A joint venture agreement must closely follow Small Business Administration rules to be compliant for a small business set-aside. And SBA interprets those rules strictly. If they are not followed, a joint venture that was up for award, can see that award go up in smoke. Here, SBA said that a joint venture involving a Service-Disabled Veteran-Owned Small Business (SDVOSB) was not compliant because it was both (a) not specific enough and (b) too detailed in providing for oversight of actions of the JV partners.
In Silotech-Apex JV, LLC, SBA No. VSBC-297, 2023 (Aug. 2023), the VA sought roof replacement services under 236220, Commercial and Institutional Building Construction, with a corresponding $45 million annual receipts size standard. It was set aside for SDVOSBs and VA made award to Silotech-Apex JV, LLC (Silotech), a joint venture. A protester argued that the joint venture agreement for Silotech was noncompliant for various reasons.
OHA looked at the following provisions in the joint venture operating agreement and found the agreement to lack the required level of detail. But it also placed too much control in the hands of the non-SDVOSB member.
Not Detailed Enough
First, a JV agreement must contain a provision “[s]pecifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance ….” 13 C.F.R § 128.402(c)(7). OHA noted that the purpose of the solicitation was roofing replacement and had definite details, “providing roofing specifics, details on buildings, drawings of the roof, and locations.” The JV agreement:
states “[e]ither venture will have the right to visit the contract site to evaluate the contract performance … [b]oth venturers will jointly have qualified site representation onsite during construction.” Section 7.0 of the JV Agreement further states “the venture” will identify key personnel, with Silotech “taking the lead”; identifies Silotech Group as the responsible member for contract negotiations; and identifies the percentages of work to be performed by each member.
OHA found this noncompliant because the agreement “does not specify the responsibilities of the parties as to contract performance” even though the solicitation included plenty of details related to contract performance areas with respect to roofing replacement.
Note that the regulation does allow a lesser showing of detail for indefinite contracts under 13 C.F.R. 128.402, which states that, “If a contract is indefinite in nature, such as an indefinite quantity contract or a multiple award contract where the level of effort or scope of work is not known, the joint venture must provide a general description of the anticipated responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance[.]” 13 C.F.R § 128.402(c)(7).
Control by Non-SDVOSB Member
Second, the JV Agreement created problems with negative control by the non-SDVOSB member. “The managing venturer must be responsible for controlling day to day management and administration of contract performance.” 13 C.F.R. § 128.402(c)(2)(i). Negative control is the ability to block actions by the SDVOSB managing venturer, such as through preventing a quorum or having a veto power.
OHA determined that the JV Agreement documents gave too much control the non-SDVOSB member:
Regarding new hires, job boards, terminations, badges, offer letters and other HR like responsibilities, the Operating Agreement states “[e]ach party shall be responsible for this task within their scope of work.” Thus, [non-SDVOSB company] ACS may exercise negative control by controlling the hiring and firing of employees, and other HR actions. ACS could conceivably exercise control by withholding enough employees from performance of the contract. OHA has repeatedly determined that the ability to hire and fire employees is considered day to day management and can result in negative control.
Therefore, Silotech (the SDVSOSB company) did not have control of the day-to-day management and administration of contract performance. Arguably, having control over one’s own employees seems within the realm of involvement “as is commercially customary” under 13 C.F.R. § 128.402. But OHA did not agree, finding that the SDVSOB managing venturer must have control over contractual performance.
Joint venture members must be careful that their joint venture agreements include all required information under the pertinent SBA joint venture regulations. But they also must be careful not to include too much information. Conceivably, the language about each company controlling its own employees could have been left out of the joint venture agreement, perhaps avoiding some of the problems raised in this decision.
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