Make sure to check those boxes
We've talked before about NAICS arbitrage as a way to navigate government size standards for small-business set asides. Today, though, I want to talk about another tool in the toolkit: mentor-protégé joint ventures.
To the uninitiated, a mentor-protégé relationship sounds like it might be sort of like a sort of old-timey apprenticeship where the mentor imparts wisdom to the protégé. You might imagine a conversation like this:
MENTOR: Hark, protégé, and learn from my years of toil through responding to RFPs. I shall teach you the strange and mysterious ways of the Federal Acquisition Regulations. And from the sweat of our jointly ventured brows, you too may successfully prime a contract one day.
PROTÉGÉ: Thank you, mentor! I swear it on my family's SAM registration that I shall bring honor to our joint venture. And, one day, we shall ride victorious with an single-award IDIQ.
But, unfortunately, you'd mostly be wrong. No, the mentor-protégé program is a formal program established by agencies (including the SBA) to help small companies learn how to play the government-contracts game. And, it is also a way for a large company to kind of sort of get advantage of small-business set asides. That's not entirely right, but it's close enough.[1] Here's how that conversation works:
MENTOR: Listen up, small. We're gonna set up a contract-vehicle-specific unpopulated joint venture. We're going to put some cash into the JV and use our past performance to win that vehicle. It's going to be set aside for veteran-owned small businesses, which you are, and our JV is going to qualify! It's going to be so awesome.
PROTÉGÉ: Wow! That's amazing... can you do that?!
MENTOR: Are you even listening right now, protégé? This is business development assistance[2] I'm trying to impart on you! Ugh. Yes, of course you can do this. Now, here's what happens next. You are going to run this unpopulated joint venture. That's right. We're gonna establish a governance structure where you have the majority share in all of this. With me so far?
PROTÉGÉ: This is just incredible. THANK YOU, mentor! I promise—
MENTOR: Hold on. There's one more thing. We're going to agree right now, you are going to do at least 40% of the work on the contract. Say it after me: you have to do at least 40% of the work. Ok?
PROTÉGÉ: Ok... I guess that makes sense since we're a small business and it's set aside for a veteran-owned small business and you're an other-than-small business. I think we could probably do most—
MENTOR: No. Stop. Are you even trying to win? C'mon, protégé. Don't get it twisted. We are going to do up to 60% of the work. Like, be real. It's a contract for like a bajillion dollars. You can't do the work yourself. This is a joint venture. Joint venture. Got it? We've gotta get ours, right? We good, small?
PROTÉGÉ: I guess so? Let's go win that work.
Right? It's kind of incredible.
Now, there are some catches. For one, in the SBA program, the mentor-protege relationship must be approved by the SBA's Associate Administrator for Business Development. And the regulations explicitly provide that an "agreement will not be approved if SBA determines that the assistance to be provided is not sufficient to promote any real developmental gains to the protégé, or if SBA determines that the agreement is merely a vehicle to enable the mentor to receive small business contracts." So, like, if the conversation above happened just like that, you might have some trouble getting approved. Not legal advice, but if you're a mentor and you're trying to get a JV approved by the SBA, it's probably a bad look to be super explicit about how you're going to make money off the thing.
There are other catches, too. For one, there are formalities! Like, the joint-venture agreement itself needs to be written down and any changes to the agreement needs to be pre-approved by SBA. You need a bank account. You get the idea.
And for another, the agreement needs to "[i]temiz[e] all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each, where practical" and specify "the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the small business partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section, where practical".
In other words, and again definitely not legal advice, you've gotta spell things out in a way that makes everyone feel comfortable that it's really a joint venture and not just a end run around small-business set asides.
So, here's a thing that happened recently.
On October 20, 2021, the U.S. Small Business Administration (SBA) Office of Government Contracting — Area VI (Area Office) issued Size Determination No. 06-2021-071, concluding that NWI&T Atkins SB JV, LLC (NWI&T) is an eligible small business for the subject procurement. NWI&T is an unpopulated joint venture between North Wind Infrastructure and Technology, LLC a/k/a LBYD Federal, LLC (North Wind) and its SBA-approved mentor, Atkins North America, Inc. (Atkins).
