Clean-Up on Aisle “FAR”: Joint Venture and Subcontracting Plan Rules Get Modernized

Joint ventures and small business subcontracting are two issues near and dear to the hearts of many small business federal contractors. Well, the Federal Acquisition Regulation will soon be updated with respect to both of these topics. The new rules will align with SBA’s rules and remove any inconsistencies. Let’s dive in!

Joint Ventures

It has taken nearly four years for the FAR joint venture rules to be updated, but it’s good that they will be. The proposed FAR rule on joint ventures was published June 5 with comments due August 4.

A joint venture is an arrangement of two or more businesses to compete and perform as prime contractor for a contract. In the small business world, they provide an opportunity for two or more businesses to jointly compete and bring the attributes of both entities to the table.

In 2010 and 2013, Congress authorized SBA to create what would be called the All Small Mentor-Protégé Program to allow small businesses, service-disabled veteran-owned small businesses (SDVOSBs), Women-Owned Small Businesses (WOSBs), and HUBZone businesses to enter into mentor-protégé arrangements like 8(a) participants had been doing for some time.

The program allows a joint venture comprised of a protégé and mentor to seek any type of small business or socioeconomic set-aside contract for which the protégé qualifies. Two or more small businesses can also form a joint venture to go after a socioeconomic set-aside bid as long as one of the joint venture members qualifies under a socioeconomic program.

SBA established the All Small Mentor-Protégé Program in July 2016, as we discussed here. It also revised various joint venture rules at 13 CFR § 124.513 for 8(a) participants, § 125.18(b) for SDVOSBs; § 126.616 for HUBZone small business concerns; and § 127.506 for WOSB and economically disadvantaged WOSB concerns.

If implemented, the FAR rules will be aligned with the SBA rules to avoid any ambiguities. A joint venture can qualify as small or for any socioeconomic program the same as under the SBA rules. In addition, contracting officers will be required to consider the past performance of the joint venture as well as each joint venture member when evaluating a proposal.

The rule will also clarify that 8(a) joint ventures do not need to be certified. FAR 52.219-18 contained ambiguous language that some agencies had interpreted to mean an 8(a) joint venture had to be certified before submitting an offer. It will add some clarity to the timing rules for a contracting officer to ask SBA to approve an 8(a) joint venture. If SBA doesn’t approve the request within 5 business days, the agency can ask the Associate Administrator for Business Development to approve the joint venture.

Small Business Subcontracting Plans

The proposed FAR rule on small business subcontracting was published on June 3 with comments due August 3. It will align the FAR with SBA rules that “provide examples of activities that would be considered a failure to make a good faith effort to comply with a small business subcontracting plan.”

SBA’s rule was issued in November 2019. As I discussed, the new rules at 13 C.F.R. § 125.3(d) were intended to hold large business prime contractors accountable to the goals of their small business subcontracting plans and to get small businesses doing more of the subcontracting. Some examples of a large business not attempting in good faith to meet its goals included things like turning in subcontracting plan reports late, not paying small business subcontractors on time, and not maintaining records showing compliance with subcontracting plan requirements.

As the rule reminds us, “[s]mall business subcontracting plans are required from large prime contractors when a contract is expected to exceed $700,000 ($1.5 million for construction) and has subcontracting possibilities.” FAR 19.704. A subcontracting plan shows how the prime will ensure that small businesses as well as small disadvantaged businesses, SDVOSBs, HUBZone businesses, and WOSBs have an equitable opportunity to compete for subcontracts. Failure to comply can result in liquidated damages per FAR 52.219-16.

Importantly, the FAR rule will also clarify that all indirect costs, with certain exceptions, are included in commercial subcontracting plans. A commercial plan covers all of a contractor’s contracts when the contractor sells commercial products to the government. Including indirect costs should make the data clearer on what part of a contract is actually going to small businesses.

Updating the FAR rules to match the SBA rules is important so that contracting officers have a clear set of guidelines to follow in reviewing how large contractors are performing their subcontracting plans. We’ve sometimes heard that contracting officers don’t believe a rule exists unless they see it in the FAR. So, any confusion between the FAR and SBA rules could decrease the likelihood of these plans being enforced. This update is a good deal for small business subcontractors.

These changes are important because they eliminate any discrepancies between SBA and FAR rules and avoid confusion about which rules agencies will follow. If there are any questions on joint ventures or small business subcontracting plans, please reach out.