SBA Issues Final Rule on Ownership and Control Changes for the 8(a) Program

The U.S. Small Business Administration (SBA) issued its final rule on April 27, 2023, implementing several changes to the ownership and control requirements for the 8(a) Business Development program. The final rule also implements several changes to SBA's other government contracting programs and regulations, including affiliation, joint ventures, the mentor protégé program, size and status protests, and the various socioeconomic programs. The rule becomes effective on May 30, 2023, and applies to all solicitations issued on or after that date.

General Changes

Joint Venture Affiliation

The final rule clarifies 13 C.F.R. § 121.103(h), which governs SBA's rules pertaining to affiliation through joint ventures. The final rule amends the regulation to capture SBA's current policies or otherwise clarify the language as far as the new "unlimited-in-two" rule; SBA's treatment of populated versus unpopulated joint ventures; the ostensible subcontractor rule; SBA's counting of receipts for populated joint ventures; decisions of the non-managing joint venture partner; and required reporting to SBA.

Unlimited-in-Two. SBA's regulations currently provide that a specific joint venture may not be awarded contracts beyond a two-year period, starting from the date of the joint venture's first contract award, without the joint venture partners being deemed affiliated. The final rule clarifies the language in 13 C.F.R. § 121.103(h) to "capture SBA's current policy" that allows orders to be issued under previously awarded contracts beyond the two-year period. Orders may be awarded under previously awarded contracts beyond the two-year period because "the restriction is on additional contracts, not continued performance on contracts already awarded[.]"

Populated Versus Unpopulated Joint Ventures. SBA's current regulations provide that if a joint venture exists as a separate legal entity, it may not be populated with individuals intended to perform contracts awarded to the joint venture. SBA's final rule clarifies that this rule only applies to contracts set aside or reserved for small businesses – meaning, a joint venture cannot be populated with individuals intended to perform for any contract or agreement set aside or reserved for small businesses, unless all parties to the joint venture are "similarly situated entities" (i.e., same socioeconomic status and both "small" under the applicable North American Industry Classification System (NAICS) code). With that said, in determining the size of a populated joint venture, whether involving similarly situated entities or not, SBA will aggregate the revenues or employees of all partners to the joint venture. Said another way, a joint venture comprised of similarly situated entities may be populated with individuals intended to perform contracts set aside or reserved for small businesses, but the joint venture – when aggregating the revenues or employees for all partners to the joint venture – must still be "small" under the NAICS assigned to the set aside/reserved contract. SBA made corresponding revisions to 13 C.F.R. § 121.1001(a)(6)(i) (Historically Underutilized Business Zone, or HUBZone program); 13 C.F.R. § 121.1001(a)(8)(i) (Service-Disabled Veteran-Owned Small Business, or SDVOSB program); and 13 C.F.R. § 121.1001(a)(9)(i) (Women-Owned Small Business, or WOSB program).

Ostensible Subcontractor Rule. SBA's current regulations provide that a contractor and its "ostensible subcontractor" (a subcontractor that is not "similarly situated" and performs the "primary and vital" requirements of a contract or is a subcontractor that the prime is "unusually reliant" upon) are treated as joint venturers for size determination purposes. The final rule 1) clarifies how the ostensible subcontractor rule should apply to general construction contracts, and 2) adds two of the four DoverStaffing factors to the ostensible subcontractor rule.

First, with respect to construction contracts, SBA clarified its current rule in an interpretation that the primary and vital portions of a construction contract are those involving management, supervision and oversight of the project. SBA recognizes that subcontractors often perform the majority of the actual construction work under general construction contracts (because the prime "frequently must engage multiple subcontractors specializing in a variety of trades and disciplines"), and the final rule reiterates that the "primary and vital" requirements under general construction contracts are "the management, supervision and oversight of the project, including coordinating the work of various subcontractors, not the actual construction work performed."

Second, the final rule revises and clarifies aspects of the ostensible subcontractor rule including in relation to long-standing precedent set forth in the decision by SBA's Office of Hearings and Appeals (OHA) in DoverStaffing, Inc., SBA No. SIZ-5300 (2011). In DoverStaffing, OHA created a four-factor test to determine when a prime contractor's relationship with a subcontractor is suggestive of unusual reliance: 1) the proposed subcontractor is the incumbent contractor and ineligible to compete for the procurement, 2) the prime contractor plans to hire the large majority of its workforce from the subcontractor, 3) the prime contractor's proposed management previously served with the subcontractor on the incumbent contract, and 4) the prime contractor lacks relevant experience and must rely upon its more experienced subcontractor to win the contract. In the final rule, SBA codified in its regulations the latter two of these four factors: reliance on incumbent management and reliance on the subcontractor's experience.

