SBA Issues Final Rule on Small Business Size Recertification
November 29, 2006
The U.S. Small Business Administration (SBA) has issued a final rule regarding small business size recertification under long-term federal contracts, including
Government-Wide Acquisition Contracts (GWACs), the General Services Administration (GSA) Multiple Award Schedule (MAS) contracts and multi-agency
contracts.
The final rule goes into effect on June 30, 2007, and it applies to solicitations and contracts issued after that date, as well as contracts and solicitations in
existence at the time of the effective date. 71 FR 66434.
In its proposed rule issued in 2003, SBA sought annual small business size recertification. 71 FR 66434. However, the federal procuring agencies subject
to the regulation informed SBA that they do not have the resources to receive and process small business size recertifications on an annual basis. 71 FR 66435.
The final rule amends 13 C.F.R. § 121.404(g). The new regulation applies to (1) long-term contracts, defined by SBA as contracts with a duration including
options, of more than five years (including GWACs, GAS MAS contracts); and (2) all contracting actions where an acquisition, merger or novation has taken
place. 71 FR 66434, 66444. SBA describes the new recertification requirement as the “least burdensome and fairest approach” of what it proposed.
71 FR 66436.
Recertifying Size Status
For small businesses performing long-term contracts, a contracting officer must request that a small business concern recertify its small business size status
prior to the sixth year of performance. 71 FR 66444. If the contractor certifies that it is other than small, the agency can no longer count the
options or orders issued under the contract towards its small business prime contracting goals. Id. Thereafter, contractors are required to
recertify their size status prior to the exercise of an option under a long-term contract. Id.
For 8(a) contractors performing under a long-term contract that are no longer small at the time an option is exercised, the procuring agency can exercise the
option, but orders issued during the option period will no longer count as 8(a) awards. 71 FR 66440.
For small businesses performing any set aside contract (long-term or a traditional contract with a base year and four option years) that are subject to
an approved novation, the contractor must recertify its small business size status to the procuring agency within 30 days of the novation or inform the
agency that it is other than small. Id. If the contractor is other than small as a result of the novation, the agency can no longer count the options or
orders issued under the contract toward its small business goals. Id.
As under a contract novation discussed above, in cases where a small business contractor performing a set aside contract is involved in a merger or
acquisition, the small business must, within 30 days of the transaction becoming final, recertify its small business size status to the procuring agency, or
inform the agency that it is no longer small. Id. If the contractor is other than small as a result of the acquisition or merger, the agency can no
longer count the options or orders issued under the contract toward its small business goals. Id.
Multiple Award Contracts and BPAs
The rule does not apply to orders issued under a multiple award contract, nor does it apply to blanket purchase agreements (BPAs). 71 FR 66438. A size
recertification does not change the terms and conditions of the contract, including the limitations on subcontracting, non-manufacturer and subcontracting
plan requirements in effect at the time of contract award. 71 FR 66437. In addition, the rule does not apply to subcontracts. In its comments on the final
rule SBA stated: “Several commenters asked whether subcontractors would be required to recertify their size for purposes of subcontracting plans. That
issue is also beyond the scope of the proposed rule, and this rule does not impose any recertification requirement at the subcontractor level. SBA may
consider such a requirement in the future as part of a separate rule-making.” 71 FR 66437.
Joint Ventures
The recertification rule affects small business contractors that team to form a joint venture: “If a team in the form of a joint venture is awarded a contract,
the joint venture as combined must meet the applicable size standard. The same rules would apply to a joint venture as would apply to a stand-alone entity.
Thus, the joint venture, as combined, would have to be small at the time of re-certification in order to retain its small business size status.” Id.
The Role of the Contracting Officer
The final rule does not prohibit the contracting officer from exercising an option where a contractor no longer qualifies as a small business, nor does it require
the exercise of an option where the contractor is no longer small. In its discussion of the final rule, SBA noted that the decision of whether to exercise
an option where the contractor no longer qualifies as a small business is best left to the discretion of the contracting officer – in consideration of issues
such as the agency’s small business contracting goals, the contractor’s past performance, the existing competition. 71 FR 66436.
Although SBA’s size recertification rule may further SBA’s goal of ensuring that small businesses receive and perform set aside contracts, it also creates
greater uncertainty for small businesses regarding the continued performance of their small business contracts, particularly for those companies considering a
potential merger or acquisition with a larger entity. Requiring recertification after the fifth year of contract performance, and prior to the exercise of
options under a long-term contract permits a certain level of long-term planning. However, recertification will also be required after a novation,
merger or acquisition. The new rule does not affect the discretion currently afforded contracting officers in exercising contract options and in continuing
contract performance. This suggests that a contractor’s position in the marketplace and its relationship with its customer agencies will be important
indicators of continued contract performance under a small business contract in the event of a loss of small business size status.
Additional Risks
While the government has the discretion regarding the exercise of options under any contract, the potential loss of small business size status under a long-term
contract or a contract where a novation, merger or acquisition has occurred, provides an additional risk to continued contract performance. For example, if
under a long-term contract, the contractor experiences growth such that it can no longer recertify its small business size status after the initial five year
period, the agency may be reluctant to exercise an option if it can no longer claim small business credit for the options or future orders. Similarly, a
contractor performing under either a long-term contract or a traditional contract with a base year and four option years, that is acquired by a large
business runs the risk that its options will not be exercised. In addition, the agency retains the discretion to terminate the contract for convenience if it
can no longer claim small business credit for the contract.
Those small business contractors least affected by the new rule include those with strong agency relationships and those with a special expertise or capability.
However, small businesses that experience performance problems and those entities where a wide pool of small businesses compete, such as information
technology service providers, run a greater risk of losing existing small business contracts in the event of a loss of small business size status.
For more information, e-mail Peter McKeen, Government Contracts Analyst, at peter.mckeen@hklaw.com or call toll free, 1-888-688-8500.
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