Last week we discussed contracting with the federal government. This week, we’re discussing a specific way to get into it: the mentor-protege program. Tune in to find out what the program is, who qualifies, and how to get set up for success.
Topics we cover on this episode include:
- Getting started with the mentor-protege program
- Putting together a joint venture and mentor-protege agreement
- Finding a mentor or protege
- Getting the joint venture contract right and staying in compliance
LINKS AND ACRONYMS
- DUNS Number (Dun & Bradstreet)
- NAICS (North American Classification System)
- SAM (System for Award Management)
- SBA Mentor-Protégé program
- Koprince Law Firm
- MATOC (Multiple Award Task Order Contracts)
- IDIQ (Indefinite Delivery, Indefinite Quantity Contracts)
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
Rob Williams: Welcome to the Contractor Success Forum! Today, we’re discussing government contracting using a mentor-protege program. We talk on the Contractor Success Forum about running a more profitable, successful construction business. And this is a great, wonderful topic to figure out how to do that.
Because we have our experts, Stephen Brown with McDaniel-Whitley Bonding and Insurance Agency. He’s got over three decades of experience doing this, to talk about these things and this mentor-protege relationship. And we have Wade Carpenter, Carpenter and Company, CPAs. He is a job costing CPA account. And that’s just amazing to do that– guru! Guru. And I am Rob Williams with IronGate Entrepreneurial Support Systems. And so today, we are talking about, I [00:01:00] can’t wait to hear more about this mentor-protege program, because as soon as we started talking about it, I just thought about my different clients and how they’re involved in these things or how they need to be. And this was just our pregame talk that we had just a couple of minutes. Just got me fired up to hear more about this.
Stephen Brown: Well, it’s really exciting if you’re in the program. It’s called the All Small Business Mentor-Protege Program. That’s what it is, and it’s part of the SBA. And you remember, I don’t know if you listened to our last podcast, folks, but it was about doing business with the government. Government contracting. And just like the military, and insurance, it’s full of acronyms. Remember, we talked about that?
Rob Williams: Oh, yeah.
Stephen Brown: Should be Acronyms. And they love throwing those around. It’s all part of the government type.
Rob Williams: I still am trying to get my Sam’s card fulfilled from last time.
Stephen Brown: There you go.[00:02:00]
Rob Williams: –episode. So,
Stephen Brown: Gonna have to beat that out of your head, Rob. Because you’re so wrong on so many levels, but.
Wade Carpenter: From my contractors’ standpoint, it has been an excellent way for a lot of my contractors to kind of get a leg up and, for smaller contractors, get into work that they normally couldn’t do. So tell us more.
Getting started with the Mentor-Protege Program
Stephen Brown: All right. Well, we talked about all the different programs through the Small business Administration. SBA.gov, go online, check it out. You’ll find out all you need to know about everything we’re talking about right there on SBA.gov. But nevertheless, we were talking about the different type of programs that are set aside to try to help small business. And this mentor-protege program is one other device designed to help small businesses get government contracts. And we’re talking about everything from contracting to acquisitions, to supplies, to anything the government might buy. Now remember, [00:03:00] last time we talked about there being a. Goal of 24 and a half percent of all the government spending going through one of these small business type set-aside programs. So set-a side programs, again are service disabled veterans, 8(a) contractors– look that up at SBA.gov. 8(a) contracting program is all types of benefits for small contractors. And then there’s HUBZone. Is your physical location in a HUB, or Historically Utilized Business Zone? There’s HUBZones set-asides.
And then there’s small business set-asides. And everybody who’s starting out pretty much qualifies as a small business, right? So what is small business, defined by the SBA.gov? Okay, here’s the kicker. That’s the first thing you have to know to get into the joint venture mentor-protege program, is what [00:04:00] size contractor are you? If it’s set-aside for small business, what you do is you, get your NAICS code. Remember that was the code that tells the government what you do. And they’re very specific. You can have two codes, the first code and a secondary code. So the first code, you go in there, you look it up and actually you go to SBA.gov/size-standards. And you put in your NAI CS code. It’s a five digit code. You put it in there, for example, General Contractor. You put it in there, and it asks you what your current sales are, and then it tells you what the most your sales can be.