Counting of Receipts for Populated Joint Ventures. The final rule clarifies how receipts are to be counted for populated joint ventures (i.e., joint ventures that hire individuals to perform contracts). For populated joint ventures, the joint venture itself performs the contract and thus the general rule – each joint venture partner must include in its own revenues the same percentage as its share of work performed under the joint venture – cannot apply. If this were the case, then each joint venture partner would perform zero percent of the work and thus include no money in its own revenues. So, in the case of populated joint ventures, SBA has clarified that the populated joint venture's revenues must be divided according to each joint venture partners' ownership share in the joint venture.

Decisions of Non-Managing Joint Venture Partner. SBA, in publishing the final rule, noted that it received comments in connection with its proposed changes to joint venture affiliation (13 C.F.R. § 121.103) regarding the joint venture provisions in 13 C.F.R. § 125.8; specifically, regarding what decisions non-managing joint venture partners can participate in. In pushing back on some recommendations, SBA noted that adding language providing that a non-managing partner could participate in decisions that were customary for joint ventures outside the government contracting environment was "unnecessary" because it would not "add anything substantively different from the current regulatory language." SBA's comments suggest that, depending on the specific factual scenario, non-managing partners can participate in decisions of the joint venture that are customary in commercial practice to the extent not otherwise contradicted by SBA's regulations, including 13 C.F.R. § 125.8. SBA did add language, however, specifying that a non-managing partner's approval "may be required in, among other things, determining what contract opportunities the joint venture should seek and initiating litigation on behalf of the joint venture." See the revised 13 C.F.R. § 125.8(b).

Submission of Performance of Work Reports. Finally, SBA clarified a perceived inconsistency in 13 C.F.R. § 125.8 regarding the requirement for mentor-protégé joint ventures to submit performance of work reports. Paragraph (h)(2) of 13 C.F.R. § 125.8 requires that, in connection with any contract set aside or reserved for small businesses that is awarded to an SBA-approved mentor-protégé joint venture, the joint venture must submit to the SBA and the relevant contracting officer a report explaining how and certifying the performance of work requirements were met for the contract, and further certifying that the contract was performed in accordance with the provisions of the joint venture agreement that are required under paragraph (b). One such provision required under paragraph (b) is a statement that the project-end performance of work report required under (h)(2) must be submitted to SBA and the relevant contracting officer no later than 90 days after completion of the contract.

Per the text of paragraph (h)(2), as written, SBA-approved mentor-protégé joint ventures are required to submit performance of work reports upon "completion" of every set-aside contract (always) and, "upon request by SBA or the relevant contracting officer[.]" See 13 C.F.R. § 125.8(h)(2). In its final rule, SBA clarified that the regulation is meant to require submission of these reports in both of these two instances.

Thus, while 13 C.F.R. § 125.8(b)(2)(xii) requires only that a mentor-protégé joint venture agreement state that the joint venture will submit the required performance of work report to SBA and the relevant contracting officer upon completion of contract performance, parties to such agreements may want to add language confirming their commitment to providing such reports as requested per (h)(2) (and obligating one another to cooperate in the preparation of any such requested reports).

Timing

Size for Orders Issued Under IDIQ MACs, Where Offerors Were Not Required to Submit Prices as Part of the Offer for the IDIQ Contract. SBA proposed to clarify when SBA determines the size status of a small business concern for indefinite delivery, indefinite quantity (IDIQ) multiple award contracts (MACs), where concerns are not required to submit price as part of the offer for the IDIQ contract (13 C.F.R. § 121.404(a)(1)(iv)). The regulations provide that, in such circumstances, size is determined as of the date of the initial offer – whether or not the initial offer includes price. The clarification in SBA's final rule addresses the timing for determining size as far as orders issued under such contracts: SBA will determine size for set-aside orders issued under such IDIQ MACs at the time the offeror submits its initial offer for the IDIQ MAC and not at the time of offer for each individual order (unless, of course, a contracting officer requests recertification in connection with an individual order). In short, SBA clarified that the timing for determining size for orders issued under IDIQ MACs where offerors were not required to submit price as part of the offer for the IDIQ award is the same as the timing for orders issued under MACs and Blanket Purchase Agreements issued under MACs per paragraphs (a)(1)(i)(A), (a)(1)(i)(B), (a)(1)(ii)(A), and (a)(1)(ii)(B).

