On April 27th, the U.S. Small Business Administration (“SBA”) published a final rule making changes to the regulations governing the 8(a) program. This final rule is SBA’s implementation of the proposed rules issued by the SBA on September 9, 2022, and we summarized the changes adopted by the final rule here.
While many of the SBA’s regulatory changes are intended to document existing SBA policies and practices, the SBA did implement a number of substantive changes. Accordingly, over the next several weeks, we will be going through various parts of the final rule and conducting an in-depth discussion and analysis of the changes. We anticipate addressing the following areas in this series:
Follow-On Contracts
In this update, we are addressing the changes to the SBA’s rules on follow-on contracts. While most of the regulatory changes are focused on the SBA’s internal process for accepting or removing a procurement from the 8(a) program, these changes will influence the procurement strategies of government agencies, and therefore the contract opportunities available to 8(a) entities.
Prior to the recent updates, 13 C.F.R § 124.506(b) provided that a procurement may not be removed from competition and awarded to a tribally-owned, ANC-owned or NHO-owned concern on a sole source basis. This regulation caused some confusion, as some interpreted it to mean that an agency could not award a sole source contract for a requirement to an entity-owned 8(a) if that requirement had previously been awarded pursuant to a competitive procurement process. The SBA revised the regulations to clarify that this is not the rule, and that 13 C.F.R. § 124.506(b) only restricts a procuring agency from announcing that a requirement will be procured competitively and then, after evidencing that public intent, awarding the work as an 8(a) sole source contract. The SBA explained that:
The provision prohibiting a procurement from being removed from competition and awarded to an entity-owned Participant on a sole source basis was meant to apply only to a current procurement, not the predecessor to a current procurement. A procuring agency may not evidence its intent to fulfill a requirement as a competitive 8(a) procurement, through the issuance of a competitive 8(a) solicitation or otherwise, cancel the solicitation or change its public intent, and then procure the requirement as a sole source 8(a) procurement to an entity-owned Participant. A follow-on procurement is a new contracting action for the same underlying requirement, and if the procuring agency has not evidenced a public intent to fulfill it as a competitive 8(a) procurement it can be fulfilled on a sole source basis to an entity-owned Participant. The proposed rule added language clarifying that intent. SBA received 12 comments supporting the clarification to allow a sole source award to an entity-owned Participant where the procuring activity has not evidenced its intent to fulfill the current requirement as a competitive 8(a) procurement and no comments opposing it. As such, SBA adopts the proposed language in this final rule. (emphasis added).
Notably, the SBA also decided, after soliciting comments on the issue, to not issue a new regulation “requiring SBA to consider the effect that losing an opportunity to compete for a follow-on contract would have on an incumbent Participant’s business development where the follow-on procurement is offered to SBA as a sole source 8(a) procurement on behalf of an entity-owned Participant.” The SBA explained that a specific rule was not needed on this issue to “capture SBA’s role in ensuring that the business development purposes of the 8(a) BD program are served.”
The SBA did adopt new language in 13 C.F.R. § 124.504 regarding when it would release requirements from the 8(a) program. 13 C.F.R. § 124.504(d)(3) previously provided that SBA will release a requirement where the procuring activity agrees to procure the requirement as a small business. The SBA explained that some agencies have interpreted this rule “to mean that SBA will always release a requirement from the 8(a) BD program if the procuring activity agrees to procure the requirement as a small business, HUBZone, SDVO small business, or WOSB set-aside.” The SBA also stated that was not correct and revised the language of the regulation to make it clear that the “SBA has discretion in any release decision” and that “[t]he fact that a procuring activity agrees to procure the requirement as a small business, HUBZone, SDVO small business, or WOSB set-aside is a positive factor for release, but SBA must still consider any adverse consequences to an incumbent 8(a) Participant.”
The SBA also clarified 13 C.F.R. § 124.504 to reject a reading of that regulation that would preclude the SBA from releasing a requirement in order to permit a set aside award of that work under a multiple award contract that is not itself a set-aside contract (i.e. permitting an agency to issue a small business set-aside award as part of a MAC that was not set aside for 8(a) entities). The SBA stated that
As long as an agency identifies a procurement strategy that would target small businesses for a follow-on procurement, release may occur. In fact, release to such a contract vehicle may be appropriate where the incumbent 8(a) contractor has graduated from the program but still qualifies as a small business, the requirement is critical to the incumbent contractor’s overall business development, the incumbent contractor is a contract holder on an unrestricted multiple award contract, and the procuring agency has evidenced its intent to set-aside an order for small business under the multiple award contract for which the incumbent contractor is a contract holder. This would give the incumbent contractor the opportunity to compete for the follow-on procurement and ensure that award would be made to a small business. The proposed rule clarified that release may occur whenever a procuring agency identifies a procurement strategy that would emphasize or target small business participation.
