SBA Proposes Combining 8(a) Mentor-Protégé Program with the All Small Mentor-Protégé Program, As Well As Extensive Changes to 8(a) Program, Joint Ventures and Multiple-Award Contracts

Miles & Stockbridge P.C.

On November 8, 2019, the Small Business Administration published a proposed rule to combine the 8(a) Business Development (BD) Mentor-Protégé Program with the All Small Mentor-Protégé Program. 84 Fed. Reg. 60,846 (Nov. 8, 2019). The far-reaching SBA proposal also includes changes to the mentor-protégé programs, changes affecting joint ventures, changes for certain details in the 8(a) Program, and new requirements for certain multiple-award contracts, among others. Comments on the proposed rule are due January 17, 2020.

Combining the 8(a) BD and All Small Mentor-Protégé Programs

Although the 8(a) Mentor-Protégé Program seems to have been around forever, SBA started it relatively recently, in 1998. The purpose of the program is to enhance the ability of the minority-owned protégé to compete for government and commercial contracts, through business assistance for the protégé, such as technical or management training, financial assistance in either equity investments or loans, and subcontracts. But it also proved popular because it enabled large firms to form joint ventures with 8(a) protégés, which were then eligible to compete for any opportunity for which the protégé qualified.

In 2010 and 2013, in two separate legislative enactments, Congress created a similar mentor-protégé program, first for the other socioeconomic preference programs – the Service-Disabled Veteran-Owned Small Business Concern (SDVO SBC) Program, the HUBZone Program, and the Women-Owned Small Business (WOSB) Program – and subsequently expanding it to cover all small businesses (the “All Small Mentor-Protégé Program”).

Since the purposes and benefits of the two programs are identical, SBA now proposes to eliminate the 8(a) Mentor-Protégé Program andallow 8(a) companies to continue to form mentor-protégé joint ventures through the All Small Mentor-Protégé Program.

Other Changes for 8(a) Mentor-Protégé Joint Ventures

The proposal also would eliminate the requirement that 8(a) joint ventures obtain SBA approval of the joint venture agreement prior to award – but only for competitive 8(a) awards, and not for sole-source awards. SBA would rely upon size and status protests to police compliance with mentor-protégé joint venture requirements for competitive 8(a) procurements. But since size protests are not available to challenge sole-source awards, prior approval by SBA would still be required for those actions.

Other Changes for Joint Ventures

SBA proposes to remove the limit that a joint venture may win no more than three contracts over a two-year period. Successful venturers would no longer have to form separate, essentially identical JV’s after winning three awards.

The proposed rule would clarify that unpopulated JVs are allowed to directly employ administrative personnel, specifically including Facility Security Officers. However, the JV still could not be populated with individuals intended to perform contracts awarded to the JV.

The proposed rule also clarifies that, for purposes of determining the size of a company that is or has been a partner in a joint venture, the company must count in its receipts only the percentage share of JV receipts and employees, proportional to the share of the JV’s work the company performed (not its ownership share).

SBA proposes to permit the parties to a JV to distribute joint venture profits disproportionately, so that a small business protégé or socioeconomic venturer would be allowed to receive profits exceeding the percentage commensurate with the work performed by that venturer. However, SBA proposes to retain the rule that a protégé or socioeconomic member of a JV cannot receive profits less than that corresponding to the work it performed. 

The proposed rule would strengthen the protégé’s annual report, reviewing the success of the mentor-protégé relationship, focusing especially on whether the protégé has received the agreed-upon business development assistance, and whether the protégé would recommend the mentor to another small business.

New Requirements for Multiple-Award Contracts (“MACs”)

Under the proposed rule, if an order under an unrestricted MAC (except for FSS orders, or Blanket Purchase Agreements issued under any FSS contract) is set aside exclusively for any small business category (i.e., small business set-aside, 8(a) small business, service-disabled veteran-owned small business, HUBZone small business, or woman-owned small business), an offeror must recertify its size status and qualification at the time it submits its initial offer including price for the order.

For those orders, the proposed rule would also allow size protests and/or protests challenging the socioeconomic status of the awardee.

The proposed rule clarifies that if a merger or acquisition causes a firm to recertify as other than small between time of offer and award, then the recertified firm will not qualify for the award. SBA would likewise accept size protests showing (with specific facts, which are always required for size protests) that an apparent awardee of a set-aside order has recertified or should have recertified as other than small due to a merger or acquisition prior to award.

The proposed rule would require that the NAICS code assigned to an order must reflect the principal purpose of that order, and must be an NAICS code included in the MAC.

Other Changes in the 8(a) Program

Several proposed changes would lessen regulatory burdens on 8(a) Program participants. Changes in ownership would no longer need prior SBA approval whenever an owner held less than a 20% interest both before and after the transaction (up from the current 10% threshold); nor would approval be required when a participant was merely increasing the percentage held by the disadvantaged individual in control of the company.

The proposed rule relaxes restrictions on participation in the 8(a) Program, when family members have previously participated in the 8(a) Program.

The proposed rule would also provide that an 8(a) firm can no longer obtain sole-source awards, once it has reached a combined total of $100 million of competitive and sole-source 8(a) awards (up from five times the size standard of its primary NAICS code, or $100 million, whichever is less).

The proposed rule clarifies that SBA does not use the certificate of competency (COC) procedures for 8(a) sole-source contracts; if an agency finds an 8(a) firm non-responsible, the agency should withdraw the award, or find a substitute awardee.

Other Changes

The proposed rule contains several changes relating to Alaska native-owned, tribal and native Hawaiian-owned companies. For example, when tribal ownership is reorganized, but does not change, prior approval by SBA would no longer be required. Tribal entities would also no longer be required to submit small business subcontracting plans, if they are small for the applicable NAICS category.

The proposed rule would require contracting officers to consider past performance of first-tier subcontractors for certain bundled and consolidated contracts, and for MACs over a certain dollar threshold, not presently required by previous legislation.

The proposed rule would clarify that affiliation may be found between a newly-organized concern and a previous company, whenever former and “current” officers, directors, principal stockholders, managing members, or key employees of one company organize a new company in the same or a related industry, and serve in similar capacities. Prior to this clarification, it was unclear whether the rule applied to individuals who are involved “currently” with both companies.

Request for Comments

SBA is also considering whether to limit mentors only to those firms having average annual revenues of less than $100 million.  Currently, companies of any size may act as mentors. Restricting the size of mentors would enable those “mid-size” firms to better compete via mentor-protégé joint ventures, by excluding the largest firms from such joint ventures. SBA seeks comments on whether such a restriction is desirable, and whether it would be detrimental to protégés.

SBA also seeks comments on how the non-manufacturer rule should be applied for certain multiple-item procurements, and on how to determine the size status of joint ventures, outside of the mentor-protégé situation, when the membership of a joint venture changes over time by the withdrawal or addition of member companies.

Comments Accepted Until January 17, 2020

SBA will accept comments on the proposed rule until January 17, 2020.  This summary does not detail every change SBA proposes. For further information about the proposed rule, click here to see SBA’s Federal Register publication.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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