On August 24, 2016, a U.S. Small Business Administration (SBA) final rule will go into effect, significantly expanding opportunities for small businesses to win government contracts by creating a government-wide small business mentor-protégé program, and clarifying the related rules on joint ventures. The rule implements the Jobs Act of 2010 and the 2013 National Defense Authorization Act (NDAA).
Establishment of a Government-Wide Mentor-Protégé Program
The mentor-protégé program was created as a business development tool in which mentors provide protégés with various types of business assistance, including "technical and/or management assistance; financial assistance in the form of equity investments and/or loans; subcontracts; and/or assistance performing Federal prime contracts through joint venture arrangements." To achieve this objective for more small businesses, this new rule establishes a government-wide mentor-protégé program that mirrors the SBA's mentor-protégé program for companies in the 8(a) BD program and expands those benefits to other qualified small businesses.
The new small business mentor-protégé program reflects key elements of the 8(a) BD mentor-protégé program; it will require approved mentors to provide assistance to protégé firms in order to enhance the protégés' capabilities, to assist protégés with meeting their business goals, and to enhance the protégés' ability to compete for government and commercial contracts. The new program spans all small business programs, rather than creating individual SDVOSB, HUBZone, and WOSB mentor-protégé programs. SBA believes that having one program is easier to understand and more efficient for the small business and acquisition communities. The only exception is the 8(a) program, which remains separate.
The new program will also effectively bring an end to individual mentor-protégé programs operated by individual federal agencies (except for the Department of Defense). Because the 2013 NDAA prohibited federal agencies from maintaining their own programs absent explicit SBA approval, the rule renders such individual programs unnecessary in light of the proposed government-wide program. The rule allows a department or agency that is currently operating an independent mentor-protégé program to continue to do so for only one year, unless an exception is granted by SBA. The DoD is exempt from this requirement.
Benefits of the Small Business Mentor-Protégé Program
The program provides many benefits for both mentors and protégés, including the following:
- A protégé and mentor may enter into a joint venture for small business set-aside contracts;
- No determination of affiliation or control may be found between a protégé firm and its mentor based solely on the mentor-protégé agreement or any assistance provided pursuant to the contract;
- In certain instances in the contract evaluation process, procuring activities may provide incentives to a firm that makes available significant subcontracting work to its SBA-approved protégé firm; and
- In order to raise capital, the protégé firm may agree to sell or otherwise convey to the mentor an equity interest of up to 40% in the protégé. Additionally, a protégé may qualify for other assistance as a small business, including SBA financial assistance.
Qualifications for Mentors and Protégés
The final rule sets forth additional and clarified requirements for qualification under the government-wide small business mentor-protégé program. In order to qualify as a mentor, a concern must demonstrate that it
- Is capable of carrying out its responsibilities in assisting the protégé firm under the proposed mentor-protégé agreement;
- Possesses good character;
- Does not appear on the federal list of debarred or suspended contractors; and
- Can impart value to a protégé firm due to lessons learned and practical experience, or through its knowledge of general business operations and government contracting.
Protégés must satisfy the following conditions:
- A protégé typically will have only one mentor at a time. A single entity may have two mentors if the two relationships "will not compete or otherwise conflict with each other" and "the second relationship pertains to an unrelated NAICS code, or the protégé firm is seeking to acquire a specific expertise that the first mentor does not possess."
- The protégé must qualify as a small business under its primary NAICS code or confirm that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code.
- The protégé may self-certify that it qualifies as small for its primary or identified NAICS code.
Changes and Clarifications to the Joint Venture Rules
The final rule also clarifies SBA's intended definition of a joint venture. According to the SBA, the current language contained in § 121.103(h) has "caused some confusion as to what an informal joint venture arrangement means." The rule clarifies the definition by explicitly requiring that any joint venture be in writing, including informal joint ventures. In the SBA's preamble to the rule, SBA notes that it "never meant that an informal joint venture arrangement could exist without a formal written document," but "merely intended to recognize that a joint venture need not be established as a limited liability company or another formal separate legal entity." It should be noted, however, that a joint venture must be identified in the System for Award Management (SAM) as a joint venture, with a DUNS number and CAGE code separate from those of the individual parties to the joint venture.
Moreover, the final rule requires joint venture partners to allow "SBA's authorized representatives, including representatives authorized by the SBA Inspector General, during normal business hours, access to its files to inspect and copy all records and documents relating to the joint venture." This language indicates that not only will the records of a joint venture and the managing venturer be subject to OIG inspection, but all joint venture members' records will be subject to inspection, as long as the records relate to the joint venture.
Finally, in an attempt to maximize the benefit realized by small protégé firms, the proposed rule specifies that a joint venture existing as a separate legal entity "may not be populated with individuals intended to perform contracts awarded to the joint venture." Thus, in contrast to the current rule, which permits a populated joint venture, the final rule allows separate legal entity joint ventures to maintain their own employees for administrative purposes, but not for purposes of performing contracts awarded to the joint venture.
Compliance Monitoring and Fraud Prevention
The rule strengthens reporting and compliance provisions to ensure that participating firms abide by the letter of the regulations, as well as the spirit underlying the mentor-protégé program. The rule requires any partner to a joint venture agreement that performs a SDVO, HUBZone, WOSB, or small business set-aside to "certify to the contracting officer and SBA prior to performing any such contract that it will perform the contract in compliance with the joint venture regulations and with the joint venture agreement." Participants will also be required to submit an annual report certifying compliance with applicable regulations and the joint venture agreement. Failure to comply may result in suspension or debarment.
Size Protest of 8(a) Joint Venture
The rule also amends § 124.513 to clarify that interested parties may protest the size of an SBA-approved 8(a) mentor-protégé joint venture that is the apparent successful offeror for a competitive 8(a) contract. This change alters the rule expressed in several size protests, which held that the size of an SBA-approved 8(a) joint venture could not be protested, because SBA had, in effect, determined the joint venture to qualify as small when it approved the joint venture pursuant to § 124.513(e). SBA clarified that its decision to authorize a joint venture between a current 8(a) Program Participant and another party by its Office of Business Development was "never intended to act as a formal size determination."
The Rule Becomes Effective August 24, 2016
If you have any questions about how these proposed rules could affect your business, please contact Paul Debolt, Keir Bancroft, Collier Johnson, Michael Francel, or any of the other attorneys in Venable's Government Contracts Practice.