One of the least understood and, frankly, least effective rules on the SBA’s books is going bye bye.
The SBA is finally getting rid of the 3-in-2 rule for joint ventures and replacing it with a simple and elegant solution.
The new rule allows joint ventures to last two years before being found generally affiliated. During that time, the joint venture can bid on, win, and perform as many contracts as it can handle.
This is a welcome change from the previous rule, an unnecessarily complicated hive of moving parts that sought to cap the number a contracts a joint venture could perform, but mostly failed to do so.
The SBA has long considered joint ventures to be short-term relationships, “something that is formed for a limited purpose and duration.” They’re not a marriage, they’re a fling. SBA adopted the 3-in-2 rule as an effort to regulate this understanding.
Until now, the rule stated that a joint venture may perform no more than three contracts during a two year period without the venturers becoming generally affiliated. That sounds simple enough, but it got more complicated from there. For example, if a joint venture had bid on several projects before being awarded its third contract, it could perform all the contracts associated with those outstanding bids if it won them. So, theoretically, a joint venture could perform a huge number of contracts (100 or more—there is no cap) without running afoul of the 3-in-2 rule.
Furthermore, there was a huuuuuuuuuge loophole to the rule that said that all joint venturers had to do if they wanted to perform more than three contracts together during the two year period was to form a new joint venture. This was the rare instance of a law telling you exactly how to circumvent it. Imagine seeing a speed limit sign that said “55 MPH (but we won’t write you a ticket unless you go 70 MPH).”
Stranger still, the 3-in-2 rule didn’t require a contractor to perform more than three contracts in order to violate it. Any joint venture that performed at least one contract and continued to exist for greater than two years could be found affiliated.
So, to sum up, the rule allowed that sometimes a joint venture could perform infinite contracts and not be in violation, sometimes it could perform just one contract and be in violation. And if you wanted to avoid the rule, it explained to you exactly how to do so.
The new rule is better—or at least more simplistic.
It says, “a specific joint venture entity generally may not be awarded contracts beyond a two-year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for the joint venture.”
In other words, the SBA will measure compliance with this rule not by the number of awards received but, instead, a more straightforward time measurement. There are loopholes, of course. The rule does allow a joint venture to receive an award after the two year period, so long as the joint venture submitted its bid before the end of the two years. And it explicitly allows the same venturers to set up a new joint venture after the two years have run, noting—as the old rule did—that at some undefined point the relationship is going to get too cozy and the venturers will be found affiliated regardless.
The rule is likely to be effective November 15.
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