Joint ventures are an increasingly popular form of business for companies pursuing government contracts. But contractors pursuing small business set-aside contracts and/or socioeconomic set-aside and sole-source contracts (such as 8(a) contracts) must strictly adhere to the rules of the U.S. Small Business Administration (SBA). One of the most important SBA joint venture rules–and one that contractors sometimes inadvertently violate–is the so-called “two-year” joint venture rule.
Under the SBA’s regulations at 13 C.F.R. 121.103(h), a joint venture is intended to be a limited-duration entity. With that in mind, the regulations state that “a specific joint venture 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.” Affiliation, in turn, means that the respective sizes of the joint venture’s partners are added together when determining whether the joint venture qualifies as a small business for purposes of the contract in question. In many cases, affiliation between the joint venturers will disqualify the joint venture from an award.
Despite the way this regulatory text reads, an example later in the regulation clarifies that a joint venture can receive awards beyond the two-year period, provided that the offer was submitted before the two-year window closed. Therefore, contractors can think of the two-year rule this way: on the date the joint venture wins its first contract, a two-year window opens. During that two-year period, the joint venture can submit an unlimited number of offers and can accept awards stemming from those offers, regardless of whether the award date occurs before or after the two-year window closes. However, if the joint venture submits an offer after the two-year window closes, the joint venture partners will be deemed affiliated.
Joint venture partners operating under the SBA’s rules should be very careful about marking the two-year deadline on their calendars and refraining from submitting offers after the window closes. However, the two-year rule does not mean that partners to the joint venture must forego joint venturing with one another after the two years have passed. Instead, the SBA’s rules state that “[t]he same two (or more) entities may create additional joint ventures, and each new joint venture 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.”
In other words, the two-year rule applies to the joint venture entity–that is, the entity registered in SAM–and not to the joint venture partners. For example, assume that Contractor A and Contractor B form a joint venture, ABJV, LLC. If ABJV, LLC submits an offer after the two-year window closes, Contractors A and B will be deemed affiliated for purposes of the joint venture. However, if Contractors A and B form a new joint venture, ABJV2, LLC, and use that entity to submit offers after the two-year window closes, the rule does not apply.
Joint venturing under the SBA’s regulations can be a powerful tool, but it requires strict adherence to the rules, including the two-year rule. As with any legal matter involving government contracting, it is recommended that contractors consult with qualified legal counsel regarding the establishment of joint ventures and compliance with legal requirements.
For more information about Government Contracting, contact your CIRAS Government Contracting Specialist or complete our Request for Counseling form.