Final Rule Amends SBA Regulations On Mentor-Protégé Programs, Joint Ventures and The 8(a) BD Program, Part 3: 8(a) BD Program

August 19, 2016​

Part 3 of Our Summary of SBA's Changes To Regulations On Mentor-Protégé Programs, Joint Ventures and 8(a) BD Program

A few weeks ago, on July 25, 2016, the U.S. Small Business Administration (SBA) issued a final rule (the "Final Rule") amending SBA regulations to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013 (NDAA 2013). The Final Rule, which becomes effective on August 24, 2016 and can be found here, did three things. First, it established a government-wide mentor-protégé program for all small businesses and made clarifications and conforming changes to the mentor-protégé program under the 8(a) Business Development (“8(a) BD”) program. Second, it made several changes to the rules applicable to joint ventures. Lastly, it made clarifications to the rules applicable to the 8(a) BD program.

In a prior editions of The GovCon Bulletin,™ we summarized the Final Rule's changes to the SBA's mentor-protégé programs (which you can read here) and the Final Rule's changes to the SBA's rules on joint ventures (which you can read here). In this edition of The GovCon Bulletin,™ we summarize the Final Rule's changes to the SBA's regulations on the 8(a) BD program.

Mark Amadeo

In the Final Rule, the SBA made several changes to the rules that apply to the 8(a) BD program. These changes are described below.

Establishing Social Disadvantage for the 8(a) BD Program   

The Final Rule amends § 124.103(c) in order to clarify that an individual claiming social disadvantage must present a combination of facts and evidence that by itself establishes that the individual has suffered social disadvantage that has negatively impacted his or her entry into or advancement in the business world. Thus, the SBA can disregard a claim of social disadvantage where a legitimate alternative ground for an adverse action exists and the individual has not presented evidence that would render his/her claim any more likely than the alternative ground. For example, a statement that a male co-worker received higher compensation or was promoted over a woman does not amount to an incident of social disadvantage by itself. On the other hand, a statement that a male co-worker received higher compensation or was promoted over a woman and that the woman had the same or superior qualifications and responsibilities would constitute an incident of social disadvantage.

Control of an 8(a) BD Applicant or Participant

Section 124.106 of SBA's regulations currently provides that one or more disadvantaged individuals must control the daily business operations of an 8(a) BD applicant or 8(a) BD participant. The SBA's regulations require that the individuals must have managerial experience “of the extent and complexity needed to run the concern.” The regulations also provide that a “disadvantaged individual need not have the technical expertise or possess a required license to be found to control an applicant or Participant.” The SBA did not intend to require that a disadvantaged individual must always have managerial experience in the same or similar line of work as the 8(a) BD applicant or 8(a) BD participant. Rather, the words “of the extent and complexity needed to run the concern” were meant to look at the degree of management experience, not the field in which that experience was gained. Consequently, the Final Rule adds language to § 124.106 to specify that management experience need not be related to the same or similar industry as the primary industry classification of the 8(a) BD applicant or 8(a) BD participant.

8(a) BD Application Processing

Current SBA regulations require applicants to the 8(a) BD program to submit certain specified supporting documentation, including financial statements, copies of signed Federal personal and business tax returns, and individual and business bank statements. The regulations also required that an applicant must submit a signed IRS Form 4506T, Request for Copy or Transcript of Tax Form, in all cases.  A commenter questioned the need for every applicant to submit IRS Form 4506T, and in response, the Final Rule eliminates the requirement from § 124.203 that an applicant submit the IRS Form in every case, and clarifies that the SBA may request additional documentation when necessary.

In addition, the Final Rule amends § 124.202 to require applications to be filed electronically, with the understanding that certain supporting documentation may also be required under § 124.203. The Final Rule also eliminates the requirement under § 124.203 that an applicant provide a wet signature from each individual claiming social disadvantage status. As long as applicants know that the individual(s) upon whom eligibility is based take responsibility for the accuracy and truthfulness of any information submitted on behalf of the applicant, an electronic, uploaded signature should be sufficient.

Also, current SBA regulations provided that if during the processing of an application, SBA receives adverse information regarding possible criminal conduct by the applicant or any of its principals, SBA would automatically suspend further processing of the application and refer it to SBA's Office of Inspector General (OIG) for review. However, the SBA has now taken the position that referral to SBA's OIG should not occur in every instance, such as where a minor infraction occurred many years ago, and that SBA should have the discretion to refer matters to SBA's OIG in appropriate instances. Consequently, the Final Rule provides discretion to the SBA to determine when to refer a matter to the OIG.

Lastly, the SBA regulations provide that each individual claiming economic disadvantage must describe the economic disadvantage in a narrative statement, and must submit personal financial information to SBA. However, the SBA's determination as to whether an individual qualifies as economically disadvantaged is based solely on an analysis of objective financial data relating to the individual's net worth, income and total assets. Consequently, the Final Rule eliminates the requirement that each individual claiming economic disadvantage must submit a narrative statement in support of his or her claim of economic disadvantage.

