mentor-protégé

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Mentor-protégé programs, such as the government-wide one at the SBA for all small business concerns, are designed to help small contractors engage in federal contracting by allowing larger, more experienced mentor firms to provide assistance to protégés. Generally, the proteges receive financial, technical, or management aid from mentors, and the mentors may receive subcontracting goal credits, reimbursement of expenses, and other incentives in return. One of the key concepts behind these programs is to increase the capacity of small business concerns to compete for contracts they would not ordinarily qualify for otherwise. The U.S. Government Accountability Office’s (GAO) recent decision in Innovate Now, LLC, B-419546, Apr. 26, 2021, confirmed this underlying principle.

Congress continues to promote opportunities for small business contractors to do business with the federal government. It also continues to increase the penalties for those taking unfair advantage of small business opportunities. Here is a look at the most recent set of carrots and sticks, which appear in the National Defense Authorization Act for Fiscal Year 2013.

1. Subcontracts with “similarly situated” small businesses

Section 1651 of the 2013 NDAA provides a new exception to the small business subcontracting cap, which restricts small businesses from subcontracting more than 50 percent of the amount paid under a services contract. With the passage of NDAA, the amount paid under any subcontract with a small business concern that has the same small business status as the prime contractor is excluded from the small business subcontracting cap. The term “similarly situated entities” includes service-disabled veteran-owned small businesses, HUBZone small businesses, women-owned small businesses, and economically disadvantaged women-owned small businesses.

This provision also changes the method for calculating the 50-percent subcontracting cap. Previously, the subcontracting limits in FAR 52.219-14 counted only direct labor costs. Under section 1651, “amount paid” under a subcontract, including labor, material, and other direct costs, is used to determine the 50-percent subcontracting cap. This is a strong incentive for small business prime contractors to award subcontracts to similarly situated small businesses. The old formula continues to govern subcontracting limitations for construction contracts, but the NDAA directs the SBA to establish similar limitations on construction contracts.

The penalty for violating the subcontracting cap is the greater of $500,000 or the dollar amount expended over the cap. The “amount expended” clause is a new penalty.

As part of the SBA’s 8(a) Business Development Program, participants are permitted to form mentor-protégé relationships and to establish joint venture (JV) entities eligible for award of 8(a) set aside contracts. Before a mentor-protégé JV can be eligible for set-aside awards, its JV Agreement has to be approved by the SBA Office of Business Development. Approval is conditioned upon compliance with applicable regulations, including 13 C.F.R. § 124.513. After award of a set-aside contract, other offerors have the option of filing a size protest with the SBA challenging the awardee’s status as small.

In Size Appeal of Trident, LLC, SBA No. SIZ-5315 (Jan. 24, 2012) [pdf], the SBA Office of Hearings and Appeals (OHA) held that an SBA area office has no authority to review the substance of an 8(a) mentor-protégé JV agreement as part of a size appeal if it has already been approved by the SBA Office of Business Development and determined to be in compliance with applicable regulations. In that case, Trident appealed the area office’s determination that it was “other than small” and accordingly ineligible for award of an 8(a) set-aside for weather observation and forecasting services.

Sweeping changes to Small Business Administration (“SBA”) regulations will go into effect on March 14, 2011.  The new rules affect SBA’s 8(a) Business Development (“BD”) program, SBA’s mentor/protégé program, and its joint venture regulations.  The final rule can be found here.  As a whole, the amendments suggest that SBA intends to eliminate manipulation and abuse of the 8(a) BD and mentor/protégé programs by small and large businesses alike.