Joint ventures are an increasingly common teaming structure in small business federal government contracting. They offer small businesses (and even some SBA-approved large business mentors) the opportunity to perform set-aside contracts as part of a team allowed to leverage the size and status(es) of its managing venturer. But with their growing popularity and obvious appeal amongst the small business community comes the often-asked question of how to calculate a joint venture’s receipts towards its venturers’ sizes. This GovConFAQ provides the answer.
To take advantage of federal set-aside contracting opportunities, contractors must maintain their small business size status (or compliantly team-up with a small business that does). And to take advantage of federal set-aside contracting opportunities through a joint venture, each venturer must maintain its small business size status (unless the venturer is an SBA-approved mentor to a protege that does). But regardless, its inevitable that every joint venture must ensure at least one contractor’s small business size status is accurately calculated under SBA’s regulations to receive any piece of the set-aside pie.
As such, it is crucial that small businesses know exactly how the annual receipts of their joint ventures will impact their size calculations and size status under SBA’s rules. But one reason this question is so common and sometimes subject to confusion is that SBA’s regulations for calculating size don’t speak to the treatment of joint venture receipts. In fact, the answer comes directly from SBA’s affiliation regulations instead. Those regulations state:
For size purposes, a concern must include in its receipts its proportionate share of joint venture receipts. Proportionate receipts do not include proceeds from transactions between the concern and its joint ventures (e.g., subcontracts from a joint venture entity to joint venture partners) already accounted for in the concern’s tax return.
Additionally, because some NAICS codes–and thus, some federal contracts–calculate a company’s size based on number of employees instead of average annual receipts, SBA’s affiliation regulations address joint venture calculations in that context too. They also state, “[i]n determining the number of employees, a concern must include in its total number of employees its proportionate share of individuals employed by the joint venture.”
So, that’s it–nice and easy–it’s simply the “proportionate share” of each venturer’s receipts or employees that such venturer must include in its size calculations! And believe it or not, at one point many years ago, that really was “it”–that was as much as SBA’s rules had to offer.
Indeed, prior to SBA’s 2020 final rule on the subject, there was confusion in the industry about the intended meaning of “proportionate share” here–specifically, whether “proportionate share” was tied to each venturer’s share of ownership in the joint venture or workshare. But fortunately, SBA took note of this confusion and supplemented the rule to clarify that “proportionate share” in this context was generally tied to workshare, not ownership. SBA updated, current rule explains, “[f]or the calculation of receipts, the appropriate proportionate share is the same percentage of receipts or employees as the joint venture partner’s percentage share of the work performed by the joint venture.”
So, in general, when calculating your size status under SBA’s small business regulations, you must include the share of any joint venture’s annual receipts (for receipt-based size standards) or number of employees (for employee-based size standards) proportionate to your company’s workshare for the joint venture.
But the reason I note “in general” here is there is one additional consideration SBA’s current rule now takes into account based on whether the joint venture qualifies as unpopulated or populated. And if you are not familiar with this final piece of the puzzle or caveat to the general rule here, don’t worry. That is likely because SBA actually did away with populated joint ventures some time ago–and only recently, decided to resurrect populated joint ventures, but only in limited circumstances.
So, the current SBA affiliation regulations now include the following caveat explaining exactly how to calculate size accounting for a populated joint venture’s receipts or employees–and in this case, “proportionate share” is actually tied to ownership. The rule states the following:
For a populated joint venture (where work is performed by the joint venture entity itself and not by the individual joint venture partners) the appropriate share is the same percentage as the joint venture partner’s percentage ownership share in the joint venture. For the calculation of employees, the appropriate share is the same percentage of employees as the joint venture partner’s percentage ownership share in the joint venture, after first subtracting any joint venture employee already accounted for in one of the partner’s employee counts.
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