Recertification in Connection with a Sale or Acquisition. Further, SBA clarified certain aspects of when recertification is required in connection with a "merger, sale, or acquisition" under 13 C.F.R. § 121.404(g)(2). SBA clarified that it was not SBA's intent to require recertification whenever "any sale of stock occurs, even de minimis amounts." Rather, certification is required in connection with a "sale" or "acquisition" "when the sale or acquisition results in a change in control or negative control of the concern." SBA's final rule revises 13 C.F.R. § 121.404(g)(2) to clarify this. 

Recertification Requirements for Joint Ventures. SBA's final rule also adds a new subparagraph under 13 C.F.R. § 121.404(g) governing the recertification requirements for joint ventures. The newly added paragraph (g)(6) sets forth the general rule: A joint venture can recertify as small where all parties to the joint venture qualify as small at the time of recertification, or where the protégé small business in a still active mentor-protégé joint venture qualifies as small at the time of recertification. The final rule clarifies that that the two-year limitation on contract awards for joint ventures in 13 C.F.R. § 121.103(h) does not apply to recertification – "recertification" is not a new contract award, so a joint venture can recertify its size status even if its timing is more than two years after the joint venture received its first contract.

Size Protests

The final rule also makes several changes regarding SBA's size protest procedures, including in the context of sealed bid procurements, following corrective action taken in response to a Federal Acquisition Regulation (FAR) Subpart 33.1 protest and requirements to update a business's size and socioeconomic status in the System for Award Management (SAM) website following a determination by SBA that the business is "other than a small business concern."

Timeliness. SBA's final rule addresses the timeliness of size protests filed with SBA in the context of sealed bid procurements. Under SBA's current regulations, an interested party must protest prior to close of business on the fifth business day after bid opening. The final rule provides that, where a low bidder is timely protested and found to be ineligible, and where the agency then identifies the next lowest bidder, an interested party may challenge the size status of the next lowest bidder to SBA within five days. 

Additionally, the final rule added a paragraph (f) to 13 C.F.R. § 121.1004, which specifies that size protests may be filed only against "an apparent successful offeror or an offeror in line to receive an award."

Corrective Action in Response to a Protest. The final rule also addresses instances in which an agency decides to reevaluate offers received as part of its corrective action in response to a protest under FAR Subpart 33.1 (i.e., a Government Accountability Office (GAO) protest, an agency-level protest and/or a U.S. Court of Federal Claims protest). These changes are presented at 13 C.F.R. § 121.1004(g) and 13 C.F.R. § 121.1009. When this occurs, SBA will dismiss any size protest relating to the initial apparent successful offeror. When offerors are made aware of the new apparent successful offeror as a result of the agency's corrective action – whether it is the same offeror initially protested or an entirely new offeror – a concern may protest the new apparent successful offeror's size to SBA within five business days after such notification. This timeliness rule applies to any protest field under FAR Subpart 33.1 – meaning, an agency-level protest, a protest to GAO and/or a protest to the U.S. Court of Federal Claims.

If, however, the agency demonstrates to SBA that the corrective action would not result in a change in the apparent successful offeror and makes a written request to SBA within two business days of the corrective action, SBA will complete the size determination. Notwithstanding, SBA will not complete a size protest if it involves size issues determined as of the date of final proposal revision per 13 C.F.R. § 121.404(d) (which provides that compliance with the nonmanufacturer rule, the ostensible subcontractor rule and the joint venture agreement requirements are determined "as of the date of final proposal revision for negotiated acquisitions and final bid for sealed bidding").  

Updates in SAM.gov. Next, the final rule implements three requirements of the National Defense Authorization Act (NDAA) for Fiscal Year 2022: 1) that a small business concern or SBA, as applicable, update the concern's size status in SAM.gov no later than two days after a determination by SBA that the concern is "other than a small business concern," 2) in the event that a business does not update its status within two days, SBA "shall" make the update on behalf of the business, and 3) where a business is required to make an update, it also must notify the contracting officer for each outstanding bid or proposal if the business finds, in good faith, that the determination affects the business's eligibility to be awarded the contract.

