When drafting small business joint venture agreements, the devil is in the details. A template JV agreement—like the one from the Small Business Administration—may not guarantee a JV’s eligibility for a contract award. The details of the agreement, like which contracts the JV will pursue and what each side will contribute, are critical.

Even if approved, a generic JV agreement may not survive a protest.

In CVE Protest of Veterans Contracting, Inc., the SBA’s Office of Hearings and Appeals sustained a protest challenging a JV’s status as a service-disabled veteran-owned small business because its JV agreement was too generic to establish the JV’s eligibility as an SDVOSB. The JV in that case (CRNTC) was a joint venture between CR Nationwide, LLC (the SDVOSB partner) and Trumble Construction, Inc.

The Department of Veterans Affairs approved CRNTC’s SDVOSB status for a period of three years in June 2018. The approval was based on the JV agreement between CR Nationwide and Trumble, which made CR Nationwide the majority owner. But the JV agreement did not identify any particular solicitation that CRNTC would pursue or otherwise outline what each partner would contribute to the JV. The agreement specified that the parties would identify the contract and scope of work at a later date and would set those out in a jointly executed statement that would be submitted to the relevant contracting authority.

Six months later, CRNTC submitted a bid in response to an SDVOSB set-aside IFB for a construction project at the VA medical center in Cleveland, Ohio. The VA selected CRNTC as the apparent awardee in March 2019, and an unsuccessful bidder, Veterans Contracting, Inc., protested the award and challenged CRNTC’s status as an SDVOSB.

In its response to the protest CRNTC attached a copy of its JV agreement and highlighted the fact that its majority owner, CR Nationwide, was an SDVOSB. That was not enough for the Office of Hearings and Appeals. OHA reopened the record and required CRNTC to provide additional evidence to establish its eligibility as an SDVOSB. It highlighted the fact that CRNTC’s JV agreement did not specify the contributions of CR Nationwide and Trumble, and there was no evidence of a jointly executed statement outlining their contributions, like the JV agreement had contemplated.

Details after award do not necessarily prove the JV’s eligibility prior to award.

CRNTC subsequently provided OHA with a copy of the VA’s letter approving CR Nationwide as an SDVOSB. It also provided a document showing an apparent breakdown of work for the solicitation at issue, but the document was unsigned and undated. The VA’s contracting officer separately informed OHA that she did not receive a jointly-executed statement outlining what scopes of work CR Nationwide and Trumble would provide for the IFB’s scope of work.

OHA concluded that this evidence was not sufficient to prove that CRNTC was an SDVOSB either on the date that it submitted its bid, or the date when it was awarded the contract (eligibility on both dates is required). Because the JV agreement was prepared months earlier and did not even mention the IFB at issue, OHA concluded that it did not satisfy the SBA requirements of itemizing the resources each JV partner would contribute and specifying each partner’s responsibilities for contract negotiation, source of labor, and contract performance. The lack of a contemporaneous jointly executed statement addressing each party’s contribution also meant that CRNTC could not show that CR Nationwide (the SDVOSB partner) was actually performing 40% of the work, as required under SBA’s regulations.

OHA also refused to consider the “breakdown” document that CRNTC submitted during the protest. It noted that CRNTC’s eligibility had to be determined at the time it submitted its bid (December 2018) and when it received award (March 2019). The unsigned and undated “breakdown” document had no bearing on CRNTC’s eligibility on those dates because the document appeared to have been created only after OHA reopened the record and asked CRNTC to provide additional evidence of its eligibility.

Determine each party’s specific contribution before submitting a proposal.

In our experience, the factual situation from this case is fairly common. Eager to establish a new relationship, partners often rush to sign a template JV agreement before they have identified how or what they will do together. As a result, the JV agreement often does little more than identify the partners and ensure that the small business partner will be the majority owner. Although that may be sufficient for preliminary size or status approval, any resulting contract award could still be at risk. In order to prove the JV’s eligibility, attention to detail is required. The parties should be sure to clearly outline their respective contributions and responsibilities for a particular procurement before they submit their bid and receive award of the contract.

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Posted by Husch Blackwell Associate David Newman

The Small Business Administration is continuing the task of implementing several regulatory changes required by the National Defense Authorization Act for Fiscal Year 2013 (NDAA) [pdf]. One such change occurred on May 7th when the SBA published an interim final rule (RIN 3245-AG55) [pdf] enacting section 1697 of the NDAA and amending 13 CFR 127.503 [pdf]. The interim final rule removes  the statutory cap on set-aside contracts for Women Owned Small Businesses (WOSB) and Economically Disadvantaged Women Owned Small Businesses (EDWOSBs).

