Potential Changes for SBA Mentor-Protégé Joint Ventures: What Small Businesses Should Know
According to a recent SBA report to Congress, although six federal agencies operate mentor-protégé programs, more than 90 percent of participants choose the SBA’s Mentor-Protégé Program (MPP). Perhaps the single largest reason why contractors overwhelmingly prefer the SBA MPP is the program’s unique joint venture benefit. Under the SBA MPP—and only under the SBA MPP—a protégé and its SBA-approved mentor may form joint ventures to compete for any contract for which the protégé qualifies by size and socioeconomic status—no matter the mentor’s size.
It’s a very powerful benefit for mentors and protégés alike. Recently, however, the SBA has raised the possibility of implementing changes that could weaken the potency of SBA MPP joint ventures. However, the way the SBA raised these changes has caused considerable confusion among many contractors about what’s on the horizon. So, let’s break down exactly what the SBA has done (and what it hasn’t).
The Tribal Consultation Notification
On July 22, 2024, the SBA published a notification in the Federal Register that it would be holding consultation meetings to receive feedback from tribes on various issues, including “prospective policy changes addressing joint venture participation in SBA’s programs.”
It is very important to note that the Tribal Consultation Notification is not a proposed rule. Without getting into the weeds of rulemaking under the Administrative Procedure Act, the bottom line is that if the SBA decides to implement the ideas it raised in the Tribal Consultation Notice, it would need to follow a specific procedure set forth in the law. As SBA suggested in a clarification issued on September 18, 2024, that procedure would include, among other things, publishing a “Notice of Proposed Rulemaking” in the Federal Register explaining the precise changes the SBA proposed to make to existing rules and allowing the public to comment on those proposed changes.
Hence, the Tribal Consultation Notification is better seen as the SBA more informally floating ideas to evaluate the public’s reaction—the proverbial “trial balloon.” That’s not to say that mentors and protégés shouldn’t take the Tribal Consultation Notification seriously, but there seems to be a widespread misunderstanding among the government contracting community that the SBA definitively plans to enact the ideas raised in the Tribal Consultation Notification. As of the date of this article’s publication, at least, these ideas have not advanced beyond the trial balloon stage.
With that in mind, what are the SBA’s ideas regarding joint ventures, and why have they caused so much consternation among mentors and protégés?
The SBA begins by explaining the rationale for the ideas it floats:
SBA is requesting comments on the perception that mentor-protégé joint ventures are winning an inordinate number of orders issued under small business multiple award contracts and seeks suggestions on how to incentivize a more equitable marketplace for individual small businesses who compete against mentor-protégé joint ventures for multiple award small business contracts. There is also a perception that small businesses often enter joint ventures to seek multiple award contract awards because procuring agency past performance and experience requirements make it difficult for many small businesses to qualify for the awards individually.
To me, the most striking part of the SBA’s rationale is the repeated use of the word “perception.” It’s unclear from the Tribal Consultation Notification whether the SBA possesses hard data to back up the perception of “inordinate” awards to mentor-protégé joint ventures or is simply responding to anecdotal complaints. While the lack of data may not be surprising in a mere notification, if the SBA eventually takes steps to address this matter via regulation, I suspect that the SBA will need to provide the public with more than a generalized statement of “perception.”
With that in mind, what ideas has the SBA floated to address this perceived problem?
The SBA says:
SBA is considering whether to propose eliminating the exception to affiliation between an SBA-approved mentor and its protégé for multiple award contracts to address this concern. Such a change would continue to allow joint ventures to seek and be awarded single award small business contracts but would make joint ventures ineligible for multiple award contracts. If that occurred, SBA would expect the past performance and experience required for award of future multiple award contracts to be adjusted to allow individual small businesses to more easily qualify for award.
For mentors and protégés, this would be a potentially devastating change. According to the Administration, in Fiscal Year 2022, multiple-award contracts accounted for “nearly $160 billion, or over 20%, of all federal government contract dollars.” The SBA’s trial balloon, if it eventually became law, would mean that a mentor-protégé joint venture would not qualify as a small business for any multiple-award contract unless both the mentor and protégé were small businesses—which, of course, is seldom the case.
Perhaps anticipating the intense pushback this trial balloon would likely generate, the Tribal Consultation Notice offers a second, more limited option to address the perceived problem:
Another potential approach would be to allow an exclusion from affiliation for a joint venture between a protégé firm and its mentor only for contracts or orders that do not exceed five years. As SBA has previously stated, SBA believes that a joint venture should not be an ongoing entity but something with limited scope and limited duration. Thus, SBA has limited the duration that a joint venture can submit offers for the award of contracts to two years from the date of its first contract award. SBA is questioning whether a joint venture performing a contract or order that exceeds five years is truly a limited-duration entity.
This option, if it became law, would leave mentor-protégé joint ventures eligible for some, but not all, multiple-award contracts. It’s worth noting, too, that the language used in the Tribal Consultation Notification with respect to this option doesn’t limit itself to multiple-award contracts. If the SBA adopted this option, it could potentially apply to single-award contracts with durations exceeding five years.
