Small business as an engine of economic growth

The Obama administration’s multifaceted approach to the recession has focused recently on the central role played by small business enterprises as the engines of economic growth and job creation.

In October, the Small Business Administration (SBA) responded with a far reaching Notice of Proposed Rulemaking (NPRM) containing several important changes that will significantly impact the small business regulatory environment. In a signal of the importance of these changes, the SBA extended the initial comment period until Jan. 28 and scheduled several public hearings on the NPRM.

One of the biggest changes proposed by SBA involves the mentor-protégé program. Under a mentor-protégé agreement, SBA allows large companies to affiliate with and guide small businesses through the federal contracting process. SBA has exempted these entities from normal affiliation rules which aggregate the size of the large company with the small company to determine compliance with SBA size standards. If an approved SBA mentor-protégé agreement exists, then SBA size standards do not apply, and the mentor-protégé entity (typically a joint venture) can bid on 8(a) and other SBA set aside contracts as a small business.

The advantages of such a program are obvious to both large and small businesses, and over time other federal agencies have implemented their own mentor-protégé programs. However, the new rules make clear that unless these other agency programs are approved by separate legislation, any mentor-protégé exceptions must be approved by SBA. In essence, the proposed rules prevent other federal agencies from developing their own affiliation and size rules.

 In another suggested change to the mentor-protégé program to be considered in a subsequent final rule, the current practice of allowing the 8(a) affiliation exemption to apply to other small business set aside contracts outside the 8(a) program will be reviewed. Finally, the new rules suggest limitations on the number of protégés a mentor may have and increase to the number of mentors that a protégé may have, as well as allowing nonprofit entities to participate as mentors.

Several proposed changes to joint venture affiliation rules are closely tied to the mentor-protégé changes discussed above. Under prior SBA rules, joint ventures were limited to pursuing three federal contracting “opportunities” under one joint venture agreement within a two year period. Contracting opportunities have been interpreted to include contract proposals and not just contract awards. This forced many joint ventures to reorganize as a follow-on joint venture to submit additional proposals. The proposed rules make clear that the same joint venture may receive up to three contract awards in a two year period as a result of multiple proposals.

In addition, SBA will measure the three contract limit as of the date that a contract proposal is submitted. Thus, a joint venture that has received two contract awards in the past may submit additional contract proposals before receiving its third award, and if it receives an award on each additional proposal, it may perform on all contracts without violating the three contract affiliation rule.

In acknowledging that these changes would not prohibit follow-on joint ventures, SBA has also suggested an alternative to the proposed three contract award rule that would limit the number of contracts that could be awarded to the same joint venture partners to a total of five. The new rules also make important changes to joint venture profit sharing arrangements and work allocations between joint venture partners.

SBA is also proposing extensive revisions to the rules used to determine whether a company is economically disadvantaged for purposes of qualifying for the 8(a) business development program. The new rules discuss how SBA will evaluate a company’s total assets, gross income, retirement accounts, and spousal assets when considering a business owner’s eligibility for funding and credit. In addition, the new rules will require the 8(a) disadvantaged manager to actually reside in the United States and spend a part of each month in the company’s main business office.

A final highlight in this area is a new regulation that would take into account a disadvantaged business owner’s military service obligation by allowing him/her to nominate someone to control the business’ daily operations when called to active duty. Current rules can result in program termination if the small business owner does not exercise substantial and daily control over the business.

Many other proposed changes are included in the new rules and require a close analysis by both large and small businesses hoping to win federal government contracts. While the rules discussed above are not yet final, it is likely that many of them will become part of any final regulations adopted by SBA.

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