SBA Mentor-Protégé Joint Ventures: Even GAO Appears a Tad Confused

The SBA’s All Small Mentor-Protégé program offers a tremendous opportunity for participants to pursue set-aside contracts as joint venture partners.  But misunderstandings and misconceptions about how SBA mentor-protégé joint ventures work are pervasive.

One very common misconception is that the SBA must pre-approve a mentor-protégé joint venture.  In most cases, that’s not so.  In a recent bid protest decision, even the GAO appeared a little confused, repeatedly mentioning SBA approval of a joint venture even though no such approval was required for the contract in question.

Before we get to the GAO’s decision, a brief background on SBA mentor-protégé agreements may be helpful.  For many years, the SBA operated a special mentor-protégé program for participants in the 8(a) Business Development Program.  Under the 8(a) mentor-protégé program, mentor companies (which are usually large businesses) provide various forms of business development assistance to their protégés.

Why would a large business agree to provide targeted business development assistance to an 8(a) company?  Well, some of them may do it for the warm fuzzy feelings they get by helping small, disadvantaged businesses.  But when the SBA established the 8(a) mentor-protégé program, it knew that most prospective mentors would seek a more concrete benefit.  So, to encourage prospective mentors and protégés alike to form these business development relationships, the SBA created a special exception to its ordinary joint venture rules.

Under the SBA’s size regulations, a joint venture ordinarily qualifies for a set-aside contract only if both members are small under the NAICS code assigned to the acquisition.  If, for example, an agency issues a small business set-aside solicitation under NAICS code 541310 (Architectural Services), a joint venture ordinarily cannot qualify unless both members fall below the associated $7.5 million size standard.

The 8(a) mentor-protégé program exempts the mentor from the analysis.  Under the 8(a) mentor-protégé program, so long as the protégé qualifies for the prime contract by size and socioeconomic status, and so long as the joint venture meets the SBA’s regulatory criteria, the mentor member of the joint venture can be a large business–even a multi-billion dollar large business.  SBA mentor-protégé programs are the only way in which a joint venture between a small business and large business can qualify for set-aside contracts.

Although 8(a) mentor-protégé joint ventures aren’t limited to pursuing 8(a) contracts, most 8(a) mentor-protégé joint ventures exclusively or primarily pursue 8(a) work.  And, under SBA’s 8(a) joint venture regulations, the SBA must approve a joint venture before the joint venture can be awarded an 8(a) contract.

Importantly, this SBA joint venture approval requirement is limited to cases in which the joint venture is pursuing 8(a) work.  In other words, once a mentor-protégé agreement is approved, any subsequent requirement for SBA approval turns on the type of contract the joint venture will pursue.  If the joint venture is pursuing an 8(a) contract, the SBA must separately approve the joint venture before award of that contract (although the SBA is considering eliminating the requirement).  If the joint venture will pursue some other type of contract, such as a small business set-aside, the SBA need not–and in fact, will not–pre-approve the joint venture for that contract, although the SBA will review the joint venture for eligibility (including ensuring that the joint venture agreement meets all mandatory regulatory requirements) if a protest is filed after announcement of the award.

In late 2016, the SBA established the All Small mentor-protégé program.  The ASMPP, as it’s called (because everything in government needs an acronym!), allows any small business–not just an 8(a) participant–to be a protégé.  And like the 8(a) mentor-protégé program, the ASMPP regulations allow small protégés and large mentors to form joint ventures to pursue set-aside contracts.

Similar to the 8(a) mentor-protégé program, the ASMPP does not impose an SBA pre-approval requirement for joint ventures, except when the joint venture will pursue an 8(a) contract.  You don’t have to take my word for it.  Here’s what the SBA says on its fact sheet titled “Joint Ventures in the All Small Mentor-Protégé Program”:

SBA does not review or approve JV agreements prior to award for non-8(a) contracts.  If the JV is seeking to win an 8(a) contract, SBA will follow the 8(a) program rules for reviewing and approving the joint venture agreement.

There’s one more nuance we should cover.  If a joint venture will pursue a VA SDVOSB or VOSB contract, the joint venture must be separately verified as an SDVOSB or VOSB by the VA’s Center for Verification and Evaluation.  Again, this applies only to VA SDVOSB and VOSB contracts; non-VA SDVOSB and VOSB contracts fall under the SBA self-certification rules.

