PilieroMazza Summarizes SBA’s Final Rule on Mentor-Protégé Programs

Today, SBA issued its final rule making changes to its rules on joint ventures, the mentor protégé program, the Section 8(a) program, and much more.  In developing this final rule, SBA reviewed and considered the many comments it received, and PilieroMazza believes that the final rule makes many positive changes that will simplify its procedures for small businesses, particularly 8(a) program participants.  Below we summarize major changes in the final rule.  If you have questions concerning SBA’s final rule on its Mentor Protégé Programs, please register for our 90-minute webinar on October 28, 2020, at 2 PM ET, where SBA’s John Klein and PilieroMazza’s Pam Mazza and Peter Ford will examine the rule changes and its implications for your business.

1. Mentor-Protégé Program Limitations and Requirements

The final rule:

• Eliminates the 8(a) Mentor-Protégé Program.
• Eliminates the reconsideration process for declined mentor-protégé agreements.
• Does not limit the size of mentor firms, and allows any business entity to act as a mentor, regardless of size, as long as that entity demonstrates both commitment and ability to assist small business concerns.
• Provides that while a mentor cannot generally have more than three protégés at one time, “the first two mentor-protégé relationships approved by SBA between a specific mentor and a small business that has its principal office in Puerto Rico do not count against the limit of three protégés that a mentor can have at one time.”
• Provides that mentors who provide subcontracts to protégés with a principal office in Puerto Rico may (a) receive “positive consideration” for the mentor’s past performance evaluation and (b) apply costs incurred for providing training to such protégé towards the subcontracting goals in the mentor’s subcontracting plan.
• Does not count mentor-protégé relationships terminated within 18 months of SBA approval of the mentor-protégé agreement against the protégé firm’s two-mentor lifetime limit.
• Allows SBA to determine that a protégé has exhausted its participation in the mentor-protégé program if the protégé shows a consistent pattern of terminating mentor-protégé agreements within the first 18 months, and therefore SBA may not approve additional mentor-protégé relationships for that protégé.
• Requires a protégé to provide “honest assessments” of its mentor’s performance to SBA during each annual review, allows a protégé to request SBA to intervene with an underperforming mentor on the protégé’s behalf, and allows SBA to terminate the mentor-protégé relationship or replace the underperforming mentor with a new mentor if the mentor does not overcome the protégé’s allegations of poor performance.

2. Use of Secondary NAICS Code for Mentor-Protégé Program

The final rule:

• Clarifies that a concern need not be “other than small” under its primary NAICS code to qualify as a protégé under a secondary NAICS code, but instead must show how the mentor-protégé relationship will help it further develop or expand its current capabilities in that secondary NAICS code.
• Provides that SBA may approve a mentor-protégé relationship under a concern’s secondary NAICS code where the small business concern can demonstrate that it has performed work in one or more similar NAICS codes or where the NAICS code in which the small business concern seeks a mentor-protégé relationship is a logical business progression to work previously performed by the concern—but, SBA will not approve a mentor-protégé relationship in a secondary NAICS code in which the small business concern has no prior experience.

3. Joint Ventures

The final rule:

• Eliminates need for 8(a) Participants to seek and receive 8(a) joint venture agreement approval from SBA for competitive 8(a) awards, but allows for checks of joint venture compliance through the size protest process.  SBA approval will still be required for 8(a) sole source awards.
• Removes three-contract limitation for joint ventures, but retains two-year joint venture activity limit, beginning from the date of first award.
• Novation of contract to the joint venture would start the two-year activity clock if that were the first award to the joint venture and a novation could be approved after the two-year period if the novation package was submitted for approval within the two-year period.
• Clarifies that joint ventures may be populated with administrative personnel, including Facility Security Officers.
• Provides for situations where the joint venture could rely on the facility security clearance of the partner(s) where a facility security clearance is required for the contract.
• For revenue-based size standards, receipts of joint venture attributed to each partner based on percentage of work performed (not ownership).  Where an employee-based size standard is used, SBA has clarified that the way to apportion individuals employed by the joint venture is the same percentage of employees as the joint venture’s percentage ownership share in the joint venture, after first subtracting any joint venture employee already accounted for in the employee count of the partner.
• Joint venture partners may agree to distribute profits from the joint venture to the small business participant(s) in excess of the percentage commensurate with the work performed.
• Clarifies that the same rules in 13 C.F.R. § 125.6 applies to calculation of work performed by a protégé in a joint venture, meaning that the rules concerning supplies, construction and mixed contracts apply to joint ventures and certain costs are excluded in the calculation.
• Confirms that a protégé must perform at least 40% of the work performed by the joint venture and cannot include work subcontracted to a similarly situated entity in that calculation.

