SBA Eases Joint Venture Rules for Disadvantaged Businesses (Small Businesses) on Federal Contracts

Companies that do not themselves qualify for federal preferences as small, disadvantaged businesses can help in joint ventures with other qualified companies and enjoy many of the benefits these programs offer.

Federal agencies annually reserve over $12 billion in federal contracting opportunities for award to “8(a)” companies, which are businesses that have successfully applied for determination of being socially and economically disadvantaged under Section 8(a) of the Small Business Administration (“SBA”) Act.  In addition, other categories of disadvantaged, small businesses, such as companies owned and controlled by service-disabled veterans, qualify for a growing allotment of set aside contracts and other preferences.

In years past, a hard and fast SBA rule prevented larger businesses, or even small businesses that did not qualify as disadvantaged, from associating with 8(a) and other disadvantaged businesses in the performance of set-aside contracts.  The rule is called “affiliation,” which comes from the notion that if a large or non-disadvantaged business has a significant involvement or becomes too intertwined with the operations of a qualified disadvantaged business, the SBA will treat the two as if they were one company.  If the rule applies, the otherwise qualified small disadvantaged business will no longer be eligible for federal set-asides and other benefits.

The affiliation rule puts disadvantaged businesses at an even greater disadvantage by preventing DBEs from doing what normal start-ups might do by teaming or forming a joint venture with an established company to gain qualifications needed to actually win a federal contract.  Therefore, in 1998, the SBA created two carefully-drawn exceptions to the affiliation rule, which it redefined and clarified in 2004.  The two exceptions are for the mentor-protégé program and competitive joint ventures.  The effect has been to let more 8(a) companies and other disadvantaged businesses participate in even larger contracts, and to allow more non-disadvantaged companies to also participate in the set-aside solicitations.

On May 31, 2016, the SBA published a lengthy final rule that implements the long-awaited changes mandated by the National Defense Authorization Act (“NDAA”) of 2013.[i]  This Act makes it easier for small disadvantaged businesses to form small joint ventures (“JVs”) to compete for the government procurement and removes prior, and often confusing, restrictions.

The SBA proposed to amend Section 121.103(h) of the SBA Act to broaden the exclusion from affiliation for the small businesses statute to allow two or more small businesses to joint venture for any procurement without being affiliated with regard to the performance of that procurement requirement.  This rule expands the exception to affiliation for all joint ventures where both concerns making up the JV are individually “small” (qualifying disadvantaged business entities).  Each of the small businesses, however, must not otherwise be affiliated for different reasons.

Presently, in addition to the exclusion from the affiliation given to an 8(a) protégé firm that joint ventures with its SBA-approved mentor for any small business procurement, there is also an exclusion from affiliation between two or more small businesses that seek to perform a small business procurement as a JV where the procurement is bundled or large (i.e., the value of the procurement is greater than half the size standard corresponding to the NAICS code assigned to the contract-revenue based size standard, or $10 million for employee-based size standards).

This new rule expands and further clarifies the exception to the affiliation regulation, allowing small businesses to joint venture as long as both are small, regardless of the value of the procurement.  Thus, the size of the procurement no longer presents a restriction for disadvantaged DBEs to JV.

Comment:  This final rule takes effect on June 30, 2016.  If a  Small Business Prime Contractor can subcontract significant portions of the contract to one or more other small businesses, and, in doing so, meet the performance of the work requirements for small business (without being affiliated with the small business subcontractor(s)), it is the SBA’s view that similar treatment should be afforded to joint ventures, so that a joint venture of two or more small businesses could perform a procurement requirement as a small business when each is individually small.

[i] This regulation change comes to us via the Federal Contracting Blog by Michael Payne and Robert Ruggieri (June 3, 2016).

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