Finally, the Tribal Consultation Notification takes aim at joint ventures involving HUBZone-certified protégés:
Specific to qualified HUBZone protégé firms participating in the Mentor-Protégé Program, SBA is considering steps to clarify the applicability of the HUBZone price evaluation preference to HUBZone joint ventures formed under the Mentor-Protégé Program. Under the HUBZone price evaluation preference, where a procuring agency will award a contract on an unrestricted basis ( i.e., full and open competition), the agency must deem the price offered by a certified HUBZone small business concern (including a HUBZone joint venture that complies with the requirements of § 126.616) to be lower than the price offered by an apparent successful large business offeror if the price offered by the certified HUBZone small business concern is not more than 10% higher than the price offered by the large business. SBA is requesting comments and input on whether it is appropriate for a HUBZone mentor-protégé joint venture to benefit from the HUBZone price evaluation preference when the joint venture is already benefitting from its large business mentor’s lower cost structures and pricing. SBA is considering whether to propose eliminating the HUBZone price evaluation preference’s applicability to all joint ventures formed under the Mentor-Protégé Program or, alternatively, to offers submitted by a HUBZone joint venture where the mentor exceeds the applicable size standard corresponding to the NAICS code assigned to the contract.
To me, this is the oddest of the suggestions in the SBA’s Tribal Consultation Notification because it seems to solve a problem that doesn’t exist. According to the SBA’s own data, HUBZone firms aren’t winning an “inordinate” number of contracts. Not only did the government miss its three percent HUBZone goal again in Fiscal Year 2023, but SBA’s Data HUB associates only $550 million with the category “HUBZone Price Evaluation Preference” for Fiscal Year 2023, out of a total of more than $654 billion in tracked spending. That doesn’t sound very inordinate to me! Additionally, a recent SBA report demonstrates that there are far fewer HUBZone firms (just 271) participating in the SBA MPP than firms with other SBA socioeconomic certifications. In this environment, I don’t see the sense in changing the rules to the disadvantage of HUBZones.
Remember, as of the publication of the article, the potential changes in the Tribal Consultation Notification are trial balloons, not formal regulatory proposals. Nevertheless, small businesses and small business advocates concerned about these ideas should make their voices heard with the SBA.
The Proposed Rule
On August 23, 2024, the SBA issued a comprehensive proposed rule to make many changes to its size and socioeconomic certification programs. Among these proposed changes are a handful affecting mentor-protégé joint ventures—although perhaps nothing as potentially earthshaking as the trial balloons floated in the Tribal Consultation Notification.
First things first: unlike the Tribal Consultation Notification, the Proposed Rule is a formal rulemaking document under the Administrative Procedure Act. This means that the SBA is actively proposing specific changes to the law, following the required statutory rulemaking process. While these proposals aren’t law as of the date of this article’s publication and could change in response to public comments, they’re much more than trial balloons.
With respect to joint ventures, the most significant proposed change would clarify the extent to which a procuring agency may require that the protégé member of a mentor-protégé joint venture demonstrate a certain degree of past performance—a subject on which the current regulations are unclear. The SBA says:
[T]he rule proposes to permit a procuring activity to require some past performance at a dollar level below what would be required of joint venture mentor partners or of individual offerors. The rule would provide an example of how this could work. In the example, where offerors must generally demonstrate successful performance on five contracts with a value of at least $20 million, a procuring activity could require a protégé joint venture partner to demonstrate one or two contracts valued at $10 million or $8 million. In addition, if a procuring activity requires a protégé joint venture partner to demonstrate successful performance on two contracts valued at $10 million or more, successful performance by the protégé firm on those $10 million contracts shall be rated equivalently to successful performance by the mentor partner to the joint venture or any other individual offeror on $20 million contracts.
It’s important to note that, contrary to a misconception I’ve heard repeatedly, the SBA does not propose that procuring agencies must demand that protégés individually possess any specific level of past performance. Rather, the SBA proposes to give agencies the discretion to do so within certain guardrails. If the SBA’s proposal becomes law, joint ventures will need to examine the terms of each individual solicitation to determine whether the protégé must individually possess a certain level of relevant past performance.
The SBA’s proposal has generated a certain amount of controversy. Some small businesses believe that requiring any level of individual protégé past performance is contrary to the purposes of the mentor-protégé program, and that it is more appropriate to evaluate the joint venture as a whole rather than its individual members. I suspect that the SBA will receive several comments from the public in response to this proposal.
The proposed rule also includes several items that are less likely to cause controversy but are nevertheless notable. In short, those are:
- The proposed rule would clarify that when a joint venture exists as a separate legal entity, such as a limited liability company, the procuring agency must execute the contract in the name of the joint venture, not in the name of the protégé.
- The proposed rule would provide that “where a mentor purchases another business entity that is also an SBA-approved mentor that is a contract holder as a joint venture with a protégé small business and the mentor is also a contract holder with a protégé small business on that same multiple award contract, the mentor must exit one of those joint venture relationships.”
- The proposed rule would “give a protégé firm a right of first refusal to purchase a mentor’s interest in a mentor-protégé joint venture where the mentor seeks to sell its interest in the joint venture.”
- The proposed rule would allow a mentor-protégé joint venture to novate (that is, transfer) an 8(a) contract from the joint venture to the 8(a) protégé.
- The proposed rule would clarify that only the HUBZone member of a mentor-protégé joint venture, not the JV itself, needs to hold a HUBZone certification for the joint venture to be eligible for HUBZone contracts.
Because the Proposed Rule follows the standard rulemaking process, the SBA is seeking public comments on the proposals contained in the Proposed Rule. Unless extended, the deadline for public comments is October 7, 2024. The easiest way to submit comments is by using this comment form.
A Few Final Thoughts
Have SBA mentor-protégé joint ventures become too powerful? That notion, right or wrong, seems to be at the heart of some of the SBA’s trial balloons. Those trial balloons, however, are a long way from becoming law—especially if the SBA receives significant backlash.
It’s worth noting, however, that even if the SBA adopted the most restrictive of its trial balloons, SBA mentor-protégé JVs would still enjoy unique and powerful benefits unavailable in any other federal program. With that in mind, if you’re curious about potentially joining the SBA mentor-protégé program, click here to learn more about the program and how to apply.
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