Justin A. Chiarodo and Christian N. Curran
After a long wait and much anticipation, the Small Business Administration (“SBA”) issued its final rule expanding the mentor-protégé program to all small businesses on July 25, 2016. The new rule broadly expands upon the existing 8(a) mentor-protégé program, and is projected to result in $2 billion in federal contracts to program participants. Though the final rule largely tracks the February 2015 proposed rule, which we previously wrote about here, the final rule does make some key changes, including changes regarding size certification and reporting. As the new rule goes into effect on August 24, 2016, contractors both large and small should prepare now to take advantage of what the newly expanded program has to offer.
The SBA mentor-protégé program has long allowed large businesses to provide technical, management, and financial assistance to small businesses, and for the mentor and protégé to compete together for contracts. The program was designed to help protégé businesses by leveraging the experience and expertise of the larger mentor contractors. Originally limited to 8(a) concerns, the program was extremely successful. Large businesses were attracted to the program because it allowed them to pursue small business set-aside contracts as a joint venture with a protégé and foster small business relationships, and small businesses benefited from the resources and expertise of their mentors.
In 2010 and 2013, Congress authorized the expansion of the mentor-protégé program. In February 2015, SBA issued its proposed rule expanding the program to include all small businesses, although the 8(a) program will also remain independent of the new program. The proposed rule indicated that SBA was contemplating a number of changes to the 8(a) model including size certification approval requirements from the SBA and additional reporting and compliance requirements, particularly with regard to the structure of the joint venture. Many of these new requirements remain in the final rule, but there are some significant changes that contractors should be aware of.
Key Provisions in the Final Rule
We summarize below key changes and provisions that made it into the final rule:
Size Status Determination: The proposed rule contained a requirement for formal SBA verification of the size status of the protégé. This requirement was removed from the final rule. SBA will continue to allow protégés to self-certify, and will rely on the size protest mechanism to ensure that businesses are accurately certifying their size.
NAICS Code Standard: Under the final rule, businesses that do not qualify as small under their primary NAICS code can still participate under a secondary NAICS code if the protégé can show that it would benefit from the progression into a secondary industry to enhance its current capabilities.
Financial Condition of the Mentor: Under the proposed rule, a mentor was required to demonstrate to SBA that it was in “good financial condition.” This requirement was removed from the final rule. SBA acknowledged that as long as the mentor can meet all obligations under its mentor-protégé agreement, then the “good financial condition” requirement was unnecessary and created too much confusion since the term was undefined.
Duration of the Agreement: The proposed rule limited the mentor-protégé agreement to three years. It also only allowed for a protégé to engage in one three-year agreement with one entity and one with a separate entity, or two three-year agreements with the same entity. Commentors did not believe that three years was long enough. SBA’s final rule allows for two three-year agreements with different mentors, but also allows for each agreement to be extended for an additional three years as long as the protégé continues to receive the agreed-upon business development assistance.
Joint Venture Entity: SBA clarified in the final rule that a joint venture need not be, but could be, a separate legal entity. SBA sought to clarify that formal or informal joint ventures were permissible. Also, consistent with the proposed rule, SBA clarified that a joint venture may not be populated with employees who are performing the contract, as this would defeat the purpose of the protégé learning from the mentor. A mentor may, however, own up to 40 percent of their small business protégé under the final rule. If ownership continues after the mentor-protégé agreement expires, SBA indicated that its affiliation rules would apply.
Compliance and Reporting: In order to ensure the program serves its purpose and is not abused, SBA has enacted rigid reporting requirements under the final rule. SBA requires both the mentor and protégé to certify the joint venture’s compliance with the regulations, the terms of the joint venture agreement, and the performance requirements of the particular contract. The protégé is also required to engage in annual reporting on compliance. Penalties for non-compliance can include suspension and debarment.
Impacts on Government Contractors
Contractors should be aware that nearly all future small business set-aside contracts will draw bids from mentor-protégé joint ventures. Given this expansion to all small businesses, mentors will now have a wider selection of protégés to choose from. The new rule is expected to result in thousands of additional applications for the program. Indeed, SBA has created an entirely new division within the Office of Business Development to process and review applications, and has left open the possibility of imposing open and closed enrollment periods for the program. Companies that are interested in participating in the program should make sure they obtain appropriate guidance on the final rule to ensure that all application, performance, and reporting requirements can be met. More information can be found here.