4. Multiple-Award Contracts (MAC)

The final rule:

• Requires contracting officers to assign the most appropriate single NAICS code to each order under a MAC, whether for a supply or a service, to ensure compliance with the non-manufacturer rule, requiring that each NAICS code be included in the underlying MAC.  If the NAICS code corresponding to the principal purpose of the order is not contained in the underlying MAC, the final rule states that the contracting officer may not use the MAC to issue that order.
• Allows SBA to clarify, complete, or supply a NAICS code designation or size standard in connection with a formal size determination or size appeal when a NAICS code designation or size standard in a solicitation is unclear, incomplete, missing, or prohibited.
• Requires an offeror to certify as to size and status at the time it submits its initial offer, including price, for an order under an UNRESTRICTED MAC, except for orders or BPAs issued under an FSS contract.  However, the final rule adds an important exception which provides that where the underlying UNRESTRICTED MAC has been awarded to a pool of concerns for which small business status is required, if an order or a BPA under that MAC is set-aside exclusively for concerns in the small business pool, concerns need not recertify their status (unless a contracting officer requests recertification with respect to an order or BPA).
• Requires that, where socio-economic status is first required at the order level, firms must qualify at that time (while size may flow down if the MAC was a small business set-aside).
• Permits size and status protests where the underlying MAC was unrestricted, except for BPAs and orders issued under an FSS.

5. Certification

a. Self-Certification

• The final rule allows a prime contractor to rely on the self-certification of its subcontractor, provided the prime does not have reason to doubt the certification.

b. Recertification

The final rule:

• Expressly states that a required recertification (e.g., as a result of a novation, merger, sale, acquisition, or at the 5-year mark of a long-term contract) changes a firm’s status for future options and orders.  This is a critical change that stands in marked contrast to SBA’s prior recertification rules.  You can read more about this change here.
• Clarifies that if a party to a joint venture is acquired or merges, only that partner (and not the non-affected partner) must recertify in order to qualify the joint venture to recertify.
• Requires a firm that experiences a merger, sale, or acquisition (including agreements in principle) between proposal submission and award to recertify its size status prior to award.  If, as a result of the transaction, the concern is no longer small, and the transaction occurs within 180 days of proposal submission, the concern is ineligible for award.  If, however, as a result of the transaction, the concern is no longer small, but the transaction occurs more than 180 days after proposal submission, award can be made but it will not count as an award to small business.  We did not support this change and believe an arbitrary 180-day line in the sand creates undue market constraints by limiting the growth strategies small businesses with pending proposals can pursue, especially since contractors often have no idea exactly how long an agency will take to render an award decision, and some procurements are not resolved for many months or even years.
• Adopts a critical rule change that we supported whereby tribal entities are not required to recertify where ownership changes but the firm is owned to the same extent (i.e., 51%) by the ultimate entity.
• Allows a contracting officer to request size recertification at any time prior to the 120-day point in the fifth year of a long-term MAC.

6. 8(a) Program

a. Follow-On Contract Requirements

The final rule:

• Adds definition of follow-on requirement or contract to 13 C.F.R. § 124.3, which definition provides the following considerations for determining whether a particular procurement is a follow-on requirement or contract: (1) whether the scope has changed significantly, requiring meaningful different types of work or different capabilities; (2) whether the magnitude or value of the requirement has changed by at least 25 percent, inclusive of all periods of performance; and (3) whether the end user of the requirement has changed.
• Authorizes SBA to appeal a decision by a contracting officer that a particular procurement is a new requirement that is not subject to the release requirements, which determination may be appealed to the head of the procuring agency.
• Provides that a procuring activity must notify SBA where it seeks to re-procure a follow-on requirement through a limited contracting vehicle which is not available to all 8(a) BD Program Participants (e.g., any multiple award or Government-wide acquisition contract, whether or not the underlying MAC or GWAC is itself an 8(a) contract)—but, if an agency seeks to re-procure a current 8(a) requirement as a competitive 8(a) award for a new 8(a) MAC or GWAC vehicle, SBA’s concurrence will not be required because such a competition would be available to all 8(a) BD Program Participants.
• Requires that in all cases where a procuring agency seeks to fulfill a follow-on requirement outside of the 8(a) Program, except where it is statutorily or otherwise required to use a mandatory source (see FAR subpart 8.6 and 8.7), the agency must make a written request to, and receive the concurrence of, SBA to move that requirement outside the 8(a) Program.
• Clarifies that the value of a bridge contract should not typically be considered in determining whether an offered procurement is a new requirement.

b. Immediate Family Member Eligibility

The final rule:

