HUBZone Joint Ventures: FAR Council Gets It Wrong

The FAR Council’s proposed update to the limitations on subcontracting, and the DoD’s subsequent FAR deviation, have been met with widespread approval by small contractors.

But for HUBZone Program participants, the proposed rule and DoD deviation contain a glaring problem: a requirement that the HUBZone member of a joint venture take sole responsibility for meeting the applicable limitations on subcontracting.  This requirement, which doesn’t apply to joint venturers in other socioeconomic programs, is unfair to HUBZones, and at odds with SBA regulations.

Before delving into the FAR Council’s proposed rule, a little background may be helpful.  Under the SBA’s regulations, when a joint venture will pursue a set-aside contract, two separate work share requirements apply.

First, the SBA has a comprehensive regulation, 13 C.F.R. 125.6, governing the division of work between a prime contractor and its subcontractors.  When the prime contractor is a joint venture, the regulation applies to the division of work between the joint venture (which, as the prime contractor, performs work through its members) and third-party subcontractors.

You don’t have to take my word for it–the SBA  has regulations on this stuff.  For the HUBZone Program, 13 C.F.R. 126.616(d) says that the joint venture is responsible for meeting the limitations on subcontracting:

(1) For any HUBZone contract to be performed by a joint venture between a qualified HUBZone SBC and another qualified HUBZone SBC, the aggregate of the qualified HUBZone SBCs to the joint venture, not each concern separately, must perform the applicable percentage of work required by [Section] 125.6 of this chapter.

(2) For any HUBZone contract to be performed by a joint venture between a qualified HUBZone SBC and a small business concern or its SBA approved mentor . . . the joint venture must perform the applicable percentage of work required by [Section] 125.6 of this chapter  and the HUBZone partner to the joint venture must perform at least 40% of the work performed  by the joint venture.

As you can see, the SBA regulation offers two alternatives.  The first applies when the joint venture consists of two or more HUBZone companies–which, in my experience, is rather unusual.  The second, more ordinary, circumstance applies when a HUBZone company joint ventures with a non-HUBZone small business or SBA-approved mentor.  In either case, the joint venture members, together, constitute the “prime contractor” for purposes of the subcontracting limits. 

That’s the first work share requirement: the limitations on subcontracting.  The second is the internal work share requirement within the joint venture itself.

While the joint venture, as the prime contractor, is responsible for meeting the limitations on subcontracting, the SBA doesn’t want joint ventures to be vehicles for pass-throughs.  So the SBA’s regulations require that the joint venture member holding the “right” certification (such as HUBZone) perform at least 40 percent of the joint venture’s work.  For HUBZone joint ventures, as you saw, 13 C.F.R. 126.616(d)(2), says that “the HUBZone SBC partner to the joint venture must perform at least 40% of the work performed by the joint venture.”

As an example of how these two requirements would work in real life, consider a joint venture between a HUBZone company and its non-HUBZone All Small mentor.  The joint venture is awarded a $1 million contract for services.  Under 13 C.F.R. 125.6, the joint venture, as prime contractor, may subcontract up to $500,000 to entities that are not similarly situated. 

Assuming that the joint venture subcontracted the maximum $500,000 to a non-HBUZone subcontractor, the joint venture members must perform the remaining $500,000.  Of this amount, the HUBZone protege would have to perform at least $200,000 (40% of $500,000, if my mental math is correct).

That brings us to the FAR Council’s recent proposal and DoD deviation.  The FAR Council proposes to revise FAR 52.219-4, which enacts the HUBZone Price Evaluation Preference.  That clause provides that, to receive the price preference, a HUBZone company must agree to comply with the limitations on subcontracting.  

The proposed revision keeps this requirement (as it should), but that’s where things get odd.  Instead of amending the clause to refer to FAR 52.219-14, where the FAR Council otherwise consolidates all of the limitations on subcontracting, the proposed revision to FAR 52.219-4 spells out the subcontracting limitations in Paragraph (d).  Then comes Paragraph (e), which says:

(e) A HUBZone joint venture agrees that the aggregate of the HUBZone small business concerns to the joint venture, not each concern separately, will perform the applicable requirements specified in paragraph (d) of this clause.

That’s it.  Notice a little something missing?  The proposed Paragraph (e) uses the SBA’s language for joint ventures involving multiple HUBZone companies, but completely omits the much more important language governing joint ventures between HUBZones companies and non-HUBZones, including SBA-approved mentors.

