SBA Releases a Flurry of Regulations For Small Government Contractors

By: Ann Sullivan

If you’ve read any of my blogs on regulations, you know that regulations are published on Regulations.gov.  You also know that there is a process to take a proposed regulation all the way to the final release.  In case you missed it, regulations are called “rules” in government speak.  

In the past several months, SBA has taken significant actions on contracting policy that affect small government contractors.  They are in various stages—some proposed rules, some finalized.  Since this has been difficult to keep track of, below is a summary and status of the actions federal contractors should be following.  Most of our summaries have been prepared by the law firm PilieroMazza because we couldn’t have said it better.

1.   SBA Adopts a Five-Year Calculation Instead of the Current Three-Year Size Calculation for Revenue Based Size Standards. Effective January 6, 2020. Final Rule.

·     This regulation implements a change in the law through legislation known as the Small Business Runway Extension Act passed in 2018.

2.   Changes to the HUBZone Program. Effective December 26, 2019. Final Rule.

Key changes to the HUBZone Program include:

·     An individual will continue to be treated as a HUBZone resident if that individual worked for the firm and resided in a HUBZone at the time the concern was certified or recertified as a HUBZone—even if the area where the individual lives no longer qualifies as a HUBZone or the individual has moved to a non-HUBZone area; HUBZone firms will only be required to certify on an annual basis, meaning such concerns will no longer be required to expressly qualify as a HUBZone at the time of each offer for a HUBZone contract and award; for compliance purposes, HUBZone firms must maintain at least 20% HUBZone residents as employees when performing on HUBZone contracts, or SBA will propose the firm for decertification. 

·     HUBZone firms have an affirmative duty to notify SBA if they fall below the 20% attempt to maintain the standard; when a company buys an office located in a HUBZone or enters into a long-term, 10-year lease for such office space, intending the space to be its principal office, the concern will be able to meet the principal office HUBZone criterion for a period of at least 10 years—even if at some point after the property is purchased or leased, the office location no longer qualifies as a HUBZone.  The idea behind this rule is that the HUBZone program should incentivize and reward companies that invest in HUBZones.

3.   Implementation of Changes Contained in FY2016 and FY2017 NDAA and the RISE Act. Effective December 30, 2019. Final Rule.

Subcontracting Plans

·     Consistent with the 2017 NDAA, the Rule provides that it will be a material breach of contract when a contractor or subcontractor fails to comply in good faith with its subcontracting plan requirements, including failing to provide reports and/or cooperate in studies or surveys to determine the extent of compliance.  The Rule provides a number of examples of what constitutes a failure to make “good faith” efforts, including, among others, (1) failing to timely submit subcontracting reports and (2) failing to pay small business subcontractors in accordance with the terms of the contract.  According to SBA, the examples set forth in the Rule are not intended to be inclusive and factors beyond those identified in the Rule may be considered in determining whether good faith efforts were made. The Rule also provides that failure to make a good-faith effort may be considered in any past performance evaluation of the contractor.

·     With respect to subcontracting plans, the Rule also requires other than small prime contractors with commercial subcontracting plans to include indirect costs in their subcontracting goals.

Small Business Contracting in Disaster Areas

·     As provided in the RISE Act, SBA is establishing contracting preferences for small business concerns (“SBC”) located in disaster areas and will provide agencies with double credit for awards to such concerns.  SBA will use the existing Federal Acquisition Regulation definitions to provide that an agency will receive credit for an “emergency response contract” awarded to a “local firm” that qualifies as an SBC under the applicable size standard for a “major disaster or emergency area.”  

·     According to the Rule, a concern is “located in a disaster area,” if, during the last twelve months, it had its main operating office in the area and that office generated at least half of the firm’s gross revenues and employed at least half of the firm’s permanent employees.  The Rule provides a number of factors that SBA will consider if the firm does not meet the foregoing criteria in order to determine whether the firm resides or primarily does business in a disaster area.

NMR Size Standard Does Not Apply to ITVAR Procurements

·    The Rule amends the NMR to expressly state that a firm may qualify as an SBC to provide manufactured products or other supply items as a nonmanufacturer if, among other things, it does not exceed 500 employees “(or 150 employees for the Information Technology Value Added Reseller exception to NAICS Code 541519, which is found at § 121.201, footnote 18)”.  According to SBA, because contractors under the ITVAR exception are non-manufacturers, it would make no sense for SBA to retain a 150-employee size standard if concerns could also qualify under the NMR 500-employee size standard.

Allowing a Set-Aside Within a Set-Aside

·     The Rule provides contracting officers the authority to set aside orders for a socio-economic small business program (e.g., 8(a), HUBZone, SDVO, WOSB) under a multiple award contract (“MAC”) awarded as a generic small business set-aside.  This is significant because although SBA has considered implementing such a rule in the past, it has chosen not to, in part because it was concerned that such a rule would unfairly deprive SBCs of an opportunity to compete for orders issued under their MACs. 

4.   Mentor/Protégé, Joint Ventures and 8(a) Changes. Proposed rule. Status: Public comment period ends January 17, 2020.

Mentor-Protégé Programs

The proposed rule would:

·     Merge the 8(a) Mentor-Protégé Program into the All Small Mentor-Protégé Program; clarify eligibility criteria for proposed mentors and request comments on whether mentors should be restricted to mid-sized firms; provide flexibility for mentors with protégés with principle places of business in Puerto Rico; provide relief from the two mentors over the life of a protégé rule; and; provide generally that protégés should be performing work under the North American Industry Classification System (NAICS) code used to qualify for the program.

