The Small Business Administration’s (“SBA”) 8(a) Mentor-Protégé Program provides a useful mechanism for 8(a) small business concerns to develop and grow by virtue of receiving various forms of assistance from qualifying mentor firms. Both the mentor and protégé firms must meet the procedural and substantive requirements of 13 C.F.R. § 124.520 and be approved as mentor and protégé by the SBA prior to being eligible to receive the benefits of the program. Once accepted, mentors may provide assistance in various forms, including technical or management assistance, financial assistance, subcontracts; and/or assistance in performing prime contracts with the Government through joint venture (“JV”) agreements.
The ability of a mentor and protégé to compete as a JV on a small business set aside is a significant benefit, and operates as an exception to SBA’s general rule that joint venturers submitting offers on a particular procurement are considered affiliated for the subject procurement. See 13 C.F.R. § 121.103(h)(2). Under the general rule, the size of the JV partner firms will be aggregated to determine if the JV meets the size standard governing the procurement. Thus, a small business meeting the applicable size standard for a procurement entering into a JV with a firm that does not or, when combined the JV partner firms exceed the size standard, will be ineligible for award. However, the regulations contain an exception to the general rule for JVs consisting of an approved 8(a) mentor and protégé, where the protégé meets the applicable size standards for the procurement (and for purposes of 8(a) sole source requirements, has not met the dollar limits for 8(a) sole-source contracts). See 13 C.F.R. § 121.103(h)(2)-(3). An additional condition to this exception is that the JV Agreement must meet the requirements of 13 C.F.R. § 124.513(c), setting forth a number of important components which must be included in the JV Agreement. In the context of an 8(a) contract award, the JV Agreement must be approved by the SBA prior to award. In contrast, for a non-8(a) small business set aside, the JV Agreement will be evaluated if the size status of the JV is protested. If the JV Agreement is found to not be in compliance with 13 C.F.R. § 124.513(c), the JV will not be able to avail itself of the mentor-protégé affiliation exception. The failure of an 8(a) mentor-protégé JV Agreement to meet the requirements of 13 C.F.R. § 124.513(c) in sufficient detail was the subject the SBA’s Office of Hearing and Appeals (“OHA”) decision last week in Size Appeal of Kisan-Pike, SIZ-5618 (2014).
In Kisan-Pike, U.S. Army Corps of Engineers (“USACE”) issued a request for proposal for the design and construction of an Army Reserve Center as a small business set aside. The procurement was conducted in two phases. Kisan-Pike (“the JV”), a joint venture consisting of an 8(a) protégé meeting the applicable size standard for the procurement and its large 8(a) mentor, self-certified as small, and submitted a proposal for Phase I. The JV was selected to submit a proposal for Phase II, subsequent to which USACE issued an Amendment to the RFP providing detailed technical specifications and drawings. The JV then entered into a JV Agreement for the subject procurement and thereafter submitted its Phase II Proposal, which included price. The JV was ultimately selected as the apparent awardee. The Contracting Officer then initiated a size protest, expressing concern that the JV Agreement did not comply with 13 C.F.R. § 124.513(c)(6)-(7), which require that the JV Agreement contain a provision:
(6) Itemizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each;
(7) Specifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements set forth in [13 C.F.R. § 124.513(d)].
With regard to the subject procurement, the performance of work requirements under the regulations set forth that the protégé firm must perform at least 40% of the work performed by the JV, to consist of more than administrative or ministerial functions. 13 C.F.R. § 124.513(d).
In attempts to meet these requirements, the JV Agreement contained statements that (1) the protégé owned 51% of the JV and serves as the managing venture; (2) “Upon award of the Contract, the JV will provide equipment, facilities and other resources to the Joint Venture required to execute the contract;” (3) the President of the protégé firm would be responsible for negotiating the original Contract, and any subsequent negotiations, and would perform day-to-day management and administration of the contract; (4) an employee of the Managing Venturer would be assigned as the Project Manager and will be responsible for performance of the project, overseeing the jobsite, and reporting to and implementing the instructions of the protégé firm (managing venture); (5) the JV would perform at least 50% of the cost of non-construction services, and 15% of the cost of general construction costs incurred; and (6) the protégé firm would perform, at a minimum forty (40%) of the JV’s work, consisting of management personnel and professional, technical, and support/trade staff.
