Source: https://www.cohenseglias.com/news-article/critical-changes-in-small-business-regulations/
Timestamp: 2019-11-13 08:34:23
Document Index: 156980869

Matched Legal Cases: ['§ 125', '§ 121', '§ 125', '§ 125', '§ 125', 'art 127', '§ 121', '§ 121', '§ 121', '§ 125', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 121', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125', '§ 125']

Critical Changes in Small Business Regulations | Cohen Seglias
Critical Changes in Small Business Regulations
December 15, 2017 / Publications / APTAC Connection
By: Maria L. Panichelli
Maria Panichelli and Ed DeLisle presented this information as a breakout session at APTAC’s 2017 Fall Training Conference. APTAC is grateful for their willingness to submit it as an article, so that our entire membership can benefit.
In 2016, the Small Business Administration (“SBA”) rolled out major changes to the federal small business procurement regulations. Although over a year has passed since these changes were made, many government contractors are still confused about the substance of the revised regulations and how these revisions might impact day-to-day business operations and contracting strategies. This article aims to clear up this confusion and advise contractors on the important compliance issues. We will focus on three items in particular:
A May 31, 2016 final rule, which finalized the agency’s earlier December 2015 proposed rule, and implemented numerous mandates by the National Defense Authorization Act (“NDAA”) of 2015. This rule went into effect June 30, 2016, and addressed a number of small business changes. We will be focusing on the changes relating to Limitations on Subcontracting (13 C.F.R § 125.6) and the changes relating to identity of interest affiliation (13 C.F.R. § 121.103(f)).
A “Statement Of General Policy” relating to the inter-affiliate sales exclusion to affiliation.
A July 25, 2016 final rule, addressing the New Small Business Mentor-Protégé program as well as Joint Ventures. This rule went into effect on August 24, 2016.
In order to combat situations in which a small business is used as a “pass-through” for a larger entity, the SBA enacted 13 C.F.R. § 125.6, which establishes minimum self-performance requirements for small business prime contractors performing set-aside contracts. Under the pre-2016 version of the regulation, compliance with the performance of work percentage requirements differed based on the type of small business program set-aside at issue. In other words, the section of the regulation dealing with HUBZones, for example, was different than the section of the regulation dealing with 8(a) concerns. Under the old regulation, the self-performance percentage requirements were also different depending on whether the contract at issue was for services, supplies, general construction or specialty trade construction. Lastly, the manner in which the percentage of work was calculated could differ based on the type of contract at issue. For example, under the old rule, some self performance requirements were calculated using “the cost of the contract incurred for personnel” while others used “the cost of the contract (not including the costs of materials)” or “the cost of manufacturing the supplies or products (not including the costs of materials).” These small differences between the manner of calculation caused a lot of confusion. It often proved very difficult for contractors to figure out what, exactly, they had to do, or what work they had to perform, in order to be compliant.
The new regulation attempted to simplify all of these issues. It did so by making several changes, which we will explain in detail below. But first, take a look at the language of the new, revised § 125.6. It reads, in relevant part:
§ 125.6 What are the prime contractor’s limitations on subcontracting?
General. In order to be awarded a full or partial small business set-aside contract with a value greater than $150,000, an 8(a) contract, an SDVO SBC contract, a HUBZone contract, a WOSB or EDWOSB contract pursuant to part 127 of this chapter, a small business concern must agree that:
(1) In the case of a contract for services (except construction), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded.
(2)(i) In the case of a contract for supplies or products (other than from a nonmanufacturer of such supplies), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted.
(ii) In the case of a contract for supplies from a nonmanufacturer, it will supply the product of a domestic small business manufacturer or processor, unless a waiver as described in § 121.406(b)(5) of this chapter is granted.
(A) For a multiple item procurement where a waiver as described in § 121.406(b)(5) of this chapter has not been granted for one or more items, more than 50% of the value of the products to be supplied by the nonmanufacturer must be the products of one or more domestic small business manufacturers or processors.
