Failure to Follow SBA Mentor Protege Joint Venture Rules 13 CFR 124.513 and 13 CFR 125.9 Can Cost You the Contract. Get Help Positioning Your Company for GSA’s OASIS UNRESTRICTED Contract Program.
The Small Business Administration SBA 8a Mentor Protege Program Joint Venture rules have significant power when applied to submitting proposals for federal government contracts (13 CFR 124.513, 13 CFR 125.9 and 13 CFR 121.103). However, there are still situations where small businesses can make serious legal mistakes and give up lucrative federal contracts as a result. Mentors, on the other hand, must also be aware that they have a strict role to play. They also cannot control the Protege to the extent that the relationship violates the statutory guidelines.
The following SBA OHA decisions show that small businesses and large companies involved in SBA mentoring programs must be aware of the dangerous pitfalls and consequences for non-compliance with SBA Mentor Protege joint venture regulations.
Size Appeal of Sage Acquisitions, LLC, SBA No. SIZ-5783 (2016) (Area Office correctly determined that a member of a purported SBA small business mentor protege program joint venture did not satisfy the requirement that it perform more than administrative and ministerial functions).
Size This is 2017 case where SBA OHA disagreed with the SBA. (Area Office erred in finding appellant: (i) was in a joint venture with two sister companies; (ii) Area Office also erred in finding that the contractor was affiliated with its sister companies under ostensible subcontractor rule and the SBA’s misapplication of the common ownership, common management rules as it applied to performance of common administrative services. 13 CFR 121.103(b)(2)(ii)).
The SBA also makes serious mistakes with its legal analysis of small business joint ventures involving in its mentoring programs. Government contractors should beware of the legal pitfalls and how to avoid them.
What are Some Benefits of the Mentor Protege Relationship?
The Mentor Protege relationship is designed so that the mentor, usually a large business can provide assistance to the small business where such assistance would be prohibited under normal procurement regulations. Both the mentor and the protege can benefit and take advantage of lucrative government contracts by relying on each other’s resources. However, the protege must receive a substantial benefit from the relationship.
You might be under more scrutiny if under an SBA-approved Mentor Protégé Agreement (MPA) pursuant to 13 CFR 125.9 because, among other things, you will not be deemed affiliated with each solely because the protege receives assistance from the Mentor. See 13 CFR 121.103(b)(6). Your competition may try to file a size protest under the MPA joint venture agreement. If you have the right mentor protege joint venture attorney that understands the rules, you might be saved if you have submitted an offer on the challenged procurement as joint venturers. You could well be on the way for qualifying for an exception under 13 CFR 121.103 h (3). By having an approved mentor protege agreement, both parties would be exempt from any attacks due to affiliation.
Make sure that you meet the basic statutory requirements to be protected as a mentor protege joint venture. Under 13 CFR 125.9
“Two firms approved by SBA to be a mentor and protégé under may joint venture as a small business for any Federal government prime contract or subcontract provided the protégé qualifies as small . . . , and the joint venture meets the requirements of [this chapter]. See13 CFR 121.103(h)(3)(ii). Section 125.9, in turn, requires, “In order to receive the exclusion from affiliation, the joint venture must meet the requirements set forth in 13 CFR 125.8(b)(2), (c), and(d).” 13 C.F.R. § 125.9(d)(ii).
Pitfalls to Avoid as a Mentor
As a Mentor, you have to show that you have the ability to assist the small protege. Many large companies see the mentor protege relationship as merely an opportunity to get small business contracts and to essentially control the protege. Nothing can be further from the truth. One of the common pitfalls that large business mentors make is to control of upcoming bids, make loans to small businesses and use it as leverage against the protege. Once the mentor qualifies, then there is a continuing duty to carry out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement. The following are other pitfalls for mentors to avoid>
- Avoid getting suspended or debarred on other government project because it may impact the current mentor protege relationship.
- If the mentor becomes part of a federal government procurement investigation for fraud or false claims, then they want to make sure that they have an attorney that also understands he various small business regulations and SBA programs.
- The mentor must make sure not to get into situations where the firm’s character may come into question. The mentor must always possess good character and a favorable financial position
- The mentor must in no way be found to control the managers of the protégé, or is otherwise found to be affiliated with the protégé.
Pitfalls to Avoid as a Protege
In addition to not being part of the above scenarios, small business proteges want to always qualify as small business for the size standard corresponding to its primary NAICS code. Many firms outgrow their small business size status. However, there could be some impact on the ability to bid on other contracts or tasks orders. This mainly depends on whether there is a recertification requirement from the specific agency.
Small proteges should not seek to have more than on mentor. Although the SBA can approve more than one, it is wise to demonstrate your ability to work with one mentor and then work your way up to having two.
