Navigating SBA Affiliation Rule 13 CFR 121.103 & SBA Small Business Joint Venture & Ostensible Subcontractor Rules 

SBA Joint Venture & Affiliation Definition and Meaning 13 CFR 124.513 & 13 CFR 121

Small businesses tend to enter joint venture arrangements without a thorough understanding of SBA affiliation rules. This can be a costly mistake when competing for federal government contracts, simply because the contract can be taking away through a small business size protest due to findings of affiliation.

Besides the Ostensible Subcontractor Rule, the SBA has launched a new set of rules that companies should be familiar with. They cover everything from FAR part 15 contract by negotitation to teaming agreements, joint venture and affiliation.

Without complying with the legal affiliation definition, the SBA can find that your company is affiliated either by joint venture or some other means of affiliation. When government contractors are also being investigated for affiliation, they must also meet the Ostensible definition that ultimately can lead to an unlawful contract award.

At Watson & Associates, our consultants and attorneys help small businesses nationwide engaged in SBA joint ventures and Mentor Protégé arrangements to meet the confusing SBA affiliation definition and rules. Get help with:

13 CFR 121.103 and 13 CFR 124.513 SBA Affiliation Rules

The SBA uses various legal approaches when seeing whether a small business meets the affiliation definition when performing with a subcontractor.  The basic rule under 13 CFR 121.103 and 13 CFR 124.513 is that affiliation exists when one business controls the other. It also applies if one business has the power to control another or when a third party as the power to control both businesses. If the government has filed a size protest against your company during performance, are there facts to support a breach of duty of good faith and fair dealing?

  • A JV of at least one 8(a) Participant and one or more other business concerns may submit an offer as a small business for a competitive 8(a) procurement, or be awarded a sole source 8(a) procurement, so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement.
  • If approved by SBA, an 8a Participant may enter into a joint venture agreement with one or more other small business concerns, whether or not 8(a) Participants, for the purpose of performing one or more specific 8(a) contracts.

These are very fact-specific cases. Having the best small business joint venture lawyers on your team can help you to get through the complex legal issues.

Specific Language of SBA Affiliation Rules 

In order to receive the exclusion from SBA affiliation rules  for both 8(a) and non-8(a) procurements, the SBA joint venture must meet the requirements set forth in 13 CFR 124.513 (c).”) Bidders must still be cognizant of the Ostensible Contractor Rule requirements and subcontractor relationships. See why the similarly situated small business rules do not always protect you from affiliation. Also be mindful of the limitations on subcontracting rules.

Under SBA joint venture rules, Small Business Joint Venture Agreements Must Meet Specific Requirements: Under 13 CFR 124.513 (c)(6), the joint venture agreement must itemize “all major equipment, facilities, and other resources” to be furnished by each of the JV partners. See information about nonmanufacturer rule issues for small businesses.

  • SBA Joint venture agreements containing generalized language will cause you to lose the contract under SBA rules.
  • Broad statements lack the specificity necessary to comply with 13 CFR 124.513 (c)(6). Similarly,
  • SBA affiliation rules require the JV agreement to specify the roles and responsibilities of the SBA joint venture partners, including how the joint venture will comply with the requirement of 13 CFR 124.513 (d) that the 8(a) BD Participant perform at least 40% of the company’s work.

The SBA can find affiliation based on a number of situations. The most common hurdles that may small businesses have to overcome include, but is not limited to:

a. Affiliation arising under stock options, convertible securities, and agreements to merge. In determining size, SBA considers stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA size standards treat such options, convertible securities, and agreements as though the rights granted have been exercised.

  •  Agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date are not considered “agreements in principle” and are thus not given present effect. This present effect rule is very tricky and depends on the facts of each case.
  • Options, convertible securities, and agreements that are subject to conditions precedent which are incapable of fulfillment, speculative, conjectural, or unenforceable under state or Federal law, or where the probability of the transaction (or exercise of the rights) occurring is shown to be extremely remote, are not given present effect.
  • An individual, concern or other entity that controls one or more other concerns cannot use options, convertible securities, or agreements to appear to terminate such control before actually doing so. SBA will not give present effect to individuals’, concerns’ or other entities’ ability to divest all or part of their ownership interest in order to avoid a finding of affiliation.
  • Affiliation based on common management. Affiliation arises where one or more officers, directors, managing members, or partners who control the board of directors and/or management of one concern also control the board of directors or management of one or more other concerns. Find out more information about asset purchase sales when getting a government contract novation.
  • Affiliation based on identity of interest. Affiliation may arise among two or more persons with an identity of interest. Individuals or firms that have identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party with such interests aggregated. Where SBA determines that such interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.
  • Exception to affiliation for certain joint ventures. (i) A joint venture of two or more business concerns may submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract.

There are many other situations. We can help you to assess your specific situation. Call us at 1-866-601-5518.

General Subcontractor Affiliation Meaning 13 CFR 121.103

The new SBA affiliation rules introduced a few significant changes that small business should be aware of when employing a subcontractor.

