New rules coming for small business contractor mentor-protégé arrangements

The Small Business Administration has proposed two important rule changes for federal contractors. One has to do with popular mentor-protégé partnerships. It seems to stem from the popularity of these arrangements. Maybe the government thinks they’re too successful. Attorney Shane McCall, a partner at Koprince McCall Pottroff, joined the Federal Drive with Tom Temin for an analysis.

Interview transcript:

Tom Temin Mr. McCall, good to have you with us.

Shane McCall Yes, thanks for having me.

Tom Temin And mentor-protege is a very popular way for small businesses to get into federal contracting. In fact, if I’m correct, even the mentor can be a small business, but one is smaller than the other. Just give us the outlines of what the program to begin with is all about and then we’ll get into the rule changes.

Shane McCall Sure. Well, there’s different match programs for different federal agencies. We focus a lot in our practice on the Small Business Administration’s mentor-protege program. Currently, there’s close to 2,000 approved mentor-proteges on SBA’s list, so it is definitely very popular. And it like you said, it’s open. It’s mainly larger businesses that are mentors, but it doesn’t have to be. And they have various items of assistance that they help a less experienced company with as the protege. And if they do it under SBA’s program, they have sort of the blessing of SBA and they get some advantages of that. Chief among them are they get an affiliation exception, meaning if the mentors providing some assistance to a small business, that assistance that’s approved under the mentor-protege agreement does not form the basis of affiliation. So it’s kind of an insulation from risk that a lot of companies really appreciate that. And then one other big benefit is a large business and small business can form a joint venture if they have an approved mentor-protege agreement. And then that joint venture qualifies as a small business or an 8A or SDVUSB service disabled if the protege company meets those requirements.

Tom Temin Right. So a protege can’t just ride along and do nothing, nor can it do all the work because then it’s the old camel’s nose in the tent idea. So what does SBA want to change? From my reading of what you’ve written, it looks as if they’re trying to get more fine-grained ability to evaluate proteges.

Shane McCall Yeah, it’s giving it seems to be giving a little more guidance to the agencies when the agency is evaluating the past performance of the joint venture. Usually in a mentor person, you get the two joint venture parties. So evaluating kind of, okay, who has to have who can have more experience, who can have less experience. And it used to just be currently the rule basically says the agency may consider the past performance experience and other qualifications of each joint venture party. So it just kind of says may consider and SBA discovered through some court cases that that left a little too much leeway up to the agencies or at least that’s how SBA views it. And so they want to provide some more details and guidance to the agencies when evaluating past performance and similar type metrics. So they’ve got that example, for example, and I looked at this and honestly, I think it’s a little confusing, but the example they give to provide this detail talks about the dollar value, the specific dollar values. So the agency may require the protege to have one or two contracts valued at $10 million or $8 million for a certain kind of a hypothetical solicitation, but can’t require the protege to have five contracts and can’t require the protege to have contracts valued at $20 million. And in that example, basically it’s saying the protege can’t be required to have the same level of projects as the mentor would have. So that was kind of the understanding from a lot of GAO decisions and court of federal claims decisions. And now SBA is kind of putting their spin on it. So it’s clear, yeah, it has to be smaller. Now, I found what I found confusing is are they saying it literally has to be less than 50%? Is that example saying that or is it just saying it can be one dollar less? And we’re just giving an example. I think SBA totally could make that a little clearer. Or maybe they don’t maybe they don’t want to hamstring the agencies and they’re just saying it has to be less. And if you use this example then you’re doing what SBA suggests you should do.

Tom Temin But essentially it sounds like well, two things. One, they wouldn’t say that if some agencies hadn’t been doing it and people somebody complained about it. But it’s also a way of, I guess, ensuring that the protege on this new contract that I’m awarding, that protege has also done similar work at all and therefore will look at how they did on a smaller size contract. So we know they can do any work whatsoever.

Shane McCall Exactly. Yeah. I think SBA said there has to be some level of experience from the protege, but it can’t be required to be the same exact value as the more experienced company. So, yeah, they are trying to make that balance between, there has to be some experience, but it doesn’t have to, it can’t be required to be as significant as the mentor. So how do they make that balance? I think that example is trying to get at that. That sort of tug of war between some experience, but not too much experience, kind of a Goldilocks type scenario.

