeal of Project Enhancement Corp., SBA No. SIZ-5604, at 9 (2014).
- Simply submitting a motion for new evidence to OHA does not end the inquiry
For immediate help with SBA joint venture agreement rules, SBA affiliation or matters relating to the Three in Two Rule (3-in-2), please contact our SBA size protest lawyers for a FREE Initial Consultation. Call 1-866-601-5518.