The Small Business Administration (SBA) recently revealed some significant changes to the way agencies will give small business credit to large entities subcontracting to a mentor-protégé joint venture in which they serve as a partner. The policy change – which the SBA couched as a clarification – came buried in a final rule detailing a number of other revisions to the 8(a) program and other government contracting programs.

Prior to the revision, the SBA’s regulations would not allow “[c]redit [to] be taken for [subcontract] awards made beyond the immediate next tier,” while noting that:

“Purchases from a corporation, company, or subdivision that is an affiliate of the prime contractor or subcontractor are not included in the subcontracting base. Subcontracts by first-tier affiliates shall be treated as subcontracts of the prime.”¹

The mentor-protégé program generally excludes joint ventures from affiliation on the basis of that relationship alone. Because the language in 13 C.F.R. § 125.3(a)(1)(i)(B) prevents entities from receiving credit for purchases from “affiliates of the prime contractor or subcontractor,” some understood the paragraph to mean the SBA would allow a prime contractor to count an award to a mentor-protégé joint venture in which it is a partner for small business subcontracting credit. The final rule clarifies this was never the SBA’s intent. The SBA revised that portion of the regulation to state that the SBA would not allow “[c]redit [to] be taken for [subcontract] awards made beyond the immediate next tier,” now noting that:

“Purchases from a corporation, company, or subdivision that is an affiliate of the prime contractor or subcontractor, or a joint venture in which the contractor is one of the joint venturers, are not included in the subcontracting base. Subcontracts by first-tier affiliates, and subcontracts by a joint venture in which the prime contractor is one of the joint venturers, shall be treated as subcontracts of the prime.”²

The SBA further added, “where an other-than-small contractor subcontracts to its own unpopulated joint venture, the work performed by a small-business member of that joint venture is considered a subcontract and the contractor may take subcontracting credit for that small-business work.”

According to the added verbiage, the SBA will no longer allow small business credit to be taken for the portion of a subcontract that a large entity provides to its own mentor-protégé joint venture and then performs as a partner. Large entities that are a part of the mentor-protégé program, and which frequently subcontract with their mentor-protégé joint ventures, should keep that policy change in mind. As with all other certifications, contractors must always represent information to the government that is in accordance with the latest version of the requirement. As of May 30, 2023, this policy is one of those requirements.

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¹ See 13 C.F.R. § 125.3(a)(1)(i)(B).
² See 13 C.F.R. § 125.3(a)(1)(i)(B) (revised) (emphasis added).