Defense Contracting: Implementation of the Pilot Mentor-Protege Program
(Letter Report, 02/01/94, GAO/NSIAD-94-101).

To increase the participation of small disadvantaged businesses in
military subcontracting, Congress mandated the Pilot Mentor-Protege
Program in 1990.  This program encourages mentoring relationships
between major prime contractors and subcontractors.  Because program
implementation has been slow, not enough information is available to
determine whether the program's goals can be achieved or whether
reauthorization and extension is warranted.  Pentagon officials said
that all fiscal years 1992 and 1993 appropriated funds for the pilot
program have been committed.  As of September 1993, however, the Defense
Department (DOD) had neither (1) complied with its own regulation to
assess programs and accomplishments realized under any of the agreements
nor (2) compiled the required data on the eight measures that it planned
to used to evaluate program success.  DOD obtained some initial
participation on a "credit-only" basis and limited participation through
a mix of credit and cost reimbursement through the mentor's overhead
cost pool.  DOD's direct reimbursement of mentors' cost has exceeded $1
million in support of each protege during a three-year period.  Unless
additional nonmonetary incentives are developed to encourage mentor
participation, it is unlikely that the program will reach the number of
proteges envisioned by Congress or significantly increase the total
number of subcontracts awarded to small disadvantaged businesses.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-101
     TITLE:  Defense Contracting: Implementation of the Pilot 
             Mentor-Protege Program
      DATE:  02/01/94
   SUBJECT:  Small business assistance
             Small business contractors
             Budget authority
             Department of Defense contractors
             Subcontractors
             Contract administration
             Prime contractors
             Appropriated funds
             Defense procurement
             Program evaluation
IDENTIFIER:  DOD Pilot Mentor-Protege Program
             SBA Minority Small Business and Capital Ownership 
             Development Program
             SBA 8(a) Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1994

DEFENSE CONTRACTING -
IMPLEMENTATION OF THE PILOT
MENTOR-PROTEGE PROGRAM

GAO/NSIAD-94-101

DOD's Pilot Mentor-Protege Program


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  OSADBU - Office of Small and Disadvantaged Business Utilization
  SBA - Small Business Administrations
  SDB - small disadvantaged business

Letter
=============================================================== LETTER


B-247530

February 1, 1994

The Honorable Sam Nunn
Chairman, Committee on Armed Services
United States Senate

The Honorable Dale Bumpers
Chairman, Committee on Small Business
United States Senate

The Honorable Ronald V.  Dellums
Chairman, Committee on Armed Services
House of Representatives

The Honorable John J.  LaFalce
Chairman, Committee on Small Business
House of Representatives

This report responds to the statutory requirement that we provide a
report on the Pilot Mentor-Protege Program within the Department of
Defense (DOD).  As specified by section 831 of the National Defense
Authorization Act for Fiscal Year 1991 (P.L.  101-510), our objective
was to determine whether the purposes of the pilot program were being
achieved during the initial 2-year period after implementation and
recommend whether the program should be reauthorized and extended
governmentwide. 


   BACKGROUND
------------------------------------------------------------ Letter :1

To provide incentives for prime contractors to increase small
disadvantaged business\1 (SDB) participation in DOD subcontracting,
the Congress, in 1990, mandated the Pilot Mentor-Protege Program. 
The program's objective is to foster the business development of SDBs
so as to increase the capabilities of such firms to participate as
subcontractors and suppliers in DOD contracts, other government
contracts, and commercial contracts.  The program authorized the
formation of mentoring relationships between major prime contractors
and subcontractors, who are approved by DOD as mentor firms, and SDBs
(proteges).  The mentors and proteges jointly develop a tailored
developmental assistance program, meeting their mutual needs, which
is set forth in a mentor-protege agreement that is submitted to DOD. 
DOD then determines the agreement's compliance with statutory and
regulatory requirements. 

The pilot program authorizes a broad array of forms of developmental
assistance that may be provided to the protege by its mentor.  For
example, it includes general business management skills development,
such as financial and personnel management, marketing, and proposal
development assistance.  Additionally, loans and limited capital
investment are permitted to meet the protege's needs for working
capital, and a mentor can award subcontracts to its protege on a
noncompetitive basis. 

The pilot program provides incentives, in the form of cash
reimbursement, credit towards SDB subcontracting goals,\2 or a
combination of both, to encourage a mentor to provide developmental
assistance to its proteges. 

The pilot program began on October 1, 1991.  The DOD Office of Small
and Disadvantaged Business Utilization (OSADBU) is responsible for
program management and administration. 

