SBA Issues Sweeping Regulatory Changes in Response to Presidential Initiative

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The Small Business Administration (SBA) recently published a much-anticipated final rule on a series of important regulatory amendments, including the:

  • Consolidation of the 8(a) Business Development (BD) Mentor-Protégé Program and the All Small Mentor-Protégé Program;
  • Elimination of the requirement that 8(a) participants seeking to be awarded an 8(a) contract as a joint venture (JV) submit the JV agreement to the SBA for review and approval prior to contract award;
  • Elimination of the so-called “three in two rule;” and
  • Requirement that a business concern recertify its size and/or socioeconomic status for all set-aside orders under unrestricted multiple award contracts.

Major highlights of this 222-page final rule — which was issued in response to President Trump’s “government-wide regulation reform initiative” — are discussed below. Additional regulatory changes from the final rule are also listed below.

Merger of 8(a) BD and All Small Mentor-Protégé Programs

As we discussed in a previous article, the SBA mentor-protégé program available to companies participating in the 8(a) BD Program, has been used as a business development tool in which mentors provide diverse types of business assistance to eligible 8(a) BD protégés. Similarly, the All Small Mentor-Protégé Program – which applies to all small businesses, including 8(a) Program participants, Historically Underutilized Business Zone small businesses, veteran-owned and service-disabled veteran-owned small businesses, women-owned and economically disadvantaged women-owned small businesses – is designed to require approved mentors to aid protégé firms so that they may enhance their capabilities, meet their business goals and improve their ability to compete for contracts. As such, the purposes of the two programs are essentially identical.

The benefits available under both programs are also identical. Small businesses and 8(a) Program participants receive valuable business development assistance, and any JV formed between a protégé firm and its SBA-approved mentor receives an exclusion from affiliation, such that the JV will qualify as a small business provided the protégé individually qualifies as small under the size standard corresponding to the NAICS code assigned to the procurement. A protégé firm may enter into a JV with its SBA-approved mentor and be eligible for any contract opportunity for which the protégé qualifies. If a protégé firm is an 8(a) Program participant, a JV between the protégé and its mentor could seek any 8(a) contract, regardless of whether the mentor-protégé agreement was approved through the 8(a) BD Mentor-Protégé Program or the All Small Mentor-Protégé Program. Furthermore, a firm could be certified as an 8(a) participant after its mentor-protégé relationship has been approved by SBA through the All Small Mentor-Protégé Program and be eligible for 8(a) contracts as a JV with its mentor once certified.

Because the benefits and purposes of the two programs are identical, SBA believes that having two separate mentor-protégé programs is unnecessary and causes needless confusion in the small business community. As such, this rule eliminates a separate 8(a) BD Mentor-Protégé Program and continues to allow any 8(a) Program participant to enter a mentor-protégé relationship through the All Small Mentor-Protégé Program. Specifically, the rule revises 13 C.F.R. § 124.520 to merely recognize that an 8(a) Participant, as any other small business, may participate in SBA’s Small Business Mentor-Protégé Program. In merging the two programs, the rule also makes conforming amendments to SBA’s size regulations (13 C.F.R. part 121), the JV provisions (13 C.F.R. 125.8), and the All Small Mentor-Protégé Program regulations (13 C.F.R. 125.9).

Elimination of Requirement that 8(a) JV Agreements Be Approved by SBA Prior to Award

The final rule also eliminates the requirement that 8(a) Program participants seeking to be awarded an 8(a) contract as a JV submit the JV agreement to SBA for review and approval prior to contract award. Currently, 13 C.F.R. § 124.513(e) provides that SBA must approve a JV agreement prior to the award of an 8(a) contract on behalf of the JV. This requirement applies to both competitive and sole source 8(a) procurements. SBA does not approve JV agreements in any other context. SBA believes that the current rule imposes an unnecessary burden on 8(a) Program participants and, as such, the final rule eliminates the need for participants to seek and receive approval from SBA for every initial JV agreement and each addendum to a JV agreement for competitive 8(a) contracts.

Elimination of the “Three in Two Rule”

The final rule additionally eliminates the requirement that any specific JV can be awarded no more than three contracts over a two-year period, but will instead permit a JV to be awarded an unlimited number of contracts over a two-year period. According to SBA, this change will reduce the burden of small businesses being required to form additional JV entities to perform a fourth contract within that two-year period. SBA observed that JVs are often established as separate legal entities – specifically as limited liability companies – based on considerations related to individual venture liability, tax liability, regulatory requirements, and exit strategies. Under the current rule, JV partners must form a new JV entity after receiving three contracts lest they be deemed affiliated for all purposes. The new rule, which dispenses with the “three in two” requirement, “will save small businesses significant legal costs in establishing new joint ventures and ensuring that those entities meet all applicable regulatory requirements.”

Recertification of Size and Socioeconomic Status for Set-Aside Orders

The final rule also requires a business concern to recertify its size and/or socioeconomic status for all set-aside orders under unrestricted multiple-award contracts (MACs), unless the contract authorized limited pools of concerns for which size and/or status was required. Under the current rule, for a MAC that is set aside for small business (i.e., small business set-aside, 8(a) small business, service-disabled, veteran-owned, small business, HUBZone small business, or women-owned small business), size status is set as of the date of the offer for the underlying MAC itself.

SBA believes, however, that there is a legitimate concern that where an entity may inappropriately rely on an initial self-certification as a small business under an unrestricted MAC contract to seek, sometime in the future when the entity no longer qualifies as small, an award of an order under that MAC. A firm’s status as a small business does not generally affect whether the firm does or does not qualify for the award of an unrestricted MAC contract. As such, competitors are very unlikely to protest the size of a concern that self-certifies as small for an unrestricted MAC. In SBA’s view, where a contracting officer sets aside an order for small business under an unrestricted MAC, the first-time size status is important. That is the first time that some firms will be eligible to compete for the order, while others will be excluded from competition because of their size status. To allow a firm’s self-certification for the underlying MAC to control whether a firm is small at the time of an order years after the MAC was awarded does not make sense to SBA.

As noted above, the final rule in this regard does not apply to MAC solicitations that seek to make awards to reserves or pools of specific types of small business concerns. Notably, the final rule also does not apply the modified recertification requirement to the Federal Supply Schedule program.

Additional Changes

The final rule addresses many issues of interest. In addition to the major highlights discussed above, the following changes are also of note to small business government contractors:

  • Agencies may no longer require a small business JV entity to possess a facility security clearance, so long as the lead JV member has the required clearance.
  • Agencies must consider first-tier subcontractor qualifications, capabilities, and past performance, so that small business offerors may rely on this expertise and performance.
  • If a small business loses its size status due to a merger or acquisition – post-proposal but pre-award – it must recertify its size status to the contracting activity. The transaction timing for small business eligibility also has been further clarified.
  • Affiliation rules concerning economic dependence/identity of interest have been relaxed and clarified to allow companies to rebut the presumption of affiliation where a company derives more than 70% of its revenue from an alleged affiliate by demonstrating the company is not solely dependent on the alleged affiliate concern.

Conclusion

With limited exceptions, the regulatory amendments in the final rule take effect within 30 days from the October 15, 2020, publication of the rule in the Federal Register, i.e., on November 16, 2020.

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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