Prolonged Bona Fide Rule Moratorium & Response to Ultima
There were two important announcements from the Small Business Administration (“SBA”) on Monday, August 21, 2023:
Bona Fide Place of Business Rule
The bona fide place of business requirement was adopted by the SBA in 1998 and applies only to 8(a) entities engaged in construction work for the federal government. The bona fide place of business rule generally requires an 8(a) construction firm to have a “bona fide place of business” in the area in which they are performing a federal construction project. The SBA adopted this requirement to implement Section 8(a)(11) of the Small Business Act, 15 U.S.C. 637(a)(11), which states that “[t]o the maximum extent practicable, construction subcontracts awarded by the Administration pursuant to this subsection shall be awarded within the county or State where the work is to be performed.” The bona fide place of business rule applies to both sole source and competitive 8(a) construction contracts.
The SBA had previously issued a moratorium on the application of the bona fide place of business rule due to the impact of COVID-19. That moratorium was set to expire on September 30, 2023. The SBA has now extended the moratorium one year, to September 30, 2024. The SBA explained that:
Based on the feedback received from the Alaska 8(a) community and congressional stakeholders, this modification to the 8(a) Business Development Program has made it easier for small and disadvantaged businesses to be eligible for 8(a) construction contract awards. This modification continues to be well received by other federal agencies seeking to increase construction procurement opportunities with small and disadvantaged businesses across the country, but especially in rural and remote areas like Alaska with population densities lower than the national average.
According to the SBA, “[d]uring the moratorium, any 8(a) Program participant seeking an 8(a) construction contract (either on a sole source or competitive basis) will not be required to have or establish a bona fide place of business in any specific geographic location.”
Notably, there is legislation pending that would eliminate the bona fide place of business rule. The moratorium may provide additional time for Congress to eliminate the bona fide place of business rule going forward.
If the bona fide place of business rule is not eliminated, the SBA’s moratorium expires in 2024, 8(a) contractors should be aware of the recent changes to the bona fide place of business rule adopted by the SBA. The changes generally make it easier for contractors to comply with the bona fide place of business rule.
Ultima and Individually Owned 8(a) Entities
On July 20, 2023, the United States District Court for the Eastern District of Tennessee issued an order in Ultima Servs. Corp. v. U.S. Dept. of Agric., 2:20-CV-00041, finding that the rebuttable presumption (the legal principle that presumes something to be true unless proven otherwise) of social disadvantage used in the Small Business Administration’s (SBA) 8(a) program to determine eligibility for individually-owned entities is unconstitutional racial discrimination. We previously discussed that ruling.
On Monday, August 22, 2023, the SBA provided guidance as to how the Ultima ruling will impact individually-owned entities:
- All individually-owned entities who relied on the rebuttable presumption to obtain entry to the 8(a) program will have to establish their social disadvantage prior to being awarded any new 8(a) contract. They will do so using the SBA’s social disadvantage narrative. The specific language from the SBA is:
To comply with the Court’s order, SBA is requiring all 8(a) participants whose program eligibility is based upon one or more individuals who relied upon the presumption of social disadvantage to establish their individual social disadvantage by completing a social disadvantage narrative.
To receive new 8(a) contracts, an individual-owned 8(a) participant that previously relied on the presumption of social disadvantage to support its eligibility will need to submit information to SBA, through the Certify.sba.gov system, that will allow SBA to determine whether the individual upon whom eligibility is based has established personal social disadvantage.
- Individually-owned entities will only need to establish their social disadvantage once. They will not need to establish it each program year. The specific language from the SBA is:
Current 8(a) participants should continue to submit their annual review and continuing eligibility materials to SBA. With respect to social disadvantage, SBA will interpret the firm’s certification that it remains eligible for the 8(a) program as stating only that there have been no changes to the information the participant previously submitted in connection with its program eligibility that would affect the social disadvantage determination. Consistent with existing regulations, 8(a) applicants and 8(a) participants will only need to establish social disadvantage once for their program term, unless there are ownership/control or other changes which affect eligibility. (emphasis added)
- Individually-owned entities who did not rely on the rebuttable presumption to obtain entry to the 8(a) program, and instead established their social disadvantage by a preponderance of the evidence, will not need to submit a narrative.
- Entities owned by Indian Tribes, Alaska Native Corporations, and Native Hawaiian Organizations will also not need to submit a narrative because they are effectively deemed socially disadvantaged by statute.
- The SBA will be issuing letters from the SBA to 8(a) entities informing them when they have established social disadvantage. Upon receipt of that letter, that entity will be eligible to continue receiving 8(a) contracts. Entities owned by Indian Tribes, Alaska Native Corporations, and Native Hawaiian Organizations should not need to do anything to receive their letter; it should come automatically from the SBA.
An individual who has been socially disadvantaged is defined by the SBA as an individual who has been subjected to racial, ethnic, or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities. The SBA will find that an individual is socially disadvantaged only where the discrimination or bias experienced by an individual is chronic, substantial, and has occurred within American society (not another country). Additionally, the discrimination must have negatively impacted the individual’s entry or advancement in the business world.
The social disadvantage narrative developed by the SBA requires applicants to submit a narrative description of:
- The applicant’s “identity,” explaining that:
Clearly describing which identity or characteristics you possess and how you have been subject to discrimination helps SBA understand your experience and eligibility for the 8(a) Program.
Race, religion, ethnic origin, gender, sexual orientation, identifiable disability, isolation from American society, and others are all categories of identities/characteristics that have formed the basis of successful social disadvantage narratives. It is important to specify the identities/characteristics within the category/categories that form the basis of your social disadvantage (e.g., Subcontinent Asian American women have specific identities within the race and gender categories).