Our March 1992 interim report\3 on the program discussed

  the regulatory implementation of the program,

  the initial participation of eligible mentor and protege firms,

  deficiencies in the program's implementation strategy and
     management of the program that are likely to impair success, and

  recommendations to correct any impediments to the program. 

The Congress has appropriated a total of $120 million for the pilot
program--$30 million in fiscal year 1992 and $45 million each in
fiscal years 1993 and 1994.  The pilot program terminates on
September 30, 1999.  Section 813(c) of the National Defense
Authorization Act for Fiscal Year 1994 (P.L.  103-160), extended the
authority to establish agreements between mentors and proteges to
September 30, 1995. 


--------------------
\1 To qualify as a small disadvantaged business, a company must not
exceed the Small Business Administration's standards for number of
employees or annual sales and must be independently owned (at least
51 percent) and operated by socially and economically disadvantaged
individuals. 

\2 In acquisitions exceeding $500,000 ($1 million for construction),
prime contractors are required to establish a subcontracting plan
that specifies the percentage goal of subcontract awards to SDBs. 

\3 Defense Contracting:  Interim Report on Mentor-Protege Program for
Small Disadvantaged Firms (GAO/NSIAD-92-135, Mar.  30, 1992). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Because implementation of the pilot program has been slow during the
specified 2-year review period, sufficient information is not
available to determine whether the program's purposes can be achieved
or whether reauthorization and extension is warranted.  For example,
at the end of fiscal year 1993, 124 proteges were receiving
assistance from mentors; however, 76 proteges, or about 60 percent of
the total, had entered the pilot program in the last 3 months of
fiscal year 1993. 

OSADBU officials said that all fiscal years 1992 and 1993
appropriated funds for the pilot program have been committed. 
According to the DOD's Comptroller Office, $47.3 million had been
obligated at the end of fiscal year 1993.  Furthermore, as of
September 30, 1993, DOD had neither (1) complied with its own
regulation to assess progress and accomplishments realized under any
of the agreements, although a few had been in effect for more than 2
years, nor (2) compiled the required data on the eight measures that
it planned to use to judge program success. 

DOD obtained some initial participation on a "credit-only" basis and
limited participation through a combination of credit and cost
reimbursement through the mentor's overhead cost pool.  DOD's initial
implementation of the authority to directly reimburse mentors' cost,
on average, is exceeding $1 million over a 3-year period in support
of each protege. 

Unless additional nonmonetary incentives are developed to encourage
mentor participation, it is unlikely that the program will reach the
number of proteges envisioned by the Congress, or result in any
significant increase in the total of subcontracts awarded to SDBs. 


   IMPLEMENTATION OF THE PILOT
   PROGRAM HAS BEEN SLOW
------------------------------------------------------------ Letter :3

The pilot program was not fully implemented on October 1, 1991, as
originally intended.  DOD's initial policy guidance implementing the
program only authorized "credit" towards attaining mentor firms' SDB
subcontracting goals or direct reimbursement of mentor costs through
the addition of a line item in existing contracts.  DOD did not take
action to encourage program managers to sponsor mentor-protege
agreements until December 5, 1991.  The Congress, in December 1991,
authorized and appropriated funds to the program for fiscal year
1992.  In January 1992, the DOD Comptroller included the fiscal year
1992 funds appropriated for the pilot program in a list of
appropriations offered for rescission.  Although the Congress, in May
1992, rejected the proposed rescission of the program's fiscal year
1992 appropriations, DOD policy and regulations were not amended
until October 1992 to permit the reimbursement of mentor costs
through either indirect cost pools or separate agreements. 
Additionally, it was not until December 1992 that DOD published a
notice in the Commerce Business Daily announcing its intent to issue
for public comment in January 1993 a draft solicitation for the award
of cooperative agreements.\4 The solicitation was issued on April 12,
1993, with proposals due by May 17, 1993.  Awards of cooperative
agreements to mentors were made in August 1993. 

As of September 30, 1993, DOD had approved 136 mentor-protege
agreements, with 72 mentors providing assistance to 124 proteges.  As
shown in table 1, participation in the pilot program has been
achieved principally through the use of cost reimbursable agreements. 
At the end of fiscal year 1993, 96 proteges, or 77 percent, were to
be receiving assistance for which their mentors would be reimbursed. 
This includes the August 1993 cooperative agreements\5 to 46 mentors
assisting 74 proteges.  On average, each protege can be expected to
receive almost $1.2 million of assistance during the 3-year period of
the cooperative agreement award.  The remaining 22 of the 96 proteges
can potentially receive, on average, over $2 million of assistance
paid over a 3-year period from the approximate remaining $45 million
in fiscal year 1992 and 1993 funds. 



