The lifespan of a joint venture is a frequently asked question that can be hard to find in SBA’s regulations if you don’t know where to look. Alternatively, people hear about the “two-year rule” and assume that’s the answer. This question comes up frequently because, like many topics in federal contracting, the answer requires some digging into the regulations and specifically the affiliation rules.   

The often-called “two-year rule” (SBA doesn’t use that term) is found in SBA’s regulation for affiliation based on joint ventures in 13 C.F.R. § 121.103. (If these are brand new topics for you, check out our Back to Basics blogs on affiliation and joint ventures). Rather than provide an exact end date to a joint venture’s existence, SBA provides a window of time where the venturing partners can submit bids as a joint venture without being deemed affiliated. To phrase the FAQ differently,

FAQ: How long can venturing partners conduct business as a joint venture before being deemed affiliated by SBA?

The regulation states that “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.” (emphasis added). People often stop reading the rule at this point, assuming they’ve got their answer. If you just read that first part, you might think: The two-years starts on the date of first award and a joint venture can’t be awarded a contract after two years. Simple enough.

But if you keep reading, SBA provides more nuance. Just like in school, always read the whole question before starting your answer. “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.” (emphasis added).

The regulation first says the joint venture “generally may not be awarded contracts beyond a two-year period,” but following this, the rule says that the joint venture just can’t submit offers beyond the two-year period. The joint venture may still “be awarded one or more contracts after that two-year period.” Here’s an example that’s adapted from some of SBA’s examples in the regulation, but simplified a little.

Example: Joint Venture AB receives its first contract on September 1, Year One. Under the two-year rule, Joint Venture AB may submit additional offers as a joint venture until September 1, Year Three. If an offer is submitted in this two-year window, Joint Venture AB may continue accepting awards on those bids after September 1, Year Three without the venturers being deemed affiliated.  Joint Venture AB may not submit bids after September 1, Year Three, or it will be found affiliated.

One last part of the regulation to note is that partners can create a new joint venture together after the two-year period has expired without being affiliated. While this seems like a “loophole” for venturing partners to keep making new joint ventures together, there is a risk. SBA warns that “such a long-standing inter-relationship or contractual dependence between the same joint venture partners may lead to a finding of general affiliation between and among them.” However, SBA generally allows joint venture partners to form multiple joint venture entities without any negative repercussions. Unfortunately, the two-year rule can act as a trap for the unwary, since it’s so easy to circumvent by creating a new joint venture entity.

The two-year rule is essentially a time frame for the joint venture to submit offers after its first award. The joint venture may still continue receiving awards on those offers well beyond two years.

If you have questions, please email us. If you need legal assistance, call us at 785-200-8919.

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