In the general contracting category, that’s $39,500,000 right now. So that’s pretty big. And you say is that last year or this year? It’s the last five years [00:05:00] averaged. So you might do 2 million the first year, 10 million the second year, 20 million the next year, 50 million the next year. Well, if it all averages that under 39,500,000, you still qualify as a small business. So there’s set-aside business, and there’s small business. And part of taking advantage of the small business category is you can form what’s called a joint venture, and form what’s called a mentor-protege agreement. It’s part of the SBA mentor-protege program. All small business mentor-protege program.
You can find a mentor that does $2 billion a year. But if you qualify as the managing venture of this joint venture, and you’re a small business, then your joint venture becomes a small business. So that allows you to go after [00:06:00] all sorts of contracts that are set aside for small business, or are bidding just for small business.
And if you throw on top of that that you have other set-aside categories, like you’re operating in a hub zone, or you’re a woman-owned business or service disabled business, a veteran-owned business, of that sort, then it’s even better. There’s just other opportunities available to you.
Rob Williams: So, I guess you get more bonding credit, partnering with a big–
Stephen Brown: Well, you do, because–
Rob Williams: Don’t you?
Stephen Brown: That’s the interesting thing. The mentor agrees, in the mentor-protege agreement, to help you in any possible way. You form the joint venture, that joint venture’s got to perform that contract, and it’s bonded. But the nice thing about it is they can lend the protege money, help a bonding credit, it’s unlimited what the mentor can do to help the protege. That’s really a huge benefit. That, and the fact that you can, as a protege, you can do much [00:07:00] larger projects that are more technical because the proposals are evaluated based on what your mentor’s qualifications are, as well as yours. You’re doubly as interesting to the contracting officers that are putting a set-aside program together.
Rob Williams: That’s got my head spinning thinking about, you could do larger jobs, theoretically bigger than the 39 and a half million dollars, I guess.
Stephen Brown: Yeah, don’t get hung up on that. That just qualifies you as a protege, as a small business, 39 and a half million– for that NAISC code. So remember, whatever type of business you’re in, you have to see what your size standard is. And you get that on SBA.gov/size-standard.
And you can find it on the SBA.gov website. So you’ve got to know your size standard first. And then we talked about getting set up for doing business with the government, getting your DUNS number, getting your federal ID [00:08:00] tax number, getting yourself set up in SAMS, Rob, which is not Sam’s Club.
Rob Williams: Sam’s Club!
Stephen Brown: SAMS is the government contracting database.
You got to get registered in there. But here’s the thing. You come up with the NAI CS number for your joint venture of what you do, and you also get a DUNS number and a federal ID tax number, and you have to set the joint venture up in SAM. That’s how you get started.
Putting together a joint venture agreement and mentor-protege agreement
Stephen Brown: Another thing you do is you have to put together a joint venture agreement and what’s called a mentor-protege agreement. And that spells out exactly who does what in the joint venture. And a lot of times the joint venture agreement and the mentor-protege agreement are different. And if the contracting officers look and there’s different terms in those two contracts, they’re not going to allow this joint venture. So you want the language to be uniform in both of the contracts.
We talked about what [00:09:00] it is, how to set it up. And I guess the thing that we could talk about for hours is the performance of that contract. Who does what percent, how much can you subcontract, all of that and still be compliant as a small business under this mentor-protege program? And that’s the great news, guys.
Wade Carpenter: I do know some of the bigger contractors are looking to get into some of these programs and they require a smaller entity to do it, or some kind of DBE, you know, disadvantaged business, like you mentioned. And so sometimes, the big contractors are chasing these contracts that they couldn’t normally get. So they will also get into partnering with people to do these. I think there are some rules about how much you have to sub to them, and there is some monitoring on that, isn’t there?
Stephen Brown: That’s absolutely right. There’s monitoring involved. There’s an annual report that has to be filed.[00:10:00] And at the end of the contract report being filed. So there’s some rules.