Another mistake to avoid as a protege is to open yourself to criminal liability for procurement fraud or a government investigation for violating the limitations on subcontracting regulations. This is becoming more and more common. Situations, where the protege contracts work back to the mentor, can be grounds for mentor protege fraud and can lead to procurement investigations.
8a Mentor Protege Program Joint Venture Participants – 13 CFR 124.513
SBA Approval: For government contracts awarded to 8 (a) small business joint ventures, “SBA must approve the small business JV agreements pursuant to 13 CFR 124.513.” 8a mentor protege joint program joint venture participants must keep the SBA in the loop at all times. This can apply to positive news and negative news that can impact the relationship. In addition, 13 CFR 124.520 (d)(1)(ii) states that “in order to receive the exclusion from affiliation for both 8(a) and non-8(a) procurements, the SBA joint venture must meet the requirements set out in 13 CFR 124.513 (c).”
It is commonplace that when in the SBA 8a Program, the SBA should be involved or made aware of all transactions in federal government contracting. As a result, the SBA mentor protege joint venture rules contemplate an exception from affiliation only for formal business venture compliance with 13 CFR 124.513 (c). If you do not have a formal approved SBA JV agreement, your scrutiny will be a lot more in a small business size protest or appeal.
Contractors should understand that the purpose of these the SBA joint venture provisions is to “encourage approved mentors to provide various forms of business development assistance to mentor protege firms.”
When is the validity of the 8a Mentor Protege Agreement Validated?
The validity of your 8a mentor protege agreement must be examined as of the date you submitted your initial proposal including price, and should be analyzed under the regulations in effect at the time the solicitation was issued. See Straughan Environmental, Inc. v. United States, 135 Fed. Cl. 360 (2017), See also, Size Appeal of Global Dynamics, LLC, SBA No. SIZ-6012 (2019). See also, 13 CFR 121.404(a) (2013).
Tip: Nothing in SBA 8a mentor protege program joint venture regulations requires that a mentor protege agreement remain effective throughout the competition and up to time of the award. Instead, SBA OHA has recognized that issues of affiliation, including whether a joint venture is eligible for the mentor-protégé exception to affiliation, are determined as of the date of initial offer including price. See also Size Appeal of Quadrant Training Sols., LLC, SBA No. SIZ-5811 (2017); Size Appeal of SGS, LLC, SBA No. SIZ-5859 (2017); and Size Appeal of HBC Mgmt. Servs., SBA No. SIZ-5686 (2015).)
Tip: SBA OHA has decided that an Mentor Protege Agreement that was not approved prior to initial offer submission including price is not entitled to the joint venture affiliation exception. See Size Appeal of Lukos-VATC JV, LLC, SBA No. SIZ-5532 (2014).)
Tip: Joint venture affiliation exception does not apply when the Mentor Protege Agreement expired prior to the initial offer. See Size Appeal of North Star Magnus Pacific Joint Venture, SBA No. SIZ-5715 (2016).)
Avoid 8a Mentor Protege Program Joint Venture Mistakes with 13 CFR 121.103 h, 13 CFR 125.9 and 13 CFR 124.513
Arguably, SBA 8a mentor protege joint venture rules are not applicable to a situation, where a protege provides subcontracts or other assistance to its mentor. Such an arrangement is not assistance from the mentor to the protege and therefore does not fall within the scope of 13 CFR 121.103 (b)(5) and 13 CFR 124.520 (d)(4). See also 13 CFR 124.520. Small businesses are also finding it difficult to develop relationships to be competitive in GSA’s OASIS UNRESTRICTED Contract Program.
Under the SBA ostensible subcontractor rule and SBA joint venture regulations, when a subcontractor is actually performing the primary and vital requirements of the contract or the prime contractor is unusually reliant upon the subcontractor, the two firms are affiliated for purposes of the specific procurement in question.
Under 13 CFR 121.103(h)(4), the ostensible subcontractor rule has the effect of treating a prime contractor and subcontractor as joint venturers for a particular acquisition. See info about Mentor Protege and advantages and disadvantages.
Given the higher level of scrutiny given to small business relationships involved in SBA mentoring programs, companies should make sure that their business practices and relationships are in compliance with the SBA’s regulations.
Be aware of recent Small Business Administration mentor protege program new rules governing MP programs. You can see how the recent rules impact your relationships. The regulations are very strict for companies entering into SBA 8a mentor protege relationships.
8 (a) companies beware: Particular care must be applied when small businesses are certified under the 8(a) Program as well as those bidding on federal procurements outside of the 8(a) Program.
However, under SBA 13 CFR part 121.105 and 13 CFR 124.513 and avoid legal mistakes with the SBA non manufacturer rules.authorize a mentor and protégé to enter an SBA joint venture relationship for any Federal procurement. SBA affiliation rules, also stipulate that assistance provided under an approved mentor-protégé agreement does not create an affiliation between the mentor and protege. See
When appealing a small business size protest to SBA Office of Hearings and Appeal, you must also be careful when assuming that simply because you enter into an SBA Mentor Protege agreement that a finding of affiliation is always improper.
