Next, this is not a discussion of the Sec. 8(a) SBA program, and I'd hardly have any authority to conduct one, although there have been a few posts on related subject matter in this blawg, e.g., here and here. You can search the web for many articles describing the program, which is an essential component of federal procurement legislation, and indicative of the kinds of programs that Prof. Steven Schooner has termed the "wealth distribution" principle of procurement, although, to me, it is also wrapped up in the goal of nurturing or propagating competition; something in the nature of an agricultural nursery.
The basic proposition for this topic is that size matters in the set aside provision. (It is a very basic proposition, in which there is no "one size fits all", but that's not a discussion for today.) Because the SBA program is about "small business" set asides, something of a valuable preference for contract awards, one of its major abuses has been qualifying a large business for a contract by use of a "front" small business. This little ruse comes in a variety of colors and forms, some of which actually work, proving the keen adaptability of businesses and lawyers. But many don't, proving that clever people can land themselves in hot water, jail and other uncomfortable headlines.
This post takes the case of one such close question. As expressed in the Pillsbury client alert mentioned above, "This decision serves to remind small and large businesses engaging in mentor-protégé relationships that the approval of a mentor-protégé agreement by the SBA does not create a safety net for the mentor-protégé joint venture formed to submit qualifying small business bids and proposals."
The "decision" is actually two decisions. One made in November "affirms Area Office finding that firms were affiliated by virtue of joint venture agreement because provisions of agreement between mentor and 8(a) protégé did not meet requirements of 13 C.F.R. §§ 124.513(c) and (d)". The other, made in December, "dismisses appeal because District Office's decision that joint venture agreement did not meet requirements of regulations was not a size determination and, therefore, could not be appealed to OHA". You can get the link to these and many more such "size decision" questions on SBA's website here.
The fundamental substantive question here was whether this particular "mentoring agreement", a concept promoted by the government to help small businesses become more competitive, might be seen as falling into the pile of relationships technically smelling of a "front". And it's not such a subjective question as it may appear at first blush, because, as any good bureaucratic regime, there are regulations that require certain hoops to be jumped to flush out the reality of the relationship. The devil here is definitely in the details, and no amount of artistic license can suffice as a subterfuge.
The first decision is Size Appeal of Kisan-Pike , A Joint Venture, SBA No. SIZ-5618 (2014):
On October 6, 2014, the U.S. Small Business Administration (SBA) Office of Government Contracting, Area I (Area Office) issued Size Determination No. 01-SD-2014-44, finding that Kisan-Pike, A Joint Venture (Appellant) is not a small business under the size standard associated with the subject procurement. Appellant is a joint venture between Kisan Engineering Company, P.C. (Kisan), an 8(a) Business Development (BD) participant, and The Pike Company, Inc. (Pike), a large business that SBA approved as Kisan's mentor. The Area Office found that Kisan and Pike are affiliated for this procurement under 13 C.F.R. §121.103(h)(2), as a result of their joint venture. For the reasons discussed infra, the appeal is denied and the size determination is affirmed.The first decision certainly, to this uninitiated eye, looked like a size determination: the CO "issued Size Determination No. 01-SD-2014-44, finding that Kisan-Pike, A Joint Venture (Appellant) is not a small business under the size standard". Alas, things are not always what they seem, even though it seems the size determination stuck in any event. The second decision concluded that the SBA Office of Hearings and Appeals (OHA) didn't have jurisdiction to hear an appeal of the size decision.
The Contracting Officer )"CO") expressed concern that Appellant's joint venture agreement did not comply with 13 C.F.R. §§124.513(c)(6) and (7). As a result, Appellant might be ineligible for the mentor-protégé joint venture exception from affiliation.
The joint venture agreement between Kisan and Pike states that Kisan owns 51% of Appellant and serves as Appellant's Managing Venturer, and Pike owns the remaining 49%. [It spelled out the roles of each co-venturer in descriptive but general language. You must read the decision in its original at the link citation for details and full context; I paraphrase stuff like this in this blawg.]