Finding a mentor or protege
Stephen Brown: But first, before I get into those rules, I want to say, how do you, if you’re a protege, find a mentor? And if you’re a mentor, find a protege? A lot of times what the mentors do is they talk to their contracting officers in the type of business where they work, and they say, what’s a good small business starting up that you really like, that I could talk to about becoming a protege?
And vice versa with the protege, talk to the contracting officers. What’s a bigger company that you could recommend me to, that we might start talking about a mentor-protege agreement? That’s one way.
Another thing is through trade organizations and just knowing each other and having common employees, that sort of thing. That’s how you get together. Remember, the mentor-protege agreement’s best done if you know each other and understand each other. The mentor does not have to see you as a threat. You’re a partner in this joint venture and they’re [00:11:00] agreeing to help you with technical assistance, and financial assistance, and equipment that you need, and doing part of the work themselves. That’s what they get out of it. The mentor.
Rob Williams: Stephen, I’ve seen this situation and the protege, sometimes they get an inferiority complex. Sometimes it’s the opposite. But usually I’ve seen guys kind of nervous about approaching the big guys and wanting to act like they’re bigger than they are. Or smarter than they are.
They kind of feel like they don’t want to tell the big guy that they don’t really know how to do that job, or something like that. I’m trying to think of what are the situations, why the protege would think that the big contractor would want them, or not want them, because it seems like sometimes there’s this act going on that they’re portraying themselves as qualified to do this job when they’re not, or something like that. Is that a reasonable [00:12:00] assumption or what, what are they thinking that’s wrong about that?
Stephen Brown: See, here’s the thing; that protege is not subservient to the mentor in this agreement. In fact, they are the managing venturer of the joint venture. That doesn’t mean they call all the shots. That’s all spelled out in a joint venture agreement, but there’s no reason to feel that way. A lot of times, that protege might bring something to the joint venture partnership that the joint venture partner doesn’t have, like experience doing government contracting, for one. Or technical experience on a particular project that they want to go after together.
So you can set up this joint venture, guys. You can set it up in your agreement on a per project basis, and then you can list each project in the addendum that you do, but basically the way you set it up is as the joint venture agreement and the mentor-protege agreement, and we can get into those details.
If you’re getting ready to set one up, a great resource is Koprince Law Firm in [00:13:00] Kansas City. Koprince, they put out books they’re the experts on making sure that these joint ventures are legal and exact. And I’ve learned a whole lot from their law firm. They have emails you can subscribe to. The Koprince law firm, it’s just fantastic. So I’ll just put a plug out for them.
Getting the joint venture contract right
Stephen Brown: So you’re doing the contract. How long do these joint ventures last? How many projects can you do under it? How much can you subcontract? Do y’all want to know any of that kind of stuff?
Rob Williams: Yeah, I’m thinking about a lot of these things and my first question is how do you have to split this thing up with them? Or is it completely negotiated? Are there a whole lot of rules about, how much does the big guy expect to get from it? Or, you know, and can the little guy really make a whole lot of extra profit cause he’s able to do a much bigger job? And where do you get into that contract negotiation, or are there already rules?
Stephen Brown: The protege has got to do at least 40% of the money that comes in from the federal government on that [00:14:00] contract. It’s a million dollar contract, the protege has to do $400,000 perform–
Rob Williams: Performance. Oh, okay. So he can’t sub the whole thing out.
Stephen Brown: You can sub up to 50% of the contract out as a joint venture.
Wade Carpenter: These are not meant to be permanent things.
Stephen Brown: Yeah, they have, what’s called a three and two rule, Wade. The three and two rule means that if you have three government contracts that are awarded, from the time the first contract is awarded, after two years, three contracts, two years, then you’re becoming what they call generally affiliated. That’s the important thing that you’ve got to understand that a good law firm like Koprince can help you with. Are you generally affiliated?