The SBA did adopt new language stating that the SBA will consider the impact on an incumbent if a procuring agency seeks to issue an order to an 8(a) entity under a multiple award contract (MAC) for a requirement that was previously performed under a different 8(a) contract. The SBA expressed concern that an 8(a) incumbent may be precluded from competing for a re-compete of the work if the work is moved to a MAC to which the incumbent does not have access. The rule does not preclude the transfer of the requirement to the MAC, but rather gives the SBA the opportunity to consider the potential impact on the incumbent:
an 8(a) incumbent contractor may be seriously hurt by moving a procurement from an 8(a) sole source or competitive procurement to an 8(a) multiple award contract to which the incumbent is not a contract holder. In such a case, the incumbent would have no opportunity to win the award for the follow-on contract and would have no opportunity to demonstrate that it would be adversely impacted by the loss of the opportunity to compete for the follow-on procurement. SBA believes that not allowing an incumbent 8(a) contractor to compete for a follow-on contract where that contract accounts for a significant portion of its revenues contradicts the business development purposes of the 8(a) BD program.
In order to eliminate any confusion and ensure that notification occurs where a procuring agency seeks to issue an order under an 8(a) multiple award contract and some or all of the work contemplated in that order was previously performed through one or more other 8(a) contracts, the proposed rule amended § 124.503(i)(1)(ii) to clarify that an agency must notify SBA where it seeks to issue an order under an 8(a) multiple award contract that contains work that was previously performed through another 8(a) contract. Where that work is critical to the business development of a current Participant that previously performed the work through another 8(a) contract and that Participant is not a contract holder of the 8(a) multiple award contract, SBA may request that the procuring agency fulfill the requirement through a competition available to all 8(a) BD Program Participants.
This new revision is helpful to incumbent contractors as a tool they can use to argue against moving a requirement to a MAC to which the incumbent does not have access.
Finally, the SBA revised the regulations to state that the SBA will not accept a contract into the 8(a), HUBZone, WOSB, or SDVO programs that seeks to limit competition only to entities that are participants in two or more small business programs. As such, a procuring agency will not be able to limit competition to just 8(a) entities that are also HUBZone eligible, and instead will be required to allow competition among all eligible entities (i.e. all 8(a) entities, HUBZone or not). The SBA explained:
SBA believes that § 8(a)(1)(D)(i) of the Small Business Act, 15 U.S.C. 637(a)(1)(D)(i), requires any 8(a) competition to be available to all eligible Program Participants. SBA has consistently interpreted this provision as prohibiting SBA from accepting a requirement for the 8(a) BD program that seeks to limit an 8(a) competition only to certain types of 8(a) Participants, rather than allowing competition among all eligible Participants. In other words, SBA has interpreted this authority to prohibit an agency from requiring one or more other certifications in addition to its 8(a) certification. This interpretation is currently contained in § 125.2(e)(6)(i) but is not specifically contained in the 8(a) BD regulations…. The proposed rule added a sentence to § 124.501(b) to clarify SBA’s position that prohibits a contracting activity from restricting an 8(a) competition to Participants that are also certified HUBZone small businesses, certified WOSBs or certified SDVO small businesses.
Comparison of the Prior Rules with the New Rule:
§ 124.501 What general provisions apply to the award of 8(a) contracts?
(b) 8(a) contracts may either be sole source awards or awards won through competition with other Participants. In addition, for multiple award contracts not set aside for the 8(a) BD program, a procuring agency may award an 8(a) sole source order or set aside one or more specific orders to be competed only among eligible 8(a) Participants, regardless of the place of performance. Such an order may be awarded as an 8(a) award where the order was offered to and accepted by SBA as an 8(a) award and the order specifies that the performance of work and/or non-manufacturer rule requirements apply as appropriate. A procuring activity cannot restrict an 8(a) competition (for either a contract or order) to require SBA socioeconomic certifications other than 8(a) certification (i.e., a competition cannot be limited only to business concerns that are both 8(a) and HUBZone, 8(a) and WOSB, or 8(a) and SDVO) or give evaluation preferences to firms having one or more other certifications.
