Opportunities for small businesses continue to grow as the Department of Defense (DoD) released a proposed rule of changes to its current, pilot mentor-protégé program. The proposed rule, released on Friday, September 23, comes just one month after the Small Business Administration’s (SBA) final rule establishing a government-wide mentor-protégé program for all small business concerns. While the DoD’s proposal is not as expansive as the changes within the SBA’s mentor-protégé program, it will likely further increase small business contracting opportunities within the federal marketplace.  This post, along with the comparison chart below, highlight some of the similarities and differences between the programs.

Similar to the SBA creating a single program for all small business concerns, the DoD’s proposed rule expands eligible protégés to include not only service-disabled veteran-owned small businesses (SDVOSB), HUBZone small businesses, and women-owned small businesses (WOSB), but also entities owned or controlled by either an Indian tribe or Native Hawaiian organization, entities owned or controlled by socially and economically disadvantaged individuals, as well as non-traditional defense contractors that have not performed any DoD contract or subcontract subject to full coverage under the cost accounting standards for at least one year prior to the solicitation. In addition, the DoD’s proposed rule also changes the purpose of the mentor-protégé program, expanding the types of contracts available to protégés. While the pilot program was created as an incentive for major DoD contractors to join the program to help protégé firms, the proposed rule changes the purpose to helping small business concerns perform work both under DoD contracts, and under other federal contracts and subcontracts.

In the face of expansion, the DoD is also proposing several restrictions. Though more types of entities may qualify as protégés, the protégé size restrictions are more constraining than what the SBA requires for its program. For the SBA program, a protégé is eligible as long as it is a small business under its primary NAICS code, while DoD protégés must be less than half the size standard for their primary NAICS code. Similarly, while both the SBA and the DoD require reporting and certifications verifying the success of the mentor-protégé program, the two agencies differ in the types of information they are seeking in the reports. The SBA requires recertification if control within a mentor agency changes and requests that protégés demonstrate they have benefitted from a mentor-protégé agreement. The DoD, on the other hand, is concerned with any loans given to the protégé, any expansions in contract terms and any advance payments to the protégé.

The DoD is also more restrictive in how it intends to prevent conflicts of affiliation and undue influence. Relying on other affiliation safeguards, the SBA program allows mentors to own up to 40% equity interest in the protégé, and has removed the requirement that the mentor divest its interest in the protégé following the end of the mentor-protégé agreement. In contrast, the DoD specifically prohibits the mentor from owning or managing any stock or convertible securities in the protégé firm. In addition, while the SBA allows up to three simultaneous, non-conflicting agreements for mentors and two for protégés, the DoD permits only one protégé agreement at any given time. Finally, though the SBA final rule establishes new guidelines for joint ventures and allows them to bid on solicitations so long as the joint venture is approved prior to the award, the DoD is not as welcoming of such partnerships. Parties must disclose all joint ventures and will be eligible for the program only when the SBA has approved the joint venture prior to the protégé making an offer on a contract.

Though the DoD’s rule expands some provisions of its pilot mentor-protégé program, overall this proposed rule is more restrictive that the final rule released by the SBA and creates some noticeable differences between the two programs (see chart below). The SBA appears to have more trust that small businesses and their for-profit mentors will act in good faith in certifying their size, affiliations and the success of the program. Conversely, the DoD is asking for specifics in the financials and partnerships between the mentor and the protégé and is looking to prevent conflicts by limiting mentor-protégé collaborations to one at a time. As for the approval process, the DoD offers a sample application and requires that the mentor provide a statement that it meets the program’s guidelines.

Written comments in response to DoD’s proposed rule may be submitted through http://www.regulations.gov until November 11, 2016. Alternatively, comments may also be mailed to Jeniffer Johnson, OUSD (AT&L) DPAP/DARS, Room 3B941, 3060 Defense Pentagon, Washington, D.C. 20301-3060, or emailed to osd.dfars@mail.mil.