Rob Williams: That’s not a good thing, right? If–
Stephen Brown: No. If you’re generally affiliated, then you don’t comply with the mentor-protege joint venture program [00:15:00] and you’re out. And there could be substantial fines if you’re affiliated. So that’s something very important. And the craziest thing, guys, is if you get close to being generally affiliated, you can stop a joint venture and start another one right now. There’s kind of a loophole in the rules there that lets you do that.
Rob Williams: Oh, so that doesn’t count as the same two.
Stephen Brown: No.
Rob Williams: Oh, interesting.
Wade Carpenter: Can I ask a question on that? So I had seen that they are limited to six years in total. Is that how they get to the three and two? How they get to the six? Cause I know they do annual evaluations on these things, don’t they?
Stephen Brown: Well, they do. And that doesn’t mean you can only get three jobs during the two years, because you may have a lot of solicitations that are out before the two years are up that aren’t awarded yet. So you could do tons of jobs within the two year period. But if you do [00:16:00] three or more before the two years are up, then they say, you’re affiliated. You have been together too long. Again, remember that the SBA, they want this program to be temporary. They want the protege to actually do work, and if they need help performing the work, they want the mentor to help them. Not just oversight and materials, supplies, that sort of part of the contract, but that’s part of what they look at in your annual report. Who did exactly, who did what?
So it’s best to do this right. It’s not hard to set it up right. But if you do it right, then you’ll be in compliance and you won’t have anything to worry about. And also it’s going to help you get the bonds.
Rob Williams: So if I’m the contractor and I’m looking for opportunities, what am I thinking about? I’m thinking about jobs that I can self perform 50% of it– or you said 40%. When you self perform, does that mean you had to have employees do that? Or can I sub it to somebody [00:17:00] different than the mentor?
Stephen Brown: No, because joint ventures, guys they’re either populated, which means the joint venture hires employees to do the work as a joint venture, or unpopulated, which means that both entities keep their own employees and operate separately. This program likes unpopulated joint ventures.
Now, maybe you could hire one employee or two to help manage things and call them a joint venture employee, but they generally do not want a populated joint venture.
Remember, once they’re approved, they’re their own set-aside entity. So if you’re joining a joint venture to take advantage of small business, and you qualify, then the joint venture, doesn’t matter how much the mentor does in sales, you don’t add those two together to get the $39,500,000. It’s totally based on the protege’s sales, average over the five-year period.
So they want you to do 40%. The mentor can do [00:18:00] 60%. And that doesn’t mean that the protege may not want to do 75%. If the mentor agrees to it and it’s over 40%, that’s fine. They can do as much as they want. Basically the performance of the work, and how you can use third parties outside of the joint venture, such as subcontractors, that can get kind of in a gray area. And again, that’s where a firm like Koprince can help you sort that out, make sure you’re doing everything right. But the rules are pretty simple. You can sub out 50%, you have to do 40% of the work.
Wade Carpenter: My experience with these has always been positive. I’m sure things always can go wrong, but I’ve heard that there are generally out clauses. If something’s not working for the protege, doesn’t the SBA kind of give out clauses and they would excuse somebody if [00:19:00] things were really blowing up?
Stephen Brown: Yeah. The joint venture agreement spells out how either partner can get out of it. You can get out of it, but the job still has to be completed by the joint venture. So you’re still obligated because a joint venture is considered legally joint and several liability as an entity.
So remember, part of forming the joint venture, you have to decide what kind of entity you want to be. You could be a simple partnership and not have to do all the reporting that you have to do to form an LLC or C Corporation. But the joint venture, most of the ones I’ve seen are LLCs that you have to set that entity up, too. So, you need to get your accountant or attorney to help set that up for the joint venture.
So the joint venture agreement, guys, it really should be set up as a separate entity, a separate set of books. Usually what you see in the agreement form, is that each side [00:20:00] have two members of the board of directors: the protege and the mentor. And they get together to make all the decisions. But the protege is what’s called the managing venturer. So, it spells out what the duties of the managing venturer are. And it’s very specific. The program wants to see that that managing venturer has the authority to administer the job. The whole idea is for that protege to grow.
