SBA's mentor-protege sees some welcome changes and one not so welcome change

Attorney James Fontana explains some of the positive changes to the mentor-protege program coming out of SBA, plus one that's not so great and makes him question whether any of the changes are worth making.

Joint ventures in government contracting have become increasingly popular, particularly in small business set aside contracts. This is especially true with regard to the SBA’s Mentor Protégé Program.

This program is designed to encourage approved “mentors” (typically large businesses) to provide various forms of business development assistance to small and developing “protégé” firms in connection with government contracts. The goal of the program is to enhance the capabilities of the protégé, assist the protégé with meeting the goals established in its SBA-approved business plan, and improve the protégé’s ability to successfully compete for contracts.

What this really means is that a large mentor can set up a joint venture with a small protégé and allow that JV to compete on small business set aside procurements as a separate small business concern without the dreaded prospect of being considered “affiliated” for SBA size determination purposes. More on that later.

Once the exclusive domain of the 8(a) world, since 2016 such joint ventures are now permitted with all qualified small businesses government-wide under the SBA’s All Small Mentor Protégé Program.

This program can have tremendous benefits. The small business partner relishes the opportunity to be backed by a large company and use its qualifications and past performance to compete on set aside contracts for which the small would otherwise not qualify. By the same token, the large business drools at the chance to capture a piece of the business that would otherwise be reserved only for smalls.

But the program has some shortcomings. For starters, mentors may be frustrated that the protégé has little to no management experience, and may or may not make the ideal partner on these contracts, especially those contracts having more complex performance requirements. Even more challenging is that the protégé must have virtually total control over the JV, its management and the day-to-day operation of the contract.

The protégé’s owner is even named individually as the “project manager” or what is now termed by the SBA as the “responsible manager.” Recent changes in the rules allow the mentor to have some participation in corporate governance and operations-related activities of the JV, but the ultimate decisions are still to be made by the protégé.

For these reasons, mentors need to know their protégés and vice versa. A mentor should ensure itself that the protégé is the right fit and will be an able partner with the ability to perform reliably on contracts and operate the joint venture in an effective manner.

Similarly, a protégé may be concerned with a potentially overwhelming mentor, whose larger business is more structured and whose business model and culture lends more to controlling rather than being control by the protégé.

In addition, protégés are typically still in their developmental stage and may find it difficult to adjust both to operating a more highly structured co-owned company and meeting those complex performance requirements, as well as stepping up to the operational and organizational standards to which a large mentor is more accustomed.

From a protégé’s standpoint, it’s important to both select mentors that align with the protégé’s core competencies and goals as well as continue to develop business outside of the mentor protégé relationship. For both the mentor and protégé, this is where the adage of know your partner before you partner rings especially true.

Both mentor and protégé should also understand that a mentor-protégé arrangement is not designed to be a handout to the protégé or an open window for large mentors to enter and participate in set-aside contracts, but an opportunity for the protégé to use the mentor’s resources, financial assistance, and expertise to help grow the protégé from the developmental stage to the next level of size and sophistication.

A high level of commitment from the mentor and protégé is necessary in seeking and obtaining valuable federal procurement opportunities. The business development and capture expertise that can be gained from an experienced mentor and later used by the protégé is critical and, in some cases, difficult to obtain outside of the mentor-protégé arrangement. However, some mentors may struggle to be effective mentors, and some may tend to hold a small protégé to standards that the protégé is not prepared to meet at the current stage of its business life.

Also, this program has the advertised benefits only if correctly formed and maintained. For example, the joint venture agreement itself is not your garden variety “JVA.” It must contain certain provisions as strictly prescribed by the SBA’s regulations. And if any one or more of these regulatory bells and whistles are omitted from that JVA, the affiliation exception may be jeopardized and the agreement may be successfully challenged in a size protest thereby threatening the JV’s small business size status.

Disputes between the mentor and protégé can also be more tricky and riskier than the usual JV partner dispute. In some cases, that dispute can spill over to the courts or the SBA itself, which doesn’t necessarily enjoy acting as the mediator between warring JV partners but in some cases may be compelled to do so, either because the mentor or protégé is violating the mentor protégé agreement, or violating other SBA regulations governing the relationship, or where a JV is awarded a contract and an SBA size protest results.

