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Procurement Lawyer Newsletter

The Procurement Lawyer Fall 2024

An Industry Response to SBA “Perceptions” of the Mentor-Protégé Program

Laura Unger

Summary

  • SBA published “perceptions” that entities other than singular small businesses are receiving a disproportionate number of small businesses set-aside contracts.
  • SBA suggested potential solutions aimed at providing small businesses not participating in Mentor-Protégé Programs better opportunities to compete in the marketplace.
  • This article provides an industry perspective as to why the proposed suggestions do not resolve the perceptions and could actually disadvantage small business concerns.
  • The author advances alternative strategies to help small business concerns compete more effectively in the federal marketplace.
An Industry Response to SBA “Perceptions” of the Mentor-Protégé Program
Catherine McQueen via Getty Images

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The US Small Business Administration (SBA) has issued a public notice calling for Tribal Consultation meetings and listening sessions regarding pending changes to the Historically Underutilized Business Zone (HUBZone) and 8(a) business development programs, while simultaneously requesting feedback on certain “perceptions” about the Mentor-Protégé Program (MPP or the Program). This request for information has brought new attention to the Program as well as Mentor-Protégé Joint Ventures (MPJVs), and whether the Program is working as it should. This article explores the background on the MPP and the issues that appear to have given rise to the SBA’s “perceptions” regarding MPJVs, responding to the SBA’s call for information by providing an industry perspective on the MPP, identifying potential ways to address the SBA’s perceived concerns, and suggesting how a broader approach may best support these programs going forward.

Background on the Consolidated Mentor-Protégé Program

In November 2020, the SBA consolidated the “8(a) Mentor-Protégé Program” and the “All Small Mentor-Protégé Program” into a single, government-wide “Mentor-Protégé Program.” Under the MPP, a small business serves as a protégé to another firm serving as a mentor. The mentor is frequently, but not required to be, a large business. The mentor must be able to carry out its responsibilities to assist the protégé by possessing “practical experience … of general business operations and government contracting,” which experience could be provided by another small business. Even though the SBA uses the ubiquitous term “other than small business” to describe a large business, this article will use the term “large business” when the large business firm status is relevant outside of a mentor-protégé relationship.

The 2020 consolidation brought many benefits to the Program participants. Firms no longer needed to decide whether to participate separately in the “8(a) Mentor-Protégé Program” or the “All Small Mentor-Protégé Program.” Rather, companies could benefit from participating in the MPP generally and pursuing any set-aside work that was relevant to the protégé’s business development and capabilities. This change has made it easier for MPJVs to pursue more work. Additionally, for those firms that were previously participating in the “8(a) Mentor-Protégé Program,” the requirement for the SBA to review and approve a unique joint venture (JV) agreement prior to submitting a proposal was removed, significantly streamlining the bid and proposal process. This brought increased agility for participants. Now, MPJVs can quickly decide whether to pursue a new contract opportunity.

Consolidating programs, combined with the concurrent reduction of burdens for participants, must have achieved the desired outcomes, particularly if the SBA now seeks comments on whether the improvements might have worked too well, noting that there is a:

perception that mentor-protégé joint ventures are winning an inordinate number of orders issued under small business multiple award contracts and seek[ing] 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.

SBA’s Request for Feedback

As noted above, the SBA is now requesting feedback from Native American Tribes, Alaska Native Tribes including Alaska Native Corporations, and Native Hawaiian Organizations (hereinafter Tribal Concerns, ANCs, and NHOs, respectively) on these “perceptions” regarding MPP. Consulting with these native stakeholders is required under the SBA Tribal Consultation Policy, as the SBA must coordinate with Tribal Concerns, ANCs, and NHOs on programs that provide these concerns business support. Proposed changes to the HUBZone program could have a substantial direct effect on Tribal Concerns and ANC participation in federal contracting. As these are a primary focus of the proposed regulatory action, input from Tribal Concerns, ANCs, and NHOs is required. Even if the sessions were limited to “perceptions” regarding MPP, the SBA is authorized to hold the consultation, as “[t]he SBA may also consult with Tribes and ANCs on significant regulatory or policy actions that do not have substantial Tribal implications but will impact the broader small business community … . Where such changes are being considered, the SBA will, to the extent practicable, make specific and direct efforts to include Tribes and ANCs in the outreach normally conducted with other stakeholders impacted by the changes.”

