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New SBA Rules Allow Greater Use of Joint Ventures by Both Small and Large Businesses for Participation in Small Business Set Asides

March 10, 2017

For businesses who are interested in contracting with a federal agency under one of the Small Business Administration’s set aside programs, two changes in the rules and regulations in 2016 governing the SBA’s small business programs have opened a crack in the door for greater participation in one of the SBA’s small business programs by small businesses, and by large business “mentors,” through a greater use of joint ventures. 

In May, 2016, the SBA’s Small Business Size Regulations were amended to provide that “A joint venture of two or more business concerns may submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAISCS code assigned to the contract.”[i] Prior to this change, except for a limited exclusion for bundled large contracts, two or more firms operating under a joint venture or a teaming agreement would be treated as affiliated for size determination purposes and this could disqualify the joint venture as a small business. 

In addition to now allowing two or more small businesses to submit offs or bids as a joint venture for contracts having a set aside under one of the SBA’s small business programs as long as all joint venture members are small under the NAISCS code for the contract in question, the SBA’s regulations were amended in July 2016 to create its All Small Mentor-Protégé Program, which expands some of the benefits under the existing 8(a) Business Development Program’s Mentor-Protégé Program to all other small business contracting programs.[ii] While the protégé must be a small business, the mentor may be a business that has graduated from the 8(a) Business Development Program, a business in the transitional stage of program participation, another small business, or even a large business “mentor.” 

Under the new regulations, the parties wishing to participate in this new program as mentor and protégé, must first enter into a written mentor-protégé agreement meeting the requirements of the regulations and submit it to the SBA for approval.[iii] Once the agreement has been approved by the SBA and the parties are admitted into the program, the parties may then enter into a written joint venture agreement for bidding on or submitting offers for a set aside contract The new regulations do have a large number of mandatory and complex requirements which must be met and provided for under the terms of the joint venture agreement, including the requirements that the protégé must own at least 51% of the joint venture and perform 40% of the work.[iv] And the parties can be subject to debarment or suspension for a wilful failure to comply with the requirements of the new regulations.[v] 

The joint venture can be a separate legal entity such as a limited liability company. However it may not be “populated” with individuals who will be performing the work under the contract awarded to the joint venture, other than employees to perform administrative functions.[vi] Nevertheless, this new program offers new opportunities for large contractors to obtain contracts with the federal government for the procurement of services, goods or construction because it allows large contractors to team up with small contractors, as mentor and protégé, under a joint venture agreement to obtain federal contracts which are normally reserved for only small business. This program does have some limitations and other factors which may outweigh its benefits. However, the adoption of this new program is significant for the reason that it now will allow large and small businesses to compete for federal contracts as a joint venture without regard to SBA’s affiliation rules. 

Joint ventures can be formal or informal. They are similar to partnerships except they are normally limited to one project or contact and have a more limited duration. The Virginia Supreme Court has defined a joint venture as: “where two or more parties enter into a special combination for the purpose of a specific business undertaking, jointly seeking a profit, gain, or other benefit, without any actual partnership or corporate designation.”[vii] A formal joint venture usually is created by a written joint venture agreement, whereas an informal joint venture may be based on an oral agreement.  For liability purposes, a joint venture is usually treated as a partnership and its venturers are taxed as partners.  The SBA’s size regulations provide that a joint venture may consist of a separate legal entity such as a limited liability company, although this is not necessary to create a “formal” joint venture. 

While there is nothing new about using joint ventures and teaming agreements for contracting with federal agencies, their use was somewhat limited for small business set aside contracts because of the affiliation rules in existence prior to 2016.  With the two changes discussed above, it can be anticipated that joint ventures will now play a greater role in contracts having small business set aside requirements and that new opportunities will be opened for participation by both small and large contractors in such programs. 

Pender & Coward shareholder Jack Rephan focuses his practice on construction law, government contracts, public procurement and alternative dispute resolution.  For more information, please contact him at (757) 490-6278 or jrephan@pendercoward.com.

[i]  13 C.F.R.§121.103 (h)(3).

[ii]  81 Fed .Reg. 48558 (July 25, 2016), codified as 13 C.F.R. Parts 121,124-27,134.

[iii] 13 C.F.R. §125.9(e).

[iv] 13 C.F.R. §§125.18(b)(2)and (b)(3)(ii).

[v]  13 C.F.R. §128.8(i).

[vi] 13 C.F.R. §121.103(h).

[vii] Roark v. Hicks, 234 Va. 470, 362 S.E.2d 711 (1987).

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