Last week, SBA issued a comprehensive rule change affecting several of its small business programs. We’ll continue to break down this new rule on GovConBrief but, in this post, we’ll address a few of the important changes that impact small business joint ventures.
In my (humble) opinion, these changes are for the better.
Before getting into too much detail, let’s start at first principles. A joint venture, under SBA’s regulations, is a separate legal entity formed by two or more small businesses to pursue a specific contract opportunity. (Note: a large business can participate in a joint venture only if it’s through an approved mentor/protégé agreement.) The joint venture entity will bid on the opportunity in its own name; but because SBA’s regulations require a joint venture to be unpopulated (that is, to not have any personnel that perform under the contract), the joint venture members will actually perform the work.
Among other things, the venturers must have a compliant joint venture agreement. SBA’s regulations provide detailed requirements for the agreement—failure to meet any of the requirements can doom a joint venture.
With that brief background in mind, let’s check out a few of the changes to SBA’s joint venture regulations.
Clarification on joint venture control.
One of the most important (yet overlooked) changes to the regulations affects joint venture control. Before the regulatory change, SBA’s regulations were interpreted to mean that the managing venturer had to exercise nearly unfettered control over the joint venture. This interpretation came from the underlying socioeconomic program regulations but, as I’ve written elsewhere, effectively disincentivized some companies from entering a joint venture.
SBA has addressed this issue by recognizing that the non-managing venturer gets a say over the joint venture’s governance:
The managing venturer is responsible for controlling the day-to-day management and administration of contractual performance, but other partners may participate in all corporate governance activities and decisions of the joint venture as is commercially customary.
I’m glad the SBA has made this change, as it removes some of the confusion relating to joint venture control. Hopefully, it will also give non-managing venturers more confidence to enter into a joint venture agreement in the first place.
Change to the Project Manager requirement.
Along the same lines, SBA has tweaked the requirement that a joint venture designate an employee of the managing venturer as the “Project Manager,” responsible for contract performance. As SBA recognized, the problem with this requirement is that some contracts don’t call for “project managers,” but might instead require a program manager, program director, or some other position. To SBA, the title of the manager was never as important as her function, so the regulations now instead require the joint venture to designate a “Responsible Manager.” The joint venture agreement must now:
Designat[e] a small business as the managing venturer of the joint venture, and designat[e] a named employee of the small business managing venturer as the manager with ultimate responsibility for performance of the contract (the “Responsible Manager”).
Joint venture participants must make sure their joint venture agreement matches the joint venture’s proposal.
Elimination of the 8(a) JV pre-approval requirement.
8(a) joint ventures have always been a bit of an outlier: only 8(a) JVs were required to be pre-approved by SBA. The SBA would review the joint venture agreement for compliance at the outset to see if the JV is eligible for the work. For the other socioeconomic programs, pre-approval was not required; instead, the JVA would be reviewed for compliance only if the joint venture’s size or eligibility was protested.
This differing treatment led to confusion among JV participants and needless administrative burdens to the SBA. Thankfully, under the new rule, pre-approval of 8(a) joint venture agreements for competitive opportunities is no longer required. Pre-approval will still be required, however, if an agency wishes to issue a sole source award to an 8(a) JV.
Clarification of joint venture profit split.
SBA will also now allow joint venturers to split profits in a manner that benefits the small business participant. Under SBA’s regulations, profit must be split between the venturers commensurate with the work they each perform. Now, however, SBA’s regulations will allow some flexibility:
[T]he small business participant(s) must receive profits from the joint venture commensurate with the work performed by them, or a percentage agreed to by the parties to the joint venture whereby the small business participant(s) receive profits from the joint venture that exceed the percentage commensurate with the work performed by them[.]
In other words, the profit split should be considered a minimum requirement; SBA won’t fault joint venturers if they decide that a small business venturer receives more profit than it otherwise might.
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SBA’s changes are important, as they will make joint venturers an even more potent competitive tool for small businesses. If you have any questions about joint ventures, please give me a call.