Some things get better with age, like cheese, for example. Others just grow mold, like, well, cheese, for example. Small business joint ventures are definitely the latter. They have a shelf life, and it’s shorter than you may 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 award. After that, it’s rotten.
SBA Joint Ventures
To understand the basis for the SBA’s ordering window limitations, we must start with how the SBA conceptualizes the joint venture program.
Joint ventures allow two or more small businesses to collaborate to bid on federal projects as a single prime contractor. The idea is that small businesses may leverage their combined resources, skills, and capabilities to perform projects that would have been otherwise unattainable for the firms individually.
For the SBA, the collaboration should be tied to a specific procurement. As it explained in recent rule making, “a joint venture should not be an on-going entity, but, rather, something formed for a limited purpose with a limited duration.” So far as the SBA is concerned, a joint venture should have a beginning and an end.
Two-Year Ordering Window
So how does a federal agency ensure that joint ventures have limited durations? It publishes regulations that compel limited duration. It’s nice to be Uncle Sam.
The SBA’s regulations state that “[o]nce a joint venture receives a contract, it may submit additional offers for a period of two years from the date of that first award.” Thus, once awarded its first contract, the joint venture has precisely two years to submit as many additional bids as it want.
This limitation applies only to new work. This is an important point. The SBA does not specify a maximum duration for the joint venture entity to perform; it merely specifies how long the joint venture may actively seek to obtain new work. The practical consequence is that the work for the joint venture will eventually run out, limiting its duration.
Another important feature of the SBA’s rule is that it tracks subsequent proposal submissions, not contract awards. As the regulations explain, “[a]n individual joint venture may be awarded one or more contracts after that two-year period as long as it submitted an offer including price prior to the end of that two-year period.” This makes sense. It can take awhile for an agency to evaluate proposals and select an awardee, so measuring proposal submissions is a sounder approach.
Consequences
As a bit of not-so-subtle foreshadowing, the two-year ordering period is codified within the SBA’s affiliation regulations. While affiliation is outside the scope of this post, in general, affiliation arises where two or more entities have connections that allow one to exert control influence over the other.
Due to their structure as separate legal entities with shared ownership, affiliation between joint venture participants was very possible. To address this issue, the SBA size regulations contain a limited affiliation exception for small business joint venture participants, provided the entity is truly limited in duration.
This is where the legal nuance of the two-year limitation’s location among the affiliation regulations becomes important. I know, leave it to a bunch of lawyers to figure out how to not let the good times roll.
As an affiliation exception, there is nothing that prevents a joint venture from submitting a bid after the ordering period is completed. What does change, however, is the application of the exception.
Joint ventures that submit bids after the two-year ordering window has closed are no longer subject to the affiliation exception. According to the SBA, “[i]f two or more separate business entities seek to join together through another entity on a continuing, unlimited basis, SBA views that as a separate business concern with each partner affiliated with each other.” Thus, the participation in the joint venture that submits bids after the two-year deadline may become an independent basis for finding affiliation between the member entities.
To be sure, this is less dire than some consequences. Nevertheless, affiliation can prove costly. Affiliates will have their average annual employees or receipts aggregated for size purposes. Consequently, affiliation can quickly turn a small business into a large one. For a small business set-aside contract, this can prove fatal.
Proposal Strategies
Like moldy cheese, submitting additional bids with a joint venture with an expired ordering period stinks. There is, however, a solution for business that wish to continue collaborating with one another to bid federal work—just form a new joint venture.
Surprising as it may sound, the SBA condones this approach. According to the SBA, “[i]f the parties intend to jointly seek work beyond two years from the date of the first award, the regulations allow 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, as necessary.
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Striking the appropriate balance for joint venture ordering periods has been a challenge for the SBA. Prior to 2020 regulatory revisions, the rule was structured differently and referred to as the “three-in-two” rule. This approach has fallen by the wayside, but the general idea remains the same: joint ventures are limited duration entities.
So, wise offerors check the sell-by date before digging in. If you have any questions about joint ventures, feel free to reach out.