(B) For a multiple item procurement where a waiver as described in § 121.406(b)(5) of this chapter is granted for one or more items, compliance with the limitation on subcontracting requirement will not consider the value of items subject to a waiver. As such, more than 50% of the value of the products to be supplied by the nonmanufacturer that are not subject to a waiver must be the products of one or more domestic small business manufacturers or processors.
(C) For a multiple item procurement, the same small business concern may act as both a manufacturer and a nonmanufacturer.
(3) In the case of a contract for general construction, it will not pay more than 85% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 85% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted.
(4) In the case of a contract for special trade contractors, no more than 75% of the amount paid by the government to the prime may be paid to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 75% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted.
As a threshold matter, notice that there is now an exemption for small contracts under the new regulation. The limitations on subcontracting do not apply to set-aside contracts under $150,000 so long as they are small business set-aside contracts. (For 8(a), WOSB/EDWOSB, SDVO SBC and HUBZone set-aside contracts, the subcontracting limitations still apply regardless of contract dollar amount). In addition to the creation of this new exemption, there are several larger changes made in the revised regulation.
First, the distinctions between types of small businesses has been removed. Under the revised regulation all types of small businesses – small, 8(a), HUBZone, SDVO SBC and WOSB/EDWOSB – are governed by the same regulatory section (the new, revised 13 C.F.R. § 125.6(a)). The new regulation does, however, maintain a distinction between the type of contract at issue. Section 125.6(a)(1) governs non-construction services contracts, (a)(2) governs supply contracts and (a)(3) and (a)(4) govern general construction and specialty construction, respectively.
Second, the new regulation specifies that the percentages will, for each type of contract, be calculated using “the amount paid by the government to [the contractor]” as the denominator; the one caveat to this is that for supply contracts as well as general and specialty construction contracts, the “[c]ost of materials are excluded and not considered to be subcontracted.” Thus, this can still be a thorny issue and, if you have any doubts about how to calculate self-performance percentages, you should consult a legal professional.
Third, on a more conceptual level, the new regulation approaches the goal of preventing a “pass-through” slightly differently. As the SBA itself has explained, the revised regulation “creates a shift from the concept of a required percentage of work to be performed by a prime contractor to the concept of limiting a percentage of the award amount to be spent on subcontractors.” By way of example, instead of requiring a prime contractor to self-perform 15% of the contract work on a general construction contract, the new regulation mandates that a prime contractor cannot subcontract out more than 85%. By switching the framework in this manner, the new regulation operates more as a “cap” to subcontracting, as opposed to a “threshold” that must be met. It is a slightly different, but important, change in perspective.
Another important change concerns subcontracts to “similarly situated entities.” Under the revised subcontracting limitation regulation, such subcontracts will not count towards the above-mentioned “cap.” A similarly situated entity is defined as “a small business subcontractor that is a participant of the same small business program that the prime contractor is a certified participant and which qualifies the prime contractor to receive the award.” In other words, a HUBZone could subcontract to another HUBZone, or a 8(a) could subcontract to another 8(a), without counting those subcontracts towards the applicable subcontracting limit. During the comment period, questions were raised about how these concepts would be applied to lower tier subcontractors. More specifically, people were concerned that, if compliance was determined by looking at first tier subcontractors only, a first tier “similarly situated” subcontractor could, in turn, pass all of its performance on to a large or otherwise not similarly situated entity through a second subcontract, thus circumventing the regulation entirely. To address these concerns, the SBA explained in the final rule that work that is not performed by the employees of the prime contractor or employees of first tier similarly situated subcontractors will count towards the subcontracting cap.