                           Table 1
           
            Mentor-Protege Agreements Approved in
                  Fiscal Years 1992 and 1993


                    1s  2n  3r  4t  1s  2n  3r  4t
Type of agreements   t   d   d   h   t   d   d   h     Total
------------------  --  --  --  --  --  --  --  --  ========
Reimbursable         0   0   1   2   4   4   4  82        97
Credit               1   6   4   2   5  11   4   6        39
============================================================
Total                1   6   5   4   9  15   8  88     136\a
------------------------------------------------------------
\a Eleven proteges are involved in both reimbursable and credit
agreements and 1 is involved in 2 reimbursable agreements.  Thus, a
total of 124 proteges were receiving assistance at the end of fiscal
year 1993. 

The remaining 23 percent of the proteges are involved in credit-only
agreements where developmental assistance costs incurred by mentors,
which are not reimbursed by the government, can be recognized as
"credits" toward the attainment of any of the firms' SDB
subcontracting goals at more than a dollar-for-dollar basis. 
Multipliers of two, three, and four times the amount expended are
authorized, depending on the specific type of costs incurred. 

The Pilot Mentor-Protege Program was designed to be a private-sector
version of the Small Business Administration's (SBA) Minority Small
Business and Capital Ownership Development Program, more commonly
referred to as the Section 8(a) Program.\6 The Senate Committee on
Small Business has stated that the Pilot Mentor-Protege Program can
potentially provide assistance to many more small and disadvantaged
businesses than the Section 8(a) Program.\7 SBA's primary source of
management and technical assistance for 8(a) firms is its 7(j)
program.  In September 1993, we reported that under the 7(j) program,
SBA hires contractors to conduct seminars and provide one-on-one
assistance to 8(a) firms and other small businesses.  In fiscal year
1992, SBA provided about $7.8 million in 7(j) assistance to 2,754
firms.\8

At an average cost of over $1 million per protege, it is unlikely the
pilot program, as currently funded, will reach more small and
disadvantaged businesses than the Section 8(a) Program. 


--------------------
\4 A cooperative agreement is used to furnish assistance by the
government to the recipient (in this case, the mentor) to accomplish
an authorized public purpose, instead of acquiring property or
services for the direct benefit of the government. 

\5 The total estimated reimbursable cost for the cooperative
agreements is $86,445,470.  This includes $30,146,484 for the first
year and $28,738,878 and $27,560,108 in the second and third years,
respectively. 

\6 The 8(a) program promotes the development of small businesses that
are owned and controlled by socially and economically disadvantaged
individuals.  Firms in the program are eligible for financial,
technical, and management assistance from SBA to aid their
development. 

\7 Legislative and Oversight Activities, Special Report of the
Committee on Small Business, United States Senate (Senate Report No. 
103-127, 103d Cong., 1st Sess., p.21, Aug.  6, 1993). 

\8 Small Business:  Problems Continue With SBA's Minority Business
Development Program (GAO/RCED-93-145, Sept.  17, 1993). 


   OVERSIGHT OF THE PILOT PROGRAM
   IS INADEQUATE
------------------------------------------------------------ Letter :4

OSADBU has not adequately provided management oversight of the pilot
program.  According to OSADBU officials, resource constraints have
prevented sufficient oversight of the program. 

DOD regulations require mentors to report semiannually on the
progress made under active mentor-protege agreements.  Among other
things, the reports are to discuss the progress achieved in providing
the developmental assistance under each mentor-protege agreement.  As
of September 30, 1993, the regulatory progress reporting requirement
was applied to 40 agreements that were at least 6 months old.\9 For
those agreements, OSADBU should have received 63 progress reports by
the end of fiscal year 1993.  However, only 11 progress reports were
received.  As of November 1993, OSADBU officials had not evaluated
any of the progress reports or followed up on the delinquent ones. 

DOD regulations also require the OSADBU to conduct annual performance
reviews of the progress and accomplishments realized under approved
mentor-protege agreements.  According to DOD policy, it will measure
the overall success of the pilot program by the extent to which the
program results in

(1) an increase in the dollar value and percentage of subcontracts
awarded to SDBs by mentor firms under DOD contracts;

(2) an increase in the dollar value of contract and subcontract
awards to protege firms (under DOD contracts, contracts awarded by
other federal agencies, and under commercial contracts) since the
date of their entry into the program;

(3) an increase in the number and dollar value of subcontracts
awarded to a protege firm (or former protege firm) by its mentor firm
(or former mentor firm);

(4) an improvement in the participation of SDBs in DOD, other federal
agencies, and commercial contracting opportunities that can be
attributed to the development of SDBs as protege firms under the
program;

(5) an increase in subcontracting with SDB concerns in industry
categories where SDBs traditionally have not participated within the
mentor firm's vendor base;

(6) the involvement of emerging SDBs in the program;

(7) an expanded relationship between mentor firms and protege firms
to include non-DOD programs; and

(8) the development of protege firms that are competitive as
subcontractors and suppliers to DOD or in other federal agencies or
commercial markets. 

