Some things get better with age, like cheese for example. Others just grow mold, like, well, cheese, for example. Small business joint ventures are certainly the latest. They have a shelf life, and it’s shorter than you might think.
A joint venture organized to take advantage of the Small Business Administration’s size and affiliation exceptions has two years to submit bids after receiving its first federal contract. After that it’s rotten.
SBA joint ventures
To understand the basics of the SBA’s command window limitations, we need to start with how the SBA conceptualizes the joint venture program.
Joint ventures allow two or more small businesses to work together to bid on federal projects as a single prime contractor. The idea is that small businesses can leverage their combined resources, skills, and abilities to complete projects that would otherwise have been unattainable for businesses individually.
For the SBA, the collaboration must be tied to a specific purchase. As he explained recently rule making, “a joint venture should not be an ongoing entity, but rather something formed for a limited purpose with a limited duration.” As far as the SBA is concerned, a joint venture must have a beginning and an end.
Two-year order window
So how does a federal agency ensure joint ventures have time limits? It publishes regulations that impose a limited duration. It’s good to be Uncle Sam.
the SBA Rules declare that “[o]Once a joint venture receives a contract, it may submit additional bids for a period of two years from the date of that first award. Thus, once its first contract has been won, the joint venture has precisely two years to submit as many additional offers as it wishes.
This limitation only applies to new jobs. This is an important point. The SBA does not specify a maximum duration of performance for the joint venture; it simply specifies how long the joint venture can actively seek new work. The practical consequence is that the work of the joint venture will eventually run out, which will limit its duration.
Another important feature of the SBA rule is that it tracks subsequent proposal submissions, not contract awards. As the regulations explain, “[a]An individual joint venture may be awarded one or more contracts after this two-year period, provided that it has submitted a bid including a price before the end of this two-year period. It’s logic. It can take some time for an agency to evaluate proposals and select a winner, so measuring proposal submissions is a smarter approach.
As a bit of not-so-subtle foreshadowing, the two-year ordering period is codified in the SBA’s Affiliate Regulations. Although affiliation is outside the scope of this post, in general affiliation occurs when two or more entities have ties that allow one to exercise controlling influence over the other.
Due to their structure as separate legal entities with shared ownership, affiliation between the joint venture participants was quite possible. To address this issue, the SBA’s size regulations contain a limited membership exception for small businesses participating in a joint venture, provided the entity is actually time-limited.
This is where the legal nuance of the place of the two-year limitation among the membership rules takes on its full importance. I know, leave it to a bunch of lawyers to figure out how do not let the good times roll.
As an affiliate exception, nothing prevents a joint venture from submitting an offer after the end of the order period. What changes, however, is the application of the exception.
Joint ventures that submit bids after the close of the two-year ordering window are no longer subject to the affiliate exception. According to the SBA,[i]If two or more separate business entities seek to combine through another entity on an ongoing and unlimited basis, the SBA considers this a separate business enterprise with each partner affiliated with one another. Thus, participation in the joint venture that submits offers after the two-year period can become an independent basis for finding affiliation between the member entities.
True, this is less serious than some consequences. However, membership can be expensive. Affiliates will see their average annual employees or revenue aggregated for size purposes. Therefore, membership can quickly turn a small business into a big one. For a small business set-aside contract, this can prove fatal.
Like moldy cheese, submitting additional bids with a joint venture with an expired order period stinks. There is, however, a solution for companies that wish to continue collaborating with each other to bid on federal work: simply form a new joint venture.
As surprising as it may seem, the SBA tolerates this approach. According to the SBA,[i]If the parties intend to jointly seek employment beyond two years from the date of the first award, the settlement allows them to form a new joint venture. There you have it, the SBA’s solution is to form a new joint venture. Rinse and repeat, if necessary.
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Finding the appropriate balance for joint venture order periods has been a challenge for the SBA. Prior to the 2020 regulatory revisions, the rule was structured differently and referred to as the “three in two” rule. This approach fell by the side of the roadbut the general idea remains the same: joint ventures are time-limited entities.
Thus, savvy bidders check the expiration date before digging.