Stating that populated joint ventures have now been eliminated, the SBA has revised its 8(a) joint venture regulations to reflect that change.
In a technical correction published today in the Federal Register, the SBA flatly states that an earlier major rulemaking eliminated populated joint venture, and tweaks the profit-sharing piece of its 8(a) joint venture regulation to remove an outdated reference to populated joint ventures. But even following this technical correction, there are three important points of potential confusion that remain (at least in my mind) regarding the SBA’s new joint venture regulations.
If you’re a SmallGovCon reader (and I’m assuming you are, since you’re here), you know that the SBA made some major adjustments to its rules regarding joint ventures earlier this year. Among those changes, the SBA amended the definition of a joint venture to state that, among other things, a joint venture “may be in the form of a formal or informal partnership or exist as a separate legal entity.” If the joint venture is a separate legal entity, it “may not be populated with individuals intended to perform contracts,” although the joint venture may still be populated with one or more administrative personnel.
When the SBA made this change, it apparently forgot to adjust its 8(a) joint venture regulation to reflect the elimination of “separate legal entity” populated joint ventures. The 8(a) joint venture regulation, 13 C.F.R. 124.513, continued to provide that each 8(a) joint venture agreement must contain a provision “Stating that the 8(a) Participant(s) must receive profits from the joint venture commensurate with the work performed by the 8(a) Participant(s), or in the case of a populated separate legal entity joint venture, commensurate with their ownership interests in the joint venture.”
In today’s technical correction, the SBA writes that “because SBA eliminated populated joint ventures,” the reference to a populated separate legal entity joint venture in 13 C.F.R. 124.513 “is now superfluous and needs to be deleted.” The SBA has amended 13 C.F.R. 124.513 to provide that an 8(a) joint venture agreement must contain a provision “Stating that the 8(a) Participant(s) must receive profits from the joint venture commensurate with the work performed by the 8(a) Participant(s).”
So far, so good. But even after this technical correction, I have three important points of confusion regarding the SBA’s new joint venture regulations.
Are all populated JVs eliminated?
In today’s technical correction, the SBA states that populated joint ventures have been eliminated. But the regulation itself only prohibits populated joint ventures when the joint venture is a “separate legal entity,” such as a limited liability company. The SBA may believe that the employees of the joint venture partners are themselves employees of the joint venture when the joint venture is an informal partnership–but that’s unclear from the regulations and the SBA’s accompanying commentary.
Could two companies form an informal partnership-style joint venture, and then populate the partnership with employees who aren’t on either partner’s individual payroll? That might not be advisable for various reasons, but the possibility appears to be left open in the SBA’s revised joint venture regulations.
Which regulation do 8(a) M/P JVs follow for small business set-asides?
When an 8(a) mentor-protege joint venture will pursue a small business set-aside contract, the revised regulations suggest that the joint venture agreement must conform with two separate regulations. And, in the case of the profit-splitting provision that I discussed earlier, the regulations appear to conflict with one another.
Bear with me here, because this involves following a regulatory bouncing ball. Under the SBA’s size regulations at 13 C.F.R. 121.103(h), in order for an 8(a) mentor-protege joint venture to avail itself of the regulatory exception from affiliation (the exception that allows a joint venture to be awarded a set-aside contract without regard to the mentor’s size), the joint venture “must meet the requirements of 13 C.F.R. 124.513(c) and (d) . . ..” This requirement applies “for any Federal government prime contract or subcontract,” including non-8(a) contracts.
Turning to 13 C.F.R. 124.513(c), the SBA’s 8(a) joint venture regulation, we see a list of mandatory provisions that the joint venture agreement must contain. Among those mandatory provisions, as I mentioned previously, is a requirement that the parties divide profits commensurate with work share. The 8(a) firm’s work share can be as low as 40% of the joint venture’s work, meaning that the 8(a) firm could receive a 40% profit share.
So far, so good. But let’s say that the joint venture will pursue a small business set-aside contract, not an 8(a) contract. The SBA’s new regulation governing joint ventures for small business set-aside contracts, 13 C.F.R. 125.8, provides that “every joint venture agreement to perform a contract set aside or reserved for small business between a protege small business and its SBA approved mentor authorized by [13 C.F.R.] 125.9 or 124.520 must contain” a list of required provisions set forth in 13 C.F.R. 125.8(b). 13 C.F.R. 124.520 is the regulation establishing the 8(a) mentor-protege program, which means that the list of required provisions under 13 C.F.R. 125.8 applies to 8(a) mentor-protege joint ventures seeking small business set-aside contracts.
While the list of required provisions in 13 C.F.R. 125.8 is very similar to that of 13 C.F.R. 124.513, there is one major difference. Under 13 C.F.R. 125.8, the joint venture agreement must contain a provision “stating that the small business must receive profits from the joint venture commensurate with the work performed by the small business, or in the case of a separate legal entity joint venture, commensurate with their ownership interests in the joint venture.” The 8(a) protege must hold a minimum 51% ownership interest, meaning that the 8(a) must receive at least a 51% profit share.
So let’s say that an 8(a) protege and its large mentor form a limited liability company joint venture to pursue a small business set-aside. In order to avail themselves of the mentor-protege exception from affiliation, the mentor and protege are required to adopt a joint venture agreement pledging to split profits based on work share, with a potential minimum share of 40% for the 8(a) protege. But in order to comply with 13 C.F.R. 125.8, the joint venture agreement must pledge to split profits based on each party’s respective ownership interest in the joint venture, with a potential minimum share of 51% for the 8(a) protege. These provisions are inconsistent, and it’s not clear how a joint venture could readily comply with both.
Can SDVOSB Joint Ventures Use “Contingent Hire” Project Managers?
For mentor-protege joint ventures pursuing small business set-aside contracts, as well as all joint ventures pursuing 8(a), SDVOSB, HUBZone, and WOSB contracts, the SBA’s regulations require that an employee of the Managing Venturer be named the Project Manager responsible for contract performance. In its revised regulations for small business, 8(a), HUBZone, and WOSB set-asides, the SBA added a new provision stating that “the individual identified as the project manager of the joint venture need not be an employee of the small business at the time the joint venture submits an offer, but if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the small business if the joint venture is the successful offeror.”
This provision makes a lot of sense, because small businesses don’t often have under-employed Project Managers (who are often rather highly compensated) on payroll, just sitting around waiting for potential contracts to be awarded. Instead, a Project Manager is often formally hired only when a contract award is made.
Strangely, though, unlike for the rest of its small business programs, the SBA did not adopt this “contingent hiring” language in its revised regulation for SDVOSB joint ventures. That regulation, 13 C.F.R. 125.18, simply states that the joint venture must designate “an employee of the SDVO SBC managing venturer as the project manager responsible for performance of the contract.”
Did the SBA intend to prohibit SDVOSB joint ventures from using contingent hire project managers? My best guess is that this was an oversight; I don’t see any good reason to differentiate SDVOSB joint ventures from other joint ventures in this regard. But unless and until the SBA clarifies the matter, it may be risky business for SDVOSB joint ventures to rely on contingent hires to satisfy the Project Manager requirement.
Almost any major rulemaking ultimately requires some clarifications and corrections, and I’m glad that the SBA is working to clarify the rule it adopted this summer. That said, some confusion seems to remain, and I hope that further clarification is coming.