• Instead of requiring no connections at all for immediate family members to be eligible to apply to the 8(a) Program, applies immediate family member restriction in instances where there is common ownership or management, regardless of amount or position, or where the companies share facilities or have a contractual relationship that was not conducted at arm’s length.
• Allows individuals applying to the 8(a) Program in the same primary NAICS code to have gained the required management or technical experience in that primary NAICS code by working for an immediate family member’s current or former 8(a) Participant and removes the presumption against granting an application when the NAICS codes are the same for the new applicant and the family member.
• Clarifies that SBA will continue to determine whether ownership, management, and facilities remain separate as part of the 8(a) annual review and that SBA would not initiate termination proceedings if the firms enter into fair market value contracts after the second firm is admitted to the 8(a) Program.

c. 8(a) Ownership Changes

The final rule:

• Provides that SBA approval is not needed when a previous owner held less than a 20% interest in the company both before and after the transaction, nor when the disadvantaged individual or entity in control of the Participant will increase the percentage of his, her, or its ownership interest.

d. 8(a) Preparatory Course

The final rule:

• Does not require an 8(a) preparatory course, and makes no regulatory change related thereto, but recognizes that such a course could be a helpful option to some concerns.

e. 8(a) Program Application and Benefits

 The final rule:

• Provides that each individual claiming disadvantaged status must authorize SBA to request and receive tax return information directly from the IRS if such authorization is required; while SBA may not utilize this in each instance, it will be an option (as it currently is).
• Reduces the time an applicant must wait to apply to the 8(a) Program after receipt of the final agency decision denying its application from 12 months to 90 days, and eliminates the request for reconsideration process; adds that if a concern is denied three times within 18 months of the date of the first final agency decision finding the concern ineligible, it must wait 12 months after the third final agency decline decision;
• Allows district directors to grant voluntary withdrawal and early graduation requests;
• Treats a firm as suspended from the 8(a) Program where the AA/BD issued a decision to early graduate or terminate a Participant and where an appeal is made, such that the Participant would not be considered an active 8(a) Participant during the appeal proceeding.
• Authorizes appeals to SBA’s Associate General Counsel for Procurement Law within 10 business days of receiving the district office’s final determination changing a concern’s primary NAICS code, and requires a decision to be issued within 15 business days of receiving the appeal.
• Eliminates the directive that the Participant cannot receive any 8(a) Program benefits until after SBA has approved its business plan and allows the Participant to receive program benefits immediately provided the Participant submits its plan to SBA for approval within 60 days after program admission.
• Allows a Participant to presume that SBA has approved its request for a bona fide place of business if SBA does not respond in the time identified (5 working days of a site visit or within 15 working days of receipt of request from servicing district office).  And, in order to be eligible for award, SBA must approve the bona fide place of business prior to award.  If SBA has not acted prior to the time that a Participant is identified as the apparent successful offeror, SBA will make such a determination within 5 days of receiving a procuring activity’s request for an eligibility determination unless the procuring activity grants additional time for review.
• Defines “bona fide place of business” as the geographic area serviced by the SBA district office, a Metropolitan Statistical Area, or a contiguous county to (whether in the same or different state) where the work will be performed.
• Voluntary withdrawal or early graduation from the 8(a) Program complete once the district director recognizes the action.

f. 8(a) Contracting

The final rule:

• Allows SBA to accept a requirement as a competitive 8(a) procurement regardless of when the offering occurred, as long as a procuring agency clearly identified a requirement as a competitive 8(a) procurement and the public fully understood it to be restricted only to eligible 8(a) Participants.
• Allows 8(a) sole source prohibition waivers to be processed at the district office level.
• Slightly adjusts the non-8(a) business activity targets to be more in line with the Congressional intent (transitional years 3, 4, and 5 were revised to 30%, 40%, and 50%, respectively; a decrease of 5% each year).
• Notes that SBA believes that the strict application of sole source restriction for failure to meet non-8(a) business activity targets may be inappropriate in certain extenuating circumstances.  SBA believes that a sole source restriction may be appropriate as a remedial measure if a particular Participant has made no efforts to seek non-8(a) awards, but it should not automatically occur if a firm fails to meet its applicable non-8(a) business activity target.  The final rule recognizes that a strict prohibition on a Participant receiving new sole source 8(a) contracts should be imposed only where the Participant has not made good faith efforts to meet its applicable non-8(a) business activity target.  Where a Participant has not met its applicable non-8(a) business activity target, however, SBA will condition the eligibility for new sole source 8(a) contracts on the Participant taking one or more specific actions, which may include obtaining business development assistance from an SBA resource partner such as a Small Business Development Center.  While SBA did not seek comments on whether the application of sole source restrictions should be relaxed, we proposed similar changes as many of our clients have been negatively impacted by the prior version of the rule.
• Provides that a Participant may not receive sole source 8(a) contracts where it has received a combined total of 8(a) competitive and sole source contracts in excess of $100 million during its participation in the program, and clarifies that in determining whether a participant has reached the limit, SBA will look at 8(a) revenues that the Participant actually received, not projected revenues.
• Clarifies that SBA does not use CoC procedures for 8(a) sole source contracts, and states that should an agency find a potential 8(a) sole source awardee to be non-responsible, it should avail itself of the SBA 8(a) substitution/withdrawal procedures set forth at 13 C.F.R. § 124.503(e).

