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.