Of the specific “perceptions” shared in the public notice, the SBA also relayed 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.” Notably, the SBA did not indicate the source of this perception—whether based on other feedback or if this is a recurrent comment submitted as part of the mentor-protégé annual evaluations, which are filed by each protégé on the anniversary of the approval of the original Mentor-Protégé Agreement.

Beyond asking for feedback to address (or possibly even dispel) the “perceptions” regarding MPP issues, the SBA also has advanced two potential program “improvements” to support opportunities for small businesses. First, the SBA wonders if MPJVs should no longer benefit from exclusion of affiliation if pursuing multiple award contracts set aside for small businesses—meaning, notwithstanding the close-knit mentor-protégé relationship approved by the SBA, the MPJV does not take on the size status of the small business protégé even if all other MPJV requirements are met. Rather, the parties might still be considered affiliated based on the totality of circumstances. Instead, MPJVs could pursue single-award contracts or non-set-aside multiple-award contracts. By removing MPJVs from the set-aside pools for multiple-award contracts, the SBA posits that individual small businesses not participating in the MPP might be more successful at obtaining such set-aside contract awards.

The SBA’s second recommendation is to limit exclusion from affiliation for contracts or orders that do not exceed five years. Currently an MPJV that is awarded a set-aside contract requires certification regarding its small business size status at the time a proposal is submitted, and the MPJV can continue to perform under the contract for its duration, even if the underlying Mentor-Protégé Agreement expires. But the contract could have a performance or order period that exceeds five years, and the MPJV can continue to work on that contract even though the Mentor-Protégé Agreement has ended. In fact, MPJVs can even receive award after the Mentor-Protégé Agreement expires, as long as the Mentor-Protégé Agreement was active at the time size certification was required. The SBA contends that JVs are supposed to be limited-duration entities, questioning “whether a joint venture performing a contract or order that exceeds five years is truly a limited duration entity.”

Based on the comments it receives in response to the public notice, the SBA may propose new rules amending the MPP. Any proposed rule would be subject to public comment before it becomes effective. However, firms can avail themselves of the opportunity to provide comments now to attempt to shape—or perhaps even convince the SBA not to pursue—a future rulemaking revising the MPP, particularly if firms believe the SBA’s “perceptions” of potential issues posed by the current MPP are not representative of industry experience.

An Industry Review of the SBA’s “Perceptions” Expressed in the Public Notice

The MPP is meeting its goal of providing small businesses more prime contracting opportunities, as well as the experiential and programmatic benefits that come with holding prime federal contracts. This accomplishment should be celebrated. But instead, the SBA seems to be proposing modifications that could limit small businesses’ ability to hold prime contracts and succeed in the federal marketplace by limiting the utility of the MPP.

Past Performance

Per the SBA’s published notice, one “perception” is that small businesses enter into MPJVs to obtain relevant past performance needed to compete for other contract awards. Past performance is vital to any federal contracting firm, as the ability to demonstrate relevant past performance is often a primary consideration when determining whether to pursue a specific federal contract opportunity. For services providers, past performance can be one of the most heavily weighted evaluation criteria. Similarly for prime contractors building a team, a subcontractor’s past performance is an important consideration in teaming decisions. In federal procurements, past performance evaluations issued through the Contractor Performance Assessment Reporting System (CPARS) are an important resource used by agencies in making their source-selection decisions in federal procurements. Per the FAR, CPARS evaluations are used in future acquisitions to demonstrate that the contractor successfully conformed to the contractual requirements and standards, forecast and controlled cost, adhered to schedules, demonstrated reasonable and cooperative behavior, and fulfilled reporting requirements, among other aspects of performance. CPARS evaluations are issued by the contracting officer to prime contractors on an annual basis and at the conclusion of a contract. CPARS evaluations are not issued to subcontractors, although a subcontractor’s performance could impact the prime contractor’s CPARS review.