Tom Temin We’re speaking with Shane McCall. He’s a partner at the law firm Koprince McCall Pottroff. And this is proposed at this point, but it sounds like it’s something that they felt agencies were doing wrong or overdoing maybe in evaluating the proteges, essentially.

Shane McCall Yeah. And I will say some of the parts of the rules suggest that the agency in some cases doesn’t have to require a protege experience, and that’s acceptable. So then it’s they’re kind of going, I that’s why I find it a bit confusing that they’re saying if they require the protege to have experience it, it can’t be the same level as the mentor. It can’t be held to that same standard.

Tom Temin Right. Otherwise it’s not really a protege at that point.

Shane McCall Right. Exactly.

Tom Temin It ought not to be a protege. You can’t have like, you know, Accenture, a protege to Booz Allen or something, to make an absurd example.

Shane McCall Yeah. And that’s that language. Yeah, that. See that again? It says, a procuring activity has discretion whether to require the protege to demonstrate some level of past performance. In my mind, with I say discretion, that can mean zero. So that kind of it actually does a little bit contrast with how some of the decisions have interpreted that rule, which they said, okay, sure, but it’s still up that they still want to leave that discretion up to the agency.

Tom Temin Well, I’m glad you’re also confused about it because that gives solace to the rest of us. And that’s not the only mentor-protege rule change that SBA is contemplating.

Shane McCall Yeah, there are some smaller ones in this proposed rule, and there’s this proposed rule kind of is talking about the hub zone program, but it mentions a lot of other small business programs. SBA is also kind of in general asking for input about kind of the entirety of mentor-protege joint venture concept. But they haven’t really, they’ve signaled they have sort of questions about it and they’ve indicated there’s some, you know, scheduled talks, kind of discussion periods and they want to hear from people about I guess they’re asking the question, are too many awards going to mentor, per se joint ventures?

Tom Temin Yeah, this has been coming up. This has kind of been the drumbeat lately. It sounds like the whole idea of mentor-protege is becoming a little suspicious.

Shane McCall That’s what SBA is suggesting, which, you know, kind of came as a surprise to a lot of us in the federal contract industry because SBA promotes a project program very, very heavily. So it’s interesting that they’re questioning kind of did we go too far? Is our program too, too, too broad or something like that? But they haven’t given many specifics about what they would propose to change it.

Tom Temin And what’s their timeline for commenting on these things?

Shane McCall Well, at this point, I haven’t seen any proposed rules on kind of the broader question. And I know that they’re having discussion sessions this fall. So I would think they would come up with something. It might not be until next year.

Tom Temin So they’re floating balloons at this point.

Shane McCall Right? Yes. And they’ve mentioned it. And, you know, there was notice about kind of a tribal discussion. And they mentioned in their notice or their SBA has put in the questions out in different notices that they send out. And then this more this rule that we talked about at the beginning, this proposed rule. Those comments are due October 7 on the joint venture past performance issue. And then the other mentor protege aspects of that one are kind of more clarifying and clean up to the Mentor Protege program. For instance, the SBA had come out a couple of years ago in a different setting, such as in conferences, and said that you can have the same mentor twice in a row. And then they clarified that in their rule to make that clear. And now they’re concerned that people think that would somehow allow more than a 12-year period of mentor-protege relationships. So they’re cleaning that up. They’re saying that a mentor has to be a for-profit business as well. So there’s some little clarifications, but those are going to just make things clearer for mentors and proteges.

Tom Temin Lots to keep an eye on. Shane McCall is a partner at the law firm Koprince McCall Pottroff. Thanks so much for joining me.

Shane McCall Thank you for the opportunity. Great talking to you.

Tom Temin We’ll post this interview along with a link to his blog on mentor-protege at federalnewsnetwork.com/federaldrive. Friday, Shane returns with analysis of an even bigger rule change having to do with hub zone contracting. Hear the Federal Drive on demand. Subscribe wherever you get your podcasts.

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