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Posted by Husch Blackwell Associate David Newman

Congress continues to promote opportunities for small business contractors to do business with the federal government. It also continues to increase the penalties for those taking unfair advantage of small business opportunities. Here is a look at the most recent set of carrots and sticks, which appear in the National Defense Authorization Act for Fiscal Year 2013.

1. Subcontracts with “similarly situated” small businesses

Section 1651 of the 2013 NDAA provides a new exception to the small business subcontracting cap, which restricts small businesses from subcontracting more than 50 percent of the amount paid under a services contract. With the passage of NDAA, the amount paid under any subcontract with a small business concern that has the same small business status as the prime contractor is excluded from the small business subcontracting cap. The term “similarly situated entities” includes service-disabled veteran-owned small businesses, HUBZone small businesses, women-owned small businesses, and economically disadvantaged women-owned small businesses.

This provision also changes the method for calculating the 50-percent subcontracting cap. Previously, the subcontracting limits in FAR 52.219-14 counted only direct labor costs. Under section 1651, “amount paid” under a subcontract, including labor, material, and other direct costs, is used to determine the 50-percent subcontracting cap. This is a strong incentive for small business prime contractors to award subcontracts to similarly situated small businesses. The old formula continues to govern subcontracting limitations for construction contracts, but the NDAA directs the SBA to establish similar limitations on construction contracts.

The penalty for violating the subcontracting cap is the greater of $500,000 or the dollar amount expended over the cap. The “amount expended” clause is a new penalty.

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The SBA has released its Small Business Procurement Scorecards for 2011, and for the second year in a row the results paint a grim picture. In 2011 [pdf], small businesses were awarded an even smaller share of federal contract dollars than they received in 2010—$6.4 billion smaller. Prime contract awards to small businesses in 2011 totaled $91.5 billion, or 21.65 percent of federal agency contract expenditures. The previous year [pdf], small businesses were awarded 22.66 percent of all federal prime contracts, or $97.9 billion. It’s official: federal agencies have failed once again to meet the 23 percent government-wide goal for prime contract awards to small business concerns set by the Small Business Act.
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As part of the SBA’s 8(a) Business Development Program, participants are permitted to form mentor-protégé relationships and to establish joint venture (JV) entities eligible for award of 8(a) set aside contracts. Before a mentor-protégé JV can be eligible for set-aside awards, its JV Agreement has to be approved by the SBA Office of Business Development. Approval is conditioned upon compliance with applicable regulations, including 13 C.F.R. § 124.513. After award of a set-aside contract, other offerors have the option of filing a size protest with the SBA challenging the awardee’s status as small.

In Size Appeal of Trident, LLC, SBA No. SIZ-5315 (Jan. 24, 2012) [pdf], the SBA Office of Hearings and Appeals (OHA) held that an SBA area office has no authority to review the substance of an 8(a) mentor-protégé JV agreement as part of a size appeal if it has already been approved by the SBA Office of Business Development and determined to be in compliance with applicable regulations. In that case, Trident appealed the area office’s determination that it was “other than small” and accordingly ineligible for award of an 8(a) set-aside for weather observation and forecasting services.

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More legislation to address the recent high-profile abuses of the SBA contracting system is in the works. A bipartisan group led by Senator Olympia Snowe (R-ME) has introduced legislation called the Small Business Contracting Fraud Prevention Act of 2011 [pdf]. Among other things, the bill would amend the provisions of the Small Business Act relating to misrepresentations as to the status of companies as small business concerns, including HUBZone, 8(a), woman-owned, and service-disabled veteran-owned small businesses.
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Do you think that small business contracts and subcontracts have been going to contractors that do not qualify as small businesses? If so, you may be interested in the new legislative changes intended to discourage and penalize fraud in small business contracting. The changes are in the Small Business Jobs Act of 2010, signed by the President on September 27, 2010.
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A recent bid protest decision by the United States Court of Federal Claims is a reminder that HUBZone small business concerns must monitor their compliance with SBA rules. In Mission Critical Solutions v. United States, No. 10-810C (Fed. Cl. Feb 18, 2011) [pdf], the court held that a contractor was properly decertified as a HUBZone small business concern and ineligible for a contract set aside for HUBZone small businesses because fewer than 35 percent of its employees resided in HUBZones at the time of award.
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The Small Business Administration has launched an informational website addressing its new Women-Owned Small Business Federal Contract Program. The website includes a step-by-step guide on how to participate in the new set-aside program, as well as links to explanatory statements and SBA contact information. The final regulations implementing the program were published on October 7,

On February 2, 2011, the Small Business Administration published revised regulations regarding the effect of an SBA size determination.  76 Fed. Reg. 5680 (Feb. 2, 2011).  The most significant of these new rules requires a contracting officer to terminate a contract that is awarded during the pendency of a size protest if the awardee is found to be not small.
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