Substantial Unfair Competitive Advantage by Tribally-Owned Business Entity

Under the Small Business Act, the size of a small business owned by a socially and economically disadvantaged Indian tribe (or a wholly owned business entity of such tribe) is determined independently without regard to its affiliation with the tribe, any entity of the tribal government, or any other business owned by the tribe, unless the Administrator determines that one or more such tribally owned business concerns have obtained, or are likely to obtain, a substantial unfair competitive advantage within an industry category.” The term “Indian tribe,” under the 8(a) BD program, includes any Alaska Native village or regional or village corporation and the SBA's regulations have extended this broad exclusion from affiliation to the other entity-owned firms authorized to participate in the 8(a) BD program (i.e., firms owned by Native Hawaiian Organizations (NHOs) and Community Development Corporations (CDCs)).

The Final Rule provides guidance as to how SBA will determine whether a business entity has obtained or is likely to obtain “a substantial unfair competitive advantage within an industry category.” Specifically, the exemption to affiliation will not apply to firms that have obtained or are likely to obtain a substantial unfair competitive advantage on a national basis in a particular NAICS code with a particular size standard. In making this assessment, the SBA will consider a firm's percentage share of the national market and other relevant factors to determine whether a firm is dominant in a specific six-digit NAICS code with a particular size standard. SBA will review Federal Procurement Data System (FPDS) data to compare the firm's share of the industry as compared to overall small business participation in that industry to determine whether there is an unfair competitive advantage. The rule does not contemplate a finding of affiliation where an entity-owned concern appears to have obtained an unfair competitive advantage in a local market, but remains competitive, but not dominant, on a national basis.

Management of Tribally-Owned 8(a) Program Participants

The Final Rule adds language to § 124.109(c)(4) specifying that the individuals responsible for the management and daily operations of a tribally-owned concern cannot manage more than two Program Participants at the same time.

Native Hawaiian Organizations (NHOs)

The Final Rule adds language to § 124.110(d) to clarify that the members or directors of an NHO need not have the technical expertise or possess a required license to be found to control an 8(a) BD applicant or 8(a) BD participant owned by the NHO. Rather, the NHO, through its members and directors, must merely have managerial experience of the extent and complexity needed to run the concern. As with individually owned 8(a) BD applicants and 8(a) BD participants, individual NHO members may be required to demonstrate more specific industry-related experience to ensure that the NHO in fact controls the day-to-day operations of the firm, such as when a non-disadvantaged owner (or former owner) who has experience related to the industry is actively involved in the day-to-day management of the firm.

The Small Business Act authorizes small business concerns owned by “economically disadvantaged” NHOs to participate in the 8(a) BD program. Currently, § 124.110(c)(1) provides that in determining whether an NHO is economically disadvantaged, SBA will look at the individual economic status of the NHO's members. The NHO must establish that a majority of its members qualify as economically disadvantaged under the rules that apply to individuals as set forth in § 124.104. Commenters recommended that NHOs should establish economic disadvantage in the same way that tribes currently do for the 8(a) BD program: that is, by providing information relating to members, including the tribal unemployment rate, the per capita income of tribal members, and the percentage of tribal members below the poverty level. For the Native Hawaiian community, this would mean that an NHO would have to describe the individuals to be served by the NHO and provide the economic data regarding those individuals. SBA agreed that basing the economic disadvantage status of an NHO on individual Native Hawaiians who control the NHO does not seem to be the most appropriate way to do so. Thus, the Final Rule makes NHOs similar to Indian tribes by requiring an NHO to present information relating to the economic disadvantaged status of Native Hawaiians, including the unemployment rate of Native Hawaiians and the per capita income of Native Hawaiians. As with economic disadvantage for tribes, once an NHO establishes that it is economically disadvantaged in connection with the application of one firm owned and controlled by the NHO because the intended beneficiaries are economically disadvantaged, it need not reestablish its economic disadvantage for another firm owned by the NHO. In addition, unless a second NHO intends to serve and benefit a different population than that of the first NHO that established its economic disadvantage status, the second NHO also need not submit information to establish its economic disadvantage.

Sole Source 8(a) Awards & Tribal and ANC 8(a) Businesses

Under the Small Business Act, 8(a) BD procurements that exceed an inflation-adjusted threshold of $7 million for those assigned a manufacturing NAICS code and an inflation-adjusted threshold of $4 million for all other procurements must generally be competed among eligible 8(a) BD program participants. The Final Rule amends the 8(a) BD regulations under § 124.506(a)(2)(ii) that reflect these competitive threshold amounts, by replacing the outdated $6.5 million competitive threshold for procurements assigned a manufacturing NAICS with the inflation-adjusted $7 million competitive threshold. The Final Rule also conforms the SBA sole-source regulations applicable to Indian tribes and Alaska Native Corporations with the rules under FAR.

