SBA Eliminates the Three-in-Two Rule for Joint Ventures

As part of the outgoing administration’s effort to eliminate and simplify regulations, the SBA issued a final rule – effective November 16, 2020 – to merge “the 8(a) Business Development (BD) Mentor Protégé Program and the All Small Mentor-Protégé Program to eliminate confusion and remove unnecessary duplication of functions within SBA.”  What many small business contractors may not realize is that this rule also eliminated the three-in-two rule for joint ventures, meaning that there is now no limit on the number of contracts a joint venture can enter into during its existence. However, that existence is now limited to two years.

The SBA’s rules for determining affiliation are stated at 13 CFR § 121.103 – “How does SBA determine affiliation?” 121.103(h) provides the rules that govern affiliation for joint venture partners. 

Prior to November 16, 2020, 121.103(h) stated that “a specific joint venture entity generally may not be awarded more than three contracts over a two year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for all purposes.” This was commonly known as “the three-in-two rule.” The prior version of 121.103(h) went on to provide a system for determining compliance with the rule depending on when the joint venture submitted its proposals. This system caused a great deal of grief and confusion for many successful joint ventures, and spawned countless size protests to the SBA.

The new version of 121.103(h) does away with the three-in-two rule in its entirety. Now, the regulation states that “a specific joint venture entity generally may not be awarded contracts beyond a two-year period, starting from the date of the award of the first contract, without the partners to the joint venture being deemed affiliated for the joint venture.” So a two year limit on the life of a joint venture applies, but there is no longer any limit on how many awards that joint venture can accept during that two-year life span.

A note of caution if you formed a joint venture before the revised regulation went into effect, on November 16, 2020. The SBA has yet to determine which version of 121.103(h) would apply if someone initiated a size protest, alleging that a joint venture formed prior to that date was in violation of the three-in-two rule. The regulation itself says that it is not retroactive in effect, but it remains to be seen how the SBA will apply the new regulation to existing joint ventures.

If you are concerned about the application of the three-in-two rule to your joint venture that was formed under the old version of 121.103(h), your best course of action may be to form a new joint venture for your future proposals. If you need help creating a new joint venture or interpreting the SBA’s affiliation regulations, give us a call.  


The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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Michael A. Richard

Associate

Michael is an attorney in Obermayer’s Government Contracting Department, where he excels at getting clients to the settlement table. Michael’s tenacity is truly a force to be reckoned with. Over the past...

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