7. Tribally-Owned Applicants and Participants

 The final rule:

• Clarifies that a Participant owned by an ANC, tribe, or CDC does not need to request a change of ownership from SBA where the ANC, tribe, or CDC merely reorganizes its ownership by either inserting or removing a wholly-owned business entity between the ANC/tribe/CDC and the Participant.
• Clarifies that if the primary NAICS code of the Participant is changed, either by SBA or through a request by the Participant, then the ANC/tribe, NHO, or CDC could submit an application to qualify another company for the 8(a) Program under the primary NAICS code that was previously held by the Participant whose primary NAICS code was changed, without needing to wait two years.
• Permits a tribally-owned applicant to satisfy the potential for success requirement by submitting a letter of support from a tribally-owned economic development corporation or other relevant tribally-owned holding company.
• Amends 13 C.F.R. § 124.112(d)(5) regarding excessive withdrawals in connection with entity-owned 8(a) Participants to clarify that a Participant which is owned at least 51% by a tribe, ANC, NHO, or CDC can make a distribution to a non-disadvantaged individual that exceeds the excessive withdrawal limitation if it is made as part of a pro rata distribution to all shareholders.
• Clarifies that ANC-owned businesses which are treated as a small business for subcontracting-goaling purposes are not required to submit subcontracting plans.

8. Small Business and Affiliation Rules Generally

The final rule:

• Clarifies that, for purposes of determining compliance with the nonmanufacturer rule, the ostensible subcontractor rule, and SBA’s joint venture agreement requirements,  size status is determined as of the date of final proposal revisions for negotiated acquisitions and final bids for sealed bidding for.
• Allows the Associate General Counsel for Procurement Law to initiate or file size protests.
• Clarifies that Women-Owned Small Businesses/Economically Disadvantaged Women-Owned Small Businesses and Service-Disabled Veteran-Owned Small Businesses may request formal size determinations in connection with applications and continued eligibility for these programs.
• Clarifies that mixed contracts include any combination of services, supplies, or construction.  Construction had previously been inadvertently omitted from the rule.
• Clarifies that where a contract integrates any combination of services, supplies, or construction, the contracting officer shall select the appropriate NAICS code under SBA regulations and that NAICS code is determinative as to which limitation on subcontracting and performance requirement applies, and provides an example of how these limitations on subcontracting should operate in a mixed contract that involves construction.
• Requires agencies to consider the capabilities, past performance, and experience of each first-tier subcontractor that is part of a team of small business subcontractors as the capabilities, past performance, and experience of the small business prime contractor when the first-tier subcontractors are specifically identified in the proposal and the capabilities, past performance, and experience of the small business prime contractor do not independently demonstrate capabilities and past performance necessary for award.
• States that the threshold for contracting agency CoC appeals is the Simplified Acquisition Threshold and not $100,000.
• Clarifies the limitations on subcontracting by stating that for a multiple item procurement where a waiver of the nonmanufacturing rule is granted for one or more items, compliance with the limitations on subcontracting requirement will be determined by combining the value of the items supplied by domestic small business manufacturers or processors with the value of the items subject to a nonmanufacturer waiver; accordingly, limitation on subcontracting requirement is satisfied as long as the value of the items to be supplied by domestic small business manufacturers or processors plus the value of the items to be supplied that are subject to a nonmanufacturer waiver account for at least 50% of the value of the contract.
• Adds that the presumption of affiliation based on identity of interest based upon economic dependence may be rebutted based on a showing that despite contractual relations with another concern, the concern at issue is not solely dependent on the other concern, either because the concern in question has only been in business for a short time and thus has only a limited number of contracts, or because the contractual relations do not restrict the concern’s ability to sell the same type of products or services to another purchaser.
• Amends newly organized concern rule to clarify that this applies to both former and current officers, directors, principal stockholders, managing members, or key employees.

If you have questions concerning SBA’s final rule on its Mentor Protégé Programs, please register for our 90-minute webinar on October 28, 2020, at 2 PM ET, where SBA’s John Klein and PilieroMazza’s Pam Mazza and Peter Ford will examine the rule changes and its implications for your business.