• Joshua Duvall

SBA Nixes the 3 From its 3-in-2 Rule for Joint Ventures

In October, the U.S. Small Business Administration ("SBA") published a wide-ranging final rule, Consolidation of Mentor-Protégé Programs and Other Government Contracting Amendments, that included a number of changes to its small business contracting regulations. Besides consolidating its mentor-protégé programs, SBA made a host of changes that impacted small business joint ventures ("JVs"). We previously discussed SBA's new JV facility security clearance and past performance rules (including in SBA's correcting amendment), and today we discuss another significant change: SBA eliminated its "3-in-2" rule, or rather, changed it to the "unlimited-in-2" rule.


In the highly competitive government contracting marketplace, one way that small contractors can bolster their chances of success is to form a JV under SBA's regulations. Indeed, small business JVs can often unlock revenue for work that a small business would not be able to win on its own. With SBA's new facility clearance and past performance rules (above) in place, forming a small business JV is now an even more promising proposition. But, SBA didn't stop there. SBA also eliminated the 3-contract limit for JVs.


SBA's 3-contract limit, or the "3" in the "3-in-2" rule, generally meant that small business JVs were only allowed to receive three contracts over a two year period. [1] As a result, potential JV members needed to think carefully about when and how to use their JV to ensure that they didn't run afoul of the rule (otherwise they would need to form another JV). [2]


After the new rule took effect in November, however, small business JVs no longer need to worry about the 3-contract limit because SBA nixed the "3" from its "3-in-2" rule. Now, JVs formed under SBA's regulations can win an unlimited number contracts over the JV's 2-year lifespan, beginning on the date of first award. [3] As a result, we now have an "unlimited-in-2" rule (okay, okay, how about the "2-year" rule).


SBA's amended regulation – 13 C.F.R. § 121.103(h) – now provides, among other revisions: [4]


  • This means that 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. Once a joint venture receives a contract, it may submit additional offers for a period of two years from the date of that first award. An individual joint venture may be awarded one or more contracts after that two-year period as long as it submitted an offer including price prior to the end of that two-year period.


Takeaway


SBA's decision to eliminate the 3-contract limit is welcome news for government contractors that are considering forming a small business JV to pursue set-aside contracts. Ultimately, SBA's JV amendments, including past performance and facility security clearances, give small business JVs a huge boost. Only time will tell, but it will be interesting to see whether these changes lead to an uptick in JVs competing for set-aside contracts. [5]


. . .


[1] Prior to November 16, 2020, 13 C.F.R. § 121.103(h) provided that:

  • This means that a specific joint venture entity generally may not be awarded more than three contracts over 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 all purposes. Once a joint venture receives one contract, SBA will determine compliance with the three awards in two years rule for future awards as of the date of initial offer including price. As such, an individual joint venture may be awarded more than three contracts without SBA finding general affiliation between the joint venture partners where the joint venture had received two or fewer contracts as of the date it submitted one or more additional offers which thereafter result in one or more additional contract awards.


[2] In that regard, SBA's regulations also provide an important caveat to this practice, as illustrated below (revised rule):


  • The same two (or more) entities may create additional joint ventures, and each new joint venture entity may submit offers for a period of two years from the date of the first contract to the joint venture without the partners to the joint venture being deemed affiliates. At some point, however, such a longstanding inter-relationship or contractual dependence between the same joint venture partners will lead to a finding of general affiliation between and among them.


[3] The revised regulation also clarifies that a "contract" includes novations of prime contracts. 13 C.F.R. § 121.103(h) ("contract refers to prime contracts, novations of prime contracts, and any subcontract in which the joint venture is treated as a similarly situated entity . . . .").


[4] See supra note 1 (quoting language from the previous version of the rule regarding SBA's 3-contract limitation).

[5] SBA's final rule also created a new regulation regarding past performance in prime/subcontractor teams. For a discussion of that issue, check out this article, New SBA Rule: Potential Game Changer for Teaming (JV & Prime/Sub).


. . .


#govcon #matross #smallbusiness #jointventure


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