Joint Ventures

The proposed rule would:

·     Eliminate joint venture approval requirements for competitive 8(a) contracts, but not sole source awards; eliminate the “three in two” rule; disallow substitution of joint venture partners who exceed the size standard for long-term contracts prior to recertification; and allow joint ventures to be populated with FSOs and provide guidance to agencies on when to allow joint ventures to bid on contracts requiring a clearance.

Multiple-Award Contracts (MAC)

The proposed rule would:

·     Require contracting officers to assign the most appropriate single NAICS code to each order under an MAC, whether for a supply or a service to ensure compliance with the non-manufacturer rule, requiring that each NAICS code be included in the underlying MAC; require an offeror to certify as to size and status in order to qualify at the time it submits its initial offer including price for an order under an UNRESTRICTED MAC, except for orders or BPAs issued under an FSS contract; require that, where the socio-economic status is first required at the order level, firms must qualify at that time; and permit size and status protests where the underlying MAC was unrestricted, except for BPAs and orders issued under an FSS schedule.

Certification

Self certification

·     The proposed rule would allow a prime to rely on the self-certification of its subcontractor, provided the prime does not have a reason to doubt the certification.

          Recertification

·     The proposed rule would clarify that if a party to a joint venture becomes acquired or merges, only that partner (and not the non-affected partner) must recertify in order to qualify the joint venture to recertify; a firm that mergers between proposal submission and award does not qualify for award if it could not or did not recertify, though size protests are permitted; and tribal entities are not required to recertify where ownership changes but the firm is owned to the same extent (i.e. 51%) by the ultimate entity.

8(a) Program

The proposed rule would:

·     Define “follow on contract” for purposes of retaining requirements in the program; loosen the prohibition on immediate family members owning 8(a) firms; allow for certain changes of ownership to occur without prior SBA approval; clarify SBA policy on voluntary withdrawals and early graduations from the program; and under some circumstances, allow firms to seek and obtain a multiple contract waiver from the sole-source restrictions for failure to comply with the business activity targets where certain extenuating circumstances exist that apply to multiple contracts.

Small Business Rules

The proposed rule would:

·     Require that mixed contracts include any combination of services, supplies, or construction though construction was inadvertently omitted from the proposed rule; require that contracting officers consider past performance of first-tier subcontractors for certain bundled or consolidated contracts and for MACs over a certain dollar threshold; clarify that affiliation may be found under the newly organized concern rule where both former and current officers, directors, principal stockholders, managing members, or key employees of one company organize a new company in the same or a related industry; and request comments on how the non-manufacturer rule should be applied to multiple item procurements where one or more of the items are subject to a class waiver.

Wide Reaching FAR Rule Touches Every Government Contractor

In the 2019 National Defense Authorization Act, Congress directed federal agencies to stop using products and services from six Chinese companies in Section 889 of the bill. Those companies include: Huawei, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, and Dahua Technology Company. 

Moving quickly, the FAR Council issued an interim final rule, Prohibition on Certain Telecommunications and Video Surveillance Services or Equipment, which became effective on August 13, 2019, and broadly prohibits federal agencies from using telecommunications or surveillance equipment or services from these six companies. Next year, step two, which prohibits any government contractor from using any components or services from these companies is expected to go into effect. Known as Section 889, this action has the potential of impacting all government contractors, large or small—even micropurchases.  

While no one doubts that these companies pose a threat to the nation’s cybersecurity, any government action that affects 139,730 small entities will have wide reaching effects. That was the theme of my participation on a panel at GSA on Section 889. I joined five other panelists to speak about how Section 889 will affect government contractors, especially small businesses. Think for a minute about complying with this new requirement. For example, do you know who manufacturers your desk phones? Do you know what brand the surveillance equipment in your building? If you travel internationally, do you know the telecom carrier you use in your office or hotel? Replacement of equipment will surely carry a cost, but figuring out usage of any components or services from these six companies will prove to be difficult.

 The new FAR rules will not only impact your employees and your physical facility, it will also extend to your workforce comprised of 1099 contractors. A small business owner shared that this new Section 889 requirement could result in her contractors opting out of federal work because the new requirements will be too tough to comply with.

One of my fellow panelists joked that these new requirements will provide full employment to lawyers and compliance experts for years to come. Small businesses will likely need to hire a compliance specialist as well as a specialist to source equipment to stay in compliance with the new rule. One small business stated that it will cost them $10,000 to conduct an audit and provide governance structure, $10,000 for new equipment, and $10,000 to change all of her contracts and educate her 1099s. An audience participant estimated a cost of $150,000 just for new equipment alone.

My greatest concern is that small businesses will not understand the implications of this new requirement until it smacks them in the face—until they don’t qualify for federal work or a prime contractor demands a certification of compliance.  

So, what can the government do to increase awareness among industry about the potential impact of Section 889? First, the government can use small business offices (OSDBUs) and small business specialists to share information about Section 889. Second, GSA can do informational webinars about the impact of the new rule. Third, the government should involve the Small Business Administration (SBA) and Procurement Technical Assistance Centers (PTACs) network. And finally, the government should engage organizations, like WIPP to spread the word about the new Section 889 rule. 

Staying on top of acquisition policies, like Section 889, directly affects your bottom line. That’s the beauty of WIPP – we are dedicated to keeping you informed and engaged.