Corporate and Securities

Recent Small Business Administration Proposed Rules: Subcontracting Limitations and Mentor-Protégé

The Small Business Administration (SBA) has been active the past few months releasing long-awaited notices of proposed rule-making (NPRM) to implement directives under the 2010 JOBS Act and the 2013 National Defense Authorization Act. We summarize key proposed rule changes in the recent NPRMs below:

Limitations on Subcontracting and Other Rules

The NPRM released on December 29, 2014 by the SBA substantially rewrites the limitation on subcontracting rule, affiliation principles, and the eligibility of small business joint ventures.

The proposed subcontracting rule changes the analysis from costs incurred by the prime contractor to a limitation of the percentage of the total award amount that may be paid to subcontractors that are not in the prime contractor’s socioeconomic category.   The prime contractor is still required to perform 50% or more of the work under service and supply agreements but the prime contractor may not spend more than 50% of the total award amount on subcontractors that are not “similarly situated” to the prime contractor. For general construction contractors, the applicable percentage is 15% and for specialty trade construction, the percentage is 25%. Per the NPRM, “a similarly situated subcontractor is a small business concern subcontractor that is a participant of the same SBA program that qualified the prime contractor as an eligible offeror and awardee of the contract.” Therefore, in the case of a small business set-aside, the prime contractor and any small business teaming partner together can fulfill the 50% requirement and the remaining 50% can be subcontracted out to any subcontractor regardless of its designation. The same rule applies to contract set-asides under the various socioeconomic programs for Section 8(a) firms, HUBZone companies, Service-Disabled, Veteran Owned Small Businesses and Women-Owned Businesses.

The same December 29, 2014 NPRM also gave guidance in determining affiliation based on identity of interest. Under the existing rules, affiliation is presumed between firms owned or controlled by married couples, parties to a civil union, parents and children, and siblings. An additional rebuttable presumption was introduced in the December 29, 2014 NPRM based upon economic dependence whereby if a qualifying small business concern derived 70% or more of its receipts from another concern in the previous completed fiscal year, then affiliation is presumed between the qualifying small business and the other concern.

Lastly, the SBA is proposing to eliminate the general rule that provided that small businesses seeking to perform as joint ventures had to combine receipts/employees of joint venture partners to ascertain whether a joint venture was considered a small business concern and therefore eligible to compete on a small business set aside. Currently, a small business concern could avoid affiliation for size determination purposes only where contracts are bundled or meet certain dollar amount criteria set forth in the SBA regulations. The NPRM proposes removing this provision and allowing small business concerns to compete on any contract size as long as each partner is small under the NAICS code assigned to the contract.

Mentor-Protégé Program for All Small Businesses

On February 5, 2015, the SBA released another NPRM pertaining to the expansion of the mentor-protégé program to all small businesses. The NPRM is implementing the directives of the 2010 JOBS Act and the 2013 National Defense Authorization Act. It also includes several significant changes to 8(a) regulations and the 8(a) mentor-protégé program in particular.

The new mentor-protégé program will be applicable to HUBZone, Women-Owned Small business and Service-Disabled Veteran Owned (SDVO) small business programs and all other small business concerns.   The new program would substantially follow the requirements of the current 8(a) mentor-protégé program with certain key components.   The benefit for the mentor and protégé under the new mentor-protégé program is that once the relationship is approved by the SBA, the mentor and protégé would be eligible to submit offers as a joint venture on small business set-asides for which the protégé is otherwise eligible.

i. Protégé Qualifications

The protégé would have to qualify as small under its primary NAICS code, which the SBA would then verify by requiring the small business concern to seek a formal size determination from the SBA. The protégé would only be allowed to have one mentor unless the circumstances are such that adding a second mentor would not compete or otherwise conflict with the assistance the first mentor offers. Lastly, protégés would not be able to be mentors themselves in a different relationship.

ii. Mentor Qualifications

To qualify as a mentor, the entity would have to show:

  1. The entity is in good financial standing;
  2. The entity is reputable and possesses good character;
  3. The entity is not on the Excluded Parties List System; and
  4. The entity can offer advice and guidance to the protégé due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting.

Any approved mentor would be required to recertify as to items 1 and 2 above on an annual basis. Similar to protégés, a mentor will generally have no more than one mentor at a time.   However, on a case by case basis, the SBA may allow a mentor to have a second protégé if the mentor can demonstrate doing so will not adversely affect the development of either protégé firm and the second protégé firm is not a competitor of the first protégé.

iii. Requirements of the Mentor-Protégé Relationship

Similar to the 8(a) mentor-protégé program, the SBA requires a formal written agreement outlining the relationship between the mentor-protégé which must be approved by the SBA. Among other things, the agreement must set forth the benefits and the assistance the mentor will provide, that either party can terminate upon 30 days’ written notice, the SBA can review such agreement annually and the term cannot be for more than three years.

Once the formal written agreement is approved, the protégé must file an annual report with the SBA that details everything from technical and/or management assistance to all federal contracts awarded to the mentor-protégé relationship, the value of each contract and the percentage of work performed and percentage revenue accruing to the mentor and protégé.

Once the actual relationship is approved, the mentor and protégé can decide to form a joint venture to pursue a set-aside contract. In the NPRM, the SBA has listed provisions that must be present in the joint venture agreement that are the same as the 8(a) mentor-protégé joint venture requirements, with three differences:

  1. The right to inspect the records of both mentor and protégé;
  2. The requirement that both parties submit a certification of compliance; and
  3. The language regarding the basis for suspension and debarment of either joint venture.

The SBA is proposing that these terms, although not currently present in the current 8(a) mentor protégé regulations, be incorporated into the 8(a) mentor-protégé regulations. In addition, the SBA proposes dropping the requirement that 8(a) protégés be in the developmental phase of the 8(a) program, have a size that is less than half the corresponding size standard of its primary NAICS code or never have received an 8(a) contract.

Lastly, the SBA proposes a rule that would require the joint venture to provide an addendum to the SBA for each award under a blanket purchase order, basic ordering agreements and similar arrangements and the SBA would consider each award a separate contract award.

About Klinedinst PC’s Corporate Transactional and Securities Department

Klinedinst PC’s Corporate, Transactional and Securities Department through its Government Contracts Group represents clients in the government contracting arena ranging from small business concerns to large public companies in all aspects of government contracts law. The opinions expressed in this newsletter are general in nature, and are not meant to provide specific legal advice. For more information, please contact Christian Fonss or Mariel Estigarribia. No attorney/client privilege is created or assumed by reading this article.