The SBA’s joint venture rules can be strict. Mistakes like failing to update a joint venture agreement, inserting ambiguous provisions in a joint venture agreement, or relying on an expired mentor-protege agreement can be costly.
Good faith mistakes are one thing–the joint venture may lose out on a contract, but probably won’t face other penalties. But when the government believes that a contractor knowingly violated the joint venture rules, the repercussions can be much more serious–as seen in a recent False Claims Act settlement involving allegations of fraud under the 8(a) joint venture regulations.
According to the Department of Justice, R&W Builders, Inc., a non-8(a) company, entered into a joint venture agreement with Global Environmental, Inc., an 8(a) participant. The companies named their joint venture Patriot Commercial Construction, LLC. The joint venture then bid on an 8(a) set-aside opportunity at Scott Air Force Base.
As required by SBA regulations, R&W and GEI apparently entered into a joint venture agreement pledging, among other things, that GEI would be the managing venturer, that GEI would employ the project manager, and that GEI would perform at least 40% of the joint venture’s work. The SBA, under the rules in effect at the time, presumably reviewed and approved the joint venture agreement.
Patriot won the contract, but the DOJ alleged that the joint venture didn’t live up to its commitments:
Immediately after Patriot received an 8(a) award on the MACC, R&W began managing the joint venture and using its own employees to complete nearly all of the work Patriot performed. Over the next two years, R&W caused Patriot to receive numerous MACC task orders set aside for 8(a) Program participants when Patriot was under R&W’s control, in violation of SBA requirements.
It is unclear from the press release how the government got wind of the alleged violations, but eventually multiple investigations were launched–by the SBA Office of Inspector General, Department of Defense Office of Inspector General, Air of Force Office of Special Investigations, and the Defense Contract Audit Agency. The government then filed an action against R&W under the False Claims Act.
R&W ultimately settled the FCA lawsuit, agreeing to pay the government $400,000. And, of course, the $400,000 isn’t the whole story–R&W undoubtedly incurred significant attorneys’ fees and may also have suffered reputational damages. (The settlement made the local news).
As is typical in such settlements, R&W does not appear to have admitted any wrongdoing, but the government didn’t mince words about R&W’s alleged violations. The Special Agency in Charge of the Defense Criminal Investigative Services Southwest Field Office, Gregory P. Shilling, said:
The Defense Criminal Investigative Service (DCIS) will investigate all allegations of abuse related to Government set aside programs designed to encourage and support veteran, woman and minority owned small businesses. Schemes like this one undermine not only the integrity of the programs, but the Government contracting process as a whole. This cannot be allowed.
The R&W settlement is an important reminder that contractors must scrupulously follow the SBA’s joint venture requirements. Especially when the government believes that a contractor knowingly violated the rules, the repercussions for violations can be very serious.
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