An 8(a) mentor-protege joint venture didn’t qualify for an SDVOSB set-aside because the mentor firm was not a small business.

In a recent decision, the SBA Office of Hearings and Appeals held that a SDVOSB-specific regulation requires all members of an SDVOSB joint venture to be small–notwithstanding language in the SBA’s size regulations and 8(a) Program regulations specifying that an SBA-approved mentor-protege joint venture may bid, as a small business, on any government contractor or subcontract, provided that the protege is small.

OHA’s decision in EKCG, LLC, SBA No. VET-255 (2016)  involved a DOJ solicitation for information security services.  The solicitation was issued as a total SDVOSB set-aside under NAICS code 541519 (Other Computer Related Services).

After evaluating proposals, the DOJ announced that EKCG, LLC had been selected for award.  An unsuccessful competitor subsequently filed a SDVOSB status protest against EKCG.  The competitor stated that EKCG was a joint venture between Espire Services, LLC and Knowledge Consulting Group, Inc.  The competitor contended that because KCG was an “acknowledged large business,” the EKCG joint venture did not comply with the SBA’s SDVOSB joint venture regulations, which require both parties to the joint venture to be small businesses.

EKCG responded to the SDVOSB protest.  EKCG argued that Espire and KCG were parties to an SBA-approved 8(a) mentor-protege relationship, and that mentor-protege joint ventures are eligible to bid as a small business on any Federal procurement, provided that the protege is a small business.

The SBA’s Director of Government Contracting held that, under 13 C.F.R. 125.15(b), all parties to a SDVOSB joint venture must be small businesses.  The D/GC rejected the argument that EKCG’s status as an approved 8(a) mentor-protege joint venture exempted it from this requirement.  The D/GC issued a decision finding EKCG to be ineligible for award of the DOJ SDVOSB set-aside contract.

EKCG filed an appeal with OHA.  EKCG argued, in part, that the SBA’s size and 8(a) Program regulations (specifically, 13 C.F.R. 121.103(h) and 13 C.F.R. 124.520(d)) permit a mentor and protege to joint venture as a small business for any procurement so long as the protege qualifies as a small business.  EKCG argued that it was contrary to these regulations for the D/GC to insist that an SDVOSB joint venture be comprised exclusively of small businesses, where the joint venture is an SBA-approved 8(a) mentor-protege joint venture.

OHA disagreed.  It wrote that a “close reading” of 13 C.F.R. 121.103(h) and 13 C.F.R. 124.520(d) “demonstrates that the regulations grant mentor-protege joint ventures an exception to affiliation for size purposes, but do  not indicate that a mentor and protege also are exempt from other program-specific requirements.”  OHA continued:

[N]either S 121.103(h) nor S 124.520(d) states that mentor-protege joint ventures are exempt from program-specific requirements if the mentor and protege choose to compete for procurements under such programs.  Similarly, there is no indication in the SDVO joint venture regulation itself–or in the corresponding regulations pertaining to HUBZone joint ventures and WOSB joint ventures–that the rules are not applicable to mentor-protege joint ventures.  I therefore find no basis to conclude that a mentor and protege are excused from program-specific regulations, in addition to enjoying an exception from affiliation.

OHA affirmed the D/GC’s SDVOSB determination, and denied EKCG’s appeal.

In my view, the small business requirement of 13 C.F.R. 125.15(b) should be viewed through the lens of the size regulations in 13 C.F.R. part 121, where a “small business” is defined.  The SBA’s size regulations, in turn, provide that an 8(a) mentor-protege joint venture may bid “as a small business for any Federal government prime contract or subcontract, provided the protege qualifies as a small business . . ..”  Moreover, 13 C.F.R. 121.103(h) specifically discusses the special mentor-protege rule in the context of non-8(a) contracts “e.g., small business set aside, HUBZone set aside” suggesting that the SBA’s rulemakers intended the exception to apply to mentor-protege joint ventures competing under socioeconomic programs like the SDVOSB program.  So while OHA’s decision isn’t necessarily unreasonable, I don’t think it’s the best reading of the regulations–or the best interpretation of the intent of the SBA’s rulemakers.

Of course, my view isn’t what counts.  Unless and until EKCG is reversed, 8(a) mentor-protege joint ventures should stand forewarned: if the mentor is a large business, the joint venture likely is ineligible for an SDVOSB set-aside contract.

Update – July 22, 2016: The SBA appears to have effectively reversed EKCG.  In its final rule adopting the new universal mentor-protege program, the SBA updates its regulations to specify that “A joint venture between a protege firm that qualifies as an SDVO SBC and its SBA-approved mentor (see [sections] 125.9 and 124.520 of this chapter) will be deemed small provided the protege qualifies as small for the size standard corresponding to the NAICS code assigned to the SDVO procurement or sale.”  Section 124.520, of course, is the regulatory section authorizing 8(a) mentor-protege JVs.  So while the new rule doesn’t mention EKCG by name, it appears to effectively overturn that case.  The new rule will take effect in late August 2016–until then, we should assume that EKCG will remain in effect.