OHA Holds that a Protested and Terminated Contract Still Triggers SBA's Two-Year Rule for Joint Ventures

For many small businesses, forming a joint venture ("JV") – as an "all small" or mentor-protégé JV – is a go-to strategy to secure lucrative set-aside government contracts. And while the Small Business Administration's ("SBA") rules on past performance evaluations or forming a compliant JV agreement are often top of mind for small businesses, SBA's two-year rule is another rule that contractors must understand to win contracts as a JV.

Briefly, SBA's "two-year rule" states that once a JV is awarded a contract, it can submit additional offers for up to two-years from the date of the first award. 13 C.F.R. § 121.103(h). If a JV submits a bid after that two-year window, the JV partners will be deemed affiliated for that effort, which means their receipts (or employees) will be aggregated to determine the JV's size (eligibility). And while this rule is relatively straightforward, a recent Office of Hearings and Appeals ("OHA") decision provided clarity where a JV's first award involved a contract that was terminated prior to performance as a result of a bid protest.

In the appeal of Hometown Veterans Medical LLC, SBA No. SIZ-6343 (2025), OHA grappled with a fact pattern in which the SBA Area Office held that a JV contract was not considered the first award under the two-year rule where the contract was terminated prior to performance (and payment) as a result of a bid protest. After all, as SBA noted, it would be "unfair" if that contract triggered the rule because the JV "performed no work, and received no benefit" from the award. OHA disagreed.

In granting the appeal, OHA said that the Area Office should have found the JV partners affiliated because the awarded contract triggered SBA's two-year rule under the plain language of the rule. OHA also said the regulatory history "confirms that SBA intended that the term 'contact award' would encompass all awards, irrespective of whether the joint venture actually performed, or benefitted from, the contract." In other words, it did not matter to OHA that the awarded contract was terminated prior to performance (or payment) as a result of a bid protest.

Because the JV received its first award more than two years before submitting its offer for the instant procurement, OHA concluded that the JV members were considered affiliated. And because the mentor was not small, OHA then held that the JV was ineligible for the award.

Takeaway

This is an important decision for small businesses (and their large mentors) to keep in mind when bidding on set-aside contracts as a JV. As OHA's decision shows, an "all small" or mentor-protégé JV's first contract will still trigger SBA's two-year rule even if that contract is subsequently terminated (prior to performance) as a result of a bid protest. Because running afoul of SBA's two-year rule leads to affiliation, small businesses, and their large mentors, should take note and plan accordingly.

Notably, following the decision, the protested JV filed a protest complaint challenging OHA's decision at the U.S. Court of Federal Claims. In its complaint, the protester argued that OHA misinterpreted SBA's two-year rule and said that OHA’s interpretation "would create the absurd result that [the JV's] two-year window started before it obtained any work at all." We will keep you posted as this case unfolds.

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