OSADBU had performed no performance reviews as of November 1993. 

OSADBU officials told us that they did not have the resources to
effectively provide management oversight of the pilot program through
fiscal year 1993.  The pilot program is not allocated a full-time
position.  OSADBU officials said that they were advised by the DOD
Comptroller that because the pilot program was funded through a
procurement appropriation, none of the funding could be used to pay
for needed program administration services--an operation and
maintenance function.  OSADBU officials expect to obtain about $1
million in fiscal year 1994 operations and maintenance funding from
the military services to be used to provide oversight, monitoring,
and data support for the program.  Additionally, section 8148 of the
Department of Defense Appropriations Act for Fiscal Year 1994 (P.L. 
103-139), provides transfer authority that should remove the
impediment to using some of the appropriated funds to improve
management and oversight of the pilot program.  OSADBU officials
expect to award a contract in the second quarter of fiscal year 1994
to get help in managing the pilot program. 


--------------------
\9 As of September 30, 1993, 96 of the agreements were less than 6
months old and the progress reporting requirement had not been
applied. 


      LIMITED RANGE OF ALTERNATIVE
      INCENTIVES
---------------------------------------------------------- Letter :4.1

There is a sharp disparity between the level of SDBs participation in
the present pilot program and the scale that the Congress now seems
to envision for a fully implemented program.  When our interim report
was issued in March 1992, participation in the pilot program was
limited.  Program funding had been proposed for rescission, rendering
it unavailable to finance reimbursement of mentors' assistance costs
or other incentives.  At that time, credit against mentors'
subcontracting goals was the only incentive OSADBU could offer to
enhance participation.  We felt that because DOD did not rigorously
enforce subcontracting goals, the credit-only incentive might not be
sufficiently attractive to many potential mentors.  The result, we
said, might constrain participation to a level below the apparent
congressional expectations. 

According to OSADBU officials, DOD is not required to test any
incentives that were not specifically mentioned in the authorizing
legislation.  For example, OSADBU officials advised us that, because
the statute did not specifically authorize such arrangements, the
Department did not reserve a portion of the appropriated funds for
use as award fees to encourage more mentors to enter into credit-only
or other nonreimbursable arrangements.  However, some contracting
officers are now beginning to use mentor-protege relationships as a
source selection factor in awarding contracts. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :5

We are not able to recommend that the current pilot program be
extended because sufficient information is not available to determine
whether the program's purposes can be achieved or whether
reauthorization and extension is warranted.  The Congress may wish to
consider delaying its decision until the OSADBU conducts its required
performance review of the progress and accomplishments realized under
approved mentor-protege agreements.  However, since there are
indications that the current pilot program, with its heavy reliance
on reimbursement as mentor incentive, is not the optimal way to
increase subcontract awards to SDBs, the Congress may wish to have
DOD test a broader range of incentives. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

We reviewed the legislation and DOD regulations and examined the
files of approved mentor-protege agreements maintained by OSADBU.  We
met with OSADBU officials in the Office of the Secretary of Defense,
as well as corresponding officials in each of the military
departments.  We interviewed selected mentors, proteges, and industry
association spokespersons and discussed their expectations and
experience with the program.  We also reviewed source selection and
contract negotiation files and met with contracting personnel
responsible for the September 1993 award of the 46 cooperative
agreements for reimbursement of assistance costs.  We also met and
discussed the program with representatives of the SBA's Office of
Minority Small Business and Capital Ownership Development. 

We conducted our review of the Pilot Mentor-Protege Program between
April and December 1993 in accordance with generally accepted
government auditing standards.  We did not obtain agency comments
that were fully coordinated within DOD.  However, we did discuss our
findings with DOD program officials, and the report reflects their
oral comments as appropriate. 


---------------------------------------------------------- Letter :6.1

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days from the date of this
letter.  At that time, we will send copies of the report to the
Chairmen of the House and Senate Committees on Appropriations, Senate
Committee on Governmental Affairs, and House Committee on Government
Operations; the Secretary of Defense; and the Director, Office of
Management and Budget.  We will also make copies available to others
upon request. 


Please contact me on (202) 512-4587 if you or your staff have any
questions concerning this report.  Major contributors to this report
were Patrick S.  Donahue, Bradley C.  Vass, and Russell R.  Reiter.






David E.  Cooper
Director, Acquisition Policy,
 Technology and Competitiveness Issues