The Area Office explained that SBA may find firms affiliated based on a joint venture relationship, unless an exception applies. One such exception refers to participants in an SBA approved mentor-protégé agreement, but if the size status of the joint venture is protested, the provisions of §§ 124.513(c) and (d) will apply. This means that the joint venture must meet the requirements of §§ 124.513(c) and (d) in order to receive the authorized exception to affiliation.
It then considered whether Appellant complied with 13 C.F.R. § 124.513(c)(6) and (7). Under those regulations, a valid joint venture agreement must contain provisions:
•(6) Itemizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each; [and]The Area Office found Appellant's joint venture agreement deficient with respect to both requirements.
•(7) Specifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section.
As to subsection (c)(6), rather than itemizing all major equipment and facilities, the agreement contained a single sentence stating, “Upon award of the Contract, Kisan and Pike will provide equipment, facilities and other resources to the Joint Venture required to execute the contract.” (Size Determination at 4, quoting Agreement § 5.0.) Appellant argued that its agreement was sufficiently detailed because this is a design-build contract, and the Corps must approve the design before Appellant can confirm the construction plan. The Area Office rejected this explanation, however, observing that Appellant's Phase II proposal contained proposed design drawings and a detailed construction schedule. Therefore, while the design had not yet been approved, “the nature and the type of building construction are certain,” and “it is very unlikely that [Appellant] has no idea how [it] will execute [its] proposal to complete the project.”
As to subsection (c)(7), the Area Office observed that the joint venture agreement merely confirmed that Appellant will perform at least 50% of the non-construction labor costs and at least 15% of the construction labor costs.
The Area Office also considered Appellant's compliance with 13 C.F.R. § 124.513(d), which requires that the 8(a) BD participant perform at least 40% of the work performed by the joint venture, and that this work consist of “more than administrative or ministerial functions.” Appellant did not meet this requirement, the Area Office reasoned, because the agreement made “broad” and “generic” representations that Kisan will perform at least 40% of the work “without any constructive plan to support [this] claim.”
Because the joint venture agreement was deficient, the Area Office determined Appellant may not avail itself of the mentor-protégé affiliation exemption. Accordingly, Kisan and Pike are affiliated for this procurement due to their joint venture. Pike is a large business, so the combined average annual receipts of Kisan and Pike exceed the applicable size standard, and Appellant is not a small business for this procurement.
Appellant contends that the Area Office “acted irrationally, arbitrarily, and outside the scope of its proper review.” First, Appellant argues, the size determination is clearly erroneous because Kisan and Pike are presumably unaffiliated as a result of their SBA-approved mentor-protégé agreement. Second, Appellant complains that it repeatedly asked SBA personnel to review and comment on the joint venture agreement, but SBA declined to do so before an award was made: “Had [Appellant] been able to obtain SBA input, it could have addressed these concerns up front." Third, that “at the
Phase I proposal stage of a design-build solicitation, at which no architectural, material, equipment or engineering details or even preliminary designs are known with any degree of specificity about the project, it is entirely infeasible for an offeror to make good faith determinations on the specific needs for equipment and managerial assignments.”
SBA stresses that a joint venture between a large and a small business, such as Appellant, is normally not eligible for a contract set aside for small businesses. SBA rejects Appellant's argument that Kisan and Pike are presumed unaffiliated. SBA asserts, concerns size determinations of the protégé itself, not size determinations of a joint venture between a mentor and a protégé, as is the
case here.
