On Friday, July 22, 2016, the Small Business Administration (SBA) released a Final Rule (Final Rule) establishing a government-wide mentor-protégé program for all small business concerns, designed to increase opportunities in the federal market place and improve development for small businesses. This expansion implements the authority Congress gave SBA in the 2013 National Defense Authorization Act to create mentor-protégé programs for Service-Disabled Veteran Owned Small Businesses (SDVOSB), HUBZone small businesses, women-owned small businesses (WOSB), and small businesses.

    The new program, which enables these categories of small businesses to benefit from the SBA-approved mentor-protégé arrangements previously only available to certified 8(a) small disadvantaged businesses, goes into effect on August 24, 2016, and will be implemented with the help of a newly formed unit within the SBA Office of Business Development devoted solely to processing and reviewing mentor-protégé applications and agreements. Instead of creating four new and separate programs covering each of the small business contracting programs (i.e., small business, SDVOSB, WOSB, and HUBZone), SBA chose to create a single program for all small business concerns modeled after the existing 8(a) Business Development (BD) mentor-protégé program, which will continue to operate as a separate program. Alongside these regulations, the Final Rule revises guidelines for joint venture agreements between a mentor and a protégé.

Opening the mentor-protégé program to new categories of small businesses creates significant opportunities for both large and small businesses. Because of the expected avalanche of applications from companies wishing to participate in this program, an overview of which is provided below, businesses that anticipate submitting applications for approval of mentor-protégé agreements should do so as soon as possible after the program goes into effect.

Benefits of the New Mentor-Protégé Program
The purpose of the program is to assist protégés in meeting their business goals while preventing large businesses from exerting excessive influence. In expanding the opportunity for mentor-protégé agreements between all small business entities, SBA hopes to increase contracting opportunities for small businesses. Under the program, mentors are able to provide:

  • 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.
  • The mentor-protégé collaboration enhances the protégé’s capabilities to successfully compete for commercial and government contracts.

      A small business seeking to submit a mentor-protégé application has two options for qualifying as a protégé: (1) the firm must either qualify as small under the size standard associated with its primary North American Industry Classification System (NAICS) code; or (2) it must be seeking assistance with business development under its secondary NAICS code and must qualify as small under the secondary code. In response to commentary in opposition, SBA has agreed to rely on a firm’s self-certification of its size, removing the requirement of affirmative verification originally included in the proposed rule. According to SBA, the option of filing a size protest creates sufficient protection against faulty self-certification. SBA also cautions that approval of a mentor-protégé agreement does not constitute a formal size determination. A formal size determination can still only be issued by the SBA’s Office of Government Contracting.

    As an added benefit, the Final Rule explains that, generally, changes in the size status of a protégé will not affect contracts previously awarded to a mentor-protégé joint venture. The Final Rule also expands on a firm’s ability to transfer from an 8(a) Business Development program mentor-protégé relationship to a small business mentor-protégé program relationship. The Final Rule removes the requirement that at least six months remain in an 8(a) program for a firm to transfer to a small business mentor-protégé agreement, allowing transfers in the last six months without having to file a separate application and seeking a second approval from SBA.

      In addition, 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. But in order to have two mentors at one time, the firms must demonstrate they are assisting each other in unique ways for different contracts. Finally, a small business may simultaneously be a protégé and a mentor.

    To qualify as a mentor, the Final Rule requires only that a firm is for profit and demonstrates a commitment and ability to assist small businesses. Unlike the proposed rule, the Final Rule also allows a protégé to become a mentor to smaller, less experienced firms. In response to concerns expressed by commentators, the Final Rule no longer requires that a mentor separately demonstrates that it is in good financial condition. Instead, the mentor must only show it can fulfill its obligations under the mentor-protégé agreement. While not required, demonstrating that a firm can fulfill its obligations will often be achieved by providing copies of federal tax returns, audited financial statements and SEC filings. In addition, following SBA approval of a mentor-protégé agreement, the mentor must still certify to good standing and a favorable financial position.

      SBA has also changed its stance on requiring mentors to divest in the protégé once their agreement terminates. Thus, a mentor firm may own up to 40% in equity interest in its protégé for the duration of the mentor-protégé agreement, and may continue to do so even after the mentor-protégé agreement expires. While some feared that allowing the continuation of these types of equity investments following the mentor-protégé program would subject small businesses to far-reaching influence from larger corporations, SBA held that the rules and regulations against affiliation prevent such undue influence.

    Also, under the Final Rule, a mentor may have up to three protégés at any one time but must demonstrate that the three relationships do not compete or conflict with each other. This will allow large businesses to enter into mentor–protégé agreements with as many as three different various categories of small business, giving mentors access to work set aside for multiple small business types.

