The Consolidation of the 8(a) Business Development and All Small Mentor-Protégé Programs
The headline change from this rule is the consolidation of SBA’s decades-old 8(a) Business Development (BD) Mentor-Protégé Program with the more-recently created All Small Mentor-Protégé Program, which had significantly expanded protégé eligibility in 2016.
SBA highlighted that the driving force for this consolidation was to eliminate confusion regarding perceived differences between the two programs, remove unnecessary duplication of functions within SBA, and establish one, unified staff to better coordinate and process mentor-protégé applications. As recognized by SBA, the purpose of and benefits available under both programs are identical.
Consolidation was achieved via the elimination of the 8(a) Mentor-Protégé Program. 13 C.F.R. § 124.520 was, in essence, deleted in full and replaced with a statement that an 8(a) BD Program Participant, as any other small business, may participate in SBA’s All Small Mentor-Protégé Program authorized under Section 125.9 of the SBA regulations. SBA also made numerous conforming amendments to SBA’s size regulations (13 C.F.R. part 121), the joint venture provisions for small business (13 C.F.R. § 125.8), the All Small Mentor-Protégé Program regulations (13 C.F.R. § 125.9), and the joint venture provisions for 8(a) entities (13 C.F.R. § 124.513).
- Do entities that have an active 8(a) mentor-protégé program need to take any steps? No. The changes impose no obligation on such entities to take any action.
- Will there be any change to how a mentor-protégé relationship that was previously under the 8(a) Mentor-Protégé Program continues operating under the All-Small Mentor-Protégé Program? No. The mentor-protégé relationship will now be governed by 13 C.F.R. § 125.9 instead of 12 C.F.R. § 124.520 – but these regulations were already largely conformed in 2016 when SBA established the All-Small Mentor-Protégé Program.
- How long will the 8(a) mentor-protégé relationship have under the All-Small Mentor-Protégé Program? The same time remaining under the All-Small Program as it would have had under the 8(a) Program.
- Does this have any impact on entities that have an active mentor-protégé agreement under the All Small Program? No.
- How does the transfer of the mentor-protégé relationship from the 8(a) Program to the All-Small Mentor Protégé Program impact the limit on the number of mentor-protégé relationships an entity can have? SBA explicitly clarified that the limit of two mentor-protégé relationships is a lifetime limit and any existing 8(a) mentor-protégé agreement that transfers over to the All-Small Mentor-Protégé Program will count as one of those two relationships.
The Mentor-Protégé Relationships by the Numbers
Throughout its rulemaking, SBA provided a few data points to give a sense of the scale of these programs, as well as the timing to obtain approval of a mentor-protégé relationship:
- SBA reports receipt of approximately 600 mentor-protégé applications each year – approximately 450 for the All Small Mentor-Protégé Program and about 150 for the 8(a) Mentor-Protégé
- As of October 15, 2020, SBA reports that there are 385 8(a) participants with BD mentor-protégé agreements and approximately another 850 small businesses that have SBA-approved mentor-protégé agreements in the All-Small Program. (SBA regularly updates the list of active-mentor protégé relationships here.)
- SBA reports that 8(a) mentor-protégé agreements took between 60 and 90 days for approval, whereas the average time for approval through the All Small Mentor-Protégé Program is about 20 working days. Given the importance of timing for approvals, new applicants will need to allow sufficient lead time given the uncertain approval timelines for the combined programs.
Changes to the Mechanics of Drafting a Mentor-Protégé Agreement and Remaining in the Program
Changes to the Mentor-Protégé Agreement
SBA made only a couple of tweaks to the information that must be contained in the mentor-protégé agreement. Of note, SBA drove home that it wants to see specifics about the business development assistance the mentor will provide to the protégé by fine-tuning an existing requirement concerning information that must be included in the mentor-protégé agreement—revising the regulation so that the parties must “specifically identify the business development assistance to be provided” before addressing how it will enhance the protégé’s capabilities.
In light of these minimal changes, entities in a mentor-protégé relationship that has already been approved by SBA should not need to amend or update their mentor-protégé agreement. Entities that are considering drafting a new mentor-protégé agreement should merely be aware of SBA’s focus on the section of the agreement highlighting the assistance to be provided to the protégé.
Click here to view the changes that SBA made to 13 C.F.R. § 125.9(e)(1)(i).
Modification of How to Address the Length of the Mentor-Protégé Relationship
SBA revised how entities can define the duration of a mentor-protégé relationship in the agreement. The cap on the length of a mentor-protégé relationship in the All-Small Mentor-Protégé Program has been and remains 6 years. While not a substantive change to the program, we’re highlighting it as it could impact how future mentor-protégé agreements are drafted.
