8(a) JV Agreement Denied: Participant Brought Only Its 8(a) Status to Relationship

When companies seek to join forces under an 8(a) joint venture agreement, they often focus on meeting the SBA’s specific joint venture requirements. In doing so, however, they might overlook the threshold goal of an 8(a) joint venture: to allow an 8(a) to develop the necessary capacity to perform a contract.

As a recent Court of Federal Claims decision shows, overlooking this requirement can cause an 8(a) joint venture agreement to be rejected by SBA—and lead to the joint venture being found ineligible for an award.

The pertinent facts of CR/ZWS LLC v. United States, No. 18-271C (Fed. Cir. 2018) are fairly straightforward. Charitar Realty (an 8(a) participant) and Zero Waste Solutions (a graduated 8(a) participant) formed an SBA-approved joint venture under the 8(a) program in 2016. In 2017, the United States Army issued a solicitation for refuse and recycling services at Fort Riley, and the joint venture wanted to submit a proposal for this work. The companies executed a written amendment to their joint venture agreement (the fifth since that agreement’s approval) that would allow them to bid on the work at Fort Riley.

The parties’ proposed effort under Amendment 5 was impacted heavily by Zero Waste Solutions’ status as the incumbent contractor. For example, ZWS pledged to provide nearly $650,000 worth of equipment to perform the work, while Charitar would provide “equipment to administer the contract valued at $50,000.” Charitar, moreover, would largely provide managerial services, while ZWS would perform much of the labor required. And for the work that Charitar would perform, its personnel would simply roll-over from ZWS’s incumbent contract.

After CR/ZWS was awarded the contract, it sought approval for Amendment 5. The SBA Area Office denied this approval, saying that the amendment raised questions of control and technical requirements. In this regard, the Area Office cited SBA’s 8(a) joint venture regulations, which state:

A joint venture agreement is permissible only where an 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. However, where SBA concludes that an 8(a) concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status, SBA will not approve the joint venture arrangement.

13 C.F.R. § 124.513(a)(2). Quite simply, the Area Office reviewed the joint venture agreement (as amended) and concluded that Charitar was “wholly dependent on ZMS for performance” and thus brought very little to the relationship other than its 8(a) status.

CR/ZWS then challenged the SBA’s decision in federal court, alleging that the denial of its joint venture agreement was arbitrary and capricious and violated SBA’s regulations. The Court of Federal Claims rejected this challenge, writing:

In the end, what is ultimately at issue here is whether the amendment to the joint venture agreement between Charitar and ZWS promotes the underlying purposes of the Business Development Program[.] That regulation authorizes an 8(a) concern that would otherwise lack the capacity to perform a contract to partner with a more experienced, non-8(a) concern through a “fair and equitable” joint venture agreement, and authorizes an agency to award the contract to the joint venture. But in order for the joint venture to be eligible for a contract set aside for 8(a) concerns, the joint venture arrangement must provide a “substantial benefit” to the 8(a) concern—i.e., it must enhance the 8(a) concern’s future capacity to win and perform similar contracts on its own. At the same time, to ensure that the 8(a) concern will provide more than window dressing, which would allow the non-8(a) concern to qualify for a contract award that it would not otherwise be eligible to receive, the SBA requires the 8(a) concern to bring more to the table than its 8(a) status.

Because the joint venture agreement did not adequately show that the relationship was in Charitar’s interest, it was properly denied.

***

Interestingly, the justification to deny CR/ZWS’s joint venture agreement amendment sounded like an ostensible subcontractor analysis: because ZWS is the ineligible incumbent, and because Charitar was largely dependent on ZWS for the needed personnel and equipment, the SBA concluded that it would not benefit under the proposed relationship. In any event, CR/ZWS serves to remind 8(a) joint venture participants that their joint venture agreement must explain how the relationship will benefit the 8(a) participant.