SBA Proposes to Eliminate the 3-Contract Limit for Joint Ventures
For many small businesses, forming a joint venture ("JV") can be a great way to compete for larger government contracts. Indeed, combining technical capabilities or past performance can unlock revenue for JV members. Yet, with all of the upside, there are some issues that can be particularly troublesome.
As noted in an earlier post, one area that can be particularly thorny for small business JV's is facility security clearances. But, the rosebush doesn't end there. In addition, JV's must also deal with another thorny issue: the "three-in-two" rule. That is, under the Small Business Administration's ("SBA") regulations, a JV may "carry out no more than three specific or limited-purpose business ventures for joint profit over a two year period." [1] In other words, starting on the date of the first contract awarded to the JV, the JV may not be awarded more than three contracts over the next two years without running into an affiliation issue.
To avoid this problem, some small businesses will form another JV, which would then restart the "three-in-two" limit. In its recent proposed rule, SBA acknowledged that the three-in-two rule might "unduly restrict[] small business and [] disrupt normal business operations" and proposed a change to fix the problem.
Specifically, the SBA notes that
To capture SBA's intent on limited scope and duration, SBA's current regulations provide that a joint venture is something that can be formed for no more than three contracts over a two-year period. If the parties intend to jointly seek work beyond three contracts or beyond two years from the date of the first award, they must form a new joint venture entity. That new entity would then be able to perform an additional three contracts over two years from the date of its first award. Several firms have commented to SBA that the three-contract limit unduly restricts small business and can disrupt normal business operations. SBA does not seek to impose unnecessary burdens on small businesses but continues to believe that a joint venture should be a limited duration vehicle. In response to these concerns, SBA proposes to eliminate the three-contract limit for a joint venture, but continue to prescribe that a joint venture cannot exceed two years from the date of its first award. In addition, the proposed rule would clarify SBA's current intent that a novation to the joint venture would start the two-year period if that were the first award received by the joint venture.
According to SBA, eliminating the "three-in-two" requirement will hopefully "lessen the burden on small businesses, while still preserving SBA's belief that a joint venture is not intended to be an on-going business entity."
This should be welcome news for many small businesses who are contemplating forming a JV to compete for government contracts. If the proposed rule becomes finalized, then contractors will have more flexibility to use JV's as they will not have to worry whether the JV will run afoul of the "three-in-two" rule. To be sure, however, SBA makes clear that the JV duration will still be limited to two years from the date of its first award.
Comments to the proposed rule are due by January 17, 2020.
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[1] 13 C.F.R. § 121.103(h).
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