As discussed previously in this blog series, the Small Business Administration (SBA) promulgates rules on the size standards under which businesses may qualify as “small.” Your business must meet the relevant size standards (i.e., according to the NAICS code for your industry) if you’d like to qualify for certain business development programs or certifications such as DBE, WOSB, EDWOSB, VOSB, SDVOSB or other SBA programs.

So far, we have explained SBA Affiliation arising from:

• Stock ownership;

• Stock Options, Convertible Securities, and Agreements to Merge; and

• Common management

• Identity of Interest

• The Newly Organized Concern Rule

Under 13 CFR § 121.103(h) the SBA may find affiliation when two parties are a joint venture. A joint venture exists where two businesses combine to apply for and carry out a specific contract and share the resulting profits over a two-year period. For size evaluations, the SBA will aggregate the revenue and number of employees of all businesses belonging to the joint venture. The same entities may create new joint ventures to continue applying for awards from small business programs beyond two years from an initial contract award, but at some point, the SBA may determine that such an ongoing relationship constitutes general affiliation. A joint venture can be awarded contracts after the end of the two-year period, provided they submitted the application for those contracts prior to the end of their two-year period.

If the joint venture is created as a separate entity, it cannot be populated unless all entities involved are similarly situated—having the same small business program status. A populated joint venture in which the entities are not similarly situated and will not be eligible for contracts set aside for small businesses. For situations where the entities in a joint venture are not similarly situated, the joint venture is only allowed to have administrative employees, while the vital requirements of the contract must be performed by employees of the parties to the joint venture.

Parties to a joint venture are affiliated unless they qualify for an exception. 

Exceptions to affiliation for joint ventures are:

1. If every party to the joint venture is small – There will be no affiliation if every party to the joint venture is considered small under the specifications of the contract.

2. 8(a) Mentor-Protégé Joint Ventures – There will be no affiliation for joint ventures undertaken by a protégé and its approved other than small mentor so long as the protégé qualifies as small for the purposes of the contract.

The Ostensible Contractor Rule

In certain contractor-subcontractor relationships, the SBA will treat these parties as joint ventures for size determination. This occurs where there is an ostensible contractor—an entity that is not similarly situated—who will perform the primary and vital requirements of the contract, or a subcontractor on which the prime contractor is unusually reliant. Consider this illustration where a contractor and its ostensible subcontractor were treated as joint ventures for size determination purposes when the contractor intended to lease the majority of equipment from the subcontractor as well as hire pilots and crewmen from them. This satisfied the threshold for being unusually reliant on the subcontractor to perform the primary and vital requirements. Size Appeal of: High Desert Aviation, LLC., SBA No. SIZ-6179, 2022 (November 23, 2022).

If both the contractor and the ostensible contractor are small under the size standards for their corresponding NAICS codes, then the venture will qualify as small. The ostensible contractor rule targets situations when a small business relies on another business for performance of the contract. The purpose of the rule is to “prevent other than small firms from forming relationships with small firms to evade SBA’s size requirements.” Size Appeal of Fischer Business Solutions, LLC, SBA No. SIZ-5075, at 4 (October 7, 2009)

To qualify for an exception from the ostensible subcontractor rule, businesses must meet at least three conditions: (1) they must execute a written joint venture agreement; (2) the joint venture must do business under its own name; and (3) it must be identified as a joint venture in the System for Award Management (SAM). Size Appeal of: Lost Creek Holdings, LLC D/B/A All-Star Health Solutions, SBA No. SIZ-5848, 2017, at 4 (August 28, 2017).

SMGG thanks summer associate Krystel G. Becker for her assistance with writing this blog.