The MPP aids small businesses in gaining past performance, as they can claim past performance for the portion of work they perform as part of an MPJV. The JV receives formal evaluations in CPARS, which the federal government can access when making future procurement decisions. There are means for small businesses and others to obtain past performance evaluations if they do not have CPARS evaluations, but those means can be challenging to pursue. Additionally, a small business could ask its federal client to complete Past Performance Questionnaires (PPQ), which can be used to document the firm’s performance under a prior federal contract when competing for a new contract opportunity. But it is not always guaranteed that the PPQ will be submitted on a timely basis. Unlike CPARS evaluations that are issued annually and at the conclusion of the contract, a PPQ is requested by the small business when it is preparing its proposal. This diverts resources that could be spent preparing a winning proposal. There is also a chance that a client may not be able to complete the PPQ before proposals are due. It is not an ideal situation for any federal contractor to have to wait on someone else to give the contractor good marks. Ensuring that the past performance evaluation is readily available through CPARS is a much simpler, and more reliable, process.

In 2022, the SBA amended its regulations to provide small businesses with additional opportunities to obtain past performance references, either as a member of a joint venture or as a first-tier subcontractor on a federal prime contract. Under this final rule, large business contractors with a small business subcontracting plan must issue a past performance evaluation to first-tier small business subcontractors within 15 days of a request. The performance evaluation must be formatted to effectively mirror a government-issued CPARS evaluation. The small business is then able to use the evaluation from its prime contractor in future proposals to meet past performance documentation requirements included in the solicitation. The small business does not need to wait for a procurement to be released to request the performance evaluation as they would when requesting a PPQ. Rather, the small business can request an evaluation from a prime contractor once the small business has substantially completed its project or at another appropriate interval. The small business can then use past performance evaluations it has already on hand when a future procurement opportunity arises.

It is worth noting that in addressing comments received during the 2022 rulemaking, the SBA acknowledged that small businesses face impediments due to not having past performance ratings, stating that “SBA believes that, by implementing this rule, the government will be able to attract new small business prime contractors. This will enhance competition in government contracting and provide agencies with increased access to innovative products and services.” The 2022 rule also clearly explained how small businesses should market and receive credit for their performance under a JV, including MPJVs. The SBA sought to address multiple situations under which a small business could receive documented past performance ratings as part of a single rulemaking action. And small businesses are the beneficiaries of this improved process.

The SBA should broadly educate the procurement community on what this 2022 rule change means for small businesses trying to obtain past performance evaluations. The SBA concedes that the evaluations are vital to firms pursuing new contract opportunities, but simultaneously has done little to broadly promote this mechanism to help small businesses acquire the past performance evaluations. For example, SBA’s website does not make any reference to this new regulatory requirement. The SBA’s website includes a page on “Prime and Subcontracting” opportunities, touting how “the federal government helps small business get an opportunity to subcontract on federal prime contracts” and detailing a large business prime’s obligation to create small business subcontracting plans and to subcontract to small businesses of all socioeconomic classifications. The webpage details multiple rules and regulations that will apply. However, the SBA does not otherwise remind large business primes or notify small business subcontractors about the opportunity to obtain past performance evaluations.

Both small businesses and large businesses could benefit from notice and education regarding the past performance evaluation requirements imposed under the 2022 final rule relating to increased past performance reviews. Even small businesses looking to participate in the MPP should be cognizant of subcontracting opportunities. Subcontracting allows both small and large businesses to confirm that they work well with each other, share similar values in their contracting approach, and would generally be a good fit for the MPP. As noted above, small businesses should be aware that they can request a past performance evaluation from their prime contractors that have small business subcontracting plans. The small business will then have a past performance evaluation on hand that can be submitted with future proposals without requiring the firm to divert attention from proposal preparation. Large businesses also should be aware of the evaluation requirement so they can quickly respond to any requests for past performance evaluations. The SBA could facilitate issuance of the evaluations by providing large businesses with a template or standard form. This would provide further consistency to the process.

