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Small Business Contracting May Be Very Different In 2016

Law360 - December 16, 2015

By: Ed DeLisle & Jacqueline Ryan

Law360, New York (December 16, 2015, 10:27 AM ET) -- In the past year, the Small Business Administration has issued proposed rules that will likely result in major regulatory changes. Some of the most important changes are those relating to its mentor-protege program, and the performance of work requirements for prime contractors. The proposed rules affecting these areas have the potential to substantially alter the landscape of small business contracting in 2016.

The Actions of the Small Business Administration in 2015 Could Bring About Substantial Changes to Mentor-Protege Programs in the Coming Year

The intent of mentor-protege programs, generally, is to partner small business concerns with established businesses for the purpose of increasing the small business’ ability to win contracts and subcontracts, and otherwise succeed. Through these programs, mentor businesses provide business and technical assistance to their proteges. In February 2015, the SBA issued a proposed rule that would establish one governmentwide mentor-protege program for all small businesses, while continuing to operate the separate mentor-protege program available to participants in the 8(a) Business Development Program. The proposed rule would expand the program to small businesses other than those in the 8(a) program and would allow all entities in SBA approved mentor-protege relationships to seek opportunities, as joint venture partners, for which the protege entity is eligible. The finalization of this rule could mean big changes for small businesses in 2016.

The authority of the SBA to issue this proposed rule was granted to it by the Small Business Job Act of 2010 and the National Defense Authorization Act for Fiscal Year 2013. The 2010 Jobs Act permitted the SBA to establish mentor-protege programs for the Women-Owned Small Business Program, the HUBZone Program, and the Service-Disabled Veteran-Owned Small Business Program. It dictated that these mentor-protege programs be modeled after the mentor-protege program already available to participants in the 8(a) program.

The NDAA of 2013 further expanded the authority of the SBA relating to mentor-protege programs by empowering the SBA to create a mentor-protege program for all small business concerns, not only socioeconomically disadvantaged companies. Similar to the 2010 Jobs Act, the NDAA of 2013 required that mentor-protege programs be identical to the existing mentor-protege program for the 8(a) program, but also allowed the SBA to modify the program if necessary based on the type of small businesses participating as proteges. Furthermore, the NDAA of 2013 required approval by the SBA if any federal department or agency wished to operate, or continue to operate, its own mentor-protege program. While the 2010 Jobs Act and the NDAA of 2013 granted the SBA the power to change the structure of mentor-protege programs, the SBA failed to take any action until this year.

It was not until February 2015 that the SBA issued a proposed rule regarding mentor-protege programs. The SBA’s proposed rule would establish a universal mentor-protege program for all small businesses, while allowing the continued operation of the SBA’s separate mentor-protege program available to 8(a) program participants. The SBA proposed a single, governmentwide mentor-protege program, as opposed to four new separate programs for each specific type of small business because it believed that a unified program will be easier for contractors to understand and for the SBA to implement. As already allowed in the 8(a) program, the proposed rule would permit entities in an approved mentor-protege relationship to be eligible to perform, as a joint venture, any contract for which the protege is eligible.

After the issuance of the proposed rule, there was approximately eight months of silence from the SBA. This caused the small business community to question when the SBA was actually going to implement these changes through a final rule. Then, in October 2015, the House Small Business Subcommittee on Contracting and Workforce held a hearing entitled “Maximizing Mentoring: How are the SBA and DoD Mentor-Protege Programs Serving Small Business?” At this hearing, individuals from the SBA testified that the agency has organized a Mentor-Protege Program Expansion Project Team to oversee the implementation of the universal program. More importantly, there was a specific indication that the final rule will be issued in the first quarter of fiscal year 2016, and that a pilot program may launch in the summer of 2016.

Given what we just learned, it appears that 2016 will bring about large-scale changes to mentor-protege programs governmentwide. Allowing an expanded array of entities to participate in approved mentor-protege relationships will certainly change the possibilities open to all types of companies, both large and small. For small businesses, it will allow them to compete for larger contracts than they might otherwise feel comfortable pursuing when operating alone. It may also allow small companies to perform more contracts at any given time based upon the support available from its mentor. For large firms, it means obtaining access to opportunities that it may not otherwise have access to in a way that makes the combination of firms more competitive.

The SBA estimates that if the proposed rule becomes final, approximately 2,000 small business concerns would likely become active in the universal mentor-protege program, who do not qualify under the present program. The SBA also projects that this increased participation could result in protege firms obtaining as much as $2 billion per year in federal contracts through the program. While these figures are merely estimates, they speak to the immensity of the potential effect of the expanded program. The SBA also suggests that because the expanded mentor-protege program will allow small businesses to compete for larger contracts and a greater number of contracts, it is probable that federal agencies will set aside more contracts for various types of small businesses, which could mean that large businesses will have fewer opportunities to contract with federal agencies in the future.

