THE SMALL BUSINESS SET ASIDE PROGRAM: DRAFTING TIPS FOR QUALIFYING JOINT VENTURE AGREEMENTS Julie Sneed Muller

HISTORY 1953 Congress enacted the Small Business Act to stimulate growth of small businesses, and established the Small Business Administration The Small Business Act was amended to provide for “set- asides” reserving certain governmental property and services contracts for small businesses.

ENTITIES THAT QUALIFY FOR SET-ASIDES 1.Small Disadvantaged Business (SDB): An SDB is a small business concern that has received certification by the SBA, has undergone no material change in disadvantaged ownership and control since certification, is owned by one or more disadvantaged individuals, where the net worth of each individual does not exceed $750,000 after applicable exclusions, and is identified as a certified small disadvantaged business concern in the database maintained by the SBA FAR (1).

ENTITIES THAT QUALIFY FOR SET-ASIDES 2.Women Owned Small Businesses (WOSB): A WOSB is a small business concern that is 51% owned and controlled by one or more women. WOSBs were authorized in 2000 in the Small Business Reauthorization Act, but the Act was not implemented by the SBA until Women Owned Small Business Federal Contract Program Final Rule, 75 Fed. Reg (proposed Oct. 7, 2010) (to be 13 CFR pts 121, 124, 125, 126, 127, 137)

ENTITIES THAT QUALIFY FOR SET-ASIDES 3. Historically Under Utilized Business Zones (HUBZones): A HUBZone is a small business concern that is at least 51% owned and controlled by US citizens, an Alaskan Native Corporation, owned and controlled by Natives, wholly or partly owned by one or more Indian tribal governments, or wholly or partly owned by a community development corporation (CDC) that has received financial assistance. 15 USC 632 (p)(3) 2006.

ENTITIES THAT QUALIFY FOR SET-ASIDES 4. Service-Disabled Veteran-Owned Small Businesses (SDVOSB): An SDVOSB is a small business concern that is at least 51% owned by one or more service-disabled veterans, or if the service- disabled veteran has a permanent or severe disability, then by the spouse or permanent caregiver of the service-disabled veteran. FAR ©(1).

HOW SET-ASIDES WORK All acquisitions above $3,000 but less than $150,000 must be set aside for small businesses subject to the Rule of Two. Rule of Two – There must be a reasonable expectation that: (1) offers will be obtained from at least two responsible small business concerns, and (2) awards will be made at reasonable prices. Contracting Officer decides if Rule of Two applies, but must justify decision not to set-aside to SBA.

GOALS FOR SET-ASIDES SBA sets annual procurement preference goals for Federal Government contracting with small businesses. Small businesses – 23% SDBs – 5%, WOSBs – 5%, HUBZones – 3%, and SDVOSB – 3%.

MONITORING GOALS FOR SET-ASIDES Each year each federal agency has a different small business contractor and subcontractor contracting goal that is decided between the federal agency and SBA. The SBA monitors each federal agencies’ achievement, which is posted in a website. If the agency fails to meet its negotiated goal, it is required to provide the SBA with justification for its failure and to offer a plan of corrective action for the following year. The government consistently fails to meet its goals.

MEETING ELIGIBILITY REQUIREMENTS A small business concern A concern is a business entity of any size that is organized for profit. A “small business concern” is independently owned and operated, is not dominant in its field, and qualifies as a small business under the criteria set by the SBA. The SBA determines exclusively the size and socioeconomic status requirements of a small disadvantaged business concern.

SBA FACTORS FOR ELIGIBILITY For small business concern: The business must qualify as small under guidelines set by the North American Industry Classification System. For other specific contracting set-asides: Ownership and control by the disadvantaged entity is critical. Look to SBA guidelines, and any guidelines of contracting programs.

SBA FACTORS FOR ELIGIBILITY Generally: The business must be at least 51 percent unconditionally owned by one or more socially and economically disadvantaged individuals. With the exception of HUBZones, management and daily business operations are controlled by one or more socially and economically disadvantaged individuals. Each individual claiming economic disadvantage must have net worth less than $750,000. With the exception of HUBZones, the majority of its earnings must accrue directly to the socially and economically disadvantaged individual.

JOINT VENTURE AGREEMENTS Generally, must meet the following requirements: (1) set forth the purpose of the joint venture; (2) retain ownership and control in the disadvantaged entity, by making the disadvantaged member the managing member; (3) the disadvantaged entity must own at least 51% of the joint venture entity; (4) the disadvantaged entity must receive profits commensurate with the work performed by the disadvantaged entity, or, if the separate joint venture entity is populated, commensurate with its ownership entity in the joint venture; (5) provide for establishment and administration of a special bank account for the joint venture, which account must require the signature of all parties to the joint venture;

JOINT VENTURE AGREEMENTS (6) list all major equipment, facilities and resources to be furnished by each party, with a detailed cost estimate; (7) detail how each party will perform the work, and what resources will be devoted to the work; (8) obligate all joint venture partners to complete performance of the work despite the withdrawal of any partner; (9) designate the disadvantaged partner as the keeper of all accounting and other administrative records; (10) the disadvantaged partner must be designated to keep all final records; (11) require quarterly financial statements to be submitted during each operating quarter of the joint venture; (12) require a project-end profit and loss statement, including a statement of final profit distribution.

PERFORMANCE OF JOINT VENTURE WORK For an unpopulated JV, the disadvantaged JV partner must perform at least forty percent (40%) of the work of the JV, which work shall be “more than administrative or ministerial.” For a populated JV, where both JV partners are considered subcontractors of the JV, the amount of work done by each JV partner will be aggregated and the work done by the disadvantaged partner must be at least equal to forty percent (40%) of the total done by all JV partners.

WHO CAN JOINT VENTURE ON A SMALL BUSINESS SET-ASIDE A large business cannot be a JV participant on a set aside procurement, unless there is an established Mentor Protégé arrangement, such as 8(a). In JVs, the JV partners are affiliated with regards to that procurement, and the revenue/employees will be combined to determine size, for purposes of determination of small business status, unless:

WHO CAN JOINT VENTURE ON A SMALL BUSINESS SET-ASIDE 1.The Project is a bundled procurement: A Bundled Procurement refers to consolidation of two or more procurement requirements for goods or services into a solicitation of offers for a single contract for award to a small business concern due to: (i) Diversity, size or specialized nature of the elements of performance; (ii) The aggregate dollar value of the anticipated award; (iii) The geographical dispersion of the contract performance sites; or (iv) Any combination of the above.

WHO CAN JOINT VENTURE ON A SMALL BUSINESS SET-ASIDE 2.The procurement is not bundled but is a large procurement: (a) Revenue based size standard: the dollar value of the procurement, including options, exceeds half the size standard of the procurement, (b) Employee based size standard: Dollar value of the procurement, including options, is over $10 million 13 CFR (h)(3)

EXAMPLE Small Business Set-Aside: Engineering Services, NAICS $3.5M estimated value of contract award. Size Standard for NAICS is $4M. Joint Venture Team: 8a Firm – 20% (average annual receipts $1M) Small Business – 70% (aar $3M) Small Business – 10% (aar $1M) This JV team can bid on the project and still be considered small since the dollar value of the procurement ($3.5M) exceeds half the size standard (half of $4M is $2M).

A WORD OF CAUTION A JV of small business concerns may bid on a set-aside as a JV without prior approval from the contracting entity; however, prior to the award, the JV must be approved by the contracting entity, in accordance with these standards.