SBA Proposes Key Changes Impacting Small Business Government Contractors and Mentor-Protégé Joint Ventures

The United States Small Business Administration (SBA) recently announced a proposed rule and a separate notification that could potentially impact the landscape for small business government contractors and investors in the government contracting industry.

• Under the current regime, small business contractors that are merged or acquired generally maintain their size and status for the life of a given contract (including orders thereunder). Under the proposed rule, however, if the small business is unable to recertify as small following a triggering event (i.e. merger, acquisition, or sale), the business would be ineligible for any set-aside orders or options under a multiple-award contract (MAC).
• Under the SBA’s Mentor-Protégé Program, a protégé and its approved mentor may form a joint venture to compete for any contract that the protégé individually qualifies for by its size and socioeconomic status. The notification hints at forthcoming proposed rules related to mentor-protégé joint ventures and long-term government contracts. These include potentially eliminating the exception to affiliation between an approved mentor and its protégé for MACs or alternatively limiting any exclusion from affiliation to contracts or orders that do not exceed five years.



Small Business Recertification Requirements

The proposed rule seeks to simplify and reorganize the SBA’s regulations addressing the date used to determine size for size certifications and determinations. Additionally, it proposes substantive changes to regulations regarding size recertification and to consolidate its size recertification requirements into a new uniform set of rules under 13 C.F.R. § 125.12.

In general, the size of a small business concern (including its affiliates) is determined at the time the concern submits its initial offer that includes price. If the small business receives a contract award, the business is generally considered small throughout the life of that contract (including orders thereunder). This is true even where the small business is merged or acquired. There are three narrow exceptions to the general rule, however. But according to the SBA “both [the United States Government Accountability Office (GAO)] and [the SBA’s Office of Hearings and Appeals (OHA)] misinterpret SBA’s regulations,” resulting in the “misapplication of SBA’s size recertification regulations.” 

Under the proposed rule, the SBA seeks to clarify the three exceptions to the general rule as follows:

1. General Services Administration (GSA) Federal Supply Schedule (FSS) Orders or Blanket Purchase Agreements (BPAs). Traditionally, there has been a recognized exception to the general rule for set-aside orders or BPAs placed against an FSS contract, meaning that size status would be determined as of the date of the underlying FSS contract award (or the date of its recertification for an option exercise). However, the proposed rule, if finalized, would eliminate this exception. Under the proposed rule: (a) if a triggering event for recertification occurs (i.e. merger, sale, or acquisition), size would be determined as of the date of the triggering event; and (b) when a contracting officer requests recertification of size with respect to a set-aside order or agreement, size would be determined as of the offer date for that order or agreement. In either case, size would be determined as of the date of the triggering event or recertification for the particular order or agreement.
2. 8(a) Business Development Program Sole-Source Awards. For 8(a) sole-source awards issued against MACs, the proposed rule states that the concern must be eligible (i.e. qualify as small and be an active participant in the 8(a) program) at the time of any 8(a) sole-source award. Therefore, the prospective awardee of an 8(a) sole-source award would have to qualify as small for the assigned NAICS code and meet all other eligibility criteria, regardless of whether the MAC was originally set-aside or awarded on an unrestricted basis.
3. MACs and Disqualification. Regarding MACs, the proposed rule states that when any scenario outlined in the proposed § 125.12 (i.e. merger, acquisition, or sale) triggers a size recertification, size would be determined as of the date of the triggering event. If the business does not certify as small following the triggering event, this would be deemed a “disqualifying recertification,” making the business ineligible for any further set-aside orders under a MAC. Unlike the current regulations, there would be no distinction between restricted or unrestricted MACs.

The proposed rule clarifies the SBA’s intent related to the coined “180-day rule.” Under the current regulation, the “180-day rule” states that if a merger, sale, or acquisition occurs within 180 days after a small business submits an offer and the business cannot recertify as small following the transaction, the business will not be a small business eligible to receive award. The proposed rule explains that recent OHA cases have improperly carved out an exception for task order proposals under restricted MACs.

If finalized, the proposed rule would alter the landscape for government contractors and investors in the government contracting industry. Under the current regime, small business contractors that are merged or acquired maintain their size and status for the life of a given contract (including orders), unless required to recertify. Under the proposed rule, however, if the small business concern is unable to recertify as small, the concern would be ineligible for any further set-aside orders or options under a MAC (including FSS contracts). The proposed rule does not clarify whether a final rule would apply to existing contracts. Comments on the proposed rule are due by Oct. 7, 2024.

Mentor-Protégé Joint Ventures

Under the SBA’s Mentor-Protégé Program, a protégé and its approved mentor may form a joint venture to compete for any contract that the protégé individually qualifies for by its size and socioeconomic status. Approved mentors and protégés are generally exempt from a finding of affiliation. Recently, the SBA published a notification in the Federal Register stating that it would be holding consultation meetings to receive feedback from tribes related to, among others, policy changes addressing joint-venture participation in the SBA’s programs and mentor-protégé affiliation.

According to the SBA, there is a perception that mentor-protégé joint ventures are winning an inordinate number of orders issued under small business MACs and that small businesses enter joint ventures to seek MACs due to the difficulties in obtaining past performance and experience. The SBA is therefore considering “whether to propose eliminating the exception to affiliation between an SBA-approved mentor and its protégé for multiple award contracts to address this concern.” This would allow mentor-protégé joint ventures to seek and obtain single award small business contracts but make those joint ventures ineligible for multiple award contracts.

Alternatively, the SBA is considering whether to allow an exclusion from affiliation for a joint venture between a protégé firm and its mentor only for contracts or orders that do not exceed five years. This is because the SBA believes “that a joint venture should not be an on-going entity, but something with limited scope and limited duration.”

Since then, the SBA published a document clarifying the scope of one of its proposed rules. The document clarifies that the proposed rule does not address the exclusion from affiliation available to mentor-protégé joint ventures, noting that those issues are outside the scope of the proposed rule. Nonetheless, the SBA still seeks comments on prospective policy changes addressing joint-venture participation in the SBA’s programs. The clarifying document again highlights the SBA’s consideration whether to: (a) eliminate the exception to affiliation between an SBA-approved mentor and its protégé for multiple award contracts, or (b) allow an exclusion from affiliation for a joint venture between a protégé firm and its mentor only for contracts or orders that do not exceed five years.

To the extent the SBA decides to propose amendments to its mentor-protégé joint venture policies beyond those outlined in the proposed rule, the clarifying document states that the SBA would do so through a separate proposed notice and comment rulemaking action.