OHA: JV Violates Two-Year Rule, Loses Award

The joint venture two-year rule always generates a lot of questions. But it’s an important one for small business joint venture members to understand and comply with. A recent decision from the Small Business Administration Office of Hearings and Appeals (OHA) shows why. In the case, a joint venture lost an award because it violated the two-year rule.

In Federal Performance Management Solutions, LLC, SBA No. SIZ-6246, 2023 (Sept. 26, 2023), OHA reviewed an award to Federal Performance Management Solutions, LLC, a joint venture (the JV) between a small business and its approved large business mentor. The solicitation sought credentialing branch support services under NAICS code 541513, Computer Facilities Management Services, with a $32.5 million size standard at that time.

A protester argued that the JV was not eligible due to violation of the SBA’s two-year rule for joint ventures. As we’ve discussed, the two-year rule is one of those deceptively simple rules that SBA has. It states:

Once a joint venture receives a contract, it may submit additional offers for a period of two years from the date of that first award. An individual joint venture may be awarded one or more contracts after that two-year period as long as it is submitted an offer prior to the end of that two-year period. SBA will find joint venture partners to be affiliated, and thus will aggregate their receipts and/or employees in determining the size of the joint venture for all small business programs, where the joint venture submits an offer after two years from the date of the first award.

13 C.F.R. § 121.103(h).

In other words, a small business joint venture should not submit offers more than two years after the first award to the joint venture, or the joint venture members will become affiliated.

The protester argued in this case, that the JV violated this very rule–and SBA agreed. The question, then, is when was the “first award” for purposes of the two-year rule? And here is where it got a little interesting.

The JV got its first award on September 15, 2018, and submitted its initial offer, including price, for the procurement at issue, more than two years later on June 7, 2022. Protester argued this was the date of the first award, but the JV disagreed. The JV attempted to argue that the September 2018 award should “not count due to the update to SBA’s regulation changing the 3-in-2 Rule to the 2-Year Rule”. Note, the Two-Year Rule, used to be the Three-in-Two Rule, which limited joint ventures to three awards within a two-year period. Since the change, joint ventures are not limited by the number of awards, only by the timing of bids. This change took effect on November 16, 2020.

The Area Office determined that the intent of the change, to the Two-Year Rule, was “not that any firms already in their two-year period received an additional two years from the date of the rule change, but rather that any firms, in their two year period, could benefit from the removal of the restriction to three awards.” And OHA agreed.

OHA concluded that “the rule provides that joint venturers will be deemed affiliated with one another if ‘the joint venture submits an offer after two years from the date of the first award’, irrespective of when that first award occurred. Applying the November 2020 Two-Year Rule to the JV is proper because the JV submitted its offer after November 2020–in 2022. OHA also noted that the two-year limit, in the rule, existed before the change to get rid of the 3-contract limit–that two-year part existed well before the 2020 change in the rule.

Because the JV submitted its offer more than two years after its first award, the two JV members were properly found to be affiliated. Because the combined receipts of the JV members were over the applicable $32.5 million size standard, the Area Office was correct in finding the JV was not a small business.

This OHA decision showcases that the Two-Year Rule can be a trap for the unwary. Unfortunately, SBA continues to keep this rule in the books. Those companies wishing to use a joint venture to go over small business contracts need to be well aware of the Two-Year Rule, and closely keep track of when a joint venture got its first award.

Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.

Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedInTwitter and Facebook