DoD Mentor-Protege Program: Major Changes Finalized

The DoD has issued a final rule making major changes in the DoD “Pilot” Mentor-Protege Program.  The rule took effect on March 23, 2018.

Among the major changes, DoD has both expanded and contracted the universe of potential proteges–and has included a mandatory certification that seems to completely misunderstand the SBA’s joint venture rules and processes.

Here is my take on the good, the bad, and the ugly from the final rule.

The Good

Unlike the SBA’s mentor-protege program, the DoD mentor-protege program isn’t open to “ordinary” small businesses–instead, an eligible protege must fit within a permitted category.  The old rule limited the universe of proteges to small disadvantaged businesses (including 8(a)s), SDVOSBs, HUBZones, WOSBs, and entities employing the severely disabled.

The final rule adds (1) an entity controlled and owned by an Indian tribe; (2) an entity controlled by a Native Hawaiian organization; (3) an entity owned and controlled by socially and economically disadvantaged individuals (which sounds a lot like an SDB to me); (4) a so-called “non-traditional defense contractor,” which is defined as “an entity that is not currently performing and has not performed any contract or subcontract for DoD that is subject to full coverage under the cost accounting standards . . . for at least the 1-year period preceding the solicitation of sources by DoD for the procurement or transaction”; and (5) an entity that currently provides goods or services in the private sector that are critical to enhancing the capabilities of the defense supplier base and fulfilling key DoD needs.

Expanding the universe of potential DoD proteges is a good step–although it’s undermined by a rather nonsensical size limit I’ll discuss momentarily.

The final rule also extends the program through September 30, 2021, which is of course a good thing.  Even though it was first established in 1990, the DoD Mentor-Protege Program remains a “pilot” program and requires occasional renewal.  Perhaps in 2020, Congress will honor the program’s 30th birthday by finally removing the “pilot” label.

The Bad

The final rule adds a new size restriction: it says that an eligible protege must be “[l]ess than half the Small Business Administration (SBA) size standard for its primary North American Industry Classification System (NAICS) code.”  I guess if the SBA’s program is the All Small Mentor-Protege Program, the DoD’s is now the “Half Small.”

I don’t like restricting proteges in this manner.  In my view, small is small.  According to the final rule, there are only 85 proteges currently participating in the DoD Mentor-Protege Program.  Imposing a Half Small limit will almost certainly further reduce the number of firms participating in the program.

The final rule also imposes several requirements designed to ensure that there is no affiliation or control between mentor and protege.  In my view, some of these go too far.

For instance, the final rule requires the mentor and protege to certify that “[t]he owners and managers of the mentor firm are not the parent, child, spouse, sibling, aunt, uncle, niece, nephew, grandparent, grandchild, or first cousin of an owner or manager of the protege firm.”  This rule goes well beyond the SBA’s affiliation regulation, under which familial relationships cause a presumption of affiliation only when the individuals in question are “married couples, parties to a civil union, parents, children, and siblings.”  And even then, the SBA rule is rebuttable by showing a “clear line of fracture” between the firms; there doesn’t seem to be any such rebuttal opportunity at DoD.

Similarly, the final rule requires the parties to certify that “[t]he mentor firm has not, during the 2-year period before entering into a mentor-protege agreement, employed any officer, director, principal stock holder, managing member, or key employee of the protege firm.” Again, this rule goes beyond the presumptions established in the SBA’s affiliation rules and appears completely unrebuttable, no matter what role the individual in question held at the mentor firm, and regardless of the individual’s ability to control the protege.

I certainly understand that the DoD wants to ensure that the program isn’t abused, but I think these overly broad rules aren’t the right way to do it.  Instead of completely preventing firms with these relationships from entering the program, the DoD would be better-served to ask for this information as part of the application, then refer the matter to the SBA for a formal size determination if the answers indicate a potential concern.

The Ugly

The very worst of these restrictions seems to completely misunderstand the SBA’s joint venture rules and processes.  The DoD mentor-protege program now requires a mentor and protege to certify that “[t]he mentor firm has not engaged in a joint venture with the protege firm during the 2-year period before entering into a mentor protege agreement, agreement, unless such joint venture was approved by SBA prior to making any offer on a contract.”

There are two glaring problems with this requirement.

First, the SBA doesn’t approve joint ventures for non-8(a) contracts.  For small business, SDVOSB, HUBZone, and WOSB/EDWOSB contracts, a joint venture must follow the SBA regulations, but the SBA will only review the joint venture if there is a protest of the apparent successful offeror.  Because it is impossible to obtain SBA’s approval for non-8(a) joint ventures, any mentor and protege who formed a joint venture for a non-8(a) contract would be precluded from participating in the DoD mentor-protege program.

Second, even for 8(a) contracts, the SBA typically doesn’t approve joint ventures “prior to making an offer on a contract.”  Rather, the SBA need only approve the joint venture before award of the 8(a) contract.  So even if the mentor and protege had been approved by SBA for an 8(a) contract, they would likely be precluded from participating in the DoD mentor-protege program, simply because of the way the SBA 8(a) joint venture process approval process works.

In practice, this rule would seem to effectively prevent anyone from applying to the mentor-protege program if the parties had formed a joint venture within the prior two years.  Because a single joint venture is almost never indicative of affiliation or control, I don’t see any good public policy purpose for this rule.  And since the restriction seems to stem from a fundamental misunderstanding of the SBA’s joint venture processes, this part of the final rule is downright ugly.

The Rest 

These aren’t the only changes included in the final rule, of course.  Among other revisions, the final rule limits proteges to one DoD mentor-protege agreement at a time, and imposes a five-year eligibility period for each protege.  The final rule also imposes new reporting requirements designed to allow the DoD to better track the progress of mentor-protege relationships.

For those considering a DoD mentor-protege application, it’s well worth reading the entire final rule to become familiar with the new requirements–good, bad, ugly, and otherwise.