Subcontracting Limitations – The Bottom Line
The revised subcontracting limitation regulations have been streamlined, which should make it somewhat easier for a contractor to analyze whether or not it is compliant. In addition, the new “similarly situated entity” subcontracting exception should give contractors more flexibility with regard to subcontracting work. Nonetheless, self-performance can be a very complicated issue, and the similarly situated entity exception can be very tricky. Contractors and PTAC representatives should check with a legal expert if they have any questions about calculating work percentages, or compliance with the revised regulation.
Changes to Affiliation based on Identify of Interest
Another major change included in the May 31, 2016 final rule related to identity of interest affiliation. Specifically, the SBA changed the regulation at 13 C.F.R. § 121.103(f) to provide further guidance relating to family member identify of interest, and economic dependence.
13 C.F.R. § 121.103(f) discusses the circumstances in which an “identify of interest” between two or more persons or entities leads to a finding of affiliation. As a reminder, a finding of affiliation between persons and/or entities results in the aggregation of the respective assets of those persons and/or entities for purposes of determining size. Affiliation based on an identity of interest encompasses several types of affiliation. For purposes of our discussion here today, we will focus only on those types of identify of interest affiliation impacted by the recent regulatory revisions.
Identity of Interest: Familial Relationships
One type of identity of interest affiliation is based on familial relationships. The SBA has consistently interpreted 13 C.F.R. § 121.103(f) as creating a rebuttable presumption that family members with identical or similar interests must be treated as one person (with their individual ownership interests aggregated), unless the family members are estranged or not involved with each other’s business transactions. However, decisions analyzing familial relationship-based identify of interest affiliation have been inconsistent and hard to interpret with regard to which specific relationships create such a presumption. For that reason, the SBA sought to add additional guidance on how to analyze this issue, narrowing the types of familial relationships that result in a presumption of affiliation.
Accordingly, the SBA’s new rule clarified which types of familial relationships result in a presumption of affiliation. Specifically, the final rule explains that the presumption of identity of interest affiliation based on familial relationships applies to firms that conduct business with each other and are owned or controlled by married couples, parties to a civil union, parents, children and siblings. This presumption may be rebutted by showing a clear line of fracture between the firms. It is notable that the rule suggests that affiliation is presumed only if the firms conduct business with each other. This appears to allow family members who own or otherwise control companies to escape the presumption of affiliation so long as the companies are not engaged in any business transactions with each other.
Identity of Interest: Economic Dependence
Another type of identify of interest affiliation is based on economic dependence, which arises when the SBA finds that one company is reliant on another company for its revenue. This can occur when the majority of a company’s revenue is derived from its relationship with another company. In those circumstances, the SBA presumes affiliation between the companies. Before the enactment of the new rule, there was no “bright line” rule for defining what constituted economic dependence between two companies included in the regulation itself, though a 70% test was regularly used by SBA’s Office of Hearings and Appeals in its case decisions. The revised regulation adopts the 70% rule from the existing case law, meaning that if a company “derived 70% or more of its receipts from another concern over the previous three fiscal years,” there is a presumption of affiliation
This presumption can be rebutted by a showing that the company in question is not, in fact, solely dependent upon another company. One way to do that is to prove that the company in question has only been in business for a short period of time and therefore has only been able to secure a limited number of contracts.
Affiliation of Interest – The Bottom Line
Contractors must make sure to be extra careful when doing business with other companies owned, run by, or employing spouses, parents, children and siblings of the contractor’s owners, executives, or employees. Failure to observe proper formalities could result in a finding of affiliation. Federal contractors should also be very careful when doing business with the same businesses over and over. Constant subcontracting to/from the same company, or any other interactions leading to 70% dependence on another company, could result in a finding of affiliation.
Changes Relating to Joint Venture Affiliation for Individually Small JV Partners
Prior to these recent regulatory revisions, the regulation dealing with affiliation (13 C.F.R. § 121.103) contained a very narrow affiliation exception applying to certain joint ventures. Specifically, under the old regulation, there was no “affiliation” between two or more joint venture members if the procurement was: (1) bundled, or (2) “large” – large meaning, in this context, that either: (a) in a revenue-based size standard, the value of the procurement was greater than half the size standard corresponding to the NAICS code assigned to the contract; or (b) in an employee-based size standard, the value of the procurement was over $10 million.
