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Joint Venture Affiliation Exception Isn’t Unlimited, OHA Says

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Koprince Law LLC

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To encourage joint venturing, the SBA’s size regulations provide a limited exception from affiliation for certain joint venturers: a joint venture qualifies for award of a set-aside contract so long as each venturer, individually, is below the size standard associated with the contract (or one venturer is below the size standard and the other is an SBA-approved mentor, and they have a compliant joint venture agreement). In other words, the SBA ordinarily won’t “affiliate” the joint venturers—that is, add their sizes together—if the joint venture meets the affiliation exception.

Because of this special treatment, it can be easy for the venturers to assume that they are completely exempt from any kind of affiliation. But as the SBA Office of Hearings and Appeals recently confirmed, however, the exception isn’t nearly so broad.

The facts in Veterans Construction Coalition, SBA No. SIZ-5824 (Apr. 18, 2017) are relatively straightforward: AWA Business Corporation (an 8(a) company) and Megen Construction Company (a small business) formed a joint venture called Megen-AWA 2 (“MA2”), to bid on and perform various construction projects at Wright-Patterson Air Force Base, under an 8(a) set-aside solicitation. The solicitation in question was issued under NAICS code 236220 (Commercial and Institutional Building Construction), with a corresponding $36.5 million size standard.

After evaluating competitive proposals, the Air Force announced that MA2 was the apparent awardee. An unsuccessful competitor filed a size protest, arguing that AWA and Megan were affiliated in various ways, including identity of interest (as the companies were owned by brothers), common management (the brother who owned AWA used to be vice president of Megen), and totality of the circumstances (the companies had worked together under other joint ventures before).

In response to these allegations, MA2 argued, in part, that it qualified as a small business because AWA and Megen both fell below the solicitation’s $36.5 million size standard, as required by the joint venture exception from affiliation. The SBA Area Office agreed, but went a step farther: it held that because AWA and Megan were parties to a joint venture, they could not be affiliated on the “general affiliation” grounds of identity of interest, common management, or totality of the circumstances. The SBA Area Office issued a size determination finding MA2 to be an eligible small business.

On appeal, OHA asked the SBA Office of General Counsel to comment on the breadth of the joint venture exception from affiliation found in 13 C.F.R. § 121.103(h)(3). The SBA Office of General Counsel wrote that the provision “created an exception to affiliation on the basis of participation in a joint venture.” The provision does not create a general exemption to affiliation for joint ventures—“[t]hat is, firms exempted from joint venture affiliation . . . still could be found to be affiliates for reasons other than those set forth in § 121.103(h).”

OHA agreed with the Office of General Counsel. OHA wrote that the affiliation exemption at issue “applied to ‘affiliation under paragraph (h),’ which is affiliation based on joint ventures. Logically, then, the exception was confined to contract-specific affiliation based on joint ventures and did not extend to issues of general affiliation[.]” Because the Area Office did not consider the general affiliation allegations (like identity of interest, common management, and totality of the circumstances), OHA remanded to the Area Office for additional analysis.

Sometimes, small businesses think that their participation in a joint venture serves as a broad exemption from affiliation with their partner. Veterans Construction confirms this isn’t true—joint venture partners can still be deemed affiliated for reasons other than their participation in the joint venture. Knowing when such affiliation might be found—and taking steps to minimize any indicia of affiliation—just might save a contract award.


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