NDAA Authorizes Mentor-Protege Programs for all Small Businesses and more…

by McKenna, Long & Aldridge, LLP
The Fiscal Year 2013 National Defense Authorization Act (“NDAA”), signed by President Obama on January 2, 2013, makes numerous significant changes in the federal government’s small business contracting programs. Most importantly, the NDAA authorizes the Small Business Administration (“SBA”) to establish a mentor-protégé program for all small business concerns. Among other changes, the NDAA revises the rules for limits on subcontracting for small business set-asides, eliminates the dollar limitations for set-aside contracts for women-owned small businesses, and creates a small business Ombudsman to serve at DCAA.

By authorizing the use of the mentor-protégé program for all small business concerns, NDAA section 1641 effectively alters the SBA’s affiliation rules, at least for SBA-approved mentors. According to the NDAA, this new mentor-protégé program generally should be identical to the 8(a) mentor-protégé program. Under the current 8(a) program, a mentor and protégé can form multiple joint ventures that are allowed to submit proposals as a small business. In a joint venture, the mentor can have a larger role in supporting the protégé and performing the contract without concern about the application of the SBA’s ostensible subcontractor rule. A mentor also may own up to 40 percent of the protégé. Finally, a company may have up to three protégés, allowing a large business to have a much larger role in the performance of small business set-aside contracts.

Previously, the Small Business Jobs Act of 2010 authorized the SBA to establish a mentor-protégé program for Service Disabled, Veteran Owned small business concerns, Women-Owned small business concerns and HUBZone small business concerns. However, the SBA did not issue regulations to establish these programs. Apparently to avoid a repeat of this problem, NDAA section 1641 requires the SBA to issue regulations to establish the mentor-protégé program for all small business concerns within 270 days.

NDAA section 1651 changes the rule for calculating the limits on subcontracting by a small business prime contractor that apply to contracts awarded via small business set-asides. Previously, to ensure that the small business prime contractor was actually performing a substantial share of each set-aside contract, the small business prime contractor was required to incur at least 50 percent of the labor costs for service or supply contracts and 25 or 15 percent of the labor costs for general or specialty construction contracts, respectively. It was difficult for agencies to enforce this subcontracting limitation during the evaluation of proposals, because for most competitive contracts, the offerors were not required to provide such cost information as part of their proposals or bids.

NDAA section 1651 seeks to address this problem by requiring the comparison of the prime contract price and the subcontract prices, rather than the amounts of labor costs. For service contracts, the small business prime contractor may not expend more than 50 percent of the prime contract price on subcontractors. Similarly, for supply contracts, the small business prime contractor may not expend more than 50 percent of the prime contract price, less the cost of materials, on subcontractors. Regarding the subcontracting limit for construction contracts, the SBA is tasked to determine the subcontracting limits by obtaining public comments during formal rulemaking.

NDAA Section 1697 removes the dollar limitations for set-asides for Women-Owned small business concerns. Under previous law, agencies were only allowed to set-aside acquisitions for Women-Owned small business concerns if the expected value of the contract did not exceed $6.5 million for manufacturing contracts and $4 million for all other types of contracts. Section 1697 allows agencies to set-aside procurements of any dollar amount for Women-Owned small business concerns.

Section 1612 of the NDAA creates the position of Small Business Ombudsman for the defense audit agencies. The Ombudsman will: (1) advise the DCAA Director on policy issues related to small business concerns; (2) serve as the DCAA’s primary point of contact and source of information for small business concerns; and (3) collect and monitor relevant data concerning the timeliness of DCAA’s audit closeouts for small business concerns and responsiveness to small business issues. However, the Ombudsman role is significantly limited, because the NDAA provides that the Ombudsman shall be segregated from ongoing audits in the field and shall not engage in activities regarding particular audits that could compromise the independence of the DCAA.

These NDAA revisions to the Small Business Act will significantly affect small business contracting. We will keep you informed as the SBA issues proposed regulations and regulations to implement these changes.

For additional information, please contact:

Richard B. Oliver
213.243.6169

John W. Heath
202.496.7224

J. Matthew Carter
213.243.6137

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