Failure to Update Joint Venture Agreement Costs Mentor-Protégé SDVOSB JV a Contract

Updating your joint venture agreement is essential to maintaining compliance with SBA’s regulations and failing to update could cost you contracts.

In Stacqme, LLC, SBA No. SIZ-5976 (Dec. 10, 2018), the SBA Office of Hearings and Appeals held that a mentor-protege joint venture’s failure to update its JV agreement caused the agreement to be non-compliant with the SBA’s rules, and meant that the joint venture was ineligible for an SDVOSB set-aside contract.

Many participants in the SBA’s All Small Mentor-Protégé Program (ASMPP) form joint ventures because of the special exception from affiliation the ASMPP offers. When members of a joint venture are also parties to an SBA-approved mentor-protégé agreement, an exception to affiliation applies pursuant to 13 C.F.R. § 121.103(h)(3)(ii). This special exception says that only the protege’s size is considered, allowing a large business (even a multi-billion dollar conglomerate) to be part of a joint venture for set-aside contracts. However, to be eligible for the exception, the joint venture, particularly its joint venture agreement, must meet a number of regulatory requirements.

Of particular relevance here, a JV seeking award of contracts set aside for SDVOSBs must “[specify] the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the SDVO small business partner(s) to the joint venture will meet the performance of work requirements.” 13 C.F.R. § 125.18(b)(2)(vii). Performance work requirements here fall under 13 C.F.R. § 125.18(b)(3) and include compliance with the limitations on subcontracting under 13 C.F.R. § 125.6 and mentor-protégé workshare requirements.

Because many joint ventures are formed before members know the contracts they’ll bid on, many joint ventures provide an addendum to their JVA to be completed or updated when the joint venture decides to pursue a particular contract. But regardless of whether the information is in the original joint venture agreement or added later, each joint venture agreement must contain some information that is contract-specific, such as the parties’ respective roles in contract performance. (JVAs for indefinite contracts can be somewhat more vague with respect to certain information, which may not be available until a competition for an order occurs).

Here, STAcqMe, LLC was a mentor-protégé joint venture made up of AcqMe LLC, the protégé and SDVOSB, and Sonoran Technology and Professional Services, LLC, the mentor. The pair had an SBA-approved mentor-protégé agreement and formed a joint venture.

STAcqMe’s JVA was based on SBA’s JVA template and thus contained many, if not most, of the regulatory requirements, including language requiring compliance with the limitations on subcontracting and mentor-protégé workshare requirements. Its JVA was adopted in April of 2017.  Because STAcqMe did not know which contracts it would pursue and could not list specific tasks each party would perform under the not yet identified contracts, STAcqMe instead included a list of all contracts it was likely to bid on in an addendum to their joint venture agreement.

In 2018, STAcqMe bid on a solicitation for Squadron Operations Support at MacDill Air Force Base, Florida. Rather than update its JVA addendum to explain which tasks each party to the joint venture would perform under the resulting contract, STAcqMe merely added the RFP number to the list of contracts it sought to pursue.  Because STAcqMe didn’t list out how its members would perform specific tasks, the SBA Area Office and the OHA took issue.

STAcqMe was awarded the contract and a competing bidder protested. Upon review, the Area Office found that STAcqMe’s JVA didn’t comply with 13 C.F.R. § 125.8(b)(2)(vii) because it hadn’t been updated to include the tasks each member would provide pursuant to the contract at issue. Accordingly, the Area Office found STAcqMe large for the procurement because the affiliation exception did not apply.

STAcqMe appealed, arguing they should have been qualified for the affiliation exception because their JVA mirrored the SBA’s template. OHA did not agree.

The OHA upheld the Area Office’s determination that “[STAcqMe’s] JVA does not fully comply with § 125.18(b)(2) and (3).” The OHA took particular note of STAcqMe’s argument about reliance on SBA’s JVA template, strongly indicating that STAcqMe “could [not] properly rely upon informal guidance, such as the SBA template, in lieu of specific regulations and without seeking further clarification.” Additionally, the OHA noted that even if STAcqMe could rely on SBA’s template without also considering the regulations upon which it was based, STAcqMe should have updated its work split in accordance with that template.

There are two major takeaways from this case. First, it is of critical importance to update your JVA as you pursue specific contracts. Even if you don’t know what each party will be doing when you first draft your JVA, updating your document to reflect contracts sought is essential. Second, even if a template comes directly from SBA, it is necessary to make sure that the “informal guidance” contained in the template, and your use of it, complies with binding regulations.

If you need help drafting your JVA, or ensuring ongoing compliance with the regulations, contact us!

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