Previously, entities could engage in a relationship for no more than three years with the recognition that SBA could approve an extension of the relationship for another three years. Now, in the initial agreement, entities may agree for the relationship to last for the full six-year period, or to last for a shorter amount of time but to be extended by mutual agreement for up to the full six-year period. Through this change, SBA is providing entities greater certainty as to the duration of the relationship, as well as allowing flexibility to set the time period for a shorter duration and increase it if so desired.
Click here to view the changes that SBA made to 13 C.F.R. § 125.9(e)(5).
Questions Related to Identifying a NAICS Code for the Mentor-Protégé Relationship
Q: Must a protégé establish a mentor-protégé relationship under its primary NAICS Code?
A: In short, no.
SBA’s All-Small Mentor-Protégé Program regulations have always contemplated that a mentor-protégé relationship can be formed in either a protégé’s primary or secondary NAICS code. But the regulations did not define exactly how to identify a secondary NAICS code.
Previously, SBA required that a secondary NAICS code be “a logical business progression for the [protégé] and will further develop or expand current capabilities.” SBA prohibited use of a NAICS code in which the protégé had no prior experience.
Now, the same prohibition applies—that SBA will not approve a “mentor-protégé relationship in a secondary NAICS code in which the small business concern has no prior experience”—but SBA has slightly relaxed the criteria by:
- Allowing a protégé to demonstrate similar work has been performed—although not necessarily in the same NAICS code for which the mentor-protégé relationship is sought; and
- Allowing a protégé to justify a NAICS code based solely on whether it is a logical progression from work previously performed by the protégé.
SBA remains focused on preventing abuse of this program. In its commentary regarding the final rule, SBA noted that it “does not want a firm that has grown to be other than small in its primary NAICS codes to form a mentor-protégé relationship in a NAICS code in which it had no experience simply because it qualified as small in that other NAICS code.” SBA expressed concern with the downstream consequences on a joint venture between a mentor and a protégé that has no experience in the NAICS code in which the relationship is formed.
Click here to view the changes that SBA made to 13 C.F.R. § 125.9(c)(1)(ii).
Q: Can a mentor have more than one mentor-protégé relationship in the same NAICS code?
A: Briefly, yes.
Previously, SBA prohibited a mentor from having two protégés at the same time that were competitors of one another. SBA has slightly streamlined this regulation and provided further guidance in its commentary regarding the final rule.
SBA received a number of comments and concerns about the prohibition on protégés of the same mentor being competitors. For example, many multiple-award procurements have separate pools of potential awardees, which could include awarding indefinite-delivery indefinite-quantity (IDIQ) contracts in unrestricted, small business, HUBZone, 8(a), WOSB, and SDVO small business pools. SBA explained that for a mentor to convince SBA to approve two mentor-protégé relationships in the same NAICS code, then the mentor must have already made a commitment that the two firms would not compete against each other. Such a commitment could look like the mentor affirming “that the one mentor-protégé relationship would seek only HUBZone and small business set-aside contracts while the second would seek only 8(a) contracts.” Joint ventures comprised of the mentor and each of its protégés would be able to submit two offers for the same solicitation so long as they were for different pools—in such a case these two protégés would not be considered “competitors with respect to that procurement.”
Click here to view the changes that SBA made to 13 C.F.R. § 125.9(b)(3) (which was formerly 13 C.F.R. § 125.9(b)(4)).
Interaction Between the Mentor-Protégé Relationship NAICS and the Ability of a Mentor-Protégé Joint Venture to Certify as Small
Q: What happens when a protégé is no longer small under the NAICS under which the SBA approved the mentor-protégé relationship?
A: Briefly, it depends.
On a going forward basis, any joint venture comprised of the protégé and its mentor can no longer certify that it is small for any NAICS code having the same or lower size standard. This answer clarifies the previous iteration of this regulation.
With respect to contracts that have already been awarded prior to the growth of the protégé to other than small, SBA specified that a change in the protégé’s status does not generally affect contracts already awarded—this has not changed during the recent rulemaking.
Click here to view the changes that SBA made to 13 C.F.R. § 125.9(d)(1)(3)(iii).
Q: What happens when a protégé is no longer small under a NAICS code assigned to a contract of more than five years and recertification is required under 13 C.F.R. 121.404(g)(3)?
A: Briefly, when the protégé is no longer small under a NAICS code assigned to a long term contract, the joint venture cannot recertify as small for that contract when required under 13 C.F.R. § 121.404(g)(3).