Wade Carpenter: The majority of this type of entity that you were talking about here are setup as partnerships. Or LLC that are treated as a partnership, I should say. Because number one, it gives them viability protection, but number two, it’s also more flexible. You could have a different capital structure and profit doesn’t have to be split the same way as losses, but it doesn’t have to be in a proportion to the ownership. So they can be very flexible on that. So that is common to put it in an LLC [00:21:00] set up as a partnership.
Rob Williams: That’s a great point, Wade. Because I was thinking about the small guy doing these big contracts and that joint and several liability maybe. But if you have some kind of a contract, I guess, maybe in certain ways, Stephen there’s joint and several liability. But if you’ve got the losses contracted already, then maybe the smaller contractor may not have to take that big risk that may put him under, that he may not want to do, that the big contractor can be in that situation that would not necessarily take him out, where it would take the little guy out.
Stephen Brown: You’re right about that. Say you could take half that contract and sub it out to anybody and get a sub bond back on that to protect yourself. You could do that, but remember that the mentor can’t be the subcontractor. I don’t know if I mentioned that, but the mentor can not be the subcontractor.
Rob Williams: That’s very interesting. That’s yeah. There’s so many different things to think about in this. [00:22:00] I’m more thinking of the smaller guy. I guess I assume the mentor’s already going to know, but that’s probably not true. They’d probably have a lot to learn as well.
Stephen Brown: Well, a lot of times the joint venture mentor-protege partnership, they’re going to form and they’re going to start bidding projects that they see as a perfect fit. And then other projects are going to come out that are perfect fit, and they’re going to go after those and their competitive bid, generally the lowest bidder that’s in compliance with all the regulations gets the job.
And then there’s set-aside work that basically can be awarded to that mentor-protege. For example, there’s programs like MATOC, which stands for Multiple Area Task Order Contracts, IDIQ contracts, Indefinite Quantity Contracts. For example, a military base may choose five contractors, some may or may not be joint ventures, but they might choose them to be part of a MATOC. And once they’re technically approved, then [00:23:00] they can just work and negotiate with those five contractors to get the work done. So that opens up all sorts of doors. If there’s $500 million worth of work in a certain MATOC, and you’re one of five contractors, you’re going to get part of it.
Rob Williams: Yup.
Wade Carpenter: If they wanted some more information, Stephen, could they call you or shoot you an email or something?
Stephen Brown: Sure. I’ll tell you all I know, could be dangerous.
Rob Williams: So how do they get in touch with you?
Stephen Brown: You can email me at SBrown@mcwins.com. SBrown@mcwins.com. And I’ll be happy to steer you in the right direction.
Rob Williams: And if you don’t write that down, you can go to the ContractorSuccessForum.Com or our LinkedIn page, Contractor Success Forum, and get our information because you’re probably listening to this in your car or something, or you’re not supposed to be writing this down right now. So, that is how you can get in touch with us.
So well, this has been really good. Wade, do you have any [00:24:00] other questions? You’ve always got so many great points.
Wade Carpenter: Well, I think Stephen made all the points today. My experience with it is that it’s always been a great program and I’d love to hear more out of Stephen at some feature date or, if there’s more things we can follow up on here.
Rob Williams: Yeah, this, this is a great opportunity. All these government programs and these opportunities. It’s a good opportunity for us to take some of these programs and maybe put them together in a block. So we’re going to work on that a little bit, so you can go to our web pages or different places and look for, maybe you can get a few of these episodes together and listen to a lot of them if you’re interested in government contract work. So take a look for that. Hit us up, follow us and get our emails, all that kind of stuff, so you can get all this vast plethora of information that comes at you. Poof. That’s right, Stephen- poof.
So thanks. And that’s what you get at the Contractor Success Forum. We have Wade Carpenter, Carpenter, and Company, CPAs, Stephen Brown, [00:25:00] McDaniel-Whitley bonding and insurance agency. And I’m Rob Williams with the IronGate Entrepreneurial Support System. Come back and see us and come check out our other shows. Have a great day.
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