OHA Decision Illustrates the Importance of Reviewing Small Business Set-Aside Joint Venture Agreements Before Each New Opportunity

In CVE Protest of KTS Solutions Inc. (“KTS”), No. CVE-146-P, the SBA Office of Hearings and Appeals reminded everyone why it is vital to amend or supplement their joint venture agreement whenever your joint venture seeks a new bidding opportunity. KTS was connected to a U.S. Department of Veterans Affairs solicitation for non-emergency, special mode transportation (SMT) services. The solicitation, issued on October 18, 2019, was for an ID/IQ Contract and was set aside for service-disabled veteran owned small businesses, or SDVOSBs.

The protested entity, 28 Trans, LLC (“28 Trans”) was a joint venture between Owl, Inc. and Red Kite, LLC, an SDVOSB. The VA’s Center for Verification and Evaluation approved 28 Trans’s SDVOSB status on July 8, 2019, making the joint venture eligible to bid on VA set-aside contracts like the one at issue. 28 Trans was also a member of the SBA’s Mentor-Protégé Program, with Owl as the mentor and Red Kite the protégé.

According to the March 21, 2019 Joint Venture Agreement, the purpose of 28 Trans was to pursue and perform contracts seeking “non-emergency transportation for special needs passengers, including stretcher, wheelchair, and other ambulatory beneficiaries of the Veterans Administration and other local government entities.” The JVA provided that Red Kite was the joint venture’s managing member and that Red Kite’s own managing member, Mr. Alessandro Janitschek, would be 28 Trans’ project manager for any contract obtained by the joint venture. The JVA included several other provisions required by 13 C.F.R. § 125.18(b)(2), but notably did not indicate a specific contract that 28 Trans was going to pursue. The JVA included general information describing how Red Kite and Owl planned to divvy up work for future contracts but did not include contract-specific information on how Red Kite would perform 40% of the work on a specific solicitation. Nor did 28 Trans enter any addenda or amendments to the JVA that set forth this information.

On December 26, 2019, the contracting officer announced 28 Trans was one of two awardees on the IDIQ contract. Five days later, KTS filed a size protest and a CVE protest, alleging that, as of the date of award, 28 Trans was not in compliance with 13 C.F.R. § 125.18(b), the regulation governing the eligibility of joint ventures for a SDVOSB set aside. That regulation requires every joint venture seeking a SDVO contract to have certain information in its joint venture agreement. Specifically, the regulation requires certain generic information be in the JVA—such as a provision stating that the SDVO entity must own more than 51% of the joint venture—and but also requires information that is solicitation-specific, such as an “itemizing all major equipment, facilities, and other resources to be furnished by each party” and the “responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance.” See 13 C.F.R. § 125.18(b)(2).

In its CVE protest, KTS first argued that Red Kite would not able to perform 40% of the JV’s non-administrative work, based on the relative resources of the joint venture partners. KTS cited the fact that Red Kite was a one-person company with no federal contracting experience and apparently minimal resources, while its mentor, Owl, had substantial federal contracting experience and was an established provider of special-needs transportation in the region where 28 Trans would perform the contract. KTS also challenged 28 Trans’ SDVOSB status on the basis that the joint venture was operating under a non-compliant JVA, because the JVA was silent as to the procurement at issue. In rebutting both arguments, 28 Trans pointed to its proposal, which included the joint venture’s plan for startup—e.g., 28 Trans acquiring the vehicles and office space needed for the contract—and its general plan for performance, which purportedly had Red Kite performing more than 40% of the work. 28 Trans also submitted a sworn declaration from project manager, Mr. Janitschek attesting to Red Kite’s ability to perform the contract, and the joint venture’s plan to be ready to perform by the first day of performance.

In its February 20, 2020 decision, OHA sustained KTS’ CVE protest determining that 28 Trans’s JVA did not comply with SBA regulations. OHA found that, while 28 Trans’s JVA included some information required by 13 C.F.R. § 125.18(b)(2), the JVA did not include any specific information on the subject procurement. OHA noted that the JVA did not include an itemization of the equipment needed for the contract nor did it specify “the responsibilities of the parties with respect to the negotiation of the contract, source of labor, and contract performance.” OHA stated “Had 28 Trans executed an addendum to the JVA at the time it submitted its initial proposal, including the required information as to equipment and the responsibilities of the parties, it could have complied with the regulation, but it failed to do so.”

OHA also noted in dicta, that, even if the joint venture had executed an addendum, 28 Trans’ proposal fared no better in setting forth the JV members’ responsibilities with respect to the contract.

OHA found that 28 Trans’ proposal laid out the resources dedicated to the contract and a procedure for handling service calls under the contract, but never indicated which member would provide those resources or perform those services. OHA also stated in closing that, even when the joint venture cannot know every contract specification because the new contract sought is an ID/IQ, the JVA should still “be able to identify the types of tasks to be performed, and which member will furnish and perform what with its own employees. 28 Trans’ JVA failed to include this information, and it therefore failed to meet the requirements of the regulation.” Having sustained KTS’ CVE Protest, OHA then remanded the Size Protest in a separate opinion and ordered the Area Office to issue a new size determination consistent with the CVE determination.

So, what can small businesses learn from KTS? First, whenever your joint venture seeks a to bid on a new contract, make sure you have an addendum to your joint venture agreement that sets out information that is specific to the new solicitation and that clearly delineates the responsibilities of each JV member. Even when the new solicitation is for an ID/IQ contract, and the RFP does not provide enough information to know every specific responsibility, your addendum should include what it can, based on the solicitation. This is required not just for SDV-related joint ventures under 13 C.F.R. § 125.18(b)(2) but for any joint venture seeking small business set aside contracts under 13 C.F.R. § 125.8(b)(2). Additionally, if you are an 8(a) joint venture seeking a new 8(a) set aside contract, thee current regulations require that the SBA approve the addendum before you can be awarded the contract.