SBA revised its regulations to implement these requirements and noted, in the final rule, that with regard to making changes in SAM.gov, SBA interprets the statute as intending that a business concern be required to update SAM.gov in all instances in which it is capable of doing so (e.g., only SBA can identify a concern as a certified HUBZone and thus, in all other instances, the business is required to update its status in SAM.gov).¹ 

In making these changes, SBA notes that SBA Area Office decisions are appealable to OHA within 15 days. See 13 C.F.R. § 124.304(a). Where the protested concern timely appeals to OHA, the two-day period for updating the concern's status in SAM.gov does not apply until OHA issues a final decision finding the firm ineligible. If the protested concern chooses not to appeal the decision, however, the two-day period applies immediately after the period to appeal (the 15 days) lapses.

But note, however, that a size determination from SBA is effective immediately (e.g., the contracting officer may award a contract to the protested concern where the SBA Area Office determines that the protested concern is an eligible small business; the contracting officer "shall not" award a contract to the protested concern if the Area Office has determined that the concern is not an eligible small business for the procurement in question). See 13 C.F.R. § 121.1009(g). The effect of an appeal to OHA is simply that the time period for updating a concern's status in SAM.gov is tolled. 

8(a) Program Changes

Rules Primarily Affecting ANCs, Tribes, NHOs and CDCs (Entity-Owned) and the Participants They Own

The proposed rule presented a number of potential changes to the regulations affecting Entity-Owned Participants, many but not all of which were adopted in the final rule. Of note, one proposed requirement – that Entity-Owned Participants must adopt a Community Benefits Plan – was severely flawed, both substantively and procedurally. After belatedly holding several post hoc tribal consultations and listening sessions, SBA announced in October 2022 that it was withdrawing this portion of the proposed rule. SBA has developed a working group to further consider the concept of such plans.

Other proposed changes affecting Entity-Owned Participants addressed in the final rule include the following:

What Does it Mean to be Unconditionally Owned by One or More Disadvantaged Individuals? SBA's final rule adopts its language revising 13 C.F.R. § 124.105 as proposed. The final rule adds language stating that a former 8(a) Program participant may substitute one disadvantaged owner for another without requiring a waiver (per 13 C.F.R. § 124.515) and without requiring termination of the former participant's 8(a) contract backlog. As SBA notes, this change will primarily impact acquisitions of former participants by Alaska Native Corporations (ANCs), tribes, Native Hawaiian Organizations (NHOs) and community development corporations (CDCs). The revised regulation also specifies that SBA must approve any such change in ownership prior to it taking effect. No such requirement was previously included in SBA's regulations. 

Do Tribes and ANCs Have Any Special Rules for Applying to and Remaining Eligible for the 8(a) Business Development (BD) Program? The final rule makes several changes to 13 C.F.R. § 124.109. First, it clarifies that only federally recognized tribes must provide a sovereign immunity waiver and that this requirement does not apply to state-recognized tribes (which do not have sovereign immunity in the first place). Second, the rule recognizes that some tribally owned entities may be established under tribal law, which may utilize different forms of documentation (as opposed to Articles of Incorporation or Organization), and requires that a sovereign immunity waiver must be provided in the similar form of incorporating document. Third, the final rule recognizes that not all Entity-Owned Participants will file independent tax returns and thus provides that financial statements, either audited or developed in-house as set forth in 13 C.F.R. § 124.602, may be provided instead.

Do NHOs Have Any Special Rules for Applying to and Remaining Eligible for the 8(a) BD Program? The final rule revises 13 C.F.R. § 124.110 to allow NHOs to utilize the same individual to operate up to two 8(a) participants on a day-to-day basis, putting NHOs on par with tribes and ANCs. The final rule also clarifies SBA's current policy that NHO-owned participants must be at least 51 percent unconditionally owned by the NHO.

The final rule did NOT adopt a provision in the proposed regulation that provided for NHOs to utilize holding companies. Specifically, the proposed rule added language at Section 124.110(d)(3)(ii) stating that "NHO officers, board members and/or leaders may control a holding company overseeing several NHO-owned business concerns, provided they do not actually control the day-to-day management of more than two current 8(a) BD Program Participant firms." 87 Fed. Reg. 55668. This language carried over into the final rule.

