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SBA’s Recent Changes to the Small Business Joint Venture Rules

| Dec 1, 2020 | Government Contracts

On October 16, 2020, the SBA issued an extensive final rule that makes numerous revisions and clarifications to the small business procurement regulations. We previously provided a high-level overview of some of the most significant changes implemented by the new rule. This article provides further analysis of some of the more significant changes to the SBA’s Joint Venture rules, which took effect on November 16, 2020.

3-in-2 Rule Becomes 2-Year Rule

SBA’s final rule made changes to the affiliation rules for joint ventures, and eliminated the 3-in-2 rule which limited joint ventures to being awarded only three contracts in two years to avoid affiliation between the JV members. The revised rule refocused the limitation only on the two-year period. Under the revised rule, a joint venture cannot continue to submit proposals for new contracts two years after the date of its first contract award. Joint ventures can be awarded contracts on proposals submitted before the end of that two year period. If a joint venture continues to pursue new contracts after this two year period, the joint venture members are deemed affiliated for size purposes – even if they are both small or a mentor-protégé team. Parties can still form subsequent joint ventures after the expiration of the two-year period.

Facility Security Clearances

The final rule recognized what has been a long-standing question for joint ventures – what entity needs to hold a facility security clearance? Unless the solicitation stated otherwise, the previous answer was that the joint venture entity would need to hold the clearance itself, even if all JV members had the required clearance.

The amended regulation now recognizes that it is not always feasible or practical to require the joint venture entity to hold a facility clearance. The new rule provides that a joint venture may be awarded a contract requiring a facility security clearance whether either the joint venture itself or the individual JV member that will perform the necessary security work has a facility clearance. If the facility security clearance is required to perform the primary requirements of the contract, the managing venturer of the joint venture must possess the required clearance. However, if the need for the facility security clearance is ancillary to the principal purpose of the contract, only the JV member actually performing such work must hold the clearance.

Joint Ventures May Employ Administrative Personnel

SBA regulations prohibit joint ventures from being “populated” with employees who perform work on contracts awarded to the joint venture. This allows SBA to track the work performed by each JV member to ensure that the small business is getting an appropriate share of the work. The new final rule clarifies that joint ventures may be populated with administrative personnel, including Facility Security Officers where the joint venture obtains a facility security clearance in its own name, so long as those personnel do not also perform work on the contracts awarded to the joint venture.

Elimination of SBA Approval of 8(a) Joint Venture Agreements for Competitive 8(a) Contracts

The new SBA final rule eliminated the need for 8(a) participants to seek and receive approval from the SBA of the initial 8(a) JV agreement, and each addendum to the agreement, before receiving a competitive 8(a) award. Approval of an 8(a) JV agreement from SBA is still required prior to receiving a sole source 8(a) award.

Size Recertification Following Merger or Acquisition of JV Member

The final rule also clarified the size recertification requirements where a member of the joint venture has been acquired, is acquiring, or has merged with another business entity. Generally, SBA’s size standards provide that a joint venture that is small at the time of an initial offer is considered small for the life of the contract, so that entities are not penalized for outgrowing their small business status naturally. However, SBA requires size recertification when a company goes through an acquisition or merger.  This also applies to joint ventures, and the new final rule confirms that when one JV member undergoes a merger or acquisition, it is only that JV member that must recertify its size status. Once it has done so, then the joint venture can recertify its own size status – the other members (not involved in the merger or acquisition) are not also required to recertify their size.

If you have questions about SBA’s final rule and how it impacts your business, please contact Berenzweig Leonard’s Government Contracts team.

Stephanie Wilson is a Partner and Co-Director of Government Contracts at Berenzweig Leonard. She can be reached at [email protected]