One identity/characteristic is sufficient to establish a social disadvantage, although individuals with multiple identities/characteristics may wish to specify more than one, as it is often difficult to determine which single characteristic is the subject of discrimination.
- Descriptions of at least two incidents of bias that establish chronic and substantial social disadvantage. The SBA explains that:
An individual should typically provide two incidents of bias to establish chronic and substantial social disadvantage. One incident may be enough to establish a social disadvantage if it is pervasive or recurring. SBA recommends limiting the narrative to two examples to avoid unnecessary delays in the review process.
Experience(s) should be related to education, employment, and business history (including current or previously owned companies). Some of the broad types of experiences that may establish social disadvantage are included later in the document.
- Education – SBA considers factors such as denial of equal access to institutions of higher education; exclusion from social and professional association with students or teachers; denial of education honors rightfully earned; and social patterns or pressures that discourage the individual from pursuing a professional or business education.
- Employment – SBA considers factors such as unequal treatment in hiring, promotions, and other aspects of professional advancement, pay and fringe benefits, terms and conditions of employment, or retaliatory or discriminatory behavior by an employer; and social patterns or pressures which have channeled the individual into nonprofessional or non-business fields.
- Business history – SBA considers factors such as unequal access to credit or capital; acquisition of credit or capital under commercially unfavorable circumstances; unequal treatment in opportunities for government contracts or other work; unequal treatment by potential customers and business associates; and exclusion from business or professional organizations.
For each incident, please describe who, what, where, why, when, and how discrimination or bias occurred. Incidents are more easily digested by the SBA if they provide information in the following order:
- When – Explain when the discriminatory conduct occurred. Exact dates, if available, are preferred but are not necessary so long as the incident provides a specific time period. This discrimination can be from any period of your life; you do not need to be experiencing current discrimination to qualify.
- Where – Explain where the discriminatory conduct occurred. The incident must have occurred in American society.
- Who – Explain who committed the discriminatory action. This could include an individual, a group of individuals, or an institution. Individual names, where available, are preferred but not necessary so long as the incident provides a specific figure or organization.
- What – Explain the discriminatory conduct.
- Why – Explain the reason(s) that the conduct was more likely motivated by bias or discrimination than other non-discriminatory reasons. Without additional facts, a mere assertion that the action was the result of bias or discrimination is not enough to support a claim of social disadvantage.
- How – Explain how each instance of discriminatory conduct impacted your entry into or advancement in the business world. Offensive comments or conduct, while reprehensible, will not support a claim of social disadvantage if there is no negative impact associated with the incident.
- The social disadvantage narrative provides several examples of incidents of social disadvantage. The examples include:
- Denial of a request to change a major from nursing to business administration:
“I had completed the necessary pre-requisite classes and was otherwise eligible to declare a business administration major. During a meeting with my faculty advisor and Dr. Doe, Dr. Doe explained that I would have more career options as a woman in healthcare. I later learned that several male nursing students in my class were given approval to declare majors outside the School of Health Sciences. For these reasons, I believe my request was denied based on gender bias.
Because my business major was not approved, I did not graduate with the education and experience necessary for an entry-level career in marketing. I spent the next 5 years completing my marketing degree as a part-time student, which delayed my entry into the marketing field.”
- Denial of a position as a site manager because of a disability:
“I requested a debrief [about denial of an application for a site manager position] with Jane [supervisor] because I had more experience and a higher trade certification than Emily. Jane stated that the company needed someone who could inspect active and/or dangerous jobsites. I reiterated, just as I had during my interview, that I was capable of performing all aspects of the site manager role to include on-site inspections. Emily does not have a physical disability like I do. For these reasons, I believe Emily was selected over me due to unfounded stereotypes associated with my physical disability.
Had I received the site manager promotion, I would have earned an additional $20,000 a year. This extra income would have allowed me to accumulate capital faster and start my business three years earlier than I did.”
- Denial of a line of credit because of their race:
“The line of credit was tentatively approved because my business met the minimal revenue and capital requirements for approval. Additionally, I had an excellent credit score of 790. Only after I met the loan officer in person did concerns arise over my ability to repay. A white former colleague, who started a business after I did, applied for the same line of credit with a lower credit score than I had and was successful. For these reasons, I believe my application was denied due to bias toward my race.
Because my line of credit application was declined, I was not able to purchase an additional truck to increase our company’s capacity. As a result, we bid on but lost a contract opportunity with the municipal government for facilities maintenance.”
Finally, the SBA also announced that the “8(a) program remains open for business” and the SBA is continuing to encourage federal agencies to use the 8(a) program:
The 8(a) program remains open for business. SBA is encouraging its continued use as federal agencies identify 8(a) and other socio-economic small businesses to help meet critical mission needs, including during the end of the fiscal year, typically a time of increased usage of the program. Agencies can immediately continue to send offer letters to SBA. SBA is currently developing a new narrative process, but until the new process is in place, SBA will process individual claims of social disadvantage under our existing narrative process.
It is a good sign that the SBA is publicly announcing its continued support for the 8(a) program, and is not retreating from this valuable program.
Individually-owned entities who are either applying for, or already in the 8(a) program, and that intended to rely on, or have relied upon, the SBA’s presumption of social disadvantage should consider preparing their social disadvantage narrative, as the SBA will not approve entry into the 8(a) program, or award of new 8(a) contracts, to individually-owned entities that have not established social disadvantage by a preponderance of the evidence.
