Although the Small Business Administration’s (SBA) goal is to encourage small businesses to become government contractors, its complex rules on occasion can work against that goal. A good example is a recent decision of the SBA’s Office of Hearings and Appeals (SBA OHA) involving joint ventures. Although one SBA regulation seemed to specifically allow the joint venture to qualify as a small business, other more general SBA regulations prohibited the joint venture from qualifying as a small business.
The confusion involved “affiliation,” the SBA rules that make status as a favored small business depend not only on its annual revenue, but also the annual revenue of firms affiliated with it. When two firms are affiliated, the combined annual revenues of both firms must be less than the SBA’s small business limit for that industry for either firm to be considered a small business.
What makes firms affiliated? One example is where two firms are owned by the same person or by members of the same family.
Another example is a joint venture which by definition consists of several firms; if a joint venture wants to be considered a small business, the combined annual revenue of all joint venturers must not exceed the SBA’s revenue limit. However, one exception to the JV affiliation rule is that a joint venture of at least one 8(a) participant and one or more other business concerns may submit an offer as a small business for an 8(a) procurement so long as each concern is small under the appropriate size standard.
In SIZE APPEAL OF: VETERANS CONSTRUCTION COALITION, LLC, two small businesses, each owned by a different brother, formed a joint venture that won an 8(a) set-aside construction contract at Wright-Patterson Air Force Base. A competitor challenged the award arguing that the brothers’ firms were affiliated under SBA standards, making the joint venture ineligible for the contract.
The brothers argued that their joint venture qualified for the 8(a) set-aside contract, because each of the brothers’ companies was small under the appropriate size standard. Thus, they argued, their joint venture fell within the exception to the JV affiliation rules. The SBA Area Office agreed, and the competitor appealed to the SBA OHA.
The SBA OHA agreed that because both joint venturers were small, the JV did qualify as a small business under the JV affiliation exception. The SBA OHA noted, however, that this exception is a limited contract-specific affiliation based on joint ventures, and does not extend to issues of general affiliation. Specifically, the SBA OHA held that the Area Office that had issued the size determination neglected to consider whether the companies were affiliated under the SBA’s general rules of affiliation, such as those applying to companies owned by family members.
The decision shows how complex the SBA’s regulations can be. The two brothers were right: their JV clearly was not affiliated according to one SBA regulation – the JV affiliation exception. But the JV was affiliated according to other SBA regulations – those involving affiliation by family members. SBA OHA remanded to case to the Area Office for further review to determine whether the brothers’ firms were affiliated and, if so, whether that prohibited their joint venture from qualifying as a small business.
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Terry O’Connor is the Co-Director of Government Contracts for Berenzweig Leonard, LLP, and can be reached at TOconnor@BerenzweigLaw.com.