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Morris Manning & Martin, LLP

The Rules are the Rules: Joint Ventures Must be Unpopulated to Receive an 8(a) Set-Aside Contract

05.23.2018

HIGHLIGHTS

  • A Joint Venture (JV) must be unpopulated to receive an 8(a) small business set-aside contract.
  • Unpopulated means that none of the employees performing work on the set-aside contract can be employed by the JV itself.
  • Incumbent loses follow-on contract as a result of “inconsistencies and ambiguities” in its JV paperwork.

In a decision first issued on May 4, 2018, under seal and recently reissued for public release, the Court of Federal Claims (COFC) held that the Small Business Administration’s (SBA) determination that Senter, LLC (Senter) was ineligible to obtain an 8(a) set-aside contract was rationally based because Senter failed to show that it was an unpopulated JV as expressly required by the SBA’s regulations. 

Under the SBA’s rules, an 8(a) Participant may enter into a JV Agreement (JVA) with one or more other small businesses for the purpose of performing an 8(a) set-aside contract, provided the JVA is approved by SBA. 13 CFR §124.513(a)(1).  The members of the JV will not be considered affiliated for size purposes if, among other things, the JV is unpopulated. 13 CFR § 121.103(h). That is, in order to qualify the JV “may not be populated with individuals intended to perform contracts awarded to the joint venture (i.e., the joint venture may have its own separate employees to perform administrative functions, but may not have its own separate employees to perform contracts awarded to the joint venture).” Id. The requirement that the JV be unpopulated just recently went into effect in August of 2016. 

Senter, an entity formed between Sylvain Analytics, Inc., an approved 8(a), and Entereza, Inc., a small business, first submitted its JVA to SBA’s D.C. office for processing in April of 2016. As initially submitted, the JVA made several references to Senter as a populated JV with its own employees. Through several iterations the JVA was revised to remove some (but not all) references to its populated status and was ultimately approved by SBA on September 1, 2016.

A year later, Senter submitted a proposal to the Coast Guard for follow-on work that Senter was currently performing as the 8(a) incumbent. Prior to award, the Coast Guard requested an eligibility determination from SBA, at which time the SBA found that Senter had not filed the necessary JVA addendum to add this second contract to the scope of its JVA. Once again, Senter submitted paperwork indicating that the JV was in fact populated. As such, the SBA issued a denial letter stating that the JVA as amended was not legally sufficient to allow the JV to be awarded an 8(a) contract. Based on this finding the Coast Guard awarded the contract to the next offeror in line behind Senter. Senter filed a bid protest with COFC. 

In its decision, COFC cited to the “dizzying array of inconsistencies and ambiguities pertinent to [Senter’s] status as populated or unpopulated” in the JVA, which confusion was only compounded by the addendum adding back in references to Senter’s populated status among other things.  Interestingly, COFC also noted that the Contract Performance section of the JVA indicated which JV members would supply what employees, but did not list all the employees who would perform substantive work on the contract, “leaving open the possibility that the JV itself might employ some individuals who would perform substantive work.” COFC also did not agree with Senter’s argument that it was grandfathered out of the new unpopulated requirement. 

The obvious take-aways from the Court’s decision are one, that the rules are the rules, and two, make sure that your JVA documents are clear. While there were many indicia in Senter’s JVA as amended that pointed to its populated status, it seems likely that even one misstep would have led to the same result. As such, JVs are cautioned to carefully review their JVAs prior to submission and make sure that all requirements are met and clearly articulated.                

A copy of the decision is available here

If you need help understanding the JV rules or assistance with the preparation and submission of a JVA, please contact Andrew Mohr or C. Kelly Kroll: