An Outline of Some Surprising New SBA Rules That Significantly Affect Both Large and Small

Client Alert- August 24, 2016

An Outline of Some Surprising New SBA Rules that Significantly Affect Both Large and Small Federal Contractors

The Small Business Administration (SBA) has just amended its regulations in several important respects. While somewhat of a tangle, these amendments contain things that benefit large businesses as well as small ones that contract with the federal government.

1. AS OF AUGUST 24, 2016, A LARGE BUSINESS CAN SERVE AS A MENTOR TO A SMALL BUSINESS PROTÉGÉ AND EVEN BID ON SET-ASIDE CONTRACTS

The most significant amendment permits large businesses to enter into mentor-protégé agreements with small businesses and, without creating an affiliation between them: provide/accept technical, management and financial assistance, and even bid on and perform contracts set aside for small businesses including those set aside for 8(a) contractors, contractors located in HUBZones, Service Disabled Veteran-Owned Small Businesses (SDVOSB), or Women-Owned Small Businesses (WOSB).

For years, large businesses have been allowed to serve as mentors to companies that were in the SBA’s § 8(a) program. Under that rule, within limits, the two are even allowed to bid on and perform 8(a) contracts. The amended regulations no longer limit protégés to being 8(a) contractors. Under the new rules, effective August 24, 2016, any small business can be a protégé and a small business mentor-protégé team can even form joint ventures to bid on, be awarded, and perform federal contracts, including those that have been set aside for small business and subsets thereof.

More specifically, without fear of creating an affiliation, the amended regulations allow a mentor (even a large business) to provide its small business protégé with various types of business assistance, including:

• technical and/or management assistance;
• financial assistance in the form of equity investments and/or loans;
• subcontracts; and/or
• actually performing a portion of federal prime contracts (even those contracts that were set aside for 8(a) contractors, contractors located in HUBZones, Service Disabled Veteran-Owned Small Businesses (SDVOSB), or Women-Owned Small Businesses (WOSB)).

Mentors (Qualifications and Limitations)

In order to qualify as a mentor, a concern must demonstrate that it:

• is capable of carrying out its responsibilities in assisting the protégé firm under the proposed mentor-protégé agreement;
• possesses good character;
• does not appear on the federal list of debarred or suspended contractors; and
• can impart value to the protégé firm due to lessons learned and practical experience, or through its knowledge of general business operations and government contracting.

Generally, a mentor will have no more than one protégé at a time. In order to demonstrate that it is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement, a firm seeking to be a mentor may submit to the SBA copies for the past three years of: the federal tax returns it submitted to the IRS, audited financial statements, including any notes, or, in the case of publicly traded concerns, the filings required by the Securities and Exchange Commission (SEC).

Once approved, a mentor must annually certify that it continues to possess good character and a favorable financial position.

Protégés (Qualifications and Limitations)

• A protégé typically will have only one mentor at a time.
• The protégé must qualify as a small business under its primary NAICS code (or confirm that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code).

Conditions That Must Be Met in Order to Obtain and Retain the Exception to the Affiliation Rule

The mentor and protégé firms must enter a written agreement that conforms to the requirements of the regulations. Among other things, the agreement:

• may not exceed three years in length, but may be extended for an additional three years.
• should set forth an assessment of the protégé’s needs and a detailed description and timeline for the delivery of the assistance that the mentor commits to provide to address those needs.
• must be approved by SBA, which will also review the mentor-protégé relationship during the protégé’s first annual review to determine whether to approve its continuation for another year or rescind it. For each annual review, the protégé must report on the extent that the following items have been provided by the mentor: technical and/or management assistance, loans and/or equity investments, subcontract awards. In addition, it must report all federal contracts awarded to any mentor/protégé joint venture.

How to Apply to Participate in the Small Business Mentor-Protégé Program

Applications from prospective participants in the programwill only be acceptedusing the new online application. The application, approval and monitoring process will be centralized in the SBA’s Headquarters office in Washington, D.C.

Both prospective protégés and mentors are going to be required to register in theSystem for Award Management (SAM). They will also be required to complete an online training module as part of the application process, and to upload a certificate of completionbefore they are allowed to complete the application process.

The application itself will be entirely electronic and will require that the following documents be uploaded:

• A certificate of completion for the online training module,

• a signed Mentor-Protégé agreement, and

• size determination letters, and other documents.

Although mentors are not required to provide financial statements and tax returns during the application process, the SBA retains the right to request such documentation during the reporting and evaluation processes.

The SBA will begin accepting applications for the Small Business Mentor-Protégé Program on October 1, 2016.Any application received prior to October 1, 2016, or received in any other format other than through SBA’s web portal will not be considered.

