A Warning To SBA Mentor-Protege Joint Ventures

January 5, 2015Articles Law360

Reprinted with permission from Law360. (c) 2015 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

Never assume that joint venture partners under the SBA’s 8(a) mentor-protege program are automatically exempt from the rules of affiliation. That was the message handed down in a recent legal decision — the first of its kind — that prevented an already approved mentor-protege team of Kisan Engineering Company PC, the 8(a) protege, and its mentor, The Pike Company Inc. from forming a joint venture. The project involved a multimillion-dollar U.S. Army Corps of Engineers small business set-aside contract to design and build an Army Reserve Center. The ruling was based on the Small Business Administration’s view that the joint venture partners were, in fact, affiliated under the SBA’s rules of affiliation (13 CFR §121.103).

The ruling, by the SBA, is significant in that it suggests that even though an 8(a) small business and a large business have been approved to participate in the SBA’s 8(a) mentor-protege program under 13 CFR §124.520, it does not mean that any joint venture between the two companies will be automatically exempt from the rules of affiliation.

In this case, following the contract award, the contracting officer questioned whether the agreement submitted by the joint venture partners satisfied the SBA’s rules for joint venture agreements. Based on these misgivings, the contracting officer initiated a size protest with the SBA area office. It is unusual to see a contracting officer initiate a size protest based on a joint venture agreement as well as to see the SBA area office review a joint venture agreement on a small business set-aside (i.e., not an 8(a) set-aside). Interestingly, both practices seem to be on the rise. See, e.g., Size Appeal of: Drace Anderson Joint Venture, SBA No. SIZ-5531 (2014). On 8(a) set-aside procurements, the SBA must approve the joint venture agreements at the time of award. That is not the case with non-8(a), small business set-aside contracts.

In this case, the area office determined that the joint venture agreement was remiss in that it:

Did not itemize all major equipment, facilities and other resources to be provided by each party;
Failed to specify the responsibilities of the parties; and,
Did not show how the joint venturers would meet the minimum performance requirements.

In the subsequent appeal of these findings, in Size Appeal of: Kisan-Pike, A Joint Venture, SBA No. SIZ-5618, 2014, the SBA’s Office of Hearings and Appeals affirmed the SBA area office’s determination that the Kisan-Pike joint venture (that is, the joint venture between 8(a) protege, Kisan Engineering Company PC, and its mentor, The Pike Company Inc.) exceeded the size standard for a small business general contractor because the two joint venture partners were affiliated.

Under 13 CFR § 124.513(c)(6) and (7), a valid joint venture must contain provisions:

Itemizing all major equipment, facilities and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each; and

Specifying the responsibilities of parties with regard to negotiation of the contract, source of labor and contract performance, including ways that the parties to a joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section.

In the Kisan-Pike joint venture agreement, the joint venture partners tried to satisfy the first requirement with this simple statement: “Upon award of the contract, Kisan and Pike will provide equipment, facilities and other resources to the Joint Venture required to execute the contract.”

Despite this attempt on the part of the Kisan-Pike joint venture to address the necessary provisions in order to remain a valid joint venture, the SBA found this statement to be unpersuasive. The SBA also considered the joint venture’s claim that the joint venture agreement was sufficiently detailed, given that the contract was a design-build contract and it was, as a result, impossible to confirm the construction plan before the Corps approved the design. The SBA found this claim to be unpersuasive as well, noting that the Phase II proposal contained proposed design drawings and a detailed construction schedule, so presumably, the joint venture would have had some idea of what equipment and resources each could provide.

With respect to the source of labor and contract performance, the joint venture agreement stated that the president of the protege would negotiate and manage the contract, but did not designate specific tasks to either Kisan or Pike. The agreement also only noted that the joint venture must perform 15 percent of the cost of the contract incurred for personnel with its own employees (not including the cost of material). The SBA found that simply stating the minimum performance requirements is insufficient to meet the requirement.

The area office also found — and the OHA confirmed the agreement did not meet the requirements set forth in 13 CFR § 124.513(d), which states that the 8(a) protege must perform at least 40 percent of the work undertaken by the joint venture, and that the protege’s work must consist of “more than administrative or ministerial functions.” In contrast, the joint venture agreement in this case made “broad” and “generic” representations stating that Kisan would perform at least 40 percent of the work. No details or plan were included.

On appeal, the OHA expressed surprise that the joint venture neither argued that its joint venture agreement complied with 13 CFR § § 124-513(c) and (d), nor that the area office’s analysis was inaccurate. In fact, the joint venture argued only that it was unfair and unrealistic to expect that the joint venture could provide the required level of detail in the early stages of a design-build construction contract. The OHA noted that the regulations do not authorize an exception for design-build procurements and that such policy arguments should be directed at SBA policy officials, not the OHA.

The takeaway lesson for SBA 8(a) mentor-protege participants in all of this is that they must take the time to clearly spell out each partner’s contributions to the joint venture, how the work will be performed and who will be responsible for each step in the process. This approach is not unlike defining the “primary and vital requirements” of the contract in an agreement to subcontract between a small business prime contractor and its large business subcontractor, and explaining clearly that the small business concern is performing those requirements. In both cases, the SBA wants to see how the small business concern is benefiting from the relationship between the small business and the larger business partner.

The final and most interesting message to participants in the SBA 8(a) mentor-protege program involves the interpretation of affiliation by the OHA in this case. The OHA rejected the argument that mentors and proteges are presumably unaffiliated when there is an SBA-approved mentor-protege agreement. 13 CFR § 124.520(d)(4) states: “No determination of affiliation or control may be found between a protégé firm and its mentor based on the mentor/protégé agreement or any assistance provided pursuant to the agreement.” In Kisan-Pike, the OHA explained that the area office did not find affiliation based on the mentor-protege agreement itself, but rather, that the area office determined that the exception of mentor-protege joint ventures is not available because the agreement did not meet the requirements set forth in the SBA regulations.

The bottom line: Never assume.

Reprinted with permission from Law360. (c) 2015 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.