The revised regulation expands the exception to affiliation for all joint ventures where both concerns making up the joint venture are individually “small.” The size standard and procurement value does not matter, nor does bundling. Under the new regulation, a joint venture will be considered a “small” business for federal procurement purposes as long as each individual joint venture partner individually qualifies as a “small” business under the relevant contract.
Identity of Interest – The Bottom Line
This revision to the regulations will make it much easier to enter into joint ventures in connection with set-aside contracts. Now, as long as both joint venture partners are individually “small”, the joint venture is considered “small” as well! Note, however, this exemption is not a blanket shield against general affiliation. If the members of the joint venture are engaging in other behavior that could result in affiliation, they could still be deemed “affiliated.”
Changes Relating to Inter-Affiliate Sales
Around the same time as the May 31, 2016 final rule, the SBA issued a “Statement Of General Policy,” which related to the inter-affiliate sales exclusion to affiliation. In order to understand the importance of this Statement, it is critical to understand some background and context.
13 C.F.R. § 121.104(a) explains how the SBA should calculate a company’s “receipts” for purposes of determining that company’s size as compared to revenue-based size standards. That regulation provides that a company’s “total receipts” should not include “proceeds from transactions between a concern and its domestic or foreign affiliates.” This is known as the “Inter-affiliate Sales Exception” or, sometimes, the “Inter-affiliate Sales Exclusion.” The purpose of this exception is to prevent “double counting of income” during the size determination process.
Based on that stated purpose, most contractors (and legal experts) had always believed that the interaffiliate transactions exception operated to exclude, when calculating a company’s receipts, all transactions between a company and any of its affiliates. However, in the 2015 case, Size Appeals of G&C Fab-Con, LLC (a case in which our firm, Cohen Seglias, represented the appellant), OHA reached a different – and therefore, rather surprising – conclusion. Specifically, OHA concluded that the “the inter-affiliate transaction exclusion applies only if the concerns in question have a parent-subsidiary relationship and are eligible to file a consolidated tax return.” (Emphasis added). In effect, OHA concluded that the only transactions excluded under the Inter-affiliate Sales Exception were transactions between parent companies and their subsidiaries. Many contractors, attorneys, and federal contracting experts felt that this was an improper and overly narrow interpretation of 13 C.F.R. § 121.104(a). Well, it turns out that the SBA as a whole also disagreed with OHA’s conclusion. It issued SBA Size Policy Statement No. 3 to express that disagreement.
SBA Size Policy Statement No. 3 explained that:
Recent SBA size determinations and decisions of the Office of Hearings and Appeals have limited the exclusion by applying it only to transactions between affiliates that are eligible to file a consolidated tax return . . . The regulation does not include a limitation on the types of affiliates for which interaffiliate transactions can be excluded, and in no way ties the exclusion to a concern’s ability to file a consolidated tax return with the identified affiliate. SBA believes that the current regulatory language is clear on its face. It specifically excludes all proceeds from transactions between a concern and its affiliates, without limitation.
In other words, the SBA found that OHA’s decision in the G&C case was wholly incorrect, and constituted an improper and overly narrow interpretation of 13 C.F.R. § 121.104(a). The SBA concluded that, going forward, when calculating a company’s receipts, the agency should not restrict the application of the Inter-affiliate Sales Exception to parent-subsidiary transactions only. Rather, the exclusion for inter-affiliate transactions should be applied to all interaffiliate transactions between a concern and a firm with which it is affiliated under the principles in 13 C.F.R. § 121.103.
