Avoid Costly SDVOSB Joint Venture Mistakes – 13 CFR 125.18 and 13 CFR 125.15

Qualifying under the Code of Federal Regulations 13 CFR 125.18 as an SDVOSB Joint Venture agreement means that you must first qualify as an SDVOSB. Getting the best guidance about the rules can put your company in a strong position even before you bid on a federal contract.

Although this seems obvious, there are cases where small businesses submitted bids for government contracts for disabled veterans with service-disabled veteran-owned small business joint venture agreements and lost when challenged by the competition in a bid protest.

Note: SBA and OHA lack jurisdiction to decide any SDVO status protest arising from a VA procurement

For example in one case, the United States Small Business Administration Office of Hearings and Appeals (SBA OHA) agreed with the SBA, that although the company’s owner qualified as is a service-disabled veteran based on documentation from the U.S. Department of Veterans Affairs, the company was still an ineligible SDVOSB under the joint venture definition because the owner lacked ownership and control. See also Compliance With SBA Rules for UnPopulated JV and Populated Joint Ventures.

New Joint Venture Agreement Rules: The SBA has developed new rules that became effective on August 24, 2016. The new rules make some detailed requirements for an SDVOSB Joint Venture arrangement. For example, the rules require that joint venture agreements contain the following sections.

• Purpose, Ownership, and Control
• Profits
• The performance of Work – Your joint venture contract must demonstrate that the SDVOSB partner MUST perform at least 40% of the work. The work must be more than administrative or ministerial in nature. The JV Agreement must also apply the required percentages under 13 CFR 125.
• Accounting, Banking and Reporting Requirements
• Responsibilities of the Parties
• Certification Before Starting Work: before starting work on the contract, SDVOSB requirements require JV prime must certify to the contracting officer and SBA that (i) the parties have entered into a Joint Venture that fully complies with 13 CFR 125.18(b)(2) and (ii) the parties will perform the contract in compliance with the performance of work requirements set forth in paragraph 13 CFR 125.18(b)(3).

JOINT VENTURE CERTIFICATIONS AND PERFORMANCE OF WORK REPORTS (13 CFR 125.8, 13 CFR Part 125.18, 13 CFR 126.616, and 13 CFR 127.506)

The new service disabled veteran owned small business joint venture definition rules require all JV partners to a joint venture agreement that perform an SDVOSB, HUBZone, WOSB, or small business set-aside contract to certify to the contracting officer and SBA prior to performing any such contract that they will perform the contract in compliance with the joint venture regulations and with the joint venture agreement. See Information on Native American Government Contracts.

Parties to the joint venture in government contracts for disabled veterans are also required to report to the contracting officer and to SBA how they are meeting or have met the applicable performance of work requirements for each SDVOSB, HUBZone, WOSB or small business set-aside contract they perform as a joint venture. There are also some nuances with joint venture and teaming arrangements for service-disabled veteran-owned small business contractors. See SBA Joint Venture Agreements Will Get No Mercy When Violating Three in 2 Rule.

13 CFR 125.15 What requirements must an SDVOSB meet to submit an offer on a government contract?

The rules under 13 CFR 125.15 are similar to other small business program regulations. If you are considered to be an SDVOSB small business you must meet certain regulatory criteria to submit bids for federal government contracts. First, you must submit the appropriate representations and certifications at the time you submit your initial bid to the contracting officer. 13 CFR 125.15 requires that your company is small under the size standard corresponding to the NAICS code(s) assigned to the contract; your company must be and SDVO SBC under governing regulations; and there can be no material change in any of the circumstances affecting your SDVO SBC eligibility.

Under 13 CFR 125.15 you can also submit bids for federal contracts if you enter into a joint venture agreement with one more SBCs or its SBA-approved mentor for the purpose of performing an SDVOSB contract.

Ownership and Control Needed Under 13 CFR Part 125

As a veteran-owned business, and to qualify as SDVOSB, the veteran owner must directly and unconditionally own at least 51% of the firm. Ownership on paper alone will not overcome control issues. See 13 CFR 125.9.

To make sure that your Joint Venture contract withstands legal scrutiny, under 13 CFR Part 125.10(a) business owners must:

• Control both the long-term decision-making and the day-to-day management of the firm.
• Under veteran owned business requirements, the Joint Venture agreement must contain a provision designating an SDVOSB as the managing venturer, and designating an employee of the managing venturer as the project manager.

In the sample case above, OHA found that although the veteran-owned 55% percent of the company’s outstanding shares, three individuals held Secured Promissory Notes which were secured by one-third of the owner’s stock.

The lesson here is that when structuring a service-disabled veteran-owned small business joint venture contract, you must make sure that the basic elements for SBA joint ventures are met. In addition, you must also make sure that your SDVOSB Joint Venture places the proper key employees to oversee the contract. If the court finds that the underlying ownership and control issues are lacking, you can potentially lose the contract. See information about HUBZone joint venture requirements.

Avoid Other Common SDVOSB Joint Venture Mistakes Under 13 CFR 125.18

• Your JV agreement must meet the statutory requirements. If your company is entering an SDVOSB mentor-protégé joint venture, then your company MUST meet the requirements of 13 CFR 125.18(b)(2)(vi) and (vii). Specifically, JV agreement MUST (i) itemize the equipment to be used in the performance of the contract; (ii) specify the responsibilities of the parties with respect to the negotiation of the contract, source of labor, and contract performance; and (iii) indicate the tasks that each member of the joint venture would perform on the contract, or which employees of each member would perform the functions). See Size Appeal of KTS Solutions, Inc., SBA No. SIZ-6049 (2020).
• Avoid generic joint venture agreements for SDVOSB government contracts. Especially, if drafted before the solicitation comes out because you can easily be liable under 1 3 CFR 125.18(b)(2) and (3) because the solicitation would dictate the relevant tasks of the parties. If subjected to a small business size protest, affiliation could be found if your SDVOSB joint venture agreement does not meet the statutory requirements. See Size Appeals of STAcqMe, LLC, SBA No. SIZ-5976 (2018).
• Avoid giving Mentor, in Mentor-Protege arrangement veto-power. If you are part of a mentor protégé arrangement, your JV agreement between SDVOSB and mentor will not comply with requirements at 13 CFR 125.18(b)(2) if the JV agreement gives the non-SDVOSB member veto power over several types of day-to-day actions of the JV). See VET Appeal of Seventh Dimension, LLC , SBA No. VET-6057 (2020)

For additional concerns or SDVOSB joint venture frequently asked questions or help with your SDVOSB Joint Venture agreement relationships under 13 CFR 125.15 or 13 CFR 125.18, call our government small business contracts lawyers at 1-866-601-5518 for a FREE INITIAL CONSULTATION.

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