The Department of Defense is proposing a major overhaul of the regulations governing its “pilot” mentor-protege program for small businesses.

The proposed rule, which was published in the Federal Register on September 23, 2016, makes a number of important changes, including adding new eligibility criteria, placing limits on the amount of time a protege can participate in the program, adding new required elements to mentor-protege agreements, and much more.

The DoD’s proposed rule responds to the 2016 National Defense Authorization Act, which called for the DoD to amend its mentor-protege program.  The proposed rule makes the following important changes:

• Purpose.  The current DoD mentor-protege program regulations (which are found in an appendix to the DFARS), describe the primary purpose of the program as being to “provide incentives to major DoD contractors . . . to assist protege firms.”  The proposed rule switches the focus, stating that the primary purpose of the program is to “[e]nhance the capabilities of eligible small business concerns to perform as subcontractors under DoD contracts and other contracts and subcontracts . . ..”
• Mentor Eligibility Expansion.  The proposed rule would expand the universe of potential mentors.  The current definition primarily covers large businesses operating under at least one approved subcontracting plan negotiated with DoD or another federal agency.  In contrast, the proposed rule would allow any eligible large business to serve as a mentor, regardless of whether the large business is operating under a subcontracting plan.  The proposed rule would also allow small businesses to serve as mentors, if approved by the DoD’s Small Business Programs office.
• Protege Eligibility Expansion.  The proposed rule also expands the universe of potential proteges.  The current rule requires that a protege be a small disadvantaged business (SDB), a WOSB, a HUBZone, an SDVOSB, or an eligible entity employing the severely disabled.  The proposed 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.
• Protege Eligibility Limitations.  It isn’t all good news for prospective proteges, however.  The proposed rule adds two new restrictions on protege eligibility.  First, a protege must be less than half of the size standard under its primary NAICS code.  In my view, this is a poor policy choice; small is small, and I don’t like the thought of restricting eligibility in this manner.  Second, a protege must be “not owned or managed by individuals or entities that directly or indirectly have stock options or convertible securities in the mentor firm.”
• Protege Term Limitations.  In addition to limiting the universe of potential proteges, the proposed rule limits the length of time a protege can participate in the mentor-protege program.  The proposed rule specifies that “a protege firm may not be a party to more than one DoD mentor-protege agreement at a time, and may only participate in the Program during the 5-year period beginning on the date the protege firm enters into its first mentor-protege agreement.”
• Affiliation and Control.  The proposed rule would require the mentor-protege agreement to contain seven separate “assurances” regarding affiliation and control, such as a statement that “the mentor firm does not share, directly or indirectly, with the protege firm ownership or management of the protege firm” and that “the mentor firm does not have an agreement, at the time the mentor firm enters into a mentor-protege agreement, to merge with the protege firm.”  Some of these requirements, however, appear to go too far and/or misunderstand the SBA’s rules.  For example, the DoD requires the parties to certify that they have not been parties to a joint venture during the 2-year period before entering the mentor-protege agreement “unless such joint venture was approved by SBA prior to making an offer on a contract.”  However, the SBA only approves joint ventures for 8(a) contracts; joint ventures for all other contracts (including small business, SDVOSB, HUBZone, and WOSB set-asides) are not pre-approved by SBA.  The DoD’s proposal, as written, would appear to exclude parties who have joint ventured for these types of contracts, even under the SBA’s new “all small” mentor-protege program.  Further, even under the 8(a) Program, the SBA doesn’t approve joint ventures “prior to making an offer on a contract,” but rather need only approve the joint venture before award of the 8(a) contract.  Here’s hoping DoD takes a closer look at these portions of its proposal before they become final.
• Joint Ventures.  The new rule doesn’t prevent DoD mentors and proteges from forming joint ventures (although it doesn’t provide an exception from affiliation to allow them to do so; a large mentor would only be able to joint venture with its protege for set-aside contracts under the SBA’s all small mentor-protege program or 8(a) mentor-protege program).  However, the proposed rule specifies that “DoD may not reimburse any fee to the mentor firm for services provided to the protege firm . . . or for business development expenses incurred by the mentor firm under a contract award to the mentor firm while participating in a joint venture with the protege.”
• Progress Reports.  The proposed rule expands on the current requirements for the mentor’s semiannual progress report.  For example, the proposed rule requires the mentor to specify whether there were any loans to the protege or any joint ventures between the mentor and protege.
• Name. The proposed rule doesn’t eliminate the term “Pilot” from the DoD Pilot Mentor-Protege Program.  This “Pilot” program was created by the 1991 NDAA, so perhaps it’s time for Congress to drop that particular word from the program’s name.

The SBA’s new all small mentor-protege program has been getting all of the press recently, including on this blog.  But even when that program is up and running over the next few months, the DoD mentor-protege program will continue to offer a separate and viable way for mentors and proteges to come together–and may be of special benefit to small businesses who are more interested in serving as DoD subcontractors than as small prime contractors themselves.