Bundled contracts and JV contracts. When the government issues a solicitation involving bundled contracts, a small business can enter into a teaming agreement with one or more small business without worrying about violating the affiliation meaning.

  • Each teaming member must be small must remain small under the NAICS code assigned to the prime or subcontract.

small businesses owned or controlled by married couples. When spouses own a small business (also parents, siblings, civil union), they are presumed affiliated if they all conduct business with each other. To avoid the affiliation presumption, the parties must show a clear line of fracture. See also information about assignment and novation clause.

Do You Meet the Exceptions to Affiliation Coverage?

The key to prevailing in a small business size protest case is to make sure that you always assess the opponent’s ability to meet the exception to affiliation under 13 CFR 121.103. They include:

  1. Small business concerns owned in whole or substantial part by investment companies licensed, or development companies qualifying, under the Small Business Investment Act of 1958, as amended, are not considered affiliates of such investment companies or development companies.
  2.   Business concerns owned and controlled by Indian Tribes,  United States Alaska Native Corporations (ANCs) organized pursuant to the
    Alaska Native Claims Settlement Act.
  3.  Business concerns which are part of an SBA approved pool of concerns for a joint program of research and development or for defense production as authorized by the
    Small Business Act are not affiliates of one another because of the pool.
  4. A firm that has an SBA-approved mentor-protégé agreement authorized under § 124.520 or § 125.9 of this chapter is not affiliated with its mentor firm solely because the protégé firm receives assistance from the mentor under the agreement. Similarly, a protégé firm is not affiliated with its mentor solely because the protégé firm receives assistance from the mentor under a federal mentor-protégé program where an exception to affiliation is specifically authorized by statute or by SBA under the procedures set forth in § 121.903. Affiliation may be found in either case for other reasons as set forth in this section.

Are Your a Similarly Situated Entity – Does Affiliation Apply to You?

A common mistake that small businesses make when it comes to SBA small business joint venture and affiliation rules is to misapply the rules regarding similarly situated small businesses. Under SBA regulations, a contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes.

However, an ostensible subcontractor is a subcontractor that is not a similarly situated entity, as that term is defined in § 125.6(g)(3), and: Performs primary and vital requirements of a contract, or of an order; or is a subcontractor upon which the prime contractor is unusually reliant. See also information  about contract by negotiation under FAR 15.

All aspects of the relationship between the prime and subcontractor are considered, including, but not limited to, the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance or the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation.

Ostensible Subcontractor Rule

One of the most common ways that the SBA finds that a small business is affiliated is through the Ostensible Subcontractor Rule. To meet the definition of Ostensible, the SBA will look to see if the prime contractor is unusually reliant on the subcontractor to perform the primary and vital parts of the contract.

Similar to the SBA’s affiliation definition, the Ostensible definition is extremely fact specific.  Having an affiliation lawyer at Watson to review your teaming agreement or joint venture agreement for evidence of affiliation can save an awarded contract being taken away.

SBA affiliation regulations stipulate that “the joint venture must meet specific requirements of 13 CFR 124.513 (c) and (d) in order to receive the exception to affiliation” for mentor-protégé joint ventures. 13 CFR 121.103(h)(3)(iii).

Mentor Protégé and SBA Affiliation

Under the new rules, the protégé firm can escape the affiliation meaning when a large business owners 40% or less of the protégé firm. However, when the mentor protégé relationship ends, so to must the ownership. If the previous owner does not end, then the small business will be deemed affiliated with the mentor. See information about employment discrimination.

Small Business Joint Venture Rules – Definition & Meaning (13 CFR 121.103(h))

Under federal procurement, a small business joint venture (JV) is a form of business arrangement where two or more companies join forces to become the offeror/ bidder for a specific contract ( find out information about common law duty of good faith and fair dealing.) The companies pool together their resources but with certain limitations. In addition to 13 CFR 121.103, FAR 9.6 also allows for joint venture agreements. See information regarding the SBA populated joint venture rule.

Under the new SBA joint venture rules, the SBA has made it clear that although JV entities can be still formal or informal, to meet the joint venture definition under 13 CFR 121.103(h), the agreement must be in writing.

  • An informal joint venture arrangement does not execute the requirement for a written agreement.

Under the joint venture definition, the SBA suggests that JV partners want to avoid the legal consequences of being a business partnership, then they should probably form a limited liability company.

Populated or unpopulated:  When small businesses enter into a teaming arrangement, it can no longer be populated with individuals intended to perform contracts awarded to the joint venture.

Important JV Agreement Tips. Get Your Free Copy

Call Our SBA Joint Venture & SBA Affiliation Lawyers for Immediate Help

If you are a small business seeking to secure government contracts with SBA joint venture rules  or teaming agreements, need help with SBA affiliation rules under 13 CFR 121.103 and 13 CFR 124.513, mentor protégé agreement, avoiding the ostensible subcontractor rule definition or other teaming relationship, call our 8a certification lawyers and consultants for a FREE Initial Consultation. Call 1-866-601-5518.