Is Your Business Still “Small?”: New Rules Require Contractors to Re-Certify Their Size Status
 
April 15, 2003
 

Until recently, newly large businesses could maintain legally their small-business size status on contracts received while eligible as small businesses.  A series of new administrative rules requires businesses to re-certify their size under existing contracts and may significantly impact their eligibility for new work. 

Under SBA regulation 13 C.F.R. § 121.404, a contractor’s size status for purposes of a federal procurement is determined on the date that the contractor “submits a written self-certification that it is small to the procuring agency as part of its initial offer including price.”  Accordingly, a contractor’s original certification as “small” attaches to the contract for the contract’s entire term, absent re-certification, even if the contractor becomes a large business for all other purposes through acquisition, growth or affiliation during the course of contract performance.  Some agencies have considered this aspect of SBA’s regulations unusual because the former small business and the procuring agency continue to receive small business credits and benefits long after the small firm has lost its small business eligibility for all other purposes.

The General Accounting Office (GAO) took the first step toward clarifying this regulatory anomaly in “CMS Information Services, Inc.,” Comp. Gen. No. B-290541 (August 7, 2002).  In this matter, CMS, a GSA Federal Supply Service (FSS) schedule contract holder, protested a procuring agency’s competitive Request for Quotations (RFQ), which limited competition to small business vendors and required vendors to self-certify as small businesses as of the date of quotation submission.  CMS contended that the RFQ improperly required vendors to re-certify their small business status as of the time of quotation submission.  CMS argued that, under the SBA rule referenced above, its certification made at the time of contract award should remain in effect for the duration of its contract (up to 21 years if all options were exercised).  CMS apparently was small when it submitted its original offer on the FSS contract in 1997, but was no longer small at the time of the quotation submission under the RFQ in 2002.  GAO denied CMS’ protest, concluding that there was “nothing objectionable in the agency’s request that FSS vendors responding to a task order RFQ be small as of the date quotations are due, instead of relying on the original FSS self-certification, which may not reflect a vendor’s current small business status.” Citing Size Appeals of:  SETA Corp., Fed. Emergency Mgmt. Admin., SBA No. SIZ-4477 (2002) (holding that a subsequent certification tendered in response to a competitive, small business set-aside RFQ issued by a requiring activity superseded the firm’s original certification tendered when it entered into its underlying FSS contract).  By citing the SETA SBA Size Appeal, GAO indicated that its holding was consistent with SBA regulations and precedent, which determine size as of the date of self-certification of size in a bid, price or cost offer.

Based on the CMS decision, procuring agencies using competitive RFQs to solicit task order quotes from FSS small business vendors may require FSS vendors to re-certify their size status to be eligible for a task order award.  While there is no mandatory re-certification requirement, GAO’s decision made it clear that agencies have the discretion to determine the need for re-certification. 

GSA’s Basic Schedule Ordering Guidelines^[1] require procuring agencies to seek at least a modicum of competition by preparing RFQs (or similar competitive requests) for services whenever a statement of work (SOW) is needed.  There also is no requirement that procuring agencies, with the notable exception of the Department of Defense (DOD),^[2]seek further competition in placing orders against the GSA schedules. See FAR 8.404(a)(1)(i).  Despite their ability to make sole source task order awards, procuring agencies often opt for competition and use RFQs.  In such cases, procuring agencies may, as discussed above, restrict the competition solely to small firms and demand that prospective vendors re-certify their size status.  Thus, in practice, newly “large” vendors could find themselves ineligible for a task order award even though the vendor’s “small business” size status on the underlying GSA schedule contract remains unchanged.  Like consequences will result if other agencies with similar schedule contracts implement ordering procedures requiring size status re-certification on all task order awards.                

GSA’s new policy of requiring contractors to re-certify that they qualify as small businesses upon option exercise also may effect a newly large contractor’s existing GSA contract vehicles.  On October 10, 2002, GSA “issued a Federal Acquisition Regulation (FAR) class deviation requiring its contractors, particularly those participating in its FSS program, to re-certify that they qualify as small businesses each time their contract is open for renewal or an option to extend the term of the contract is about to be exercised.” See GSA Press Release #9991 dated November 15, 2002.  The “new policy is intended to address a loophole in federal contracting that has allowed businesses to retain their status as ‘small’ . . . even after they no longer meet the requirements for being classified as small.”   Under this new rule, a contractor will be unable to maintain its “small business” status for the length of its GSA contract vehicles if it becomes large.  A contractor will lose its “small business” status on each of its GSA contract vehicles at the time of renewal or option exercise, whichever is earlier. 

In response to GSA’s action to close this “federal contracting loophole,” trade journals speculated that other agencies might adopt GSA’s new re-certification rule on their governmentwide acquisition contracts (GWACs).  As if on cue, on February 12, 2003, the Office of Management and Budget’s (OMB’s) Office of Federal Procurement Policy (OFPP) announced that it will require agencies using GWACs (namely, GSA, NASA, the Commerce Department, and the National Institutes of Health) to re-certify small businesses annually beginning April 1, 2003.  OMB also disclosed its plans to publish proposed changes to the FAR and the SBA regulations to make the change permanent for all multiple-award vehicles, including GSA schedules.  It is unclear, however, whether OMB’s proposed changes will extend to small business contracts that are not GSA schedule contracts or GWACs.  While OMB’s new policy cannot override SBA’s regulations, there is nothing to prevent agencies from requesting re-certification for task orders or option renewals.

Given these new rules, newly large contractors and growing contractors on the verge of becoming large businesses must develop business strategies to compensate for ineligibility on task order awards, contract renewals and option exercises under existing GSA contract vehicles.  Contractors also must prepare for the new OFPP policy requiring annual re-certification for GWACs and the uncertainties surrounding OMB’s announced rulemaking plans.

For more information, call Michelle D. Hertz, toll free, at 1-888-688-8500.

[1]See www.gsa.gov/Portal/content/offerings_content.jsp?contentOID=116966&contenttype=1004.

[2]Under DFARS 208.404-70, issued pursuant to Section 803 of the Defense Authorization Act for FY02, orders for services exceeding $100,000 must be placed on a competitive basis unless waived in writing by the contracting officer.