§ 124.504 What circumstances limit SBA’s ability to accept a procurement for award as an 8(a) contract, and when can a requirement be released from the 8(a) BD program?
(d) Release for non-8(a) or limited 8(a) competition.
(1) Except as set forth in paragraph (d)(4) of this section, where a procurement is awarded as an 8(a) contract, its follow-on requirement must remain in the 8(a) BD program unless SBA agrees to release it for non-8(a) competition. Where a procurement will contain work currently performed under one or more 8(a) contracts, and the procuring agency determines that the procurement should not be considered a follow-on requirement to the 8(a) contract(s), the procuring agency must notify SBA coordinate with the SBA District Office servicing the 8(a) incumbent firm and the SBA Procurement Center Representative assigned to the contracting activity initiating a non-8(a) procurement action that it intends to procure such specified work outside the 8(a) BD program through a requirement that it considers to be new. Such notification must identify the scope and dollar value of any work previously performed through another 8(a) contract and the scope and dollar value of the contract determined to be new Additionally, a procuring agency must notify SBA where it seeks to reprocure a follow-on requirement through a pre-existing limited contracting vehicle which is not available to all 8(a) BD Program Participants and the previous/current 8(a) award was not so limited. If a procuring agency would like to fulfill a follow-on requirement outside of the 8(a) BD program, it must make a written request to and receive the concurrence of the AA/BD to do so. In determining whether to release a requirement from the 8(a) BD program, SBA will consider:
(i) Whether the agency has achieved its SDB goal;
(ii) Where the agency is in achieving its HUBZone, SDVO, WOSB, or small business goal, as appropriate; and
(iii) Whether the requirement is critical to the business development of the 8(a) Participant that is currently performing it.
(2) SBA may decline to accept the offer of a follow-on or renewable 8(a) acquisition in order to give a concern previously awarded the contract that is leaving or has left the 8(a) BD program the opportunity to compete for the requirement outside of the 8(a) BD program.
(i) SBA will consider release under paragraph (2) only where:
(A) The procurement awarded through the 8(a) BD program is being or was performed by either a Participant whose program term will expire prior to contract completion, or by a former Participant whose program term expired within one year of the date of the offering letter;
(B) The concern requests in writing that SBA decline to accept the offer prior to SBA’s acceptance of the requirement for award as an 8(a) contract; and
(C) The concern qualifies as a small business for the requirement now offered to the 8(a) BD program.
(ii) In considering release under paragraph (2), SBA will balance the importance of the requirement to the concern’s business development needs against the business development needs of other Participants that are qualified to perform the requirement. This determination will include consideration of whether rejection of the requirement would seriously reduce the pool of similar types of contracts available for award as 8(a) contracts. SBA will also seek the views of the procuring agency.
(3) SBA will may release a requirement under this paragraph only where the procuring activity agrees to procure the requirement as a small business, HUBZone, SDVO small business, or WOSB set-aside or otherwise identifies a procurement strategy that would emphasize or target small business participation.
(4) The requirement that a follow-on procurement must be released from the 8(a) BD program in order for it to be fulfilled outside the 8(a) BD program does not apply:
(i) Where previous orders were offered to and accepted for the 8(a) BD program pursuant to § 124.503(i)(2); or
(ii) Where a procuring agency will use a mandatory source (see FAR Subparts 8.6 and 8.7(48 CFR subparts 8.6 and 8.7)). In such a case, the procuring agency should notify SBA at least 30 days prior to the end of the contract or order.
§ 124.506 At what dollar threshold must an 8(a) procurement be competed among eligible Participants?
(b)(3) There is no requirement that a procurement must be competed whenever possible before it can be accepted on a sole source basis for a Tribally-owned or ANC-owned concern, or a concern owned by an NHO for DoD contracts, but a procurement may not be removed from competition to award it to a Tribally-owned, ANC-owned or NHO-owned concern on a sole source basis. However, a current procurement requirement may not be removed from competition and awarded to a tribally-owned, ANC-owned or NHO-owned concern on a sole source basis (i.e., a procuring agency may not evidence its intent to fulfill a requirement as a competitive 8(a) procurement, through the issuance of a competitive 8(a) solicitation or otherwise, cancel the solicitation or change its public intent, and then procure the requirement as a sole source 8(a) procurement to an entity-owned Participant). A follow-on requirement to one that was previously awarded as a competitive 8(a) procurement may be offered, accepted and awarded on a sole source basis to a tribally-owned or ANC-owned concern, or a concern owned by an NHO for DoD contracts.
