SBA Proposes to Remove the “Three” from the “Three-In-Two” Rule for Joint Ventures

The SBA recently proposed a rule that would amend the infamous three-in-two (AKA 3-in-2) rule for joint ventures. SBA’s current regulations provide that a joint venture can be awarded no more than three contracts over a two-year period. While SBA plans to keep the two-year lifespan for joint venture awards, it plans to get rid of the three contract maximum.

The SBA released the proposed rule in November with the aim of streamlining small business regulations. The elimination of the three-in-two rule was just one of SBA’s major revisions to the regulations. This blog post is the sixth in a line of blogs on SBA’s proposed changes (here are Part 1Part 2, Part 3, Part 4, and Part 5 of our coverage).

The three-in-two rule is codified at 13 C.F.R. § 121.103(h) and currently states that

a specific joint venture entity generally may not be awarded more than three contracts over a two year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for all purposes.

Under the rule, the two-year clock starts on the date of the first contract award. The joint venture can then be awarded up to two additional contracts during that two-year period. The three-in-two rule can be tricky, however, because SBA measures compliance with the rule for additional awards as of the date of the initial offer including price. This means that, under certain circumstances, a joint venture could be awarded more than three contracts during the two-year period. If a joint venture submits multiple proposals before its third contract award, it could still receive any of those awards without risking affiliation. But it cannot submit any additional proposals after its third award.

So under the three-in-two rule, the parties to the joint venture may be found generally affiliated if the joint venture bids on any additional contracts after its first three awards or after the two-year mark hits, whichever comes first. Even if the joint venture is awarded all three contracts during its first year, it cannot bid on any more contracts after that point (without risking affiliation), regardless of the time left on the clock. And even if the joint venture is only awarded one contract during the two-year period, it cannot bid on additional contracts once the two-year period is up.

In practice, the three-in-two rule has resulted in the same entities simply forming new joint ventures after every three contract awards. As the same two companies can continue to compete for contracts as a joint venture either way, the rule really just adds logistical steps to the process. It requires the companies to create a new joint venture and execute a new agreement in order to keep receiving awards—sometimes even within the same year, if it receives three awards by that time. While at “some point” SBA may find general affiliation under the rule based on multiple joint ventures, there is no bright line in the rule as to when that point would arise.

For an example of how the three-in-two rule works, lets say Dunder Mifflin and Schrute Farms formed a joint venture called Beet Paper Pulp, LLC. Lets also say Beet Paper was awarded three contracts on February 5, 2017, February 8, 2018, and May 6, 2018. Then, on July 20, 2018, Beet Paper submits a proposal for a DoD solicitation. Because Beet Paper had already been awarded three contracts when it submitted its proposal, the SBA may find Dunder Mifflin and Schrute Farms to be generally affiliated, even though this is within the two-year period.

SBA explains that the three-in-two rule was put in place to “capture SBA’s intent on limited scope and duration,” as “SBA believes that a joint venture is not an on-going business entity, but rather something that is formed for a limited purpose and duration.”

But it appears that SBA has realized that a limit on the lifespan of joint ventures alone is sufficient to meet this goal. The proposed rule explains:

The change removing the limit of three awards to any joint venture would relieve small businesses of the requirement of forming additional joint venture entities to perform a fourth contract within that two-year period. The proposed rule attempts to lessen the burden on small businesses, while still preserving SBA’s belief that a joint venture is not intended to be an on-going business entity.

The rule was proposed in response to growing concerns within the government contracting industry that “the three-contract limit unduly restricts small business and can disrupt normal business operations.” And this was clearly not SBA’s intent. As SBA explains:

SBA does not seek to impose unnecessary burdens on small businesses but continues to believe that a joint venture should be a limited duration vehicle. In response to these concerns, SBA proposes to eliminate the three-contract limit for a joint venture, but continue to prescribe that a joint venture cannot exceed two years from the date of its first award.

SBA’s proposed rule would amend the introductory text to 13 C.F.R. § 121.103(h) to revise the joint venture requirements and remove the three-contract limitation entirely. It would leave the two-year time limit in place, however. So, the initial contract award would still start the two-year clock. But now, the same joint venture could be awarded any of the contracts it bids on during those two years.

This means there would no longer be a need to start multiple joint ventures within the same two-year period simply because three awards were already made. In other words, the quantity of contracts awarded to the joint venture would not affect its eligibility for future awards in any way.

The proposed rule states: “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.” This would apply regardless of whether it was awarded one, twenty-one, or some other number of contracts during that time-frame.

For an example of how the proposed rule would work, lets take our example from above. Remember, the first award was February 5, 2017. Under the proposed rule, it would be just fine for Beet Paper to submit the July 20, 2018 proposal for (and even be awarded) the DoD solicitation, regardless of how many awards were made, because the proposal was submitted before the two-year mark. However, if Beet Paper submitted another proposal on a VA solicitation on February 7, 2019, it would risk affiliation because this date was past the two-year mark.

Even with the two-year limit staying in place, the proposed rule should reduce the need to form new joint venture entities. The only time two businesses would need to execute a new joint venture to receive future awards is after the two-year period from the first contract award has run.

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