Expired 8(a) Mentor-Protégé Agreement Sinks JV’s Eligibility

An 8(a) mentor-protégé agreement, which expired one year after its approval by the SBA, did not protect the 8(a) protégé and its mentor from affiliation–and meant that their 8(a) mentor-protégé joint venture was an ineligible large business.

A recent size appeal decision of the SBA Office of Hearings and Appeals is a cautionary tale for 8(a) protégé and their mentors, and highlights the importance of securing timely SBA reauthorization of 8(a) mentor-protégé agreements.

OHA’s decision in Size Appeal of North Star Magnus Pacific Joint Venture, SBA No. SIZ-5715 (2016) involved a joint venture between North Star Construction and Engineering, an 8(a) program participant, and North Star’s mentor, Magnus Pacific Corp.

On July 5, 2014, the SBA approved a mentor-protégé agreement between North Star and Magnus Pacific.  The mentor-protégé agreement stated that the initial period of the agreement was one year.  North Star, the protégé, was required to request continuance of the mentor-protégé agreement within 60 days prior to its expiration.  The SBA’s letter approving the mentor-protégé agreement similarly stated, “[t]his agreement shall expire after one year, unless SBA approves an extension.”  The letter reiterated that North Star was to request an extension within 60 days prior to expiration.

On May 12, 2015, the U.S. Army Corps of Engineers released a solicitation for flood risk management and ecosystem restoration.  The solicitation was designated as a total small business set-aside under NAICS code 237990 (Other Heavy and Civil Engineering), with a corresponding $36.5 million size standard.  Offers were due on July 17, 2015.

On July 6, North Star and Magnus Pacific signed an amendment agreeing to extend their mentor-protégé agreement.  The amendment was later submitted to North Star’s local SBA District Office for approval, although neither the Joint Venture nor the SBA could determine the exact date when the SBA received the extension request.

On July 17, 2015, North Star and Magnus Pacific submitted a proposal in response to the Corps’ solicitation.  The offeror was a joint venture between the two parties, named North Star Magnus Pacific Joint Venture (which, for simplicity’s sake, I’ll just call “the Joint Venture”).

In its evaluation of proposals, the Corps determined that the Joint Venture had proposed the lowest price.  However, the Corps found the Joint Venture to be unacceptable for responsibility-related reasons.  As required by law, the Corps then referred the matter to the SBA for a responsibility determination under the SBA’s Certificate of Competency process.

During the course of the COC evaluation, questions arose as to whether the Joint Venture was an eligible small business in the first instance.  The SBA Area Office then initiated a formal size determination review.

As the SBA’s size review was ongoing, the SBA District Office approved an extension of the mentor-protégé agreement.  On October 30, 2015, the District Office informed North Star that the SBA “approves your request to extend the mentor-protégé agreement between [North Star] and [Magnus Pacific] for one year through July 4, 2016.”

The SBA Area Office was made aware of the District Office’s extension.  The SBA Area Office noted that the District Office’s letter did not state an effective date, and was therefore ambiguous as to when the extension commenced.  The SBA Area Office determined that the extension was effective on October 30, 2015–the date the District Office approved the extension.

Because the original one-year period had expired on July 5, and because the new period did not commence until October 30, the SBA Area Office found that North Star and Magnus had not had an active SBA-approved 8(a) mentor-protégé agreement in place on July 17, when the Joint Venture submitted its bid.  The Joint Venture, therefore, was unable to avail itself of the 8(a) mentor-protégé exception from affiliation.

The resulting affiliation between North Star and Magnus caused the Joint Venture to exceed the $36.5 million size standard.  On November 20,2015, the SBA Area Office issued a size determination finding the Joint Venture to be ineligible for the Corps solicitation.

The Joint Venture filed a size appeal with OHA.  The Joint Venture argued, in part, that the SBA Area Office erred by finding that the mentor-protégé agreement was not in effect on July 17, 2015.  The Joint Venture contended that, under the SBA’s 8(a) Program regulations, a joint venture agreement remains in effect until the 8(a) participant’s next annual review.

OHA began by noting that, under the SBA’s regulations, “[g]enerally, two firms that form a joint venture to perform a contract will be considered affiliates for purposes of that contract.”  However, there is a special exception from affiliation for joint ventures between 8(a) Program participants and their SBA-approved mentors.  OHA wrote that “[t]he regulations are clear that SBA must approve the mentor/protégé agreement before the two firms may submit an offer as a joint venture . . . in order for the joint venture to receive the exclusion from affiliation.”

In this case OHA held, the Joint Venture “has not proved that the Area Office clearly erred in determining that an approved mentor-protégé agreement was not in place as of the date [the Joint Venture] submitted its proposal . . ..:”  OHA noted that the mentor-protégé agreement and SBA’s letter to North Star both suggested that the agreement would expire on July 5, 2015.

Further, “it is noteworthy that North Star and Magnus executed Amendment 1 on July 6, 2015, exactly one year after their mentor-protégé agreement was approved.”  This “indicates that North Star and Magnus themselves were under the impression that the approval of the mentor-protégé agreement would lapse on July 5, 2015, one year after its approval.”

OHA held that the SBA District Office’s October 30 approval did not apply retroactively.  Under the SBA’s regulations, “size is determined as of the date the concern submits its initial offer including price.”  Here, the Joint Venture submitted its proposal on July 17.  “Accordingly,” OHA wrote, “actions from the District Office subsequent to this date are not relevant to whether there was an approved mentor-protégé agreement in place as of the date [the Joint Venture] submitted its proposal.”

OHA denied the Joint Venture’s size appeal.

The 8(a) mentor-protégé exception from affiliation is a powerful tool that can allow joint ventures to successfully bid on set-aside contracts, even where one member of the joint venture (the mentor) is a large business.  But as the North Star Magnus Pacific Joint Venture case demonstrates, the special exception is only valid if there is an active, SBA-approved 8(a) mentor-protégé agreement in place on the date of the joint venture’s initial priced proposal.

Leave a Reply

Your email address will not be published. Required fields are marked *