Previously, SBA’s regulations seemingly said the same thing—just not as clearly. Now that the rule is unambiguous—both mentors and protégés must understand the implications. Many joint ventures are currently bidding on and winning spots on long-term, multiple-award contract vehicles. When the protégé is no longer small, that joint venture will be unable to recertify as small for the contract at the five-year mark. Additionally, the terms of that contract will dictate if the joint venture is moved from the small business to a large business pool or off-ramped entirely. Entities should also remember that SBA has provided contracting officers tools to request recertification earlier than the five-year mark: (1) contracting officers may now request recertification prior to the 120-day point in the fifth year so long as the request is made of all contract holders; and (2) as always, contracting officers have the discretion to seek recertification on an order-by-order basis.
Click here to view the changes that SBA made to 13 C.F.R. § 125.9(d)(1)(3)(iii)(B).
Emphasis on Ensuring Benefits to Protégés
Given that the SBA limits small businesses to having no more than two mentor relationships (as a protégé) during its lifetime, and SBA has received complaints of protégés receiving limited or no assistance from mentors, the final rule provides further protection to protégés.
To do so, SBA not only included a mechanism for reporting, but also incentivized reporting in the following ways:
- Added questions during the annual review for the protégé to answer, such as whether the protégé would recommend its mentor to serve as a mentor to other protégés in the future;
- Added a provision allowing a protégé to request SBA to intervene on its behalf with the mentor—which would prompt SBA to give the mentor an opportunity to overcome the adverse information—but if the mentor is unable to do so, SBA will terminate the relationship;
- Incentivized protégés to be forthcoming by not only providing that a mentor relationship gone wrong would not count as one of a small business’ two lifetime mentor-protégé relationships, but also allows the protégé to substitute another firm to be its mentor for the time remaining in the mentor-protégé agreement without counting against the two-mentor limit; and
- Established an “easily understandable and objective basis” of 18 months for counting or not counting a mentor-protégé relationship.
Concerns about Early Termination of a Mentor-Protégé Agreement
Concern continues to be focused on the idea that unscrupulous mentors may enter into a mentor-protégé agreement to form a joint venture with a small business in order to win a single set-aside award and then cancel the mentor-protégé agreement before that happens.
SBA found that there was no need to revise its regulations address that scenario, as 13 C.F.R. § 125.9 has always provided for consequences in such a scenario:
- SBA will deem the mentor ineligible to serve as a mentor for a period of two years from the date SBA terminates the mentor-protégé agreement, but
- SBA may also recommend that the relevant procuring agency issue a stop work order for each Federal contract for which the mentor and protégé are performing as a small business joint venture, and SBA may seek to substitute the protégé firm for the joint venture if the protégé firm is able to independently complete performance of any joint venture contract without the mentor.
Declining to Make Changes that Would Have Benefited Mentors More than Protégés
Entities who are a mentor or intend to serve as a mentor must keep in mind that SBA continues to emphasis that the mentor-protégé program is for the benefit small businesses. While the participation of mentors is obviously vital when talking about a mentor-protégé relationship, the focus must remain on ensuring the development of the small business protégé.
Cap on the Number of Protégés that One Mentor Can Have Remains at Three
SBA declined to increase the number of protégés firms that one mentor can have at one time. The concern was not that large businesses would lack the capability to mentor more than three small businesses at one time but, rather, SBA does not believe it is good policy for anyone to perceive that one or more large businesses are unduly benefitting from small business programs.
Rejection of Limitation of Mentors to Mid-Size Firms
SBA declined to limit the size of entities that can serve as a mentor in the All-Small Mentor-Protégé Program. In the proposed rule, SBA requested comments on whether it should limit mentors only to those firms having average annual revenues of less than $100 million. This was the most commented-upon issue—SBA received over 150 comments on this issue, with the majority of commenters strongly opposed to the proposal. SBA continues to allow any business entity, regardless of size, that demonstrates a commitment and the ability to assist small business concerns to act as a mentor.
Prioritization of Working with Puerto Rican Firms
Per the 2019 NDAA, SBA added two provisions to encourage mentors to form mentor-protégé relationships with protégés that have their principal office located in the Commonwealth of Puerto Rico:
- Over and above the three-protégé cap at one time for a mentor, a mentor can have up to two additional mentor-protégé relationships with protégés that have their principal office located in the Commonwealth of Puerto Rico, and
- Mentors that subcontract to a protégé that has its principal office located in Puerto Rico may (i) receive positive consideration for the mentor’s past performance evaluation; and (ii) apply costs incurred for providing training to such protégé toward the subcontracting goals contained in the subcontracting plan of the mentor.