New Small Business Rules: 8(A) Program

Morrison & Foerster LLP - Government Contracts Insights

As we recently discussed, the U.S. Small Business Administration (SBA) has published a long-awaited rule that made important changes to numerous small business contracting programs and the rules Federal agencies must follow when contracting with small businesses. These changes went into effect on November 16, 2020. You can read our high-level summary of the rule here, an in-depth look at new treatment for joint ventures and first-tier subcontractors here, and the rule itself here. In this post, we’ll take a closer look at few notable changes to the 8(a) program.

8(a) Joint Ventures

Some of the more notable changes to the 8(a) program relate to 8(a) joint ventures. First, the final rule implements the much-anticipated merger of the 8(a) Mentor Protégé Program into the All Small Mentor Protégé Program), eliminating the 8(a) Mentor Protégé Program. The mentor protégé programs allow a protégé and mentor with an SBA-approved Mentor Protégé Agreement to form a joint venture together and not have the joint venture cause the two partners to be affiliated with one another. However, under the previous rule, Mentor Protégé Agreements could be submitted under either program, causing inefficiencies and differences in review. To eliminate this redundancy and confusion, the All Small Mentor Protégé Program set of rules will now govern all Mentor Protégé Agreements. All current 8(a) Mentor Protégé Agreements will continue to operate as an SBA-approved Mentor Protégé Agreement under the All Small Mentor Protégé Program regulations, and they will continue to have the same remaining time left in the program as they otherwise would have in the 8(a) Mentor Protégé Program.[1]

Second, the final rule also eliminates the current requirement for 8(a) Participants to obtain SBA approval of every joint venture agreement before award of competitive 8(a) contracts.[2] This reduces a major burden on 8(a) joint ventures that was not imposed on any other type of small business joint venture. However, for 8(a) sole source contracts, SBA approval of the joint venture agreement will still be required (perhaps because those awards are less likely to be regulated via size protest).

Follow-on Contracts and Sole Source Awards

For contracts or orders accepted into the 8(a) program, SBA’s general rule is that a procuring agency may not remove follow-on requirements to those contracts and orders from the 8(a) program without prior SBA approval.[3] However, there has been confusion regarding what qualifies as a follow-on contract, and the final rule now provides a much-welcomed definition. Specifically, when determining whether a requirement is a follow-on requirement, agencies must consider “[1] whether the scope has changed significantly, requiring meaningful different types of work or different capabilities; [2] whether the magnitude or value of the requirement has changed by at least 25 percent for equivalent periods of performance; and [3] whether the end user of the requirement has changed.”[4] While satisfaction of one of these three conditions generally means the requirement is not a follow-on, this is not a dispositive rule, especially where the 25 percent change in value is the only condition out of the three that is met. Furthermore, while the contracting officer (CO) will make the determination as to whether a requirement is a follow-on, the final rule imposes a new obligation that the CO must notify SBA if it determines the requirement is not a follow-on and therefore intends to remove it from the 8(a) program. SBA will now have the opportunity to appeal the CO’s decision if it disagrees – making removing contracts from the 8(a) program a continued challenge.

The final rule also clarified certain eligibility requirements for 8(a) sole source awards. Specifically, SBA explained that it will determine a Participant’s eligibility for 8(a) sole source awards at the time SBA accepts a requirement for the 8(a) program.[5] The rule also clarifies that where a firm graduates from the program before the sole source award actually occurs, the award cannot be made. In addition, 8(a) Participants cannot receive 8(a) sole source awards after they have reached a certain dollar level of awarded overall 8(a) contracts. However, under the current rules, the dollar level threshold was different based upon a concern’s primary NAICS code. The final rule simplifies this and provides that regardless of a concern’s primary NAICS code, once the Participant (other than one owned by an Indian Tribe, Alaska Native Corporation (ANC), Native Hawaiian Organizations (NHO), or Community Development Corporations (CDC)) receives a combined total of competitive and sole source 8(a) contracts in excess of $100,000,000, it may no longer receive 8(a) sole source contracts.[6]

Immediate Family Member Rule

The final rule also relaxes the “immediate family member” rule for serial 8(a) participation. Previously, an applicant firm had to show it had “no connection” with another current or former participant of the 8(a) program whose eligibility was based on an immediate family member of the disadvantaged applicant.[7] The purpose of this rule is to prevent one individual from unduly benefiting from the 8(a) program by participating beyond the nine-year maximum by qualifying under a second firm. The SBA, finding the “no connection exists” standard “a bit extreme,” is implementing a relaxed standard requiring the two businesses be “truly separate and distinct entities.”[8] To be “truly separate,” the two entities cannot: (1) have any common ownership or management, regardless of the amount or position; (2) have any contractual relationships that are not conducted at an arm’s length transaction representing fair market value; or (3) share facilities. Furthermore, an individual applying to the program in the same primary NAICS code as an immediate family member must personally have the management or technical experience in that primary NAICS code.[9]

Changes in Ownership

Typically, change in ownership of an 8(a) concern requires prior SBA consent, with a few exceptions. To facilitate minor changes in ownership, the final rule allows changes in ownership without prior SBA approval so long as the previous owner (i.e., the owner that is changing the amount of its ownership interest) held less than a 20 percent interest in the concern both before and after the transaction. This effectively raises the trigger threshold for SBA consent from 10 percent in the previous rules to 20 percent.[10] This is a welcomed change, as SBA consent for changes in ownership can be a time-consuming process.

