Silotech-Apex's Operating Agreement Challenged in SDVOSB Protest

On May 25, 2023, Brandon Parker, a Contracting Officer from the U.S. Department of Veterans Affairs, filed a protest against Silotech-Apex JV, LLC (Silotech) challenging their Service-Disabled Veteran-Owned Small Business (SDVOSB) status. The protestor alleged that Silotech failed to meet the requirements for SDVOSB status due to non-compliance with the Small Business Administration's Mentor-Protege Joint Venture agreement regulations. The protest landed at the SBA's Office of Hearings and Appeals (OHA) for resolution. 

The Solicitation

In March 2023, the U.S. Department of Veterans Affairs (VA) issued Solicitation No. 36C24523B0002 for the replacement of roofs at Perry Point VAMC. The solicitation required the contractor to provide labor, supervision, equipment, and materials for the project. The procurement was set aside for SDVOSBs (Service-Disabled Veteran-Owned Small Businesses). The designated NAICS code was 236220, with a $45 million annual receipts size standard.

The Protest

On June 1, 2023, the protestor filed an amended protest. The crux of the protest centers around Silotech's joint venture agreement, which allegedly fails to meet the necessary requirements set forth by the Small Business Administration (SBA). Specifically, the protest points out that Silotech's operating agreement falls short on four key aspects as outlined in the SBA regulations for joint ventures. Specifically, the grievances raised in the protest are as follows:

1. Silotech's operating agreement neglects to itemize additional capital contributions, a mandatory provision according to 13 C.F.R. § 128.402(c)(6).
2. Silotech's operating agreement fails to sufficiently specify the responsibilities of each party involved, in violation of 13 C.F.R. § 128.402(c)(7).
3. Silotech's operating agreement fails to include a provision for timely submission of requisite documents to the SBA within 45 days after the conclusion of each operating quarter, as stipulated by 13 C.F.R. § 128.402(c)(11). 
4. Silotech's operating agreement does not address the requirement of submitting project-end profit and loss statements to the SBA within 90 days after the completion of the contract, as mandated by 13 C.F.R. § 128.402(c)(12).

The Operating Agreement was executed on April 11, 2023, between Silotech Group Inc. and American Contracting Solutions LLC (ACS). Silotech Group maintained a majority ownership stake of 51%, whereas ACS held the remaining 49% ownership interest. These ownership percentages are essential in determining the dynamics and control within the joint venture.

Silotech's Response

Silotech responded to the protest by arguing that the allegations made by the protester were actually related to their Operating Agreement, not their Joint Venture Agreement, which they emphasize are separate and distinct documents. Silotech intended to submit their joint venture agreement but mistakenly submitted their operating agreement instead, and that the solicitation did not explicitly require the joint venture offeror to provide a joint venture agreement as proof of their status. 

Silotech sought to have the case dismissed, arguing that that the protestor's allegations were speculative and lacked specificity and credible evidence. They pointed out that the protester had not actually received the Joint Venture Agreement, which created a disconnect between the allegations and the facts. Additionally, they argued that apart from the mistakenly submitted Operating Agreement, the protester failed to provide sufficient evidence or explanations for their Joint Venture Agreement's non-compliance with SBA regulations. Silotech acknowledged that the initial assumption about the document being the JV Agreement was understandable, but argued that subsequent information revealed the lack of credible evidence supporting the allegations.

Silotech firmly maintained that their JV Agreement fully met SBA requirements. They emphasized that their SDVOSB partner was certified under the Veteran Certification program, and that the JV Agreement was executed before the submission of bids and met all the necessary requirements for a joint venture. It included a comprehensive list of equipment and facilities as required by 13 C.F.R. § 128.402(c)(6) and provided detailed information about party responsibilities, labor sourcing, and performance as required by 13 C.F.R. § 128.402(c)(7). The agreement also contained provisions for the timely submission of Quarterly Financial Statements, as mandated by 13 C.F.R. § 128.402(c)(11), as well as project-end profit and loss statements and statements of final profit distribution, as required by 13 C.F.R. § 128.402(c)(12).

In response to the protest, Silotech provided a copy of its Joint Venture Agreement with ACS. This agreement was executed on May 11, 2023, and included Silotech's equipment list as an attachment. Additionally, Tiffany Tremont, the President of Silotech Group, submitted a Declaration stating that Silotech mistakenly submitted the Operating Agreement instead of the intended JV Agreement in the bid package.

