This is the second in a series of Williams Mullen Government
Contracts Alerts that analyze changes that the U. S. Small Business
Administration ("SBA") published on February 11, 2011 to
its regulations governing the 8(a) Business Development
("BD") program, the SBA's size regulations, and the
regulations affecting Small Disadvantaged Businesses
("SDB"). The SBA implemented these final rules after
issuing proposed rules and soliciting comments. In some ways, the
new regulations formalize existing SBA practices. This
Alert summarizes and provides commentary on changes that
pertain to 8(a) Joint Ventures ("JVs") and the SBA's
Mentor/Protégé program.
These revisions to 13 C.F.R. Part 124 apply to all 8(a) procurement
requirements accepted by the SBA on or after March 14, 2011.
With approval from the SBA, a certified 8(a) BD concern (an
"8(a) Participant") may enter into a joint venture
agreement ("JVA") "for the purpose of performing one
or more specific 8(a) contracts. See 13 C.F.R. §
124.513(a)(1). The SBA will permit an 8(a) JV when the 8(a) concern
lacks the necessary capacity to perform the contract on its own,
and the agreement is fair and equitable and will be of substantial
benefit to the 8(a) concern. See 13 C.F.R. § 124.513(a)(2).
The SBA has left unchanged the regulations based on size that limit
the situations in which an 8(a) JV can participate in a
procurement. Each concern must be small under the corresponding
NAICS code for the procurement, the size of at least one 8(a)
Participant in the JV must be less than half the size of the
corresponding NAICS code, and the procurement must exceed half the
size standard corresponding to a revenue-based NAICS code or, for
an employee-based NAICS code, must exceed $10 million. Parties to
JVs that do not satisfy these standards will be deemed to be
affiliated for size status purposes, which could result in the JV
being deemed not to be small and therefore not qualified for the
procurement. See 13 C.F.R. § 124.513(b).
The SBA has amended its regulations that pertain to the contents of
the JVA, performance of work requirements, and affiliation.
At 13 C.F.R. § 124.513(c), the SBA describes the minimum
requirements for a JVA. In the new regulations, the SBA addresses
the distinction between a JV that is or is not a separate legal
entity and, if it is a separate legal entity, whether a JV is
populated or unpopulated. See 13 C.F.R. § 121.103(h).
In the unpopulated JV scenario, the 8(a) and non-8(a) partners
technically function as subcontractors to the JV.
Under the revised 8(a) JV regulations: "In an unpopulated [JV]
or a [JV] populated only with administrative personnel, the [JV]
must designate an employee of the 8(a) managing venturer as the
project manager responsible for performance of the contract. In a
[JV] populated with individuals intended to perform any contracts
awarded to the [JV], the [JV] must otherwise demonstrate that
performance is controlled by the 8(a) managing venturer." 13
C.F.R. § 121.124.513(c)(2).
In addition, if the JV is a separate legal entity, the 8(a)
Participants must own at least 51% of the entity, and they must
receive profits from the JV commensurate with their ownership
interest in the JV. If the JV is not a legal entity, the 8(a)
Participants must receive profits commensurate with the work they
perform. See 13 C.F.R. § 121.124.513(c)(3) & (4).
Regarding the performance of work, the regulations continue to
require that the JV perform the applicable percentage of work
required by the SBA's regulations (typically, for a service
contract at least 50% of the cost of contract performance incurred
for personnel, and for a construction contract 15% of the cost (not
including the costs of materials)). The new regulations more
specifically require that the 8(a) partners in an unpopulated JV
must perform at least 40% of the work performed by the JV. In the
typical unpopulated JV scenario where the JV subcontracts the work
to the JV partners, the 8(a) partners must perform at least 40% of
the total work. A JV that is populated only with administrative
personnel is treated as an unpopulated JV where the subcontracted
8(a) partners must perform at least 40% of the aggregate work.
Importantly, under the revised regulations, for a populated JV, a
non-8(a) JV partner and its affiliates may not act as a
subcontractor to the JV. See 13 C.F.R. §
121.124.513(d).
The SBA also changed the regulations that pertain to the frequency
that a JV entity may be awarded contracts without the partners
being deemed affiliated for all purposes. Generally, this means
that a specific JV may not be awarded more than three contracts
over a two year period, starting from the date of the award of the
first contract. The same entities may create additional JVs, and
each new JV entity may be awarded up to three contracts over a two
year period; however, at some point a longstanding relationship
will lead to a finding of general affiliation. See 13 C.F.R. §
121.103(h). Where a JV has been approved by the SBA for one
contract, a second or third 8(a) contract may be awarded to that JV
provided an addendum to the JVA is provided to and approved by SBA
prior to contract award. See 13 C.F.R. §
124.513(e).
The opportunity to bid as a JV on both 8(a) and small business
set-aside procurements is one of the aspects that attract mentors
to the SBA's 8(a) Mentor/Protégé Program.
"Two firms approved by SBA to be a mentor and
protégé under § 124.520 of [13 C.F.R] may [JV]
as a small business for any Federal government prime contract or
subcontract, provided the protégé qualifies as
small" and has not reached certain dollar limitations as
described in the regulations. See 13 C.F.R. §
121.103(h)(3)(iii); 13 C.F.R. § 124.520(d)(1). If the
procurement is in the 8(a) Program, SBA must approve the JV. See
id. For other set-aside procurement, the JV need not be approved by
the SBA; however, in the event of a size status protest the
SBA's standard for an 8(a) JVA will apply. See
id.
Several agencies have developed their own
mentor/protégé programs. In these new regulations,
the SBA has emphasized its authority as the sole agency that can
exempt mentor/protégé relationships from SBA's
affiliation rules: "SBA firmly believes that another agency
should not be able to exempt firms from SBA's affiliation rules
(and in effect make program-specific size rules) without SBA's
approval." 76 Fed. Reg. 8222 at 8223 (Feb. 11, 2011). The SBA
revised the affiliation regulations to establish that the exemption
to affiliation exists for a protégé firm only when
the mentor/protégé relationship is established
pursuant to a Federal Mentor-Protégé program where an
exception to affiliation is specifically authorized by statute or
by the SBA under its regulatory procedures. See 13 C.F.R.
§ 121.103(b)(6) (referring to 13 C.F.R. § 121.903).
A JVA is an important relationship that has both business and
regulatory consequences. For example, the minimum requirements for
an 8(a) mentor/protégé JV generally are not adequate
to address all of the business concerns that arise from a JVA. On
the regulatory side, the SBA's changes in the regulations
regarding 8(a) JVs and mentor/protégé arrangements
provide added clarity to the standards for several existing
practices. These changes might lead to a reduction in the number of
size status protests that the SBA has received based on these
arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.