On appeal, Focus Revision Partners (Appellant) maintains that the size determination is clearly erroneous, and requests that SBA's Office of Hearings and Appeals (OHA) reverse. For the reasons discussed infra, the appeal is granted.
Oopsies! Now, I am not going to bore you with all of the details of the opinion,[3] but I am going to call out a few highlights, because they are (1) funny and (2) instructive.
First, a thing to know is that the original joint-venture agreement (JVA) at issue here was for a different contract. So the parties needed to amend the agreement so they could compete for the contract at issue. By itself that would not have been a big deal, but the agreement also required that any amendments to the agreement needed to be in writing and approved by both parties. And, well, that didn't happen:
[T]he JVA Addendum was unsigned by either of the joint venturers, and thus does not constitute a valid “addendum” as defined by NWI&T's JVA. According to the JVA, a proper addendum requires “the approval of each of the Members”. Moreover, the JVA characterizes an addendum as a type of “amendment”, which must be “in writing and executed by both Venturers”... In the instant case, the JVA Addendum was not signed by North Wind or by Atkins, and thus is not a valid “addendum” or “amendment” under the terms of the JVA.
So, look, if you're going to have a JVA and you say that the JVA can only be amended in writing with approval by all of the parties, you have to do the procedural step of signing the amendment. There are formalities!
The second thing to know here is that the Administrative Judge concluded that the the JVA lacked detail about how the joint venture would work in practice. The JVA, as amended, basically said that a guy from the protégé's company would be sitting on top of a bunch of people from the mentor's company, and everything will all work out fine. But that's not enough to cut mustard:
[T]he JVA, as supplemented by the JVA Addendum, does not contain sufficient detail to meet all the requirements of 13 C.F.R. § 125.8(b)(2) and (c). The JVA Addendum affirms that each venturer “will provide the needed equipment and facilities to perform the work that it conducts for [NWI&T]”, but fails to “[i]Itemiz[e] all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each”, as required by 13 C.F.R. § 125.8(b)(2)(vi). Similarly, the JVA Addendum does not explain how the joint venturers will source labor or will perform the contract, as required by 13 C.F.R. § 125.8(b)(2)(vii) and (c). Rather, the JVA Addendum merely indicates that North Wind's role “must be more than administrative or ministerial” and that Mr. Johnson will “ensure” that North Wind will perform “at least 40%” of the total work. The JVA Addendum does not delineate the types, or percentage, of work or that each joint venturer will perform, nor identify labor categories each joint venturer will contribute in performing the instant contract.
In other words, you can't just wave your hands vaguely and claim that "the protégé is totally going to make sure that it's all going to work out". You have to provide some detail about who's going to what work and how they're going to do it. At least a "general description" is needed. That's just part of the deal.
So a lesson to be learned here is that you really need to make sure to check the boxes if you're going to use the mentor-protégé program to take advantage of a small-business set aside. If you don't have your paperwork in order, you can lose a contract.
And, well, what an important lesson! If you're a protégé, losing at the SBA because someone failed to sign documents or, I guess, attach an Excel spreadsheet with your labor categories or cost buildup or whatever is probably not exactly the way you hoped to earn your stripes. But then, learning early on that you need to have your paperwork in order feels like such an invaluable education in govcon! Let us all celebrate that win for the mentor-protégé program!
[1] Ok, look. Before I get the SBA and a bunch of lawyers all worked up, I know that a prerequisite for a mentor-protege relationship is "a commitment and the ability to assist small business concerns" and that mentors must provide "business development assistance to protégé firms and to improve the protégé firms' ability to successfully compete for federal contracts." But also, the set-aside thing?
[2] See?
[3] Sorry, lawyers. Gonna need to read it yourselves.