Significant U.S. Small Business Administration Regulatory Changes Take Effect November 16, 2020

The U.S. Small Business Administration (SBA) issued a final rule on Oct. 16, 2020, consolidating its Mentor-Protégé programs and making several potentially significant changes to other aspects of SBA's government contracting programs. The effective date for the rule changes is Nov. 16, 2020.

Consolidated Mentor-Protégé Programs

The principal stated purpose of the new rule is to combine SBA's 8(a) Mentor-Protégé Program and its All Small Mentor-Protégé (ASMP) Program. SBA adopted the ASMP Program in 2016 at the direction of Congress. The ASMP Program was designed to mirror SBA's pre-existing 8(a) Mentor-Protégé Program and make the same mentor-protégé benefits available to all small businesses, including those participating in SBA's other socio-economic programs (HUBZone, Women-Owned Small Business (WOSB), Service-Disabled Veteran-Owned Small Business (SDVOSB), etc.). The final rule collapses the two programs into a single program and combines the body of regulations in the ASMP regulations found in 13 C.F.R. § 125.9.

The final rule also implemented Section 861 of the 2019 National Defense Authorization Act (NDAA), which provided for several benefits to small businesses with their principal office in the Commonwealth of Puerto Rico. The final rule made several additional clarifications to the existing elements of its now consolidated Mentor-Protégé Program.

Other Significant Changes

Through this rule-making, SBA also tackled several issues, including clarifying and revising rules for joint ventures, certifications under certain Multiple Award Contracts (MACs), the impact of mergers and acquisitions on pending proposals and certain requirements for Alaska Native Corporations (ANCs), Indian Tribes and Native Hawaiian Organizations (NHOs) (collectively known as entity-owned businesses). Each of these changes is summarized below. This blog will address additional information about several of these changes in separate posts.

Joint Ventures

SBA made several changes to its joint venture (JV) affiliation and 8(a) regulations, including the following:

• SBA is no longer required to approve joint venture agreements (JVAs) for competitive 8(a) set-aside contracts (approval of JVAs is still required for sole source 8(a) contracts).
• SBA reinforced that while JVs generally must be "unpopulated" (i.e., have no employees), a JV may have administrative personnel, including specifically facility security officers (FSO). Of note, SBA stated in the final rule that it does not believe it is appropriate for procuring agencies to mandate in a solicitation that a JV must possess its own facility security clearance, where both parties to the JV possess the requisite clearance. While SBA's position reflects the practical reality that a JV may not be able to obtain a clearance until it has been awarded a contract, procuring agencies may not feel the need adhere to SBA's position.
• SBA provided some clarification on the apportionment of JV revenues and employees for size calculation purposes.

Multiple Award Contracts

• SBA established a new requirement that on unrestricted MAC contracts, the appropriate size standard code – and the associated North American Industry Classification System (NAICS) code – should be assigned at the task order level. Previously, SBA's regulations held that any contract, including a MAC, could only be assigned a single NAICS code, even if the contract involved a mix of services and/or products. This change eliminates a significant loophole in SBA's regulations and may mean that businesses that qualify under the primary MAC NAICS code could be ineligible to pursue orders containing a lower size standard. More information regarding this and recent associated changes will be addressed in a forthcoming post.
• SBA also established a new requirement related to unrestricted MACs. Specifically, SBA is now requiring that where orders are set aside under an unrestricted MAC, MAC holders must meet the NAICS and other socio-economic requirements of that particular order and recertify their status in connection with that order. SBA excepted Federal Supply Schedule (FSS) program contracts from this requirement.
• Finally, SBA clarified that orders under small business set-aside MACs could be set aside further for other SBA-preferred programs (i.e., 8(a) or WOSB), but that MAC set-asides, which were initially limited to one such SBA program, could not be further set aside (i.e., no HUBZone set-aside orders could be issued under an 8(a) set-aside MAC).

Impacts of Mergers & Acquisitions (M&A)

SBA made revisions to its size recertification provisions, particularly related to the impact of merger and acquisition (M&A) activity. Of note, SBA established a new rule for circumstances where a merger or acquisition causes a firm's status to change after proposal submission but prior to award. Previously, SBA required recertification of size status whenever there was M&A activity up to the time of award. However, SBA has now recognized that in some cases there may be a substantial lag time between proposal submission and award. Under the revised regulations, if a merger or acquisition occurs after proposal submission but prior to award, the offeror must recertify its size to the contracting officer prior to award. If the merger or acquisition (including any agreement in principle) takes place within 180 days after the date of the offeror's proposal submission and the offeror cannot recertify as small, it will not be eligible as a small business to receive the award. Where the M&A activity takes place more than 180 days after proposal submission, award can still occur; however, the agency will not be eligible to take small business credit for the award.

Alaska Native Corporations (ANCs), Indian Tribes and Native Hawaiian Organizations (NHOs)

SBA made several significant changes to its regulations affecting entity-owned concerns.

• First, SBA clarified that advance SBA approval is not required for Alaska Native Corporations (ANCs), Tribal and Community Development Corporations (CDC) when a subsidiary's ownership changes but does so within the ANC/Tribe/CDC structure, including where ownership is transferred from one holding company owned by the same parent to another. SBA now requires only that "notice" be provided to SBA of such a change. Other changes in ownership, including from one entity to another or involving changes in minority ownership interest, must still meet the approval requirements of SBA's existing regulations.
• Second, SBA discussed what constitutes a "new" requirement for purposes of determining whether a requirement to a follow-on sole-source contract can be awarded on a sole-source basis to a sister entity owned by the same entity. SBA laid out a number of factors to be considered but refused to adopt a bright line test. The factors SBA will consider are 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. SBA stated that where the procurement satisfies any one of these requirements it may be considered "new" but will not be dispositive. In particular, SBA refused to apply a bright line test on the 25 percent requirement.
• Third, for tribes, SBA also clarified that in the 8(a) application process, pledges of financial and other support for purposes of establishing the applicant's potential for success could come from a tribal economic development body as opposed to the tribe itself.

Other Provisions

SBA's final rule made a number of other changes to the 8(a) program regulations, including streamlining the voluntary withdrawal and early graduation procedures, clarifying appeal rights for firms terminated or early graduated from the program by SBA, and clarifying SBA's process for acceptance of requirements for the 8(a) program. SBA also made changes to its limitation on subcontracting requirements and the non-manufacturer rule and their application in multiple item procurements.