The SBA also should consider educating government procurement officials on the use of these prime contractor–issued past performance evaluations. The evaluations must be given the same consideration as a government-issued CPARS evaluation. Training government procurement officials to recognize and accept the evaluations will prevent small businesses from being unfairly penalized for using such evaluations in place of CPARS evaluations or PPQs. Furthermore, procurement officials should consider revising procurement templates to reference the regulation in their small business set-aside solicitation documents. This would both increase awareness of the requirement as well as provide confidence to the small business that their past performance evaluations will be fairly considered during scoring.

But even with the alternative mechanism for obtaining past performance evaluations that has been in place since 2022, past performance gained through participation in an MPJV is still important for many small businesses. Many procurements request evidence of past performance on a project of a certain magnitude or complexity. A small business frequently needs the opportunity to participate in the federal marketplace through an MPJV to obtain this past performance. The MPP remains the best avenue for small businesses of all socioeconomic classifications to participate in large and complex contracts within a prime role. In the alternative, government procurement officials should be cognizant when experience requirements would effectively preclude stand-alone small businesses from pursuing and winning set-aside contracts, effectively imposing an overly restrictive requirement that could limit competition. This issue will be discussed in further detail below.

Managing Complex Contracts

The MPP provides small businesses the opportunity to obtain vital experience managing complex contracts that they may not be able to obtain outside of the MPP. This is true even if there were other methods for small business JVs to pursue these set-asides. Each of the “perception”-based modifications that the SBA proposes to the MPP would have the effect of depriving small businesses of opportunities to gain experience that would allow them to thrive in the federal marketplace.

The SBA first suggests eliminating the exception to affiliation if the MPJV pursues multiple award contracts (MACs). This proposal overlooks that certain agencies largely rely on MACs, not single-award contracts, to procure their requirements. If a protégé is specifically looking to gain experience with those agencies and within a specific desired industry (as determined by its North American Industry Classification System (NAICS) code), the SBA’s new proposal could eliminate the opportunity for the small business. The small business may be dependent on support from a mentor in order to be competitive in this space. Therefore, before advancing this suggestion any further, the SBA should conduct research on agencies issuing MACs as opposed to single awards, and if there are certain NAICS codes under which the agencies tend to prioritize MPJVs. The SBA should seek feedback from protégés in the affected industries as to whether protégés are able to compete in their desired market outside of the MPP. Without this consideration, impacted small businesses may be deprived of the opportunity to gain necessary experience with certain agencies or in certain industries.

Similarly, managing a MAC is different than managing a single-award contract. Protégés may seek advice from mentors on how to position themselves to win a MAC award, as well as guidance on winning and managing work on orders competed under the MAC. Winning award of, and successfully performing under, a MAC necessitates a level of sophistication that is part of the mentor qualifications required under the SBA regulations. The change suggested by the SBA would cause small businesses to lose valuable hands-on experience in managing a MAC alongside their mentor. And this will also adversely impact the protégé’s ability to win or manage MACs on their own, potentially reducing the available contracting base.

The SBA also proposes limiting the duration of exclusion from affiliation so that MPJVs can only perform contracts with a period of performance of five years or less. Again, this limitation would make some contracts no longer viable opportunities for MPJVs, even if it is an opportunity under which the small business is seeking mentorship support. Some contracts are regularly awarded with 10-year, 15-year, or even longer periods of performance. These contracts set aside for small businesses would require significant restructuring to permit MPJVs to pursue them if the SBA ultimately imposes the limitation it is considering.

Additionally, small businesses benefit from mentor support in the performance of long-term multiyear contracts. The protégés gain insight into forecasting staffing and availability of resources necessary to execute the work. Mentors can support with budgeting and financial reporting. Business strategy around long-term contracts, especially task order contracts, is significantly different than managing short-term and single-purpose contracts. The SBA’s suggestions would deprive small businesses of meaningful mentoring, imposing unnecessary hurdles for small businesses, generally.

Transparency in Data

The SBA did not provide any meaningful insight as to the source of its “perception” that MPJVs have created an inequitable marketplace for individual small businesses. The SBA receives significant data from MPP participants. Each mentor-protégé team must provide annual evaluations so the SBA can assess how the relationship is working and confirm that the mentor is providing the agreed-upon business development assistance. The protégé also must detail the federal contracts awarded to a MPJV. The SBA could use these reports to collect more data to confirm or rebut its “perceptions,” including data such as whether the contract is a MAC or single award, the duration of the contract (base year and any options), and if the contract award was pursued specifically for an MPJV to achieve an agreed-upon business development goal for the small business protégé.

