Common Misconceptions about the All Small Mentor-Protégé Program and Mentor-Protégé Joint Ventures

Attention all government contractors, it’s myth-busting time!

By now, you have probably heard about the Small Business Administration’s “All Small” Mentor-Protégé program. After a long wait, the SBA implemented the program a couple years ago. Before its implementation, the only SBA mentor-protégé program was the 8(a) Mentor-Protégé Program, which – as its name implies – was open to 8(a) contractors and their mentors only. With the addition of the All Small Mentor-Protégé Program, other types of small businesses can now form mentor-protégé relationships.

If used correctly, this program can greatly increase contracting opportunities for participating small businesses, as well as their mentors. However, the program is often misunderstood. But not to worry – – we are here to clear up some of the most common misconceptions about the program.

Myth: Mentor-Protégé pairs can be formed between large and small concerns for the sole purpose of joint venturing for small business set aside contracts.

Truth: It is true that, if the SBA approves a mentor-protégé relationship, the mentor and the protégé can form a joint venture that, if set up correctly, can avoid certain types of affiliation and therefore remain “small.” Accordingly, those joint ventures may be eligible for set-aside contracts. However, the SBA will not approve mentor-protégé relationships that are formed solely to enable a large business to joint venture with a small business and gain access to set-aside contracts.

Pursuant to 13 C.F.R. § 121.103(h)(2), companies that form a joint venture are considered affiliated for purposes of any contract for which the joint venture competes. This means that if a large business and a small business form a joint venture, the size of that joint venture will be determined by comparing the aggregate, total size (i.e. size of the large business + size of the small business) with the applicable size standard. In other words, generally speaking, a joint venture between a large contractor and a small contractor will not be small and will be ineligible for small business set-aside contracts. If, however, the large business and the small business are part of an approved mentor-protégé pair, the joint venture can compete for any small business set-aside contract for which the protégé is eligible, provided that the joint venture is set up correctly.

It is unsurprising, then, that large and small businesses often seek to form approved mentor-protégé pairs so that they can joint venture together for set-aside contracts. However, the mentor-protégé regulations make it very clear: A mentor-protégé relationship “will not be approved if SBA determines that the assistance to be provided is not sufficient to promote any real developmental gains to the protégé, or if SBA determines that the agreement is merely a vehicle to enable the mentor to receive small business contracts.” So what does this mean for you? It means that you must always keep in mind the purpose of the program when applying for approval of a mentor-protégé relationship. The program was designed to help small businesses receive business guidance and development assistance – it was not designed to help large businesses gain access to, and revenue from, set-aside contracts. The key to getting your mentor-protégé agreement approved is to outline the specific business goals of the protégé concern, and provide details of how the mentor will help the protégé achieve those goals. If the parties are not prepared to engage in real mentoring, this program is not for them.

Myth: Once you have an approved mentor-protégé agreement, you are ready to compete for contracts.

Truth: Approval of your mentor-protégé relationship is just step one. Contrary to what many contractors think, a “mentor-protégé” is not an entity that cannot compete for contracts. The mentor and the protégé are still two separate companies, albeit with a special SBA-approved relationship. Those two companies still need to form a teaming / subcontracting relationship, or form a joint venture, to compete for contracts together. If they choose to form a team to compete for set-aside contracts, the small, protégé concern with the small business eligibility would be the prime contractor, with the large mentor company as a subcontractor. If the mentor and protégé form a joint venture, the joint venture itself can compete for set-aside contracts as the prime contractor, provided that the JV is set up correctly.

Myth: A joint venture formed between a mentor and a protégé is automatically eligible for any set- aside contract for which the protégé is eligible.

Truth: A joint venture formed between a mentor and a protégé is not automatically eligible to compete for set-aside contracts. Rather, it must comply with certain SBA regulations to be eligible. These other regulations impose strict requirements including specific provisions that must be included in the JV agreement, the percentage of work the protégé concern needs to perform, and the types of certifications that need to be made. You need to make sure you comply with these regulations, or your JV will not be eligible to compete for set-aside contracts. Moreover, failure to comply with these additional regulations can be a basis for suspension and debarment. It is, therefore, critically important to make sure you understand the applicable regulations and have set up your joint venture correctly.

Myth: Once you are approved as a mentor-protégé pair, you can just proceed with competition for, and performance of, contracts without any continued obligations to the SBA regarding your mentor- protégé relationship.

Truth: There are ongoing reporting and compliance requirements that the mentor and protégé need to satisfy to maintain approved mentor-protégé status. The SBA continues to monitor mentor-protégé requirements even after approval. For example, every year, the protégé must provide the SBA a report detailing, among other things: the technical and management assistance provided by the mentor to the protégé; all loans to and/or equity investments made by the mentor in the protégé; all subcontracts awarded to the protégé by the mentor and vice versa (with the value of such subcontracts); all federal contracts awarded to the mentor-protégé pair as a joint venture (along with the value of such contract, the percentage of work being performed by the protégé, and the percentage of revenue accruing to each JV partner); and a narrative describing the success such assistance has had in addressing the developmental needs of the protégé. The protégé must report the mentoring services it receives by category and hours. This demonstrates just how much importance the SBA puts on the developmental assistance provided by the mentor to the protégé. The SBA wants to ensure that the mentor-protégé relationship is being used properly, for its intended purpose; if no mentoring is going on, the SBA will may terminate a mentor-protégé relationship.

In short, while the All Small Mentor-Protégé program offers a lot of opportunities, there are hidden risks and pitfalls, as well. The regulations governing these programs can be complicated and confusing, and non-compliance can have very serious consequences. If you seek to form a mentor-protégé relationship, or joint venture with your mentor or your protégé, you should seek legal assistance to ensure that you are compliant and minimizing the risks associated with misuse of this program.

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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Michael A. Richard

Associate

Michael is an attorney in Obermayer’s Government Contracting Department, where he excels at getting clients to the settlement table. Michael’s tenacity is truly a force to be reckoned with. Over the past...

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