The final rule also addresses continued performance of contracts awarded to 8(a) Participants that undergo a change in majority ownership. Currently, the general rule is that an 8(a) contract (or an 8(a) order where the underlying contract is not an 8(a) contract) must be performed by the 8(a) Participant initially awarded the contract.[11] If there is a change in control of the 8(a) Participant, the 8(a) contract or order must be terminated for convenience unless SBA grants a waiver. One of the grounds upon which SBA will grant a waiver is if the change of control passes to another “eligible” 8(a) Participant. The final rule clarifies that to be an “eligible” 8(a) Participant, the acquiring firm must be “responsible” to perform the contract, which is determined at the time of the request for the waiver that must be submitted prior to the change in ownership.[12] To be “responsible to perform the contract,” the new owner must meet all 8(a) eligibility requirements and certify that it is a small business for the size standard corresponding to the NAICS code assigned to each contract for which waiver is sought. Further, the new owner must have performed similar work to the work being performed under those contracts. This clarification provides additional insight into SBA’s waiver approval process.

8(a) Participants Owned by ANCs, Indian Tribes, NHOs, and CDCs

There are also numerous aspects of the final rule that relate to the special regulations applicable to ANC, tribally owned, NHO, and CDC owned 8(a) Participants.

First, the final rule clarifies that 8(a) Participants owned by ANCs, tribes, and CDCs do not need to request SBA approval for a change in ownership where the ANC, tribe, or CDC merely reorganizes its ownership of a Participant by inserting or removing a wholly owned business entity between the ANC/tribe/CDC and the Participant.[13] However, this does not apply to NHO-owned Participants, as 8(a) eligible entities cannot be owned through subsidiaries of the NHO.

Second, SBA clarified that individuals responsible for management and daily business operations of more than one ANC or tribally owned 8(a) Participants need not be devoted full time to each Participant.[14] However, these individuals cannot manage more than two Participants at the same time.

Third, under the previous rules, ANCs, tribes, NHOs, and CDCs could not own 51 percent or more of an 8(a) Participant that has the same primary NAICS code as another entity owned by the ANC/tribe/NHO/CDC that is a current 8(a) Participant, or that participated in the program within the previous two years.[15] Under the new rule, if one of the entity-owned 8(a) Participants receives SBA approval to change its primary NAICS code (e.g., because a majority of its work is under a different code), then the ANC/tribe/NHO/CDC can immediately have one of its majority owned concerns apply to the 8(a) program under the current Participant’s original primary NAICS code.[16] In other words, these concerns no longer need to wait two years after the 8(a) Participant graduates to have another one of its majority owned concerns with the same original primary NAICS code apply to the program.

Fourth, SBA relaxed the prohibition on excessive withdrawals in the form of distributions for entity-owned 8(a) Participants. Currently, Participants majority owned by an ANC, tribe, NHO, or CDC are prohibited from making excessive withdrawals, including distributions, unless the withdrawal is made for the benefit of the ANC, tribe, NHO, or CDC.[17] This meant that only the ANC/tribe/NHO/CDC owner of the Participant could receive distributions that exceeded SBA’s excessive withdrawals threshold. Under the final rule, however, these entities are now allowed to make distributions to the non-disadvantaged owners that exceed the excessive withdrawal threshold so long as that distribution represents a pro rata distribution to all shareholders of the entity.[18]

Takeaway

SBA’s final rule actively sought ways to make compliance with its myriad of regulations easier for small businesses, and the changes to the 8(a) program are no exception. While there are certainly remaining issues in the 8(a) program that would benefit from further SBA clarification, these changes are a step in the right direction.

[1] 85 Fed. Reg. 66146, 66147 (Oct. 16, 2020).

[2] 85 Fed. Reg. 66146, 66164 (Oct. 16, 2020).

[3] 13 C.F.R. § 124.504(d)(1).

[4] 85 Fed. Reg. 66146, 66183 (Oct. 16, 2020).

[5] 85 Fed. Reg. 66146, 66161 (Oct. 16, 2020).

[6] 85 Fed. Reg. 66146, 66165 (Oct. 16, 2020).

[7] 13 C.F.R. § 124.105(g).

[8] 85 Fed. Reg. 66146, 66165 (Oct. 16, 2020).

[9] Id. at 66166.

[10] 13 C.F.R. § 124.105(i).

[11] 13 C.F.R. § 124.515(a).

[12] 85 Fed. Reg. 66146, 66165 (Oct. 16, 2020).

[13] 85 Fed. Reg. 66146, 66157-58 (Oct. 16, 2020).

[14] 85 Fed. Reg. 66146, 66157-58 (Oct. 16, 2020). Though not explicitly stated in the new rule, it does not appear that this waiver of the full-time devotion rule extends to NHO or CDC-owned Participants.

[15] 13 C.F.R. § 124.109(c)(3)(ii); id. at § 124.110(e); id. at § 124.111(d).

[16] 85 Fed. Reg. 66146, 66157-58 (Oct. 16, 2020).

[17] 13 C.F.R. § 124.112(d)(5).

[18] 85 Fed. Reg. 66146, 66158 (Oct. 16, 2020).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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