A tongue in cheek comparison would be a married couple having to go before the presiding preacher to resolve their marital squabbles. Yet I’ve seen many a successful mentor protégé relationships, and a few unsuccessful ones, some of which ended up in JV divorce court.

But if done correctly, the mentor protégé JV can be a win-win for both parties. Where typically a joint venture between a large and small concern is considered “affiliated” under SBA rules and thus their revenues or employees (depending on the size standard) would be combined, under the Mentor Protégé Program the JV enjoys an exception to that affiliation rule.

But don’t let that fool you, because despite doing everything right to set up the mentor protégé JV, the parties can still be “otherwise affiliated” which in plain English means that other aspects of the relationship can result in an affiliation unrelated to the establishment of the JV or the JVA.

One example is no matter what a JV agreement says regarding the protégé’s management control of the JV, if there is evidence that the mentor is actually exerting improper control over the JV or its contracts, the mentor and protégé may be considered otherwise affiliated, thereby stripping away the affiliation exception.

Other than being found affiliated or facing termination of an approved mentor-protégé arrangement, additional consequences can result from violating the SBA regulations, to include contract termination for default, suspension or debarment of both the mentor and protégé, and in rare cases civil and/or criminal penalties.

There is, however, some potentially brighter light on this process. Recently the SBA, apparently in a “let’s reduce some of the regulatory burden” mood, stripped itself of some of its proclivities at micromanaging the mentor protégé relationship, especially regarding JVAs that are required under the program.

In revised rules, which became effective last November 16, the SBA consolidated the 8(a) Mentor Protégé Program and the All Small Mentor Protégé Program, which should go some way in avoiding confusion between the two programs.

The SBA explained that the two programs were virtually identical in any event and that having them separate were unnecessary and confusing. According to the SBA, there are currently about 1,200 active mentor-protégé agreements under the All Small Mentor Protégé Program.

A further (and very welcomed) change coming from these new rules is that SBA no longer requires prior approval of a mentor protégé JVA for competitive acquisitions (the approval requirement still exists for 8a sole source awards).

Here’s the back story: before last November 16, SBA was required to approve all JVAs, and frankly took a more substantial role in (putting it nicely) cajoling applicants to insert certain provisions into the agreement that had little or no relation to the SBA’s required provisions.

In some cases, provisions certain SBA officials sought made little to no business or legal sense. See for example the SBA’s joint venture agreement template, which has typos, is devoid of any meaningful business terms, and is really just several pages of regurgitated regulations.

There have been instances where the SBA has insisted that joint venture parties use this form, much to the chagrin of many a mentor and protégé, not to mention their lawyers, and forcing the parties to draft a separate “operating agreement” or other document governing the joint venture business, which was also subject to SBA approval.

Trust me when I say that separate and potentially inconsistent agreements between the same parties for the same purpose is dangerous to say the least.

Another key change is the relaxing of the restrictions on how many contracts a mentor protégé joint venture can obtain. Under the old rule a joint venture was limited to being awarded only 3 contracts in a 2-year period to avoid “affiliation” between the JV partners.

The SBA revised this so-called 3 in 2 rule by allowing the JV to obtain as many contracts as it can within the 2-year period, but the 2-year duration restriction remains so that unless the proposal was submitted before that 2-year period expired, the JV could not bid on further contracts without being found affiliated. However, a contract novation may occur after 2 years if the JV submitted the novation package to the contracting officer prior to the end of that 2-year period.

A not so positive development from these same revised rules goes beyond mentor protégé joint ventures: a small business must now re-certify its size status at the time it submits a proposal (to include price) on a set aside task order issued under an unrestricted multiple award contract (MAC).

The only exception are those orders issued under the GSA’s Federal Supply Schedule. That means if the firm cannot certify as small at the task order level and for each task order award it will not be eligible for a set aside award even if it did under the MAC.

This is going to be tough for those smalls that outgrow their size standards in the midst of a 5 or 10 year MAC term, preventing the firm from riding out the contract’s full period of performance. In addition, the rule allows a contracting officer to request a size re-certification 120 day prior to the fifth year of a MAC. This is an unwelcomed change for small businesses to include small business joint ventures.

Frankly I’d rather SBA not make the welcomed changes if it meant not making the unwelcomed changes.

Stay safe.