On February 5, 2015, the Small Business Administration issued proposed rules that would establish a government wide mentor-protégé program for all small business types, including participants in the HUBZone, Women-Owned Small Business and Service Disabled Veteran Owned Small Business programs.  These rules implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act for Fiscal Year 2013. The new Small Business mentor-protégé program will significantly expand contracting opportunities for large and small businesses alike.  With these expanded opportunities will come expanded risks and potential pitfalls for government contractors.  SBA has asked for comments to be filed by April 6, 2015.  For contractors interested in participating in the new mentor-protégé program, the time to start planning is now.

The major aspect of this proposed rule that will likely lead to increased competition for contract awards and scrutiny from SBA is the affiliation exception.  Generally, under SBA regulations, two companies that form a joint venture are considered affiliates.  This rule will make an exception to that rule, already enjoyed by 8(a) contractors, such that a mentor and protégé under the new program will not be considered affiliates on the basis of the approved mentor-protégé joint venture, though the two concerns may be found to be affiliated for other reasons.

With the added benefit of the new program will come expanded risks and pitfalls.  The proposed rule calls for additional certifications and reports to be made by mentors and protégés.  These certifications, as with all certifications in federal contracting, lead to a higher level of scrutiny and the risk of a contractor being investigated for misrepresentation or fraud. In addition, the recently released proposed rules on small business performance of work standards may be implicated by the new mentor-protégé program rules.

Applications to the SBA's Small Business Mentor-Protégé Program

SBA has proposed two paths for application to the mentor-protégé program.  For eligible 8(a) Program participants, the SBA's Associate Administrator for Business Development will continue to approve mentor-protégé agreements between 8(a) contractors and their mentors.  For non-8(a) contractors, applications will be approved by the SBA's Director of Government Contracting.

Content and Review by SBA of Mentor-Protégé Agreement

Under the proposed rule, mentor-protégé agreements must be written. The agreement must demonstrate that the assistance to be provided by the mentor will result in real development gains for the protégé. Based on the number of mentor-protégé applications SBA anticipates, the proposed rule invites comments on whether to limit the time for "open" and "closed" periods during which SBA will accept and review applications or whether SBA should limit the number of applications that it will review or approve during a year. In addition to initial approval of the mentor-protégé agreement, SBA will require annual review of the mentor-protégé relationship to determine continued approval.  The proposed rule would limit the duration of a mentor-protégé agreement to three years. SBA has also invited comments on the issue.

Mentors and Protégés

SBA has included guidelines for both mentors and protégés.  The proposed rule limits to three the number of protégés a mentor can have.  This total includes all mentor-protégé programs.  A protégé may not become a mentor and also retain its protégé status. In a departure from the current rule, the proposed rule will permit any firm that qualifies as small to qualify as a protégé in either the small business or 8(a) mentor protégé programs.  Under the current 8(a) rule, a protégé has to be less than half the size standard for its industry. For construction, that means average annual receipts for the past three years must be less than $36 million/2 = $18 million.  The proposed rule will do away with this and any business that is small (annual receipts less than $36 million) can qualify as a protégé. In order to ensure that only small firms become qualified as protégés, the proposed rule will require an affirmative determination of size, similar to the size protest or determination process, not self-certification.  For contractors already certified as small as part of a size determination or appeal, the contractor will be required to certify that there have been no changes to its size status since the determination. SBA has not included in the proposed rule any time frame in which the verification will be made, though it does include provisions relating to reconsideration of a denial of a mentor-protégé application.  Contractors should keep in mind that the verification process does not insulate a protégé or a joint venture from being protested.

Affiliation Exception

The proposed rule will expand the current affiliation exception for 8(a) mentors and protégés to all participants in the SBA small business mentor-protégé program.  Though affiliation between the two businesses is not ruled out completely, affiliation will not be found on the basis of the mentor-protégé relationship.  This proposed rule provides a major improvement in contracting opportunities available to potential mentors and protégés.

Joint Ventures Under a Mentor-Protégé Agreement

Joint venture agreements must be written. No specific business form is required. A joint venture may exist as a partnership, a limited liability company or other legal form. 

The proposed rule will restrict whether a joint venture may be populated or not.  Under the current rule, the joint venture partners are free to choose whether to populate the joint venture, that is, whether the joint venture will hire employees to perform the contract, will populate the joint venture with only administrative employees, or will have an unpopulated joint venture (no employees such that the contract is performed by employees of the joint venture partners).  The proposed rule will prohibit a joint venture from populating the joint venture with employees "intended to perform the contracts."  This proposed change will allow SBA (1) to more effectively determine that the protégé benefits from and controls the joint venture and (2) to more readily determine that the protégé is performing the minimum required 40% of the work done by the joint venture as required by SBA's performance of work requirements.  The proposed rule will permit populating the joint venture with administrative employees only. Contractors should note that this proposed rule may implicate, possibly conflict with, and/or supplement other recently published revisions to SBA's performance of work requirements.

HUBZone Joint Ventures

Under the proposed rule, HUBZone contractors will be allowed to joint venture with an SBA-approved mentor.  Under the current rule, HUBZone concerns may only joint venture with other HUBZone contractors.

New Joint Ventures Certifications and Performance of Work Reports

The proposed rule will add an additional layer of certification and reporting to the federal government by small businesses and their joint venture partners.  Specifically, joint ventures will be required to submit an annual report to the contracting officer and to the SBA certifying compliance with SBA regulations and the joint venture agreement. The report will also be required to explain how the joint venture has met the small business performance of work requirements for the contract. SBA indicates that this new certification requirement is a method to allow the government to detect fraudulent contracting and to deter wrongdoing.

Tracking Joint Venture Awards

SBA's commentary states that it wants to track awards to joint ventures.  While SBA has not determined what approach will be used to track awards to the joint ventures, the rule will likely require more reporting by contractors. SBA did state that the purpose of tracking joint venture awards is to deter fraudulent or improper conduct.