However, in an odd twist, the notice accompanying the final rule states that SBA "received one comment questioning why NHOs cannot use holding companies to own [8(a) Participants] as ANCs and Tribes can." SBA acknowledged this creates a disparate situation between NHOs and tribes/ANCs. SBA noted that the Small Business Act explicitly authorizes tribes (defined to include ANCs) to utilize holding companies but does not provide the same authority for NHOs. Based on this, SBA concluded it lacks the statutory authority to permit NHOs to use holding companies and that NHOs must directly own their 8(a) Program participant subsidiaries. It therefore appears any such provision would have to be supported by legislation. SBA does not explain what the language quoted above, explicitly referencing holding companies, actually means.

Acceptance of Sole Source 8(a) Requirements on Behalf of Tribally Owned, ANC-Owned or NHO-Owned Participants. SBA's ability to accept a sole source 8(a) requirement on behalf of a tribally owned, ANC-owned or NHO-owned participant above the general competitive threshold amounts, Section 124.506(b)(2) provided that a procurement "may not be removed from competition" to award it to a tribally owned, ANC-owned or NHO-owned concern on a sole source basis. SBA clarified the provision was meant to apply only to a current procurement, not the predecessor to a current procurement. In other words, an agency may not evidence its intent to fulfill a requirement as a competitive 8(a) procurement, through the issuance of a competitive 8(a) solicitation or otherwise, cancel the solicitation or change its public intent, and then procure the requirement as a sole source 8(a) procurement to an Entity-Owned Participant.

Applying to and Exiting the 8(a) Program

SBA's Processing of Applications. 13 C.F.R. § 124.204 governs SBA's processing of applications to the 8(a) BD program, including that only the Associate Administrator for Business Development (AA/BD) is authorized to approve or decline applications for admission to the 8(a) BD program. With that said, SBA's electronic 8(a) application system includes four "fundamental eligibility questions" that applicants must answer before SBA will review an application: 1) the applicant must be a for-profit business, 2) every individual claiming disadvantaged status must be a U.S. citizen, 3) neither the applicant nor any of the individuals upon whom eligibility is based can have previously participated in the program, and 4) any individually owned applicants (i.e., nonentity owned applicants) must have generated some revenues. If any of these eligibility criteria are not met (and thus not answered in the affirmative in SBA's electronic 8(a) application system), then the applicant is automatically rendered ineligible for the program, and its application will not be further reviewed by SBA. SBA is amending 13 C.F.R. § 124.204 to state this.  

Graduation and Early Graduation. 13 C.F.R. § 124.302 addresses instances in which SBA may graduate a firm from the 8(a) BD program – at the expiration of its program term (graduation) or prior to the expiration of its program term (early graduation). Under an earlier version of SBA's regulations, among the criteria SBA considered when determining whether an applicant or participant should be deemed "economically disadvantaged" was a comparison of the concern's financial condition to non-8(a) BD concerns in the same or similar line of business. SBA eliminated this criterion because it believed it was not consistent with the statutory authority for the 8(a) Program (which requires the concern be owned and controlled by an economically disadvantaged individual, not that the concern itself be economically disadvantaged).

The criteria for determining whether an applicant has met its goals and objectives (which informs whether SBA may initiate graduation or early graduation proceedings) under 13 C.F.R. § 124.302 retained this old language. As part of SBA's final rule, it is removing the criterion in (b)(5) (requiring a comparison of the participant's business and financial profiles with the profiles of non-8(a) BD concerns in similar lines of business) as similarly inconsistent with the statutory authority for the 8(a) Program.

Early Graduation and Termination. The final rule clarifies when SBA may initiate early graduation and termination procedures (13 C.F.R. § 121.304) in instances where SBA obtains evidence that a participant has ceased its operations. In these instances, the AA/BD may immediately terminate the concern's participation in the program by notifying the concern of its termination and right to appeal that decision to OHA, as opposed to notifying the concern of SBA's intent to terminate and allowing the concern 30 days to respond.

Business Development Plans

Section 124.402 requires each firm admitted to the 8(a) BD program to develop a comprehensive business plan and to submit that business plan to SBA as soon as possible after program admission. Section 124.402(b) provides that SBA will suspend a participant from receiving 8(a) BD program benefits if it has not submitted its business plan to its servicing district office within 60 days after program admission. The final rule clarifies that, consistent with the Small Business Act's statutory language, SBA must approve a participant's business plan before the firm is eligible to receive 8(a) contracts. SBA recognizes that some firms are admitted to the 8(a) BD program with procurement commitments from one or more procuring agencies, and several newly admitted participants have missed 8(a) contract opportunities in the past because SBA did not approve their business plans before the procuring agencies sought to award such 8(a) contracts. Therefore, the final rule provides that where a sole source 8(a) requirement is offered to SBA on behalf of a participant or a participant is the apparent successful offeror for a competitive 8(a) requirement and SBA has not yet approved the participant's business plan, SBA will approve the participant's business plan as part of its eligibility determination prior to contract award.

