Check Your Joint Venture Agreements: Under-the-Radar SBA Change Could Cause Problems

Joint ventures operating under the SBA’s All Small Mentor-Protege Program may need to adjust their joint venture agreements because of a little-noticed change to SBA’s joint venture rules.

In its recent final rule, effective November 16, SBA amended two of the mandatory requirements for mentor-protege joint ventures pursuing small business set-aside contracts. SBA did not make corresponding changes to the joint venture rules for SBA’s four major socioeconomic programs–meaning that a joint venture agreement that complies with the small business set-aside rules may not be valid if the joint venture pursues 8(a), SDVOSB/VOSB, HUBZone or WOSB/EDWOSB contracts (and vice versa).

Under the All Small Mentor-Protege Program, a mentor and protege can form joint ventures to pursue any opportunity for which the protege qualifies, by size and socioeconomic status. If the joint venture wishes to pursue a small business set-aside contract, and the mentor is a large business for purposes of that contract, the mentor and protege must execute a joint venture agreement containing a number of mandatory provisions, which are set forth in 13 C.F.R. 125.8.

Omit even one of the many mandatory provisions, and the joint venture doesn’t qualify as small. This means that if the joint venture is named the awardee, but its size is challenged, the joint venture will lose the contract.

Given the high stakes involved, it’s essential to make sure that every joint venture agreement contain all of the mandatory requirements. And that is why it is very important to be aware that two of the mandatory requirements in 13 C.F.R. 125.8 changed on November 16. (The SBA also tweaked some of the other mandatory requirements, but in my opinion, these tweaks probably should not affect the validity of joint venture agreements that use the pre-November 16 language).

Before November 16, 13 C.F.R. 125.8(b)(2)(xi) and (xii) required each joint venture agreement to contain these provisions:

(xi) Stating that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to SBA not later than 45 days after each operating quarter of the joint venture; and

(xii) Stating that a project-end profit and loss statement, including a statement of final profit distribution, must be submitted to SBA no later than 90 days after completion of the contract.

But on and after November 16, 13 C.F.R. 125.8(b)(2)(xi) and (xii) impose substantively different requirements:

(xi) Stating that annual performance-of-work statements required by paragraph (h)(1) must be submitted to SBA and the relevant contracting officer not later than 45 days after each operating year of the joint venture; and

(xii) Stating that the project-end performance-of-work required by paragraph (h)(2) must be submitted to SBA and the relevant contracting officer no later than 90 days after completion of the contract.

Paragraphs (h)(1) and (2), cited in the new rule, require reports regarding the joint venture’s compliance with the performance-of-work rules: that is, the limitations on subcontracting and rules governing the joint venture’s internal work split.

The SBA’s change is likely to cause problems, in two ways.

First, many joint venturers rely on template agreements, essentially reusing the same joint venture agreement repeatedly. But if a mentor-protege joint venture bids on small business set-aside work after November 16 and doesn’t include the new performance-of-work reporting provisions in its joint venture agreement, the joint venture is likely ineligible. Templates created to comply with the old rules are outdated, and joint venturers should not rely on them to pursue small business set-aside contracts.

Second, for whatever reason, the SBA did not make corresponding changes to its separate joint venture regulations for 8(a), SDVOSB/VOSB, HUBZone and EDWOSB/WOSB programs. All four of these regulations continue to require the submission of financial statements and profit-and-loss statements.

If a mentor-protege joint venture intends to bid on both small business and socioeconomic contracts, the joint venturers will need to be very careful that the “right” provisions are included in the JV agreement for each bid. This can be accomplished with carefully-crafted language in the joint venture agreement, or by simply forming two unpopulated JVs: one to pursue small business set-asides; the other to pursue socioeconomic contracts.

In the last few months, it seems like almost every week has brought major changes in government contracting rules affecting small businesses, from WOSB certification, to the consolidation of the SBA’s mentor-protege programs, to an extra year for 8(a) participants. With so much news, it’s little wonder that this seemingly dry, boring change to 13 C.F.R. 125.8 has garnered almost no attention. But don’t overlook it–your joint venture’s eligibility may hang in the balance.

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