SBA recently revised its affiliation regulations in a number of ways, some of which we have already discussed here. We have likely sounded pretty upbeat about most of SBA’s recent updates thus far, as the majority do seem to be a step in the right direction–adding clarity to SBA’s rules and furthering the policies SBA seeks to enforce. Well, not trying to rain on any parades here, but at least one of SBA’s recent regulatory updates, (at least in our humble opinion) has the potential to confuse federal contractors regarding SBA’s affiliation rules. That update revised the language in SBA’s “Two-Year Rule” for small business joint ventures–though, it really didn’t change the substance or effect of the rule, at all. Let’s take a closer look.
At this point in the article, you may be (quite reasonably) asking yourself how we got on the topic of SBA’s affiliation rules, given the title of the article is focused on joint ventures (and if you are sitting there wondering what joint ventures and affiliation even are, don’t stress it; here is a Back to Basics blog on joint ventures, and here is one on affiliation, and here is one on the different types of affiliation).
Well, we are talking about affiliation here because SBA’s small business joint venture rules pertaining to the required content of a joint venture agreement (and various other socioeconomic categories of small business joint venture rules doing the same) do not actually contain any term limitations for joint ventures. SBA’s “Two-Year Rule” for joint ventures isn’t a actually joint venture rule at all. You guessed it–it is an affiliation rule. All this means is that SBA doesn’t tell joint ventures they can’t continue bidding work after two years–SBA will just find the joint venturers to be affiliates at that point, if they do so (don’t worry, we will talk more specifics of the rule shortly).
Unfortunately, that fact alone–that SBA’s term limit for small business joint ventures is essentially buried in SBA’s affiliation rules, rather than in any of SBA’s joint venture rules–leads to confusion. Indeed, many federal contractors participating in small business joint ventures seem to either be completely unaware of the two-year-term limitations or to completely misunderstand them (even prior to the recent update).
For a little bit of history on the “Two-Year Rule,” it used to be the “Three-in-Two Rule,” which limited joint ventures to three awards within a two-year period. But a few years ago–in what most everyone in the government contracting world seems to consider an excellent rule revision–SBA did away with the “three” part of the “Three-in-Two Rule” for joint ventures. While this significantly minimized the amount of paperwork and administrative burden on joint venture parties that wanted to perform more than three contracts together, it left in place the two-year term limitation.
SBA’s most recent affiliation rule, before this latest change, regarding the two-year term limitation for joint ventures said the following:
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 submitted an offer including price 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) (January 5, 2022, to May 30, 2023).
Now, this is again just in my humble opinion, but I thought the language from this version of the rule did a pretty decent job of explaining the rule. Just in the first sentence, it tells you that the two-year-clock starts from the “date of that first award” and it is the submission of “additional offers” that is prohibited after that two-year-clock ends. And the sentences that follow the first sentence here just elaborate on that point, explaining that the joint venture can continue to receive awards and perform contracts after that clock runs–it merely cannot submit more bids from that point on.
The updated language for SBA’s current “Two-Year Rule” follows:
[A] specific joint venture generally may not be awarded contracts beyond 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 the joint venture. However, a joint venture may be issued an order under a previously awarded contract beyond the two-year period. 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 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).
Interestingly, in reviewing the history of this rule, it appears that SBA actually tried inserting this language once before for a brief period between the era of the “Three-in-Two Rule” and January 2022–but ended up removing it. But now, its back again.
I copied a good portion of the rule into this quote, to make sure that it is clear that a lot of the rule actually stayed the same. But I am a bit concerned that SBA’s added language actually adds more confusion than clarification. Specifically, if anyone were to read just the first sentence copied above and stop there, it could lead to an incorrect application of this rule. It actually says that you “generally” cannot “be awarded contracts” after the two-year clock runs. Yes, it then goes on to make an exception for awards that were bid prior to the expiration of the two-year clock–which, in effect, is basically what the rule already did. It just feels (again, at least to me) like this added language increases the chances that contractors will misinterpret and misapply the rule. But I truly hope I am wrong!
Finally, I did just want to note that the new rule–like the old one–still clarifies that joint venture parties are allowed to keep working as a joint venture team once the two years is up. They just need to create a new joint venture (meaning a new agreement and a new entity, with all the registration and filing that entails) to submit any new bids.
Joint ventures provide an incredible opportunity for companies to team up for work they may not otherwise be (1) eligible for, or (2) able to perform on their own. They also give contracting agencies sort of a two-for-one special that can be really beneficial to the government and tax-payers. But they do have a lot of rules that go with them. And some of those rules might not be where you think they are. If you are not careful, you could risk affiliation.
Questions about this post, joint ventures, affiliation, or any other government contracting matter? Email us. Need legal assistance? Call us at 785-200-8919.
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