Understanding the Latest SBA Rule for Small Businesses
The Small Business Administration (SBA) recently released its final Clarifications to Other Small Business Programs rule, which will take effect on January 16, 2025. These updates are designed to foster greater small business participation in federal contracting opportunities, with a focus on creating fairer, clearer, and more streamlined processes. While the rule leaves some issues unresolved, particularly around mentor-protégé affiliations, it introduces several notable updates, including new guidelines for joint ventures (JVs), the Mentor-Protégé Program (MPP), and recertification requirements.
Here’s a breakdown of the changes that small businesses need to know.
Key Updates to the Mentor-Protégé Program and Joint Ventures
- For-Profit Mentors Only. Under the new rule, only for-profit businesses can act as mentors in the SBA’s MPP. This ensures that mentors are business concerns that have a vested interest in supporting the growth of small businesses.
- Restrictions on Multiple Joint Ventures. One of the more significant changes involves the limitation on mentors. A mentor is now prohibited from having two different JVs acting as contract holders on the same multiple-award contract at the same time. This aims to prevent potential conflicts of interest and create a more equitable playing field.
- Work Share Requirements. The new rule specifies that the managing partner of a JV (typically a small business) must perform at least 40% of the total contract value, which includes labor and other costs. This requirement also applies to Mentor-Protégé Joint Ventures (MPJVs), ensuring that small businesses maintain meaningful participation in contracts.
- Non-Similarly Situated Partners. The updated rule emphasizes that non-small business partners in a JV cannot perform primary or vital work on a contract. Small business partners must maintain operational control and meaningful participation, making sure that the contract is truly beneficial for the small business.
- Protege Rights and JV Exit Strategies. Proteges in a mentor-protégé relationship gain the right of first refusal to purchase the mentor’s interest in a JV. If this purchase is financed under commercial terms, it will not trigger affiliation, providing proteges with a path to greater control and independence.
- Joint Venture Size Status Recertification. JVs must now recertify their size status if any partner undergoes a merger, acquisition, or sale. For contracts lasting more than five years, recertification must occur 120 days before the fifth year and each subsequent option period. This ensures that only businesses that still meet the small business criteria can participate in long-term contracts.
Recertification and Eligibility Updates
- Trigger Events for Recertification. Any merger, acquisition, or sale requires recertification within 30 days of the transaction. For long-term contracts (five years or more), recertification must happen before the fifth year and at each option period.
- Consequences of Failing Recertification. If a business fails to recertify, it can continue performing on existing contracts but will be ineligible for new set-aside orders. Additionally, it can only remain eligible for options on single-award or unrestricted contracts, not on multiple-award contracts. This encourages businesses to maintain their eligibility status to compete for new contracts.
- Small Business Eligibility for Joint Ventures. JVs may still recertify as small even after two or more years if the protégé remains eligible under an active Mentor-Protégé Agreement. This provision helps to keep long-term collaborations intact, ensuring that small businesses benefit from ongoing support.
Past Performance Evaluation Changes
- Evaluation of Joint Ventures. When assessing past performance for JVs, agencies must now consider the performance of the JV entity, the managing partner, or the individual JV members equitably. This helps ensure that smaller businesses within a JV are fairly evaluated for their contributions.
- Subcontractor Past Performance. Small business subcontractors will now be fairly evaluated for their past performance in federal contract competitions. This ensures that smaller companies receive recognition for their significant work on past projects, which can have a positive impact on their future opportunities.
- Reduced Past Performance Requirements. For protégés or small JV partners, agencies may accept past performance on smaller or fewer contracts than required for larger partners. A successful performance on smaller contracts will be rated equivalently to a larger contract performed by a mentor or large partner, providing more opportunities for small businesses with limited experience.
Ostensible Subcontractor Rule
The Ostensible Subcontractor Rule has been reinforced to prevent small businesses from unduly relying on a large subcontractor to perform core work. If a large subcontractor is performing the primary work, this could result in disqualification from small business eligibility. This rule applies at both the contract and order levels under multiple-award contracts, promoting true small business ownership and control.
Partial Set-Asides and Small Business Reserves
Under the new rule, agencies are permitted to use both partial set-asides and small business reserves within the same procurement, allowing for more flexible and targeted approaches to ensuring small businesses benefit from federal contracting opportunities.
What Does This Mean for Small Businesses?
These changes mark a significant step forward in promoting small business involvement in federal contracting. With clearer rules and more opportunities for joint ventures, mentor-protégé relationships, and past performance evaluations, small businesses will have better access to these critical opportunities. However, it is important to note that some provisions will not be effective until January 17, 2026 – giving businesses time to adjust to the new rules.
As always, small businesses should stay informed about these updates and consider consulting with legal or compliance experts to ensure they are prepared for the upcoming changes. The SBA’s final clarifications promise to create a more level playing field for small businesses, helping them compete more effectively for government contracts.
For more information on this SBA ruling and how to grow your business in federal contracting, please reach out to Blake Harvey at [email protected].
