The Small Business Administration Could Bring About Substantial Changes to Mentor-Protégé Programs in the Coming Year
Last year, the Small Business Administration (SBA) issued proposed rules that will likely result in major regulatory changes. One of the most important changes relates to the SBA mentor-protégé program and has the potential to substantially alter the landscape of that program, as well as small business contracting generally.
By way of background, the federal government currently attempts to steer a percentage of government contracts to small businesses by “setting aside” certain contracts exclusively for those businesses. As part of this effort, certain contracts are set aside for particular types of small businesses, namely those participating in the SBA’s and Department of Veterans Affairs’ (VA) small business programs. These include the SBA’s 8(a) program (for small, disadvantaged businesses), the SBA’s HUBZone program (for small businesses located in historically underutilized business zones), the SBA’s SDVOSB program (for service-disabled-veteran-owned small businesses), the SBA’s WOSB/EDWOSBs program (for woman-owned/ economically disadvantaged woman-owned small businesses), and, finally, the VA’s VOSB/SDVOSB program (for veteran-owned/service-disabled veteran owned small businesses). Once a business is a qualified participant in one of the above programs, it is eligible for set-aside contracts designated for the applicable type of business.
However, small businesses can sometimes lose their small business status if they are found to be “affiliated” with other businesses, rendering them ineligible for set-aside contracts. A finding of affiliation can be based on a variety of factors but, generally speaking, any close working relationship between two companies poses an affiliation risk. As a rule, joint venture partners are presumed to be affiliated. This affiliation issue often discourages small businesses from working with other businesses, especially large businesses. Government mentor-protégé programs offer a potential solution to that issue.
The purpose of government-sponsored mentor-protégé (MP) programs is to partner established (and often large) business “mentors” with small business “protégés.” Through these MP programs, mentors provide both business and technical assistance to their protégés, increasing the small business’s ability to win federal contracts. One additional benefit, currently applicable to the 8(a) MP program only, is that joint venture partners in approved MP relationships are generally excluded from any “affiliation” analysis. In other words, large business “mentors” can assist 8(a) “protégés” and form joint ventures with those protégés, without worrying that the two businesses will be found “affiliated,” or that the protégé will lose its 8(a) status or eligibility.
In February 2015, the SBA issued a proposed rule aimed at establishing one universal MP program open to all types of SBA small businesses. As explained above, while joint venture partners are presumed to be affiliated as a general rule, joint ventures formed between an 8(a) protégé and its approved mentor are an exception to that rule. In the proposed universal MP program, this exception would be expanded to cover all SBA approved MP joint ventures. This means that HUBZones, SDVOSBs, and WOSB/EDWOSBs—not just 8(a) businesses—could form affiliation-proof joint ventures with approved mentors. As in the current 8(a) program, those joint ventures would then be eligible for any set-aside for which the protégé was eligible.
Needless to say, this rule could mean big changes for construction companies, both large and small. Small businesses, supported by a mentor, will be able to compete for larger contracts than they might otherwise not have been capable of winning. Larger firms, by partnering with a small business protégé, will get access to set-aside contracts for which they otherwise would be ineligible.
The SBA estimates that if the proposed rule becomes final, approximately 2,000 small business companies who do not currently qualify would likely become active in the universal mentor-protégé program. The SBA also projects that this increased participation could result in protégé firms obtaining as much as $2 billion dollars per year in federal contracts through the program.
All of this is certainly good news. The most common question we get from our clients is “When will the universal mentor protégé program go into effect?” The answer is (hopefully) soon! In October 2015, individuals from the SBA testified before Congress, stating that the agency had organized an MP Program Expansion Project Team to oversee the implementation of the new program and that the final rule would be issued in the first quarter of fiscal year 2016. In March, an SBA representative clarified that the final rule should be issued this summer and that implementation is set to begin in the fall.
With this program set to begin within a few months, large businesses should consider making strategic alliances with small businesses as soon as possible. Of course, in order for small businesses to take full advantage of these potential opportunities, they should seek out strategic partners as well. Firms, both large and small, must be prepared for what could be a major shift in contracting practices. All businesses must adapt to become more competitive after the SBA finalizes its proposed rule in the coming year. We will most definitely keep our eyes on this one.