Joint Ventures Between Approved Mentors-Protégés

Entities with an SBA approved mentor-protégé agreement can submit an offer as a joint venture, on contracts set aside for small businesses, etc. A protégé and mentor approved for the program may seek any type of small business contract for which the protégé firm qualifies (e.g., where protégé firm qualifies as a WOSB, the joint venture could seek a WOSB set-aside.

The joint venture may, but need not, be in the form of a separate entity (i.e., a limited liability company, corporation or partnership). However, if it is a separate entity, while it may have its own separate employees perform administrative functions, it may not have its own employees perform contracts awarded to the joint venture.

Irrespective of the form of the joint venture, the content of the joint venture agreement must contain certain provisions set out in the regulations, including ones:

• Designating a small business as the managing venturer, and an employee of the small business-managing venturer as the project manager responsible for performance of the contract.

• Stating that with respect to a separate legal entity joint venture, the small business must own at least 51% of the joint venture entity.

• Stating that the small business must receive profits from the joint venture commensurate with the work performed by the small business, or in the case of a separate legal entity joint venture, commensurate with their ownership interests in the joint venture.

• Providing for the establishment and administration of a special bank account in the name of the joint venture.

• Itemizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture.

• Specifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the small business partner to the joint venture will meet the performance of work requirements set forth in the regulations.

• Obligating all parties to the joint venture to ensure performance of a contract set aside or reserved for small businesses and to complete performance despite the withdrawal of any member.

• Designating that accounting and other administrative records relating to the joint venture be kept in the office of the small business-managing venture.

• Requiring that the final original records be retained by the small business-managing venturer upon completion of any contract set aside or reserved for small business that was performed by the joint venture.
• Dealing with the submission of financial data to SBA.

Both the failure of the joint venture agreement to comply with these requirements and the failure to comply with the joint venture agreement is a ground for suspension or debarment.

When evaluating the past performance and experience of an approved joint venture submitting an offer for a contract set aside for small business, the procuring activity must consider work done individually by each partner to the joint venture as well as any work done by the joint venture itself previously.

On any contract set aside for small business to be performed by the joint venture,

• the joint venture must perform the applicable percentage of work required by 13 C.F.R.§125.6,e.g.,
• With regard to a contractfor services (except construction), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated.
• In the case of a contractfor general construction, it will not pay more than 85% of the amount paid by the government to it to firms that are not similarly situated; and
• the small business partner to the joint venture must perform at least 40% of the work performed by the joint venture;

• the work performed by the protégé must be more than administrative or ministerial.

• Prior to the joint venture’s performance of any contract set aside for small business, etc., the small business partner to the joint venture must submit a written certification to the contracting officer and SBA, signed by an authorized official of each partner to the joint venture, stating that:

(1) The parties have entered into a joint venture agreement that fully complies with the regulations, and

(2) The parties will perform the contract in compliance with the joint venture agreement and with the performance of work requirements set forth above.

• Failure to perform the contract in accordance with these requirements is grounds for suspension/debarment.

2. JOINT VENTURES BETWEEN SMALL BUSINESSES

The general rule has been and still is that joint venturers are deemed to be affiliated with each other with regard to “a particular procurement or sale” that they are performing or seeking to perform. Hence, under the general rule, in order to be awarded a contract set aside for small business, the members of the joint venture have tocollectivelymeet the size standard applicable to the contract.The amended rule, effective August 24, 2016, provides a significant exception. That is, provided the conditions listed below are met – so long aseachjoint venturer meets the applicable size standard, the joint venture itself will be treated as a small business,i.e., even though the joint venture partnerscollectivelyexceed the applicable size standard, the joint venture itself can bid on the contract as a small business

Conditions That Must Be Met in Order to Obtain and Retain the Exception

• There must be a written joint venture agreement.

• The joint venture must

• do business under its own name, and

• identify itself as a joint venture in the System for Award Management (SAM).

• The joint venture may not be awarded more than three contracts within a two-year period from the date of award of the first contract without the partners to the joint venture being found affiliated. More precisely, as of the date that it submits an initial offer including price that leads to the award of a contract, the joint venture should not have been awarded any more than two contracts in the previous two years.

Other Things of Note

Once again, the joint venture may, but need not, be in the form of a separate entity (i.e., a limited liability company, corporation or partnership). However, if it is a separate entity, while it may have its own separate employees to perform administrative functions, it may not have its own employees to perform contracts awarded to the joint venture.The same entities can also create additional joint ventures. However, the regulations indicate that “at some point” such a longstanding inter-relationship or contractual dependence between the same joint venture partners will lead to a finding of affiliation. The bottom line – through a proper joint venture agreement, small businesses can now join forces to bid on and perform contracts set aside for small businesses.