As a result, it would behoove large businesses to begin making strategic alliances with small businesses as soon as possible to account for this shift. Of course, in order for small businesses to take full advantage of these potential opportunities, it behooves them to seek out strategic partners as well. Firms, both large and small, must be prepared for what could be a major shift in contracting practices. Large and small businesses alike must learn to adapt to become more competitive after the SBA finalizes its proposed rule in the coming year.

The SBA’s Proposed Rule Relating to Performance of Work Requirements Could Mean Fundamental Changes to Small Business Contracting

On Dec. 29, 2014, the SBA issued a proposed rule to implement directives contained in the NDAA of 2013 in another way. The proposed changes would affect the performance of work requirements set forth in 13 CFR § 125.6. This change, and the effects thereof, will be important for all small businesses to understand in order to remain eligible under the SBA’s rules.

The provisions of 13 CFR § 125.6 currently set forth minimum requirements of self-performance for prime contractors. These regulations are often referred to as “performance of work requirements.” The purpose of requiring a small business prime contractor to perform a percentage of the work itself is to ensure that money set aside for a small business actually goes to that small business. The performance of work requirements attempt to prevent small business prime contractors from being awarded a set aside contract, but then simply subcontracting the performance of the contract to another, perhaps large, business, thereby eliminating a prime purpose of setting aside contracts.

Traditionally, the goal of ensuring that funds flow to the type of entity they were intended to benefit was achieved by requiring a percentage of the work on a contract be performed by the prime contractor itself. However, the NDAA of 2013 changed the metric for measuring self-performance. Instead of requiring a percentage of work be performed by the prime, the NDAA of 2013 shifted the framework to limit the amount of work the prime can subcontract to other contractors. The SBA’s proposed rule is designed to implement this conceptual shift. The proposed revision aims to simplify the regulations for easier use, and to further promote small business contracting opportunities.

Furthermore, under the proposed rule, work subcontracted out to “similarly situated entities” would not be included for purposes of determining compliance with the limitation on subcontracting requirements.” A “similarly situated entity” is “a small business subcontractor that is a participant of the same small business program that the prime contractor is a certified participant of and which qualified the prime contractor to receive the award.” The SBA’s rationale for this proposed revision is that the goal of the business development programs is still advanced when prime contractors benefit other participants that are members of the same small business program.

Similarly, the proposed rule also revises the circumstances under which the SBA will find that joint venture partners are affiliated for the purposes of a size determination. In line with the proposed rule’s treatment of similarly situated entities under the new limitations on subcontracting, the proposed rule excludes similarly situated subcontractors from affiliation under the “ostensible subcontractor rule.” The “ostensible subcontractor rule” provides that a subcontractor upon whom a prime is unusually reliant for a procurement is considered affiliated with that prime for size status purposes. The SBA’s proposed rule would mean that a prime contractor that subcontracts a majority of its primary and vital work will not be considered affiliated with its subcontractor as long as the subcontractor is a “similarly situated entity.”

The comment period for this rule originally ended on Feb. 27, 2015. However, the SBA reopened the comment period until April 6, 2015, because of the contracting community’s interest in the issues raised, and that interest level is clearly warranted. After a careful reading of the proposed rule, there is a question regarding how far the SBA meant the “similarly situated entity” exception to extend. For example, under the rule, on an SDVOSB set-aside contract, an SDVOSB prime could not subcontract more than 75 percent of a specialty construction contract to a non-SDVOSB firm. However, the remaining 25 percent of the work could be performed by the prime itself, or the prime could subcontract the remaining work to a similarly situated entity. In this example, the SDVOSB prime could end up performing none of the work. This issue has been specifically raised with the SBA during the comment period.

The SBA suggests that allowing small businesses to utilize similarly situated subcontractors when performing set-aside contracts could benefit the small business community by increasing the capacity of prime contractors, which would allow them to compete for larger contracts. The ability of primes to subcontract work to similarly situated entities without penalty has the potential to create more contracting opportunities than would be available under the current system. Theoretically, firms that normally compete against each other for set aside contracts may instead be incentivized to form teaming relationships to take advantage of the new rules, which, in turn, could impact the bid and proposal process, generally, in a multitude of ways. It is safe to say that if the proposed rule is finalized in the coming year, it has the potential to significantly alter the way small businesses interact with each other.

Looking Forward

If the proposed rules discussed in this article are finalized in a form similar to that which has been proposed, they have the potential to change the landscape of small business contracting. Because of this, it is imperative that members of both the large and small business community remain abreast of the SBA’s progress in 2016.

—By Edward T. DeLisle and Jacqueline J. Ryan, Cohen Seglias Pallas Greenhall & Furman PC

Edward DeLisle is a partner in the Philadelphia office of Cohen Seglias and co-chairman of the firm’s federal contracting group. Jacqueline Ryan is an associate in the firm's Philadelphia office.

DISCLOSURE: Edward DeLisle is a member of the Section of Public Contract Law of the American Bar Association and, as such, participated in drafting a comment on the Proposed Rule: Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments.

This article was originally published by Law360. You can access the article on their website.