Without that important language, Paragraph (e) would seem to apply to any HUBZone joint venture seeking to take advantage of the price preference clause.  And applying this language to all HUBZone joint ventures seems directly at odds with the SBA’s regulation.

Let’s return to the example above of a joint venture between a HUBZone company and its mentor, but this time let’s assume the joint venture avails itself of the HUBZone price preference and is awarded an unrestricted contract.  As before, the value of the contract is $1 million and the joint venture chooses to subcontract $500,000 to a non-HUBZone company.  So far, so good.

We’re again left with $500,000.  So how much must the HUBZone company self-perform?  The SBA regulation would say $200,000.  But as I read the FAR Council’s proposal, revised FAR 52.219-4 will require the HUBZone protege to perform all $500,000 of the joint venture’s work, with nothing performed by the mentor.  After all, how else can the “HUBZone small business concerns to the joint venture” meet the 50% requirement?

Treating HUBZone joint ventures this way is inconsistent with the remainder of the FAR Council’s proposal.  In proposed FAR 52.219-14(f), which would apply to all set-aside contracts, the FAR Council sets forth the specific limitations on subcontracting in Paragraph (e), then uses this language:

(f) A joint venture agrees that, in the performance of the contract, the applicable percentage specified in paragraph (e) of this clause will be performed by the aggregate of the joint venture participants.

Yes!  That is exactly right!  The “aggregate of the joint venture participants” should be responsible for meeting the performance of work requirements–not some subset of the aggregate, like the HUBZone member.  

The FAR Council’s “aggregate of the HUBZone small business concerns” language applies only to the use of the HUBZone price preference, and not to HUBZone set-aside contracts.  So is this language really inconsistent with the SBA’s regulation?

My highly professional opinion is: “darn tootin’ it’s inconsistent.'”  The SBA’s regulation applies to any “HUBZone contract,” which is broadly defined, in another SBA regulation, to include “[a]wards to qualified HUBZone SBCs through full and open competition after a price evaluation preference is applied to an other than small business in favor of qualified HUBZone SBCs.”  By proposing to require the “aggregate of the HUBZone small business concerns” to meet the performance requirement, the FAR Council has, in my view, created a clear conflict between its proposed rule and the SBA’s active rule.

The FAR rule, of course, is just a proposal.  But the DoD’s deviation is in effect right now, and it contains the same problem.  Even worse, the DoD’s deviation maintains this “aggregate of the HUBZone SBCs” language in FAR 52.219-3 (Notice of HUBZone Set-Aside or Sole Source Award), which applies to all HUBZone contracts.  At DoD, then, the deviation would seem to effectively render HUBZone joint ventures all but useless.

The restriction the DoD uses exists in the current FAR, from an era in which the SBA only allowed HUBZone firms to joint venture with other HUBZones.  But the SBA eliminated this requirement in 2016, and one would have thought that a late-2018 FAR deviation would take the same approach.  That said, I can only criticize the DoD so much: the class deviation ain’t perfect, but it’s better than nothing, and will eventually be superseded by a final FAR rule.

Now, some of my gentle readers will undoubtedly think I’ve wasted a lot of ink (or rather, pixels) on a relatively minor issue.  And in the grand scheme of things, this problem may not rate as highly as some others, like that still-missing SBA women-owned small business certification program.

But the Government has consistently fallen well short of its 3% HUBZone goal in recent years, “A” grades notwithstanding.  The SBA, to its credit, has been taking action to try to fix the problem.  The SBA has removed HUBZone-specific restrictions, like the former requirement that HUBZones could only joint venture with other HUBZones.  More recently, the SBA proposed a major overhaul of the HUBZone Program’s rules, in a thoughtful proposed rule that recognizes many of the program’s structural shortfalls. 

The SBA’s intention, in both regulation and policy, is to eliminate unnecessary “HUBZone only” regulatory roadblocks.  Unfortunately, when it comes to HUBZone joint ventures, the FAR proposal and DoD deviation maintain one of those roadblocks.  

Hopefully, the final FAR rule will eliminate this wrongheaded restriction.  In the meantime, though, HUBZone joint ventures find themselves in the same spot they have been for the last several years: uncertain which rule to follow.  For years, I’ve been asked which limitations on subcontracting rule a small business should follow: the FAR, or the SBA?  The answer hasn’t been clear.

HUBZone joint ventures are now looking at a disconnect between the FAR Council’s proposal and DoD deviation, on the one hand, and SBA regulation, on the other.  Which governs?  Beats me.  

I’ll keep you posted.