The SBA Area Office found that JV Agreement was deficient for failure to comply with the requirements of 13 C.F.R. § 124.513(c)-(d). As a result, the JV could not avail itself of the mentor-protégé affiliation exemption, and the JV partners were thus affiliated for purposes of the subject procurement. The JV partners combined annual receipts greatly exceeded the applicable size standard, and thus the JV was not eligible for award.
The JV appealed the Area Office’s decision to OHA, arguing: (1) that the JV is presumed unaffiliated pursuant to 13 C.F.R. § 124.520(d)(4), which states that “no determination of affiliation or control may be found between a protégé firm and its mentor based on the mentor/protégé agreement or any assistance provide pursuant to that agreement.” The JV argued that only when the scope of the mentor-protégé agreement is exceeded does affiliation arise (which it alleged did not occur here); (2) the Area Office unreasonably penalized the JV for providing an honest assessment of expected equipment needs and division of labor at the earliest stages of the design-build project (i.e. the JV Agreement could not have been more detailed); and (3) the JV’s size should have been evaluated based on information that was provided at the time of submission of its Phase I Proposal, rather than subsequently provided information.
OHA upheld the Area Office’s determination that the JV Agreement failed to comply with the requirements of 13 C.F.R. § 124.513(c)(6)-(7), and thus was not entitled to avail itself of the mentor-protégé exception to the joint venture affiliation rule. With regard to itemizing all major equipment, facilities and other resources to be furnished by the JV partners, as required under 13 C.F.R. § 124.513(c)(6), OHA pointed to the fact that the JV Agreement contained only one sentence on this topic which simply stated that the upon award the JV would provide all equipment, facilities, and other resources required to execute the Contract. The decision states, “[s]uch a broad statement lacks the specificity necessary to comply with 13 C.F.R. § 124.513(c)(6).” Similarly, the Agreement failed to meet the requirements of 13 C.F.R. § 124.513(c)(7), by not specifically delineating tasks or responsibilities between the joint venture partners or explain how the JV would meet the performance of work requirements under 13 C.F.R. § 124.513(d). OHA was also not persuaded that the nature of the design-build contract did not permit additional detail to be included in the JV Agreement. OHA noted that the JV had received detailed specifications and drawings prior to executing its JV Agreement, and thus additional detail could have been provided. Further, the regulations do not provide for an exception for design-build contracts or other procurements where it may difficult for the JV to provide detailed information, and thus the JV’s argument is better placed with SBA policy officials, not OHA.
OHA also rejected the JV’s remaining arguments, finding that the regulation relied on by the JV that the mentor and protégé are presumed unaffiliated only stands for the proposition that they mentor and protégé are not affiliated based on the mentor-protégé agreement itself, but is inapposite to a determination of whether the exception to the mentor-protégé joint venture is met. Finally, OHA implicitly agreed with the SBA’s argument on appeal that SBA regulations and OHA precedent establish that in the context of the two-phase design-build procurement at issue, size should be determined when the JV submitted its Phase II Proposal that included price. See Ftsi-Phelps Jv, SIZ-5583, (2014).
The Kisan-Pike decision provides a cautionary tale of the dangers of not including sufficient detail in a mentor-protégé JV Agreement. The fact that the SBA has approved the mentor-protégé relationship and agreement is no substitute for ensuring the mentor-protégé JV Agreement provides all information requested in 13 C.F.R. 124.513, and doing so in sufficient detail. As addressed in the Kisan-Pike decision, this can be difficult in the context of a design-build procurement or procurements where a JV may have difficulty providing detailed information. Yet, the current regulations do not provide an exception in these circumstances. Thus JV partners must use best efforts to provide an honest and detailed assessment in their JV Agreement of, among other things, resources to be used and allocation of responsibilities based on the information that is provided by the Government.