    Approval Process for Mentor-Protégé Agreements
    As a result of the Final Rule, SBA is anticipating an influx of mentor-protégé applications. Originally, SBA intended to have the SBA Director of Government Contracting (D/GC) review and approve agreements. However, in response to concerns over the administrative burden, SBA is creating a separate unit within the Office of Business Development to process the mentor-protégé applications. This unit does reserve the right to create “open” and “closed” enrollment periods for firms seeking approval of mentor-protégé applications. The ultimate approval or denial of a mentor-protégé agreement is to be issued by the SBA Associate Administrator for Business Development (AA/BD) or his/her designee.

      To apply for the mentor-protégé program, the mentor and protégé have to submit a written mentor-protégé agreement setting forth the projected benefits of the relationship for the protégé. In the application, firms must disclose and differentiate any other mentor-protégé arrangements of either firm.

    Central to SBA’s decision in approving or denying the mentor-protégé application is the projected benefit to the protégé. SBA maintains that it will only approve applications that demonstrate that the protégé will receive real developmental gains out of the collaboration. After a mentor-protégé agreement is approved, SBA will conduct annual reviews of the relationship to determine whether it is worthwhile. If the mentor is benefitting from the agreement more than the protégé, or if either party is not complying with the terms and conditions of their agreement, SBA can terminate the relationship at any time.

      In addition to SBA’s ability to terminate the mentor-protégé agreement at any time, the Final Rule requires any mentor-protégé agreement to allow for either the mentor or protégé to terminate the agreement upon 30 days notice. If the parties merely wish to amend the agreement, any changes must first be submitted in writing to SBA for approval. Failure to obtain SBA approval before making a change to a mentor-protégé agreement may result in the SBA terminating the mentor-protégé relationship and proposing one or both parties for suspension or debarment. In cases where a change occurs in the control of the mentor firm, in order for the previously approved mentor-protégé agreement to continue, the mentor must express in writing to SBA that it intends to continue to fulfill its obligations under the mentor-protégé agreement.

    If SBA denies the application under the mentor-protégé program, the protégé can request that the AA/BD review the decision within 45 days of the denial. SBA’s decision on the reconsideration must be completed within 45 calendar days of the protégé’s request. If the final decision confirms denial of the mentor-protégé agreement, the protégé cannot attempt to enter into a mentor-protégé agreement with the same mentor for 60 calendar days from the final decision. However, the protégé is free to apply under the program with a different mentor. Parties also have the option of requesting that the decision is reconsidered by the SBA Office of Hearings and Appeals (OHA). Under the Final Rule, SBA may initiate the request for reconsideration by OHA, even if it had not previously participated in the review. Any petition for OHA reconsideration must be filed within 20 calendar days of service of the written decision and must demonstrate error of fact or law material to the decision.

      Joint Ventures under the Mentor-Protégé Program
      A significant benefit of the mentor-protégé program is that it allows joint ventures that include large business mentors to compete for small business set-aside contracts without violating rules against entity affiliation. Under the expanded program, joint ventures with a mentor-protégé agreement can compete for contracts reserved for small business concerns or concerns from one of the four SBA contracting programs: 8(a), HUBZone, SDVOSB and WOSB. Although the Final Rule creates uniform requirements for all types of small businesses, in competing for these contracts, the joint venture must still meet the separate requirements associated with contracts reserved for the different categories of small businesses.

    The Final Rule clarifies the process firms must follow in order to qualify as joint ventures and bid on government contracts without violating regulations against entity affiliation. First, the Final Rule clarifies that a joint venture may be either a formal legal entity or an informal partnership, but the joint venture agreement must be set out in writing. To ensure the small business benefits from the partnership, a joint venture set up as a formal legal entity may not be populated with individuals intended to perform contract requirements. Joint venture employees can only perform administrative functions. However the joint venture is set up, the small business partner to the joint venture must perform at least 40% of the substantive – rather than administrative or ministerial – work.

      A mentor and protégé seeking to enter into a joint venture must first be approved under the mentor-protégé program before filing for approval as a joint venture. The mentor-protégé joint venture must then be approved by SBA before the joint venture can begin competing for small business set-aside contracts. To qualify as a joint venture, the partners should be separately identified in SAM, must have a separate DUNS and CAGE number, must identify their entity type as “joint venture” in SAM, and should list the individual joint venture partners. The firms are required to identify a project manager of the protégé firm. While the project manager need not be employed with the protégé firm at the time the joint venture submits an offer, the individual must provide a letter of intent to be employed by the protégé firm in the event that the joint venture is the successful offeror.

    As part of the joint venture approval process, the partners must submit certifications to the contracting officer and SBA for approval. Each entity must certify that it will perform the contract in compliance with joint venture regulations and with its joint venture agreement. The joint venture partners must report to the contracting officer and SBA on how they are meeting or have met the work requirements as a joint venture.

      Importantly, the Final Rule also changes the standards for evaluating the past performance of a joint venture offeror. Previously, agencies were permitted to issue solicitations limiting the review of past performance to the joint venture only, ignoring the past performance of the individual joint venture partners. The Final Rule eliminates this possibility, requiring procuring agencies to consider in its evaluation of past performance the past performance of the individual members of the joint venture, as well as any experience of the joint venture itself.