Inter-Affiliate Sales – The Bottom Line
If a company has been found to be “affiliated” with another company, there might still be hope that it is “small”. The company’s size standard will be calculated using the sum total of its receipts/employees together with its affiliates’ receipts/employees. But, in a revenue-based size standard context, ALL inter-affiliate transactions will be excluded, which just might make the difference between falling under or over the “small” business threshold. If you have questions about how to calculate a company’s size, you should consult a legal expert familiar with Federal small business procurement, and the Inter-affiliate Sales Exception in particular.
The New “All Small” Mentor Protégé Program
Like the May 2016 final rule, the July 25, 2016 final rule contained a number of important changes to the SBA’s small business regulations. The one that has gotten the most attention is probably the creation of the SBA’s “All Small” Mentor-Protégé Program, a/k/a the “Universal” Mentor-Protégé Program.
As many of you know, the SBA 8(a) Mentor-Protégé program has been around for years, but the July 25, 2016 final rule put into place a mentor-protégé program that is open to all small businesses – not just 8(a) firms. This “All Small” program has been in the works for years. It was first authorized by the Small Business Jobs Act of 2010 and then addressed again in the National Defense Authorization Act (“NDAA”) for Fiscal Year 2013. It took several years for the SBA to roll out the program, partially because the regulatory scheme is so complicated and interwoven with other regulation sections.
There are many benefits associated with becoming an approved mentor-protégé pair. The most important are the following:
In order to raise capital, the protégé firm may agree to sell or otherwise convey to the mentor an equity interest of up to 40% in the protégé firm;
A protégé and mentor may joint venture as a small business for any government prime contract or subcontract, provided the protégé qualifies as small for the procurement;
Such a joint venture may seek any type of small business contract (i.e., small business set-aside, 8(a), HUBZone, SDVO SBC, or WOSB/EDWOSB)) for which the protégé firm qualifies;
No determination of affiliation or control may be found between a protégé firm and its mentor based solely on the mentor-protégé agreement or any assistance provided pursuant to the agreement.
In other words, whereas a joint venture of a small company and a large company would normally be automatically considered “other than small,” an approved mentor-protégé pair get special treatment: A mentor and its protégé may form a joint venture and – even if the mentor is an “other than small” company – the joint venture will be considered small, so long as the joint venture fulfills certain requirements (see below). Moreover, a joint venture between a large mentor and a small protégé will be considered eligible for any other set-aside contract for which the protégé is eligible (8(a), HUBZone, SDVO SBC, WOSB/EDWOSB), provided that certain requirements are met (see below).
Based on this, many contractors believe the mentor-protégé program is nothing more than the first step in forming more joint ventures with large companies. However, contractors need to be very careful here. The true purpose of the mentor-protégé programs, as stated by the SBA, is to enhance the capabilities of protégé firms by requiring approved mentors to provide business development assistance and improve the protégé firms’ ability to successfully compete for Federal contracts. This assistance may include technical and/or management assistance; financial assistance in the form of equity investments and/or loans; subcontracts (either from the mentor to the protégé or from the protégé to the mentor); trade education; and/or assistance in performing prime contracts with the government through joint venture arrangements. The key to here is to remember that the entire purpose of the mentor-protégé relationship is the growth and business development of the small, protégé concern. While the mentor may provide contracting assistance by (among other ways) joint venturing with the protégé, the mentor-protégé program was not designed simply to allow large firms to form joint ventures with small businesses and go after set-aside contracts. Accordingly, a mentor-protégé relationship will not be approved if the SBA determines that the arrangement is merely a vehicle to enable the mentor to receive set-aside contracts. Nor will the SBA approve the relationship if the assistance to be provided to the protégé is not sufficient to promote any real developmental gains.