Contractual Assistance

What General Provisions Apply to the Award of 8(a) Contracts? SBA made several important changes to 13 C.F.R. § 124.501. First, SBA clarified that contracting officers cannot further restrict 8(a) set-aside competitions to require additional SBA program credentials (i.e., HUBZone, WOSB and SDVOSBs).

Second, SBA provided that agencies may issue sole source orders to 8(a) participants on unrestricted multiple award contracts. [Note, the rule does not address how this would play into fair opportunity provisions in such contracts, which may preclude such orders.]

Third, SBA noted that it would review 8(a) eligibility of a contractor prior to award of a sole source or competitive 8(a) contract. Presumably this would also apply to orders placed under the authority noted above. SBA noted that this review would be limited to the 8(a)'s eligibility including when a joint venture was the awardee (i.e., SBA will not review the underlying joint ventures agreement, a practice SBA ended in prior rule-makings).

Finally, the SBA yet again took on issues related to Bona Fide Office (BFO) requirements for 8(a) construction contracts. The Small Business Act requires that to the "maximum extent practicable" 8(a) construction contracts "shall be awarded within the county or State where the work is to be performed." SBA has made several changes to the BFO requirements over the past several years. This included a temporary moratorium on application of the rule during the pandemic, which runs through Sept. 30, 2023. The final rule clarifies the following:

• A participant will be eligible for 8(a) contracts throughout the entire state where it has a BFO.
• If a participant is currently performing an 8(a) construction contract in a state, it will be deemed to have established a BFO in that state.
• The foregoing does not also allow the participant to use an existing contract to establish it has a BFO in a contiguous state.
• A full-time employee in a "home office" would meet the BFO requirement, and that employee need not be a "resident" of that state.
• A participant may use one or more employees in a geographic area (i.e., it could rotate employees through).
• For a single award 8(a) construction contract requiring work in multiple locations, the BFO must be in the place where the majority of work is to be performed; for multiple award 8(a) construction contracts, the BFO can be in "any location" where work is to be performed.

SBA's Acceptance of a Procurement Through the 8(a) Program. SBA clarified that, per 13 C.F.R. § 124.503(a), the 10 business day acceptance time frame applies only to 8(a) offers made outside the 8(a) Partnership Agreement authority and further clarified that even where there is an 8(a) Partnership Agreement, agencies must still request an eligibility determination prior to making an award to an 8(a) below the simplified acquisition threshold (124.503(a)(4)(ii)).

• Section 124.503(i)(1)(ii): SBA clarified that an agency must notify SBA where it seeks to issue an order under an 8(a) multiple award contract that contains work that was previously performed through another 8(a) contract.
• Section 124.503(i)(1)(iv): SBA clarified that compliance with the Section 124.509 business activity target requirements will be considered before SBA will accept a sole source 8(a) order on behalf of a specific 8(a) participant multiple award contract holder; and for a sole source order to a joint venture, SBA will review and determine whether the lead 8(a) partner to the joint venture is in compliance with any applicable competitive business mix target established or remedial measure imposed by Section 124.509. SBA also clarified that for a sole source order to a joint venture, the two-year restriction for joint venture awards set forth in Section 121.103(h) does not apply, and SBA will not review and approve the joint venture agreement (although SBA will review the 8(a) joint venture member's eligibility).
• Section 124.503(i)(2)(ii): SBA clarified that where an agency seeks to issue an 8(a) competitive order under the Federal Supply Schedule (FSS), an agency can utilize the procedures set forth in FAR Subpart 8.4 and the apparent successful offeror for an 8(a) order under the FSS must be an eligible participant as of the initial date specified for the receipt of offers contained in the request for quote, or at the date of award of the order if there is no solicitation.

Procedures Authorizing Release of a Follow-On Requirement From the 8(a) Program. Section 124.504(d)(3) provides that SBA will release a requirement where the agency agrees to procure the requirement as a small business, HUBZone, SDVOSB or WOSB set aside. SBA amended this section by changing the words ''SBA will release'' to ''SBA may release'' to clarify that SBA has discretion in any release decision.