SBA Small Business Joint Venture Regulations 13 CFR 124.513, 13 CFR 121.103 and 13 CFR 125.9
Under 13 CFR 121.103 (h)(3)(iii) and 13 CFR 124.520 (d)(1) the SBA mentor protege joint venture rules would only apply to formal SBA small business JVs approved by SBA, not to constructive joint ventures as envisioned by the ostensible subcontractor rule. See also, 13 CFR 124.513, 13 CFR 125.9 and 13 CFR 125.8 – What requirements must a company satisfy to submit an offer? Learn how to avoid costly mistakes with SDVOSB joint ventures.
Are participants small? A key aspect of the contractual SBA JV agreement relationship is whether the small business is the prime or subcontractor. The new JV rules now allow two or more small businesses to joint venture without the burden of affiliation so long as both of them are small.
SBA Mentor Protege and Joint Venture Affiliation Rules
Rules governing the SBA Mentor Protege Program, 13 CFR 121.103 (b)(6) and 13 CFR Part 124.520(d)(4) apply to assistance provided by a mentor to a protege, not vice versa.
SBA rules may preclude affiliation if the mentor was the prime contractor and the protege was the subcontractor; the SBA affiliation regulations do not extend to situations where a protege provides subcontracts or other assistance to its mentor. See also Difference Between Teaming Agreement vs Joint Ventures. The most common situation the parties should avoid is violating the limitations on subcontracting regulations.
Benefits of Having a Small Business Administration Mentor Protege Agreement: The SBA Mentor Protege Program does have its benefits. However, the analysis is more than simply whether the parties have an existing agreement under other contracts. You must ask whether the SBA has actually approved this Mentor Protege agreement. If not, does the relationship still meet statutory requirements under 13 CFR 121.103? Read information about joint venture definition. See also information about SBA Joint Venture Rules & SBA Approval.
Non-8(a) SBA Mentor Protege Joint Venture Rules
Small Business Regulations for Government Contractors Not in SBA 8 (a)Program: Oftentimes, government contractors enter into an agreement or small business Joint Venture contract when a specific procurement is not awarded under the SBA 8 a Program. However, there are regulations that also govern HUBZone Mentor protege joint venture relationships and SDVOSB JV relationships. In these situations, the agreements must still meet the requirements of 13 CFR 124.513 (c)(6) and (7), 13 CFR 125.8, 13 CFR § 125.18 and CFR 124.513 (d). See also SBA mentor protege exception to affiliation.
For 8(a) certified companies, getting approval from the SBA should still be a requirement. This rule is focused primarily on the Small Business Administration Mentor Protege Program and 8(a) JV agreements for companies who are not 8(a) certified. There are basic statutory requirements that contractual joint venture agreement must meet in order to minimize an adverse impact is a small business size protest. Find out What is a Mentor Under SBA Rules 13 CFR 124.520 and 13 CFR 125.9.
- The protege firm must at least 40% of the JV’s substantive work.
- The SBA joint venture agreement must itemize “all major equipment, facilities, and other resources” to be furnished by each of the JV partners.
- SBA rules require your JV agreement to also specify the roles and responsibilities of the joint venture partners, including how the joint venture will comply with the statutory requirements.
- If an initial reading of the agreement does not meet these basic requirements, companies often find themselves losing out on lucrative government contracts.
Important Issues that CEOs Must be Aware of
Whether you are involved in an 8a mentor protege agreement, SDVOSB or HUBZone relationships, CEOs for the Mentor or Protege should always develop joint internal policies and controls that are measurable and investigated for compliance. Checking for compliance during contract performance is always better than having to evaluate the relationship during a fraud investigation or some other adverse action.
CEOs must always be mindful of the limitations on subcontracting under the mentor protege joint venture rules. It is the most common violation sought after in government procurement investigations.
Sometimes a protestor will challenge the ability of one of the joint venture members to perform 40% of the work. With that said, your original mentor protege joint venture agreement will be the source document looked at when litigation arises. See the case of Size Appeal of Spinnaker Joint Venture, LLC, SBA No. SIZ-5964 (2018) where the appellant in a size appeal raised this very argument.
This is a situation where under SBA affiliation rules, your small business runs the risk of becoming affiliated and can possibly lose the contract in a small business size protest.
Get help positioning your company for Mentor Protege Joint Venture relationships. Get help avoiding mentor protege government contract fraud investigations. Please Contact Watson & Associates’ Government Contract Lawyers Today. Call 1-866-601-5518. FREE INITIAL CONSULTATION.