On February 11, 2011, the U.S. Small Business Administration (SBA) published a final rule revising the regulations governing SBA's 8(a) small disadvantaged businesses, SBA's mentor-protégé program, and joint venture agreements. The new rules took effect March 14, 2011, and represent the first comprehensive revision to SBA's 8(a) program in more than decade. The final rule eases certain regulations SBA deemed too restrictive, and tightens others it determined were too expansive or indefinite. The new regulations expand federal contracting opportunities for businesses of all sizes, but also introduce new restrictions on participating small business firms. SBA is holding public meetings in 13 cities through June 3, 2011, to provide information and solicit input on these and other changes to its small business regulations and on competing for federal contracts.
Mentor-protégé SBA's mentor-protégé program encourages approved mentors to provide business development assistance to 8(a) firms by providing the mentors with access to 8(a) and small business set-aside contracts for which they would otherwise be ineligible. In the past, a mentor was generally limited to having one protégé and a protégé could have only one mentor. So long as the relationships will not compete or conflict, SBA's new rules allow a mentor to have up to three protégés at a time and permit a protégé to have a second mentor in an unrelated secondary line of business in which its first mentor lacks expertise. These changes expand the opportunities for businesses of all sizes to enter mentor-protégé agreements, with SBA's approval. However, SBA is also tightening its rules to ensure that the mentor-protégé program is not used merely as a vehicle for mentors to receive the benefits of 8(a) contracts. For instance, SBA will not approve a mentor-protégé relationship for an 8(a) firm with fewer than six months left in the 8(a) program. In addition, mentors that default on their obligations to a protégé will face consequences that may include stop work orders on contracts they perform with their protégé, exclusion from the mentor-protégé program for two years, or debarment proceedings. In addition, SBA has made it clear that other federal agencies will now need statutory authorization or SBA approval to administer a mentor-protégé program that makes partnering firms eligible for 8(a) and small business contracts by exempting them from SBA's affiliation rules.
SBA's final rule also significantly changes its regulations governing joint ventures between 8(a) and non-8(a) firms (JVs). Previously, an SBA-approved JV could submit no more than three offers for federal contracts over a two-year period. Under the new rule, a JV can receive three contract awards in a two-year period and may continue to bid on others until it receives its third award. The parties to one JV can also form additional JVs with SBA approval, each of which can receive three awards. Also, JVs can now pursue federal government subcontracts as small businesses because SBA has expanded the exemption from affiliation beyond federal prime contracts. As a result, firms can form multiple JVs to pursue more federal contracts and subcontracts, though SBA has cautioned that such partnering would lead to affiliation at some point. With these changes, large firms have additional opportunities to pursue new work in the federal market through JVs with 8(a) firms.
SBA has also realigned the division of labor and profit requirements for JVs performing federal contracts, and introduced somewhat differing rules if a JV is populated with employees. Previously, 8(a) participants had to perform a "significant portion" of the JV's work and receive 51% of the profits. Under the new rules, 8(a) participants must perform 40% of the JV's work (or substantially benefit from work done by a populated JV) and receive profits commensurate with the work the 8(a) firms perform (or commensurate with their ownership of at least 51% if the JV is a separate legal entity). These changes eliminate the uncertainty of the "significant portion" standard and suggest that in some cases an 8(a) firm might receive less than 51% of the profits where it performs as little as 40% of the work. In addition, the SBA has introduced a new ban that bars a populated JV from subcontracting any work to a non-8(a) JV partner or to any of the non-8(a)'s affiliates unless SBA determines that no other potential subcontractors are available.
The final rule formalizes a broad array of other important changes to the 8(a) program itself. For example, SBA has set specific income and asset thresholds to determine if a firm is economically disadvantaged for purposes of 8(a) program eligibility. In addition, agencies can now receive credit for orders placed with 8(a) concerns under contracts not set aside for 8(a) firms so long as the order is competed exclusively among 8(a) firms and subject to the 8(a) subcontracting limits. And for the first time, firms exempt from restrictions on sole source contracts, including those owned by Alaska Native Corporations (ANCs) and Indian tribes, must report how 8(a) participation benefits their communities and may not receive a sole source contract performed directly prior by a firm owned by the same entity.
The final rule is available at 76 Fed. Reg. 8,222 (February 11, 2011) (codified in 13 C.F.R. Parts 121 and 124). Changes regarding 8(a) joint ventures and SBA's mentor-protégé program can be found at 13 C.F.R. §124.513 and §124.520, respectively.