Collecting these data would allow the SBA to determine if the negative perceptions referred to by the SBA reflect the widespread opinion of the contracting community or merely the opinion of a vocal few. To the extent this kind of data can be published before taking regulatory actions (or as part of an announced notice of proposed rulemaking), small businesses and the contracting community can better respond to the SBA’s proposed actions.

Similarly, it would behoove the SBA to seek input from the broader small business community. This recent request for comments and Listening Sessions relates to potential updates to the HUBZone and 8(a) programs, requiring consultation with Tribal Concerns, ANCs, and NHOs. However, with the consolidation of the MPP, these changes could have a major impact on the entire small business community. The SBA needs to seek feedback from all small businesses to ensure that program changes are not disproportionately benefiting a subset and to ensure that all voices are heard.

Minimizing Changes

At its core, the SBA should subscribe to the “if it ain’t broke, don’t fix it” principle of rulemaking. If no changes are needed, the SBA should avoid making unnecessary changes to the MPP rules. Federal contracting is already fraught with frequent regulatory and procedural changes, forcing government contractors to constantly build their business on shifting sands. New SBA program changes add another level of complexity for small businesses to navigate. Rather than devoting energy to tracking and complying with these changes, small businesses may simply discontinue their participation in SBA programs. Those small businesses that remain may be better staffed or particularly savvy firms that are likely disproportionate beneficiaries of the “perceptions” advanced by the SBA. Unless there is a clear inequity that the future regulatory update will address without harming small businesses, the SBA should not make further sweeping changes to the MPP.

More Practical Fixes

Education on Contract Structure

Even if there are no changes made to the MPP, small businesses would still benefit if government procurement officials were trained on how contracts can be structured to benefit small businesses and increase small business participation as prime contractors. Agencies also would benefit, as enhanced training of their procurement workforce on these issues could increase the agency’s small business awards and spending, both of which the SBA evaluates on an annual basis and both of which are continual priorities for both Congress and the White House.

Procurement officials should understand that the contract or program ceiling may limit an individual small business’s ability to compete or perform. Small businesses may not have the capacity and resources needed to pursue a large contract vehicle, including necessary staff to perform work, capital to advance material and payroll costs, or facilities for performance. When work is not sufficiently disaggregated to facilitate small business participation, many small businesses cannot compete. Also, if the contract includes bonding requirements, many small businesses are limited in their ability to obtain a bond. While the SBA can provide substantial support to 8(a) firms in obtaining bonding, its ability to provide bonding assistance to other types of small businesses is limited to a guarantee, bid bond, payment bond, performance bond, or ancillary bond up to $14 million. Unless construction contracts or other contracts requiring bonding are sufficiently compartmentalized, the contractual bonding requirements create a significant barrier to entry for small business prime contractors.

Procurement officials also should consider whether contract duration is creating an unnecessary barrier to small business participation. While contracts with longer duration may provide efficiency to the government by reducing administrative burdens attendant to recompeting a requirement, these longer-term contracts may be more challenging for small businesses to pursue. Small businesses may be discouraged from competing for such contracts out of concern that the need to commit resources to one program for a longer period of time would prevent them from pivoting to other opportunities in a different market that would be more suitable for their growth. If the contract with a long duration also includes a bonding requirement, it may be impractical for a small business to have its overall bonding capacity tied up in one contract for that long, as doing so would limit its ability to pursue other work. Small businesses may prefer to pursue contracts with a shorter duration so that they can reclaim the bonding capacity, even if this means they are no longer able to participate in federal contracting.

If procurement officials are aware of the impacts that contract structure can have on a small business, they may be able to design procurements in a way that makes it easier for a small business to pursue the work and support the agency.