Comparison of SBA’s “All Small” MP Program vs. DoD’s MP Program (as proposed)

MP Program	SBA Program	DoD Program (as proposed)
Purpose	Enhance protégé capabilities	Help small business concerns perform contracts as subcontractors with the DoD and under other contracts and subcontracts
	Improve protégé abilities to compete for government and commercial contracts
	Help protégés meet business goals
Eligible Mentors	Must be a for-profit business (small or large)	Any eligible large business – not required to have subcontracting plan with a federal agency
		Potential for a small business to serve as mentor through waiver authorized by the Director of Small Business Programs, OUSD (AT&L)
Mentor Limitations	Must demonstrate that it can fulfill its obligations under the mentor-protégé agreement	Must show it is qualified to provide assistance to the protégés
	Mentors may own up to 40% in equity interest in the protégé	Must certify good financial health and character
	Must certify to good standing and a favorable financial position
Eligible Protégés	Women-Owned Small Business	Women-Owned Small Business
	HUBZone Small Business	HUBZone Small Business
	Service-Disabled Veteran-Owned Small Business	Service-Disabled Veteran-Owned Small Business
	Small Businesses	Small Disadvantaged Business
		Entity owned/controlled by Indian tribe or Native Hawaiian organization
		Entity owned/controlled by socially and economically disadvantaged individuals
		Non-traditional defense contractor: entity not currently, nor previously, performing any DoD contract or subcontract subject to full coverage under the cost accounting standards for at least one year prior to the solicitation
		Entity currently providing goods or services in the private sector critical to enhancing capabilities of the defense supplier base and carrying out key DoD needs
Protégé Limitations	Must qualify as small for the size standard corresponding to its primary NAICS code, or identify that it is seeking business development assistance with respect to its secondary NAICS code and qualify as a small business for the size standard that corresponds to that NAICS code	Must be half the size standard under its primary NAICS code
Total Mentor-Protégé Relationships	Mentor may have a total of up to three protégé firms at one time	Protégé can only have one mentor
	Protégés can have up to two mentors at one time
	Cannot have mentor-protégé relationships that conflict or compete with each other
Term Limitations	May enter into up to two three-year mentor-protégé agreements, each of which can be extended for a second three-year term	Five years
Reporting	Once a mentor-protégé relationship ends, the protégé must submit a close out report to the SBA on whether the protégé believes the mentor-protégé relationship was beneficial and describe any lasting benefits it received	Mentor must report any additional, unreported, progress payments, advance payments or loans to the protégé from the mentor
	If the protégé does not report the results of the mentor-protégé relationship, the SBA will not approve a second mentor-protégé agreement	Mentor must disclose any joint ventures with the protégé and any contracts awarded to the joint venture
	Must report to the contracting officer and the SBA how they are meeting/have met the applicable work requirements for the work performed if operating as a joint venture	Mentors must report all technical/management assistance they provide to protégé
		Mentor must report any new rewards of subcontracts to the protégé firm
		Mentor must report any assistance the mentor provided the protégé through small business development centers
		Must report any changes in the terms of the mentor-protégé agreements
		Must provide narrative describing the success of the mentor-protégé agreement in assisting the protégé’s developmental needs
Affiliation	Affiliation rules provide sufficient protection against far-reaching influence by large businesses	Must certify that the mentor does not have ownership of the protégé
		Must certify that the mentor does not have an agreement to merge with the protégé firm
Joint Ventures	If entering into a joint venture, must obtain SBA approval prior to award of the contract	Must certify that they have not been party to joint venture for two years prior to the mentor-protégé agreement unless the joint venture was approved prior to making the contract offer
	Can be a formal legal entity or a partnership	Doesn’t prevent joint ventures but no exception from affiliation
	All partners to a joint venture have to certify to the contracting officer and the SBA, prior to performing a contract, that they will perform in compliance with joint venture regulations and the joint venture agreement	Can only joint venture with a protégé for set-aside contracts under SBA’s Mentor-Protégé Program or 8(a) Mentor-Protégé Program
		The DoD will not reimburse fees incurred by the mentor for business development while participating in a joint venture with the protégé

I would like to thank Lidiya Kurin, a Bass, Berry & Sims law clerk based in our Washington, D.C. office, for her assistance in drafting this blog post.