Verify Your Joint Venture Agreements Because a Problematic Under-the-Radar SBA Change

 A little-noticed change to the SBA's joint venture standards may require WOSB joint venture operating under the SBA's All Small Mentor-Protege Program to modify their joint venture agreements.

Two of the prerequisites for mentor-protege WOSB joint venture attempting to get small company set-aside contracts were modified by the SBA in its most recent final rule, which became effective on November 16. A WOSB joint venture agreement that complies with the small business set-aside requirements may not be legal if the joint venture seeks 8(a), SDVOSB/VOSB, HUBZone, or WOSB/EDWOSB contracts since SBA did not make appropriate revisions to the joint venture standards for SBA's four key socioeconomic programs (and vice versa).

A mentor and protege can create joint ventures under the All Small Mentor-Protege Program to seek any opportunity for which the protege is eligible based on size and socioeconomic status. The mentor and protege must sign a WOSB joint venture agreement that includes some mandatory clauses that are detailed in 13 C.F.R. 125.8 if the joint venture seeks to pursue a small company set-aside contract and the mentor is considered a large business for that contract.

The cooperative venture is not considered small if even one of the many necessary clauses is omitted. This implies that the WOSB joint venture will forfeit the contract if it is named the awardee but its size is contested.

Given the significant risks involved, it's critical to ensure that every joint venture agreement includes all necessary provisions. And for that reason, it's crucial to be aware that on November 16, two of the essential standards in 13 C.F.R. 125.8 were altered. (The SBA also changed a few other necessary standards, but in my opinion, these changes shouldn't have an impact on the legality of joint venture agreements that still contain wording from before November 16).

Before November 16, each joint venture agreement had to include the following clauses following 13 C.F.R. 125.8(b)(2)(xi) and (xii):

Stating that SBA must receive quarterly financial statements detailing total contract receipts and expenses (including principals' compensation for the joint venture) no later than 45 days following each operating quarter of the joint venture; and

Requiring the SBA to receive a project-end profit and loss statement, along with a statement of final profit distribution, no later than 90 days following the conclusion of the contract.

The requirements outlined in 13 C.F.R. 125.8(b)(2)(xi) and (xii) are materially changed as of November 16 and thereafter.

Stating that SBA and the relevant contracting officer must receive annual performance-of-work statements required by paragraph (h)(1) no later than 45 days following each joint venture operating year; and

Stating that no later than 90 days following the conclusion of the contract, SBA and the appropriate contracting officer must receive the project-end performance-of-work required by paragraph (h)(2).

Reports detailing the joint venture's compliance with the performance-of-work requirements, such as restrictions on subcontracting and guidelines for the joint venture's internal work split, are required by the new rule's cited paragraphs (h)(1) and (2).

In two ways, the SBA's adjustment is likely to be problematic.

The first is that a lot of WOSB joint ventures use sample agreements, basically employing the same joint venture agreement over and over again. However, a mentor-protege joint venture that does not have the new performance-of-work reporting clauses in its joint venture agreement and submits a proposal for a small company set-aside work after November 16 is probably ineligible. Joint venturers should not rely on out-of-date templates to seek small company set-aside contracts because they were made to conform with the previous regulations.

Second, the SBA's unique joint venture regulations for the 8(a), SDVOSB/VOSB, HUBZone, and EDWOSB/WOSB programs remained unchanged for whatever reason. Financial and loss statements must still be submitted following all four of these regulations.

A mentor-protege joint venture must take great effort to ensure that the "proper" provisions are included in the JV agreement for each proposal if it plans to submit bids for both socioeconomic and small enterprise contracts. This can be achieved by carefully crafting the joint venture agreement's language or by establishing two empty JVs, one to obtain socioeconomic contracts and the other to pursue small business set-asides.

The SBA's mentor-protege programs have been consolidated, the WOSB certification program has been extended for an additional year, and it seems like there have been significant changes to government procurement laws affecting small businesses virtually every week during the past few months. Understandably, this seemingly uninteresting amendment to 13 C.F.R. 125.8 has received so little attention given how much news there are these days. But don't ignore it—the eligibility of your WOSB joint venture may depend on it.