On July 22, the U.S. Small Business Administration ("SBA") issued its highly anticipated final rule expanding the mentor-protégé program. The rule is set to go into effect on Aug. 24, 2016.

The mentor-protégé program is "designed to enhance the capabilities of protégé firms by requiring approved mentors to provide business development assistance to protégé firms and to improve the protégé firms' ability to successfully compete for federal contracts." Under the program, mentors are able to provide protégés with technical and management assistance, financial assistance through loans and investments, subcontracts that serve as developmental assistance, help in performing prime contracts through joint venture arrangements, and trade education. Mentor-protégé joint ventures benefit from numerous competitive advantages, including the ability to rely on the combined capabilities, resources and experience of two companies as the prime contractor.

In its current form, the mentor-protégé program is limited to 8(a) small business concerns. The SBA's final rule expands the mentor-protégé program, making it available to service disabled veteran-owned small businesses, HUBZone small businesses, women-owned small businesses and non-disadvantaged small businesses. All small businesses will be part of the same program (except for those in the 8(a) mentor-protégé program, which will be kept separate from the new program), and the rules of participation will be consistent among the different types of small businesses.

Under the new rule, any small business can form a joint venture ("JV") with any larger, for-profit mentor business that demonstrates a commitment and ability to assist small businesses. Such a JV may compete for any type of small business contract for which the protégé firm qualifies.

Key Features of the Final Rule

  • The final rule allows a business that doesn't qualify as small business under its primary NAICS code, but does qualify under a secondary NAICS code where it has previously performed work, to form a mentor-protégé JV.
  • A mentor and protégé seeking to enter into a JV must first be approved under the SBA's mentor-protégé program before filing for approval as a JV. The mentor-protégé JV must then be approved by the SBA before the joint venture can begin competing for small business set-aside contracts and begin benefiting from the affiliation exception that is part of the small business mentor-protégé program.
  • Mentor-protégé JV agreements, whether formal or informal, must be in writing. The agreement must set forth an assessment of the protégé's needs and provide a detailed description of the assistance the mentor commits to provide to address those needs. The final rule permits mentors and protégés to provide a general description to specify how the parties will provide the resources and labor responsibilities, or in the alternative, how the parties will furnish the anticipated resources and responsibilities when the scope of work becomes available.
  • Mentor-protégé agreements are limited to an initial term of three years, with an option to extend for three additional years (for a total of six years).
  • The SBA has the ability to terminate the mentor-protégé agreement at any time.
  • A small business can be both a mentor and protégé at the same time, as long as the second relationship will not compete with or otherwise conflict with the first mentor-protégé relationship.
  • There is no requirement that a separate legal entity be formed. But if a separate legal entity is formed, it must not be populated with its own separate workers. Performance by the mentor and the protégé is required to occur at the subcontract level. An unpopulated joint venture may have employees but only to perform administrative functions.
  • The individual JV partners must be identified in SAM separately to ensure they can be tracked for compliance. And the JV must be identified in SAM with DUNS and CAGE numbers that are distinct from the mentor and the protégé.
  • A graduating 8(a) protégé can transfer its mentor-protégé arrangement to the new small business program by providing notice to the SBA. Transfers are permitted within the last six months remaining in the 8(a) program without having to file a separate application and seeking a second approval from the SBA.
  • The JV's project manager is not required to be a protégé employee at the time of proposal submission, as long as a letter of intent is submitted stating that the project manager will become an employee of the protégé if the JV is the successful offeror. The project manager cannot be employed by the mentor and then become an employee of the protégé.
  • The small business partner to the JV must perform at least 40% of the substantive work.
  • The past performance of the members of the JV, and not just the JV itself, must be considered by the government in the evaluation of a bid or proposal.
  • The rule's requirement that allows the SBA to inspect JV-related documents will not give the SBA access to unrelated documents of the JV partners.

Mentors

  • A mentor may be a large or small business.
  • To qualify as a mentor, the firm must be a "for profit" business and demonstrate a commitment and the ability to assist small businesses.
  • The mentor must be able to demonstrate that it can fulfill its obligations under the mentor-protégé agreement and must certify to good standing and a favorable financial position.
  • The rule limits a mentor to one protégé and a protégé to one mentor, but the SBA has discretion to permit a mentor to have up to three protégés in the aggregate and a protégé to have up to two mentors if certain circumstances are met.
  • A mentor may retain up to a 40% ownership interest in its protégé after expiration of the mentor protégé arrangement. The SBA will rely on the affiliation rules to determine whether the large business' ownership interest creates affiliation.

Protégés

  • A protégé may enter into up to two three-year mentor-protégé agreements, each of which can be extended for a second three-year term. In order to have two mentors at one time, the firms must be able to demonstrate that they are assisting each other in different ways and for different contracts.
  • A small business protégé must make reports to the SBA annually and at contract completion to report on how the JV complied with the performance of work requirements.
  • A protégé is not required to obtain a size status determination prior to participating in the small business mentor-protégé program.
  • Changes in the size status of a protégé will generally not affect contracts previously awarded to a mentor-protégé JV.

Potential Issues

The SBA is creating a new unit within the Office of Business Development solely dedicated to processing and reviewing applications to the small business mentor-protégé program. This unit has the right to create "open" and "closed" enrollment periods for firms seeking approval of mentor-protégé applications if the number of applicants becomes unmanageable. As a result, some businesses may have to wait an inordinate amount of time to have their JV approved, potentially missing certain contract opportunities.

In addition, there may not be enough qualified mentors for all of the protégés seeking partners for the program. Some small businesses may therefore find themselves at a disadvantage when competing against mentor-protégé JVs for set-aside contracts.

Conclusion

The SBA has estimated that about 2,000 new small businesses will seek to take advantage of the expanded mentor-protégé program, teaming up with large businesses on about $2 billion in contracts per year. While this will create additional opportunities for numerous businesses, large and small, it may also make it difficult for small businesses who are not in a mentor-protégé relationship to successfully compete for set-aside contracts.

Businesses that are interested in participating in the new expanded mentor-protégé program should start working on establishing mentor-protégé relationships and preparing mentor-protégé agreements now so they are ready on Aug. 24, 2016. Doing so will allow those businesses to submit their applications and mentor-protégé agreements for approval as soon as the program goes into effect.