The Importance of Updating a JV Agreement for New Opportunities
Joint ventures are a popular option for government contractors looking to increase their contractual opportunities. By combining their capabilities and experience, the JV partners are often able to submit proposals and compete for awards on procurements that the partners would not be able to pursue on their own. For small business contractors entering into a JV with the intention of pursuing a small business set-aside, it is important that the JV partners are cognizant of the SBA requirements for JVs.
There are many different issues that can trip up contractors pursuing work under a JV, foremost of which is affiliation. Every federal solicitation includes a North American Industry Classification System (NAICS) code that establishes the size standard for that procurement, with the threshold either being a limit on annual receipts (e.g., $15 million) or number of total employees (e.g., 500 employees). To be considered a small business under the procurement, an offeror needs to fall under the applicable NAICS threshold. Generally, the partners in a JV are considered to be affiliated for the procurement at issue. This means that in calculating the annual receipts for a JV, the total annual receipts for all JV partners are aggregated. This works the same way for NAICS codes with employee-based thresholds.
Fortunately for small businesses, there are exceptions to the affiliation for JVs with small business partners. Under these exceptions, e.g., a JV formed between a mentor and protégé pursuant to an SBA approved mentor-protégé agreement, the JV can compete for a specific procurement as a small business without the partners to the JV being considered affiliated. If the JV agreement meets the applicable SBA regulations, the JV partners can proceed with pursuit of the set-aside without affiliation concerns.
However, under the so-called 3-in-2 rule, a JV can generally only receive three contract awards within a two year period (starting with the date of the initial award) before the parties would be considered to be affiliated for all procurements. The flip side of the 3-in-2 rule is that a single JV can be used for multiple contract opportunities. There could always be a finding of affiliation for other reasons, but if the JV does not violate the 3-in-2 rule, the JV partners could pursue and win multiple contracts through the JV and would not be found to be affiliated solely due to participation in the JV. Where things get tricky is that the SBA regulations require JV agreements to be written for a specific procurement. This means the JV partners would need to amend the JV agreement, typically through addendums, that address each new contract opportunity the JV is pursuing. A recent size protest decision issued by the SBA Office of Hearings and Appeals (“OHA”) provides an illustration of this issue, demonstrating how a failure to properly amend the JV agreement can trip up a JV and cost it a contract.
In ASIRTek Federal Services, LLC (SBA No. VET-269), the issue was an award made by the Air Force to a JV under a solicitation set aside for Service-Disabled, Veteran-Owned Small Businesses (“SDVOSBs”). SBA regulations provide that a JV can qualify as an SDVOSB as long as the managing venturer is a qualified SDVOSB, the SDVOSB and all other JV partners are small under the solicitation’s NAICS code, and the JV agreement meets all requirements for SDVOSB JVs. It is this last point that caused issues for the JV in this case.
The eligibility of a small business, including JVs, is determined as of the date the offeror submits its offer on a procurement. The JV awardee had originally set up its JV agreement for the pursuit of a contract set aside for 8(a) small businesses. However, the JV failed to properly amend the JV agreement prior to submitting its offer for the SDVOSB set-aside. Thus, all contract references in the JV agreement concerned an old 8(a) procurement. The JV partners did draft an addendum to the JV agreement that addressed the SDVOSB solicitation, but it was not signed by both JV partners until approximately 18 months after the JV submitted its proposal for the SDVOSB opportunity. OHA determined that because the addendum was not executed prior to the submission of the JV’s proposal, it was not relevant to the question of whether the JV was an eligible SDVOSB.
Ultimately, OHA found that because the JV agreement did not address the SDVOSB procurement at issue, or even any SDVOSB procurement, the JV agreement did not meet the relevant SBA requirements. As a result, OHA found that the JV did not qualify as an SDVOSB, and was thus ineligible for award of the Air Force contract. OHA noted that even if the late addendum was executed prior to proposal submission, it would not have cured the deficiencies in the JV agreement. This is because the addendum did not specify the respective roles and responsibilities of the JV partners for performance of the contract, which is a requirement for a proper JV agreement.
This case shows the importance of JVs pursuing small business set-asides understanding the requirements for JV agreements, and being diligent in updating the JV agreement to correspond to each new contract opportunity pursued by the JV. As demonstrated in this case, if the JV fails to properly amend its JV agreement to account for these new opportunities, it could lose a contract award.
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