SBA notes that the joint venture agreement does not itemize resources, and Appellant makes no attempt to argue that its agreement does comply with these requirements. Further, the joint venture agreement “entirely flouts” the requirement in 13 C.F.R. § 124.513(d) that the protégé firm, Kisan, perform at least 40% of the joint venture's substantive work. SBA argues that these omissions are egregious because the purpose of these rules is to prevent large businesses from enjoying contracts intended for small businesses. By failing to delineate responsibilities, Appellant makes it possible for Pike to perform all or most of the contract. Further, SBA argues, to create an exception for joint venture agreements drafted before the offeror is certain of the procuring agency's requirements would be “unwise and unworkable” because there is often some degree of uncertainty. (Id. at 6.) Such an exception would also be at odds with OHA precedent, which indicates that joint venture rules should be applied “literally and narrowly so as to preclude situations where the 8(a) concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status.”
The CO notes Appellant executed its joint venture agreement on May 7, 2014, after the Corps had issued the Phase II technical specifications and drawings on April 28, 2014. These specifications, the CO emphasizes, contained “over 2000 pages of technical standards and criteria, and numerous conceptual drawings". Thus, Appellant had ample information to define the partners' respective responsibilities and to itemize equipment, facilities, and other resources. The CO casts doubt on Appellant's representation that it could not determine what each joint venture partner would need to bring to the project. To the CO, this statement is not credible because Pike, the mentor firm, has vast construction experience with similar projects.
Appellant also argues unconvincingly that mentors and protégés are presumably unaffiliated when there is an SBA-approved mentor-protégé agreement. The regulation Appellant relies upon, however, does not stand for the proposition Appellant advances. Importantly, the regulation does not establish a presumption that a mentor and protégé are unaffiliated. Rather, it merely states that the mentor and protégé are not affiliated based on the mentor-protégé agreement itself. The Area Office did not find affiliation based on the mentor-protégé agreement, but instead determined that the exception for mentor-protégé joint ventures is not available because Appellant's joint venture agreement does not meet the criteria.
For the above reasons, the appeal is DENIED and the size determination is AFFIRMED.
This second decision is Size Appeal of Kisan-Pike, A Joint Venture, SBA No. SIZ-5623 (2014):
On November 10, 2014, Appellant filed an appeal with the U.S. Small Business Administration (SBA) Office of Hearings and Appeals (OHA). The appeal, titled “Joint Venture Agreement Rejection Appeal of Kisan-Pike, A Joint Venure”, challenges the decision by the District Office declining to approve Appellant's JVA. In the appeal petition, Appellant states that “SBA's determination that KPC's JVA does not conform to regulatory requirements is in essence a size determination.” OHA noted the determination Appellant seeks to challenge does not appear to be a formal size determination.As noted above, this is pretty arcane stuff, and the devil is in the details. That said, the broad structure is pretty common and understandable.
Appellant states that the “instant matter is at its very essence a size determination because under the mentor-protégé regulations, the Determination is a finding of affiliation between [Kisan Engineering Company, P.C.] and [The Pike Company].” Appellant contends OHA, in the past, has routinely taken jurisdiction over cases involving size determinations where an SBA Area Office rejected a JVA. Appellant maintains the difference here is that the District Office rejected the JVA without explaining that the rejection was based on Appellant's size.
OHA's jurisdiction, stated by regulation, provides in pertinent part: “OHA has authority to conduct proceedings in the following cases: ... Appeals from size determinations ...." The regulations
governing size protests and formal size determinations include “Who makes a formal size determination?” provides: “The responsible Government Contracting Area Director or designee makes all formal size determinations in response to either a size protest or a request for a formal size determination. . . .”
Here, the District Office's disapproval of the JVA is not a formal size determination according to this definition. The disapproval did not come from a Government Contracting Area Director, and it was not issued as the “response to either a size protest or a request for a formal size determination.” A size protest may only be filed after bid opening or notification to offerors of the selection of the apparent successful offeror. Appellant did not file a protest after receiving notification of the identity of the apparent successful offeror, but only upon receipt of the disapproval of the JVA. The regulation does not provide for filing an appeal from this decision.
Accordingly, the District Office's letter rejecting Appellant's JVA is not a formal size determination, or in “essence” a size determination as Appellant argues, and OHA does not have jurisdiction to hear this appeal.
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