Supplemental Information Provided by SanDow Construction

SanDow Construction, Inc., an interested party in the solicitation, filed their response to the protest on June 23, 2023. They argued that the Protestor had a reasonable basis for believing that Silotech's Operating Agreement and the Joint Venture Agreement were one and the same, citing relevant OHA case law that upheld the reliance on the Operating Agreement. SanDow maintained that it is a common practice for the Joint Venture Agreement to also serve as the Operating Agreement, therefore supporting the Protestor's conclusion. SanDow further alleged that Silotech intentionally provided the Operating Agreement to comply with the requirements outlined in 13 C.F.R. § 128.402(c).

SanDow supported the Protestor's argument regarding the non-compliance of the JV Agreement with SDVOSB Joint Venture requirements. They claimed that the Operating Agreement failed to include an itemized list of equipment, facilities, and resources provided by the members of the agreement for the construction contract. The solicitation demanded bidders to provide an itemized list of labor, materials, equipment, and other resources, making it necessary for Silotech to list resources from each joint venturer. SanDow argued that the JV Agreement did not specify the responsibilities of the joint venturers, which violated SBA regulations that required a contract-specific agreement. The Operating Agreement did not explicitly state that the JV would submit quarterly financial statements to SBA within 45 days and project-end profit and loss statements to SBA within 90 days after completing the contract.

SanDow alleged additional violations in the Operating Agreement in addition to the arguments made by the Protestor. 

• Section 3.1 of the Operating Agreement failed to allocate profits based on work performed, as required by 13 C.F.R. § 128.402(c)(4). 
• Exhibit 3 of the Operating Agreement included generic responsibilities instead of specific tasks related to the contract. Joint venture agreements are supposed to be contract-specific according to OHA and SBA regulations, which they allege Silotech failed to meet. 
• Section 11.1 of the Operating Agreement did not comply with 13 C.F.R. § 128.402(c)(5) as it only required signature, not consent, for making withdrawals under $10,000. 
• The perpetuity clause in Section 9 contradicted the purpose of joint ventures as "limited purpose entities" under 13 C.F.R. § 121.103(h). 
• ACS, the minority member, had improper negative control over Silotech's daily management, which went against 13 C.F.R. § 128.402(c)(2). 

Lastly, SanDow contended that if Silotech executed a separate JV agreement, it should be evaluated by OHA to ensure compliance with SBA regulations.

Analysis and Conclusion

The protester's appeal in the case of SDVOSB status protest was specific and credible. Silotech argued for the dismissal of the appeal, claiming that it lacked specificity and credible evidence. However, a proper SDVOSB status protest required specific allegations supported by credible evidence, which the protester provided.

In this case, Silotech mistakenly submitted its Operating Agreement instead of its Joint Venture Agreement. Although it was an error, the protester's allegations were still based on credible information provided by Silotech, albeit unintentionally. It's important to note that the Joint Venture Agreement was not a requirement under the solicitation, but Silotech intended to provide a copy of its JV Agreement in its Proposal. Therefore, the protester reasonably relied on the information provided by Silotech to support its allegations of non-compliance with SBA regulations.

Silotech asserted that it was in compliance with SBA regulations for joint ventures and provided its JV Agreement as evidence. However, a review of the JV agreement revealed that it failed to meet the twelve specific provisions required by SBA regulations. This failure led to the granting of the protest.

One specific provision that Silotech's JV Agreement lacked was the specification of responsibilities related to contract negotiation, source of labor, and contract performance, as required by 13 C.F.R § 128.402(c)(7). The precedent of CVE Protest of Patriot Strategies, LLC, CVE-243-P (warning: PDF), served as an analogous case. In that case, the lack of clarity and identification of specific tasks related to the contract's purpose in the JV agreement resulted in the grant of the protest.

In the solicitation, the detailed requirements for the required roofing work were provided, including specifications, building details, drawings, and locations. The Joint Venture (JV) Agreement allowed both ventures to evaluate contract performance, but it failed to specify the responsibilities of the parties for contract performance, despite the detailed requirements in the solicitation. This lack of compliance with 13 C.F.R § 128.402(c)(7) indicated that Silotech did not meet the requirements for an SDVOSB joint venture.

Another issue was the presence of negative control in Silotech's JV Agreement. Negative control existed when a non-qualifying veteran had the ability to prevent a quorum or block actions according to the governing documents of the concern. The managing venturer should be responsible for day-to-day management and administration of contract performance. However, Silotech's JV Agreement allowed the partner venturer to have negative control, which included the ability to hire and fire employees. This failure to meet the regulatory requirements for control of day-to-day management and administration of contract performance further solidified the outcome of the protest.

In conclusion, Silotech failed to establish that it met the regulatory requirements of an SDVOSB joint venture, and as a result, the protest was granted, standing as the final agency action of the U.S. Small Business Administration with regards to this case.

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