On February 11, 2011, the Small Business Administration issued a final rule comprehensively revising the regulations governing the 8(a) Business Development Program. This is the first full revision of the 8(a) program in more than 10 years. Effective March 14, 2011, the new rule amends Parts 121 and 124 of Title 13 of the Code of Federal Regulations. The SBA’s rewrite addresses all aspects of the 8(a) program but those changes concerning joint ventures and mentor/protege agreements are also of interest to contractors outside the 8(a) program. These arrangements are important to non-8(a) contractors because they may join forces with 8(a) companies by means of a joint venture and/or mentor/protege agreement and that relationship will not be considered an affiliation for purposes of determining if a contractor qualifies as a small business. See 13 CFR Section 121.103(b)(6) & (h).
The revised regulations address various aspects of joint ventures between an 8(a) company and a non-8(a) partner. These revisions include the following:
- Limit on Number of Contract Awards
The old regulations limited a specific joint venture to submitting no more than three offers over a two year period. The new rule allows a specific joint venture to be awarded three contracts over a two year period. It also clarifies that the partners to a joint venture can form a second joint venture and be awarded three additional contracts and a third joint venture to be awarded three more. The SBA cautions that at some point, however, such a long-standing relationship or contractual dependence could lead to a finding of general affiliation (even in the mentor/protege context).
- Written Agreement Required for Joint Venture
The new rule clarifies that while a joint venture may or may not be a separate legal entity (e.g. a limited liability company) it must exist through a written document. Thus, even an informal joint venture must have a written agreement between the partners.
- Joint Venture May Be Populated or Unpopulated
The new rule clarifies that a joint venture may or may not be populated (i.e. have its own separate employees). The individual businesses involved in the joint venture should determine whether to form a separate legal entity for the joint venture and, if they do, further determine whether or not to populate the new entity. The SBA will not require a joint venture either to be populated or not populated.
- 8(a) Participant’s Share of Profits
The new rule provides that the 8(a) participant in a joint venture must receive profits from the joint venture commensurate with the work performed by the 8(a) company.
- 8(a) Participant’s Share of Work Performed
The regulations are amended to provide that the 8(a) participant in a joint venture receiving an 8(a) contract must perform at least 40% of the work done by the joint venture. The SBA concedes that for a populated joint venture, the requirement that the 8(a) partner must perform at least 40% of the work may not always make sense. Where the joint venture is populated with one administrative person, then there is no reason that the 8(a) cannot perform at least 40% of the work. However, where the joint venture itself hires the individuals necessary to perform the contract, the work of the joint venture will be done by the joint venture. An 8(a) partner to such a joint venture must demonstrate clearly how it will benefit or otherwise develop its business from the joint venture relationship. Where an 8(a) participant cannot clearly demonstrate the benefits it will receive, the SBA will not approve the joint venture.
- Report to SBA
The new rule requires that each 8(a) firm that performs an 8(a) contract through a joint venture must report to the SBA how the performance of work requirements (i.e. that the joint venture performed at least 50% of the work of the contract and that the 8(a) participant to the joint venture performed at least 40% of the work done by the joint venture) were met on the contract.
The final rule also amends the requirements of the mentor/protege program. These changes include the following:
- Agreement Must Follow Business Plan
The new rule specifically requires that assistance to be provided through a mentor/protege agreement be tied to the protege firm’s business plan. While the SBA believes that this was implicit in the old regulations, the agency thought it was important to emphasize that the mentor/protege program is but one tool that can be used to help the business development of 8(a) participants in accordance with their business plans.
- Limit on Number of Proteges
Although the new rule states that a mentor would generally have one protege firm, it further provides that the number of proteges any mentor can have at any one time is three. The purpose of this revision is to prevent mentor firms from taking advantage of the 8(a) program by collecting proteges.
- Submission of Financial Information by Mentor
The new rule relaxes the requirement for submission of financial information by a firm seeking to be approved as a mentor. Such companies may submit federal income tax returns or audited financial statements, including any notes, or other evidence to demonstrate the firm’s favorable financial health. The previous requirement that a proposed mentor must submit federal tax returns in all instances has proved to be impractical, particularly in the case of very large firms.
- Ending the Benefits of Mentor/Protege Agreements
The revised regulations expressly state that the benefits derived from a mentor/protege relationship end once the protege firm graduates from or otherwise leaves the 8(a) program. The SBA wanted to make clear that the exclusion from affiliation enjoyed by joint ventures between proteges and their mentors generally ends when the protege leaves the 8(a) program.
- Acquisition of Second Mentor
The new rule allows a protege to have a second mentor where it demonstrates that the second relationship pertains to an unrelated secondary NAICS code, the first mentor does not possess the specific expertise that is the subject of the mentor/protege agreement with the second mentor, and the two relationships will not compete or otherwise conflict with each other.
- Federal Subcontracts
The revised regulations allow a joint venture between a mentor and protege to be considered small for the purpose of federal subcontracts.
- Reconsideration of Rejection of Mentor/Protege Agreement
The new rule clarifies the procedure for requesting reconsideration of the SBA’s decision to deny a proposed mentor/protege agreement. No reconsideration process was authorized under the old regulations. The new regulations provide that where the SBA declines to approve a specific mentor/protege agreement, the protege may request reconsideration of this decision by filing a request for reconsideration with its servicing SBA district office.
- Mentor Failure to Provide Assistance
The revised regulations include a new section which sets forth consequences for a mentor that fails to provide the assistance it agreed to provide in its mentor/protege agreement. When the SBA determines that a mentor has not provided this assistance, the SBA will afford the mentor an opportunity to respond. If the mentor fails to respond, does not supply adequate reasons for its failure to provide the agreed upon assistance or does not set forth a definite plan to provide the assistance, the SBA may recommend a stop work order on the contract. Where a protege firm is able to independently complete performance of any contract awarded to a joint venture between it and its mentor, the SBA may authorize substitution of the protege firm for the joint venture. The SBA is also authorized by the new rule to terminate a mentor/protege agreement where the mentor has failed to provide the agreed upon developmental assistance and render the mentor firm ineligible to act again as a mentor for a period of two years thereafter.
Impact of New Rule
Not only do companies participating in the 8(a) program need to be familiar with the comprehensive revisions to the 8(a) program, firms planning to do business with 8(a) companies as joint venture partners and/or mentors need to be familiar with the new regulations as well. While there are some exceptions, for the most part, the changes to the regulations governing the 8(a) program are intended to encourage relationships between small disadvantaged companies and larger, more experienced contractors. Non-8(a) companies must bear in mind however, that the focus of the 8(a) program remains on fostering the business development of small disadvantaged businesses. Where the business goals of a company seeking to work with an 8(a) company conflict with those of the participant, the SBA regulations favor the small disadvantaged company.