8(a) BD participants that are owned by Indian tribes and ANC’s are exempt from the $4 million and $7 million competitive threshold limitations and, thus, are eligible for sole-source awards that exceed them. Nevertheless, the National Defense Authorization Act for Fiscal Year 2010 (NDAA 2010) imposed justification and approval requirements on any 8(a) sole source contract above a certain amount – currently $22 million as adjusted for inflation. Specifically, these requirements, which are implemented in FAR 19.808-1(a) and 6.303-1(b) state that the head of an agency cannot award an 8(a) sole source contract above the limitation “unless the contracting officer for the contract justifies the use of a sole-source contract in writing” and “the justification is approved by the appropriate official designated to approve contract awards for dollar amounts that are comparable to the amount of the sole-source contract.” The Final Rule incorporates these requirements into SBA's regulations. In addition, it requires a procuring agency that is offering a sole source requirement that exceeds $22 million for award through the 8(a) BD to provide a statement in its offering letter that the necessary justification and approval under the FAR has occurred. The SBA also included an explanation aimed at eliminating a misconception that there can be no 8(a) sole source awards that exceed $22 million. According to the SBA, nothing in NDAA 2010 or under the FAR prohibits 8(a) sole source awards to Program Participants owned by Indian tribes and ANCs above $22 million. Rather, all that is required is that a contracting officer justify the award and have that justification approved at the proper level.

Change in Primary Industry Classification

The Final Rule authorizes the SBA to change the primary industry classification contained in an 8(a) BD participant's business plan where the greatest portion of the participant's total revenues during a three-year period have evolved from one NAICS code to another. The rule also requires the SBA to notify the participant of its intent to change the participant's primary industry classification and afford the participant the opportunity to submit information explaining why such a change would be inappropriate. A participant can demonstrate why it believes the primary industry classification in the business plan continues to be appropriate despite the increase in revenues in the secondary NAICS code. The participant should identify: all non-Federal work that it has performed in its primary NAICS code; any efforts it has made to obtain contracts in the primary NAICS code; all contracts that it was awarded that it believes could have been classified under its primary NAICS code, but which a contracting officer assigned another reasonable NAICS code; and any other information that it believes has a bearing on why its primary NAICS code should not be changed despite performing more work in another NAICS code.

The proposed rule also provided that if SBA determined that a change in a Participant's primary NAICS code was appropriate and that 8(a) BD participant was an entity-owned firm (i.e., owned by a tribe, ANC, NHO, or CDC) that could not have two BD participants in the program with the same primary NAICS code, the entity would be required to choose which participant should leave the 8(a) BD program if the change in NAICS codes caused it to have two 8(a) BD participants with the same primary NAICS code. However, agreeing with comments responding to the proposed change, the SBA’s Final Rule provides that where an SBA change in the primary NAICS code results in an entity having two 8(a) BD Participants in the same NAICS code, the second, newer, 8(a) BD participant may continue to participate in the 8(a)(BD program. However, for a period of time lasting until two years after the first older 8(a) participant leaves the 8(a) BD program  the entity will not be able to receive any 8(a) contracts in the six-digit NAICS code that is the primary NAICS code of the first older participant.

8(a) BD Program Voluntary Suspensions

The Final Rule adds two additional bases for allowing an 8(a) BD participant to elect to be suspended from 8(a) BD program participation: First, where the Participant's principal office is located in an area declared a major disaster area; or, second, where there is a lapse in Federal appropriations. The changes were intended to allow a firm to suspend its term of participation in the 8(a) BD program in order to not miss out on contract opportunities that the firm might otherwise have lost due to a disaster or a lapse in Federal funding.

Benefits Reporting Requirement

The Final Rule changes the timing of benefits reporting for entity-owned 8(a) BD participants from the time of a participant's annual review submission to the time of a participant's annual financial statement submission. The regulatory change will continue to require the submission of the data on an annual basis but within 120 days after the close of the concern's fiscal year instead of as part of the annual submission.

Reverse Auctions

The Final Rule adopts the SBA’s proposed amendment of §§ 125.2(a) and 125.5(a)(1) to address reverse auctions. Specifically, the Final Rule reinforces the principle that all of SBA's regulations, including those relating to set-asides and referrals for a Certificate of Competency, apply to reverse auctions.

Reconsideration of Decisions of SBA's OHA

The Final Rule adopts the proposed clarification to § 134.227(c) that recognizes that the SBA may file a request for reconsideration in a proceeding before the Office of Hearing Appeals in which it has not previously participated. The clarification overrules the decision in Size Appeal of Goel Services, Inc. and Grunley/Goel JVD LLC, SBA No. SIZ-5356 (2012), which held that SBA could not request reconsideration where SBA did not appear as a party in the original appeal.

Recertification When an Affiliate Acquires Another Concern

In the final rule, the SBA makes clear that recertification is required when an affiliate of an entity acquires another concern. Otherwise, firms can circumvent the SBA's recertification rules by simply creating affiliates to acquire or merge with other firms. According to the SBA, the intent of the recertification rule is to require recertification when an entity exceeds the size standard due to acquisition, merger or novation, and there is no public policy rationale for not requiring recertification based on the whether it is the entity in question that acquires another concern, or an affiliate of the entity in question.