Sole-Source Contracts

When considering contract structure, the federal government should be assessing if work can be issued under a sole-source contract to a small business. These contracts may be issued without a competitive bidding process to 8(a) concerns, woman-owned small businesses (WOSBs), HUBZone business concerns, and service-disabled veteran-owned business concerns (SDVOSBs). The sole-source award must meet certain criteria, such as determination that the awardee is a responsible contractor, and the award is made at a fair and reasonable price. In the version of the Fiscal Year 2025 National Defense Authorization Act passed by the US House of Representatives, veteran-owned small businesses (VOSBs) also would receive a sole-source contracting program in the Department of Defense, as currently only the Department of Veterans Affairs can issue VOSB sole-source awards. The Senate version does not contain the same provision.

The federal government and other small businesses should have confidence that sole-source contracts are awarded to qualified small businesses, as each of these designations requires certification by the SBA. This includes awards to MPJVs that take on the certification status of the protégé.

One limitation on the use of sole-source contracts involves low contract maximum values. For contracts with nonmanufacturing NAICS codes, non-entity-owned 8(a) concerns, WOSBs, and HUBZone sole-source awards cannot exceed $4.5 million, and SDVOSB sole-source awards cannot exceed $4.0 million. Entity-owned 8(a) participants that are tribally owned or ANC-owned concerns can receive a sole-source contract with a higher value, but a justification may need to be prepared depending on the value, which will vary depending on whether the government agency is defense or civilian. As 8(a) firms are not subject to the lower sole-source limits that other types of firms typically face, it is more likely that an MPJV with an 8(a) concern would pursue work through a sole-source contract. However, any MPJV with one of the specified participants would be eligible for at least some type of sole-source award.

Another limitation of sole-source contracts is that the agency may not issue a sole-source contract to a WOSB, HUBZone, or SDVOSB if there is a reasonable expectation that at least two firms of the applicable designation would bid on the contract. In that case, the contract must be set aside for competitive procurement for eligible participants instead of issued on a sole-source basis. 8(a) procurements also must be set aside unless the SBA accepted the activity as a sole-source 8(a) procurement on behalf of Tribal Concerns, ANCs, and NHOs. In this respect, Tribal Concerns, ANCs, and NHOs have an added procurement method not available to general small businesses. However, none of the “perceptions” referenced in the SBA’s public notice indicate that these sole-source contracts are disproportionately awarded to MPJVs. As with other small business program benefits, ensuring that both industry and procurement officials are fully educated is a laudable goal. But, for now, there is no indication that the sole-source programs require an overhaul to level the playing field for small businesses not participating in the MPP.

Acquiring a Protégé

While not common, some mentors may use participation in the MPP as a means to conduct due diligence on a small business prior to acquiring it. If the small business is acquired during or immediately after conclusion of the Mentor-Protégé Agreement, that defeats the purpose of developing a small business to successfully compete in the federal marketplace. To prevent this from happening, the SBA should consider prohibiting mentors from acquiring protégés for a certain period of time after termination or expiration of a Mentor-Protégé Agreement. For example, if a mentor acquires a former protégé within three years of the conclusion of the Mentor-Protégé Agreement, the SBA may consider preventing that mentor from participating in the MPP for three years. This promotes participation of mentors who are truly focused on helping their small business protégé partners grow and succeed on their own.

Conclusion

The MPP has been proven successful in supporting the small business community to more fully participate in the federal marketplace. The consolidated program is achieving positive results and should not be significantly altered just a few short years after its creation. There are many practical changes that the SBA can advocate for within federal procurements to support enhanced contracting opportunities for small businesses, without implementing far-reaching and drastic changes to the MPP based on nothing more than subjective “perceptions” lacking substantiation in the public record.

Both large and small businesses must be aware of the ever-changing regulatory landscape affecting small business participation in the marketplace. When the SBA and other government agencies request feedback on the impacts of the Program, the contracting community should be responsive. Amendments to the regulations are not an academic exercise. They impact all contractors’ ability to fully participate in the marketplace and serve their government clients. They have real and lasting impacts on the viability of all businesses.

The MPP is successful because industry is actively participating in it. Industry should continue to vocalize its support for the program and highlight the benefits that accrete to both small businesses and the government. Additionally, industry should be proactive in engaging in all programs designed to uplift small businesses, such as providing subcontracting opportunities, issuing past performance evaluations, teaming with small businesses taking on set-aside contracts, and reporting on outcomes to provide transparency.

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