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Posted on Friday, June 29, 2018

Lack of “Substantial Benefit” to 8(a) Invalidates 8(a) Joint Venture Agreement

The best way a non-8(a) government contractor can get 8(a) work is to become part of an 8(a) Joint Venture (JV). But the admission ticket to this unique opportunity has a price: the 8(a) JV must provide “substantial benefit” to the 8(a). This means that the JV – particularly the non-8(a) member — must improve the 8(a)’s capacity to win and perform similar contracts on its own. “Where SBA concludes that an 8(a) concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status, SBA will not approve the joint venture arrangement.” 13 C.F.R. § 124.513 Under what circumstances can a joint venture be awarded an 8(a) contract?

In a recent protest decision of the U.S. Court of Federal Claims (COFC), the court concluded that the SBA properly invalidated a proposed 8(a) JV agreement because the agreement would not “substantially benefit” the 8(a).

The 8(a) JV, CR/ZWS LLC, was formed to compete for an Army 8(a) solicitation for refuse and recycling services at Ft. Riley, KS. The 8(a) JV member, Charitar Realty was a real estate, janitorial, and property maintenance firm and did not qualify for the NAICS code applicable to the procurement for refuse and recycling services. The non-8(a) JV member was Zero Waste Solutions, Inc. (ZWS), the incumbent contractor and a graduate from the 8(a) program.

After CR/ZWS was selected for contract award, the SBA refused to approve the JV agreement. The Army then awarded the contract to VMX International, LLC (VMX), the next lowest bidder. CR/ZWS protested the Army’s decision to the COFC, arguing in part that the SBA should have approved the JV Agreement.

The court noted that ZWS would provide almost all the equipment (estimated value of $650,000) needed to perform the work with Charitar supplying only local office space, office supplies, uniforms, and personal protective equipment (estimated value of $50,000). According to the Court, the staff Charitar would employ, “consisting of the quality control manager, the quality control inspector, the scale operator, and the landfill operator, would be hired ‘en masse’ from ZWS.” The court also cited SBA’s belief that Charitar would not gain any “actual performance experience in the delivery of services on the base.” The court concluded that the SBA properly refused to approve the JV because the 8(a) member would not substantially benefit from the JV relationship.

The decision shows that the SBA will not simply rubber stamp an 8(a) JV agreement. To get SBA’s approval of the 8(a) JV agreement and, therefore, the 8(a) work, the JV members must carefully draft the JV agreement to assure that the JV provides “substantial benefit” to the 8(a) firm.

CR/ZWS LLC, v. United States, and VMX International, LLC, COFC No. 18–271C, May 16, 2018.

Berenzweig Leonard is teaming up with Red Team Consulting for a monthly newsletter featuring upcoming contracts, key protest decisions, events, and more. This post was published in the June Monthly Insights newsletter. To sign up for Monthly Insights, please click here.

 Terry O’Connor is a Partner at Berenzweig Leonard, LLP. Terry and Stephanie Wilson lead the firm’s Government Contracts practice. Terry can be reached at toconnor@berenzweiglaw.com.