SBA Revises Rules Regarding Joint Ventures and Limitations on Subcontracting

07.14.2023

The U.S. Small Business Administration (“SBA”) recently revised several regulations affecting small businesses participating in SBA programs. The revised rules include changes and clarifications to joint venture and limitation on subcontracting regulations, among others pertaining to SBA programs. 

Joint Venture Regulations

Under SBA joint venture regulations, two or more small businesses that are small for the applicable size standard can create a joint venture that qualifies as small, and a large business mentor and small business protégé in an SBA-approved mentor-protégé relationship can create a joint venture that qualifies as a small business. As a result, a small business can enter into multiple joint ventures with different companies. However, it was not clear if those joint ventures could compete for the same procurements. In other words, could a small business that was a member of multiple joint ventures hedge its bets by submitting offers as part of multiple different joint ventures? The new regulations make clear the answer is no.

The revised regulations for the 8(a), Service-Disabled Veteran-Owned Small Business (“SDVOSB”), Woman-Owned Small Business (“WOSB”) and Historically Underutilized Business Zone (“HUBZone”) programs state that a company that participates in those programs cannot be a joint venture partner on more than one joint venture that submits a proposal for a specific set-aside contract or for a set-aside order under an unrestricted multiple award contract. 13 C.F.R. §§ 124.513(a)(4), 128.402(a)(3), 127.506(a)(3) and 126.616(a)(2). The SBA stated that the rule was created to address concerns that allowing a company that is a member of multiple joint ventures to submit competing proposals via its multiple joint ventures would give such a company an unfair advantage against less sophisticated small businesses, and concerns that a company having access to pricing information from several proposals could affect the pricing the Government is offered.

While the new regulations limit the number of proposals a company can submit for a particular opportunity, they broaden the mentor-protégé rules to allow corporate family members of a mentor to provide assistance to the protégé. Under the new regulations, the mentor-protégé agreement must identify which specific entity or entities will provide assistance to the protégé or joint venture with the protégé in situations in which the mentor is a parent or subsidiary of the entity providing the assistance or participating in the joint venture. 13 C.F.R. § 125.9(e). The SBA stated that the purpose of the rule is to enable subsidiaries of the mentor who have experience in an industry in which the protégé seeks to enter – and in which the mentor does not have experience – to assist the protégé in gaining experience in that industry.

The new regulations also address the rule stating that a joint venture cannot be awarded contracts beyond a two-year period, starting from the date of the award of the first contract, without the joint venture partners being deemed affiliated with each other and having their revenues or numbers of employees aggregated to determine the joint venture’s size. The regulations clarify that a joint venture may be issued an order under a previously awarded contract beyond the two-year period. 13 C.F.R. § 121.103(h). The new regulations also allow for joint ventures consisting of similarly situated companies that perform on set-aside contracts to be populated with the joint venture’s own employees (as opposed to each partner to the joint venture individually performing work under a subcontract with the joint venture), but provide that in such a situation the revenues or employees of each party that forms the populated joint venture will be aggregated together in determining the joint venture’s size. 13 C.F.R. § 121.103(h)(1). Similarly situated companies are ones that have the same small business program status, such as small, WOSB, SDVOSB, and HUBZone. 

Limitations on Subcontracting

Under SBA regulations, when a contract is set aside for small businesses, the small business awarded the contract must not pay more than 50 percent of the amount the Government pays to it to firms that are not similarly situated (i.e., do not fall within the set-aside category of the contract) if the contract is for services or supplies; not more than 85% to companies that are not similarly situated for a general construction contract; and not more than 75% to companies that are not similarly situated for a special trade contract. A company must comply with the limitations on subcontracting for the base period and for each option period. The new rule clarifies that for contracts where more than one agency can issue orders under the contract, the period of measurement for determining compliance is the period of performance for each order. 13 C.F.R. § 125.6(d). This is due to the fact that no one agency looks at the cumulative work performed under the contract to see if a company is complying with the limitations on subcontracting when multiple agencies have issued orders under the contract.

The SBA also provided teeth to the requirement by adding consequences if a contracting officer determines at the conclusion of the contract that a company did not comply with the limitations on subcontracting. Failure to meet the limitations on subcontracting can result in a negative past performance evaluation. Under the new rules, an agency is not allowed to give a company a satisfactory or higher past performance rating for the appropriate factor or subfactor if the company failed to meet the limitation on subcontracting, unless the company provides evidence of mitigating or extenuating circumstances or the failure to meet the requirement was out of the company’s control. 13 C.F.R. § 125.6(e). 

The new regulations became effective on May 30. They also include changes and clarifications pertaining to the 8(a) program, the ostensible subcontractor rule, the management requirements for joint ventures, and recertification of size following a sale or acquisition, among others.

If you have questions regarding the new regulations or compliance with SBA regulations, please reach out to our Government Contracts team.