To become an approved-mentor protégé pair, a mentor and protégé must apply at certify.sba.gov. In order to qualify as a protégé firm, a concern must be “small” in its primary NAICS code or identify that it is seeking business development assistance with respect to a secondary NAICS code, and qualify as small for the size standard corresponding to that NAICS code. As part of its application, the protégé must submit a business plan. The mentor and protégé must also enter into and submit a mentor protégé agreement, which sets forth an assessment of the protégé’s needs, and also provides a detailed description and timeline for the delivery of the assistance the mentor commits to provide. The key is to remember to emphasize the various ways in which the mentor will assist the protégé in fulfilling the goals set forth in the protégé’s business plan. To that end, the Mentor-Protégé agreement must: address how the relationship will enable the protégé to meet goals in its business plan; establish a point of contract at the mentor firm; provide that assistance will be provided for at least one year; identify any other mentor-protégé relationship the mentor or protégé are involved in, provide a copy of each such mentor-protégé agreement, and describe how the assistance provided in this mentor-protégé relationship will differ from those other relationships; and state that either party may terminate with 30 days’ notice / that SBA may terminate if protégé is not benefiting from the relationship.
The SBA has 45 days to grant or deny the SBA application though, as of the time of publication, the agency is generally turning out responses within a week or two. If the SBA denies an application, the applicants can ask for reconsideration within 45 days. Applicants are permitted to amend or revise the subject application and mentor protégé agreement during that time to address any areas of concern referenced by SBA in its denial of the application. If, upon reconsideration, the application is denied again, the applicants must wait at least 60 days before re-applying.
If approved, the SBA will review the mentor-protégé relationship annually. As part of this review process, the protégé must report the mentoring services it receives, both by category and by hours. The SBA must approve all changes to the mentor protégé agreement in advance and changes must be in writing; if a contractor fails to advise the SBA of changes, it risks not only termination but also potential suspension / debarment. In addition, SBA may terminate the relationship at any time if it determines that the protégé is not benefiting from the relationship or that the parties are not complying with any term of the mentor-protégé agreement.
All Small Mentor-Protégé – The Bottom Line
The new “All Small” Mentor-Protégé program opens up a world of opportunities in terms of 8(a), HUBZone, SDOVSB and WOSB joint ventures. However, it is critically important that contractors understand the true purpose of the program, and make sure not to run afoul of compliance requirements. Failure to do so could result in very serious consequences.
Changes Relating to “Small” Joint Ventures
Remember from above that the May 2016 final rule expanded the joint venture exception for individually small businesses. Under the revised regulations, a joint venture between individually small joint venture partners will automatically be considered “small,” assuming there is no other basis for affiliation. Remember also that pursuant to the new “All Small” Mentor Protégé Program, an approved mentor-protégé may form a joint venture, and such joint venture will be considered “small,” even if the mentor is a large company, so long as certain requirements are met. Moreover, a joint venture between a large and a small company can be considered eligible for any set-aside contract for which the protégé is eligible, provided that certain requirements are met. It is those “certain requirements” that we deal with in this section.
The new, revised 13 C.F.R. § 125.8 outlines what a joint venture needs to do in order to be deemed “small” and therefore eligible for small business set-aside contracts.
A joint venture agreement pertaining to a joint venture between two or more entities that individually qualify as small need not be in any specific form or contain any specific conditions in order for the joint venture to qualify as a small business. In contrast, however, a joint venture agreement to perform a set-aside contract, which is entered into between a mentor and a protégé, must contain certain provisions in order to be eligible for the joint venture affiliation exceptions outlined above. Specifically, every joint venture agreement to perform a set-aside contract, made between a protégé small business and its SBA–approved mentor, must contain 12 particular provisions. Many of these provisions are complicated enough as to require legal guidance in terms of interpretation and drafting; for that reason, and for the additional purpose of brevity, we will not list each specific provision here. They are set forth in full at 13 C.F.R. § 125.8(b)(2)(i)-(xii), but we strongly recommend consulting a Federal contracting attorney if you wish to draft a compliant joint venture agreement containing these provisions.