Whew, that’s a lot.  Let’s sum it up.  For a large business and small business to be eligible to win a set-aside contract as joint venture partners, the following pre-approval rules apply:

  • 8(a) Contracts: SBA must approve mentor-protégé agreement and SBA must separately approve joint venture.
  • VA SDVOSB/VOSB Contracts: SBA must approve mentor-protégé agreement and VA CVE must separately verify joint venture; no separate SBA joint venture approval required.
  • All Other Set-Aside Contracts: SBA must approve mentor-protégé agreement; no separate joint venture pre-approval required.

No doubt about it: this is confusing stuff.  With so many different rules and requirements, it’s no wonder that the procurement community as a whole seems rather uncertain of the rules governing SBA mentor-protégé joint ventures.

That finally takes us to the GAO’s decision in HealthRev, LLC; DLH Solutions, Inc., B-416595, B-416595.2 (Oct. 25, 2018).  The HealthRev case involved a VA SDVOSB set-aside solicitation for consolidated mail order pharmacy operations.

As you know from our lengthy discussion above, if a joint venture consisting of an SDVOSB and a large business wished to submit a proposal for this VA SDVOSB set-aside solicitation, the joint venture would need the SBA to approve a mentor-protégé agreement and the CVE to separately verify the joint venture as an SDVOSB.  The SBA would not be required to separately approve the joint venture.

HealthRev was a joint venture between an SDVOSB named e-Revs supply chain LLC and DLH, a large business.  HealthRev wished to submit an offer for the solicitation.  However, by the due date for proposals (July 23, 2018), HealthRev had not been verified by the VA.  Apparently, HealthRev had not even submitted a verification application.  HealthRev filed a GAO bid protest challenging the terms of the solicitation, arguing in part that the VA had not allowed it sufficient time to become a verified SDVOSB joint venture.

The GAO began its analysis by describing the membership of the HealthRev joint venture.  That’s where things start to get a little confusing.  Discussing the relevant factual background, the GAO wrote that “[t]he joint venture applied for recognition as a qualifying mentor-protégé joint venture under the SBA’s Mentor-Protégé program on June 6, and received the SBA’s approval of the joint venture on July 3.”

After discussing HealthRev’s knowledge of the VA’s procurement and HealthRev’s failure to act promptly to establish its joint venture, the GAO again repeatedly suggested that HealthRev needed to obtain the SBA’s prior approval of its joint venture agreement:

Notwithstanding all of the agency’s clear information relating to the fact that it intended to set aside the requirement for SDVOSB participation, the protester took no action to establish its joint venture or seek SBA’s approval of that joint venture until June 6, well after the agency announced its intention to acquire the CMOP requirement using an SDVOSB set-aside, and also after the agency issued its RFP.  The protester has offered no explanation for why it waited more than a month after the agency announcement of the solicitation to establish its joint venture and seek the SBA’s approval of the arrangement.  Further, the unavailability of the agency’s website for applying for certification of the joint venture’s status as an SDVOSB concern during portions of May and June could not have been the cause of HealthRev being unable to apply for verification of its joint venture by VA, since the joint venture was not even approved by the SBA until July 13, well after the website was again available.

The SBA denied HealthRev’s protest, writing “[i]n the final analysis, the record shows that the paramount cause of HealthRev being unqualified to offer on the agency’s requirement was the firm’s failure to diligently pursue the SBA’s approval, and the VA’s verification, of the joint venture.”

A reader of this GAO decision would very likely come away with the impression that the SBA must pre-approve a joint venture before that joint venture can be awarded a VA SDVOSB set-aside contract.  Indeed, by my count, the GAO referred to SBA approval of the joint venture five separate times in its decision.  The problem, of course, is that the SBA simply does not pre-approve joint ventures except for 8(a) contracts.

So what’s going on here?

My best guess is that the GAO, like so many others in the broader procurement community, got a little confused about SBA’s precise role in the mentor-protégé joint venture process–and used imprecise terminology as a result.  My assumption is that HealthRev submitted an ASMPP mentor-protégé agreement to the SBA on June 6 and that the SBA approved the mentor-protégé agreement on July 3.

Because DLH was a large business, the SBA’s approval of a mentor-protégé agreement was a prerequisite for HealthRev to qualify as an SDVOSB for this procurement.  But approving a mentor-protégé agreement is quite different from pre-approving a joint venture agreement–a separate step involving a separate document, and a step the SBA performs only in connection with 8(a) contracts.

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