Performance of Work Requirements and Performance of Work Reports
Another key component of the new § 125.8 relates to the joint venture partners’ performance of work. Remember from above that 13 C.F.R. § 125.6 sets forth certain limitations on subcontracting, thus impacting the amount of work that a prime contractor on a set-aside contract must self-perform. Section 125.8(c) provides that, for any small, set-aside contract that is to be performed by a joint venture, where that joint venture was formed by an approved “All Small” mentor-protégé pair, the joint venture must perform the applicable percentage of work required by § 125.6. In other words, as the prime contractor on a small business set-aside contract, a mentor-protégé joint venture as a whole has to meet the requirements set forth in § 125.6. In addition, the small business partner to the joint venture itself must perform at least 40% of the work performed by the joint venture.
It’s enough to make your head spin, right? Let’s walk through an example. Consider a joint venture formed by a large company mentor named “Mentor” and a small company protégé named “Protégé.” Let’s assume the contract at issue is a non-construction services project, where the “the amount paid by the government” to the joint venture is $10,000,000. For simplicity’s sake, let’s assume that the joint venture has not found any “similarly situated entities” with which to subcontract, and thus every one of the joint venture’s subcontracts counts towards its 50% subcontracting limit, as set forth in § 125.6. Pursuant to § 125.6(a)(1), then, the joint venture cannot subcontract more than 50%, and, therefore, must self-perform at least 50% of $10,000,000, or $5,000,000. Now, pursuant to § 125.8(c), the small joint venture partner – here, Protégé – must perform 40% of the work the joint venture is performing. If the joint venture is self-performing $5,000,000, the Protégé must itself perform 40% of that $5,000,000, or $2,000,000.
As if this was not complicated enough, when assessing whether or not a small business joint venture partner is compliant and has reached its self-performance requirements, one must also consider the type of work being performed. Specifically, the 40% performed by the small business partner to a joint venture must be more than administrative or ministerial functions. They should be doing substantive contract work. Otherwise, the joint venture will be deemed not to have complied with § 125.8(c). Moreover, when determining the amount of work done by a mentor participating in a joint venture with a small business protégé, all work done by the mentor and any of its affiliates at any subcontracting tier will be counted.
In addition to meeting the self–performance requirements set forth at § 125.8(c), a mentor-protégé joint venture must also complete reports certifying its compliance with the self–performance requirements, pursuant to § 125.8(h). Specifically, the small business partner must describe how it is meeting or has met the applicable performance of work requirements for each contract set-aside or reserved for small business that it performs as a joint venture. The small business partner to the joint venture must submit a report to the relevant contracting officer and to the SBA annually, and must submit another report at the completion of the contract. Pursuant to § 125.8(i), any person with information concerning a joint venture’s compliance with the performance of work requirements may report that information to SBA and/or the SBA Office of Inspector General.
Certificates of Compliance and Inspection of Books and Records
In addition to the performance of work reports discussed above, the new regulations require the small business partner of a mentor-protégé joint venture to fulfill other administrative requirements as well. 13 C.F.R. § 125.8(d) requires that, prior to the performance of any set-aside contract by a joint venture between a protégé small business and a mentor, the small business partner to the joint venture must submit a written certification to the contracting officer and SBA, signed by an authorized official of each partner to the joint venture, stating that:
(1) The parties have entered into a joint venture agreement that fully complies with the 12 provision requirements listed at § 125.8(b), discussed above;
(2) The parties will perform the contract in compliance with the joint venture agreement and with the performance of work requirements discussed above.
13 C.F.R. § 125.8(g) provides that the joint venture partners must allow SBA’s authorized representatives, including representatives authorized by the SBA Inspector General, during normal business hours, access to its files to inspect and copy all records and documents relating to the joint venture.
The new regulations outline some pretty serious consequences should a contractor fail to comply with the requirements outlined above. § 125.8(i) provides that the Government may consider any of the following a basis for suspension or debarment, as “a willful violation of a regulatory provision or requirement applicable to a public agreement or transaction”:
Failure to enter a joint venture agreement that complies with 125.8(b) (i.e. an agreement that fails to contain the 12 provisions discussed above);
Failure to perform a contract in accordance with the joint venture agreement or performance of work requirements in 125.8(c) (which is discussed above);
Failure to submit the certificate of compliance or comply with the inspection of records requirements (both discussed above).
Finally, the new regulation relating to joint ventures provides the agencies with some guidance regarding how to evaluate a joint venture’s past performance for purposes of source selection. Specifically, § 125.8(e) provides that, when evaluating the past performance and experience of a joint venture entity submitting an offer for a set-aside contract, a procuring activity must consider work done individually by each partner to the joint venture as well as any work done by the joint venture itself previously. Previously, agencies had more discretion concerning whether they would consider the past performance of each individual joint venture partner, or only the joint venture as a whole.
Changes Relating to Specific Types of “Small” Joint Ventures
Thus far, we have been discussing 13 C.F.R. § 125.8 which, as explained above, addresses what requirements a joint venture must satisfy to submit an offer for a procurement or sale set aside or reserved for small business. In other words, it outlines what a joint venture needs to do in order to be deemed “small” and therefore eligible for small-business set-aside contracts. However, recall from our earlier discussion that a joint venture between a large and a small company can be considered eligible for any set-aside contract for which the protégé is eligible, provided that certain requirements are met. In other words, in certain circumstances, a joint venture between a protégé and a large mentor could be considered an 8(a), HUBZone, SDVO SBC, WOSB/EDWOSB, etc. Each of those specific instances is dealt with in its own regulation, as follows:
WOSB/EDWOSB – 13 CFR 127.506
HUBZone – 13 CFR 126.616
SDVO SBC – 13 CFR 125.18(b)
8(a) – 13 CFR 124.513(c)
For the most part, these regulations reflect, and are consistent with, the requirements set forth in § 125.8 and so, for purposes of brevity, we will not address them in detail here. However, a careful review of these regulations is necessary if one is analyzing whether a joint venture is compliant and eligible to compete for 8(a), HUBZone, WOSB/EDWOSB or SDVO SBC set-aside contracts.
Joint Ventures – The Bottom Line
The new joint venture regulations, in conjunction with the “All Small” Mentor Protégé Program, make it easier for certain joint ventures to gain access to set-aside contracts. However, these regulations also impose on the joint venture – and the small business/protégé joint venture partner in particular – a host of complicated requirements. Failing to meet those requirements can devastate a company, causing it to lose its small business status, or putting it out of business altogether through debarment. Thus, to the extent a contractor hopes to enter a mentor-protégé arrangement, or compete for and perform set-aside contracts through a joint venture formed between a mentor and protégé, it is critical that they ensure their compliance with the new regulations.
Recent years have seen a lot of changes to the SBA small business regulations. Overall, we see these changes as very positive. As discussed above, under the new regulations, contractors should find it much easier to figure out what work, exactly, they have to perform to be compliant with § 125.6. Moreover, the “similarly situated entity” change should give contractors more flexibility in terms of subcontracting. The new regulations have also provided much needed clarity to the identity of interest basis of affiliation regulation, and the SBA’s policy statement has made it easier to determine how inter-affiliate transactions should be excluded for purposes of calculating receipts.
The expanded affiliation exception for joint ventures, the new “All Small” mentor protégé program, and the revised joint venture regulations will allow contractors to joint venture more often, which will promote growth as well as cooperation. These changes represent improvement, but also stay true to the purpose of the small business programs (the economic development of small businesses through performance of government contracts). They also, in our view, create a more intuitive framework without (for the most part) creating unnecessary confusion or red tape.
The critical part for contractors to remember is that they need to stay informed about changes such as this, and ensure their own compliance, or face serious consequences. It is strongly recommended that contractors consult a legal professional to confirm that they are in full compliance with the new regulations and understand their obligations under the new small business rules.
October 31, 2019 / Utility & Transportation Contractor