Sole Source Awards. SBA added a provision to Section 124.506(d) to clarify that an 8(a) may receive a sole source award in excess of the $4.5 million and $7 million competitive threshold amounts set forth in Section 124.506(a)(2) where a procuring agency has determined that one of the exceptions to full and open competition set forth in FAR 6.302 exists. Further, for U.S. Department of Defense (DoD) 8(a) sole source awards exceeding $25 million or $100 million, the contracting officer must justify the use of a sole source contract in writing and confirm it has obtained the necessary approval under FAR 19.808-1 or DFAR 219.808-1(a).

Non-8(a) Business Activity Targets (BAT). In other recent rulemakings, SBA relaxed its application of the BAT requirements and the consequences for failing to meet BAT. This rule further revised Section 124.509 to provide that a strict prohibition on a participant receiving new sole source 8(a) contracts should be imposed only where the participant has not made good faith efforts to meet its applicable non-8(a) business activity target. In the final rule, SBA has expressly provided two ways by which a participant could establish that it has made good faith efforts: 1) it submitted offers for one or more non-8(a) procurements which, if awarded, would have given the participant sufficient revenues to achieve the applicable non-8(a) business activity target during its just-completed program year, or 2) explain that there were extenuating circumstances that adversely impacted its efforts to obtain non-8(a) revenues. Possible extenuating circumstances include but are not limited to a reduction in government funding, continuing resolutions and budget uncertainties, increased competition driving prices down or having one or more prime contractors award less work to the participant than originally contemplated.

Waiver Process. The current regulations at 13 C.F.R. § 124.515 implement the provisions of the Small Business Act, generally requiring that the concern initially awarded an 8(a) contract complete performance and, correspondingly, that any 8(a) contract the concern is performing will be terminated for convenience if the owner(s) upon whom eligibility was based relinquish ownership or control of the business. There are five enumerated circumstances in which the SBA administrator can grant a waiver to this presumption of termination, including ownership and control passing to another eligible 8(a) participant, the inability of the qualifying individual's incapacity or death, and a certification from the procuring agency that termination would severely impair the agency's attainment of its program objectives or missions. In all circumstances besides death or incapacity, any request for such a waiver must be submitted in writing prior to the ownership change, demonstrating the applicable grounds for the waiver, and must be submitted to the 8(a)'s SBA servicing district office for processing.

The amendments in the final rule broke out the subparts of Subsection 13 C.F.R. § 124.515(c) regarding the timing and content for a waiver request into separate paragraphs for clarity and also specified that a waiver based on impairment of agency objectives must identify the relevant agency and provide the corresponding certification for each 8(a) contract for which the business seeks a waiver. From a process perspective, the SBA further revised the relevant procedures for submitting a waiver request in response to widespread concerns about the complexity and long wait times associated with having them reviewed and approved. These challenges, according to commenters on the proposed rule, often dissuaded participants from submitting a waiver request and negatively impacted the ability of disadvantaged individuals to sell their firms. The revised regulations provide that waivers should be submitted directly to the AA/BD and must be processed within 90 days. This introduces much-needed certainty and a more streamlined approach to the submission and processing of waiver requests under 13 C.F.R. § 124.515.

Finally, one commentator raised a concern about the portion of the existing regulations at 13 C.F.R. § 124.515(d), which provide that, for waivers based on the transfer of ownership and control of the 8(a) contractor to another participant, the SBA would ensure not only that the acquiror is an eligible participant for purposes of each contract, but also that the work was similar to the type of work the acquiror has previously performed and the propriety of this latter factor as a basis for denial of a waiver request. The SBA agreed that the underlying statutory authority focuses on the requirement of current eligibility, as opposed to assessing the responsibility of the acquiror to perform or its future business strategy. Thus, the revised regulation deletes the sentence of the current version in this subsection restricting transfers where the acquiring participant had not performed work similar to the work being transferred in the past.

Changes to the Limitations on Subcontracting

SBA's positions on the Limitations on Subcontracting (LoS), 13 C.F.R. § 125.6, have evolved steadily through the last several cycles of rulemakings. This final rule presents two important additional changes.

First, the final rule adds language that applies to "multi-agency" set-aside contracts and provides that "the ordering agency must use the period of performance for each order to determine compliance [with LoS]." Previously, SBA's regulations merely permitted such oversight at the order level but did not require it. The final rule makes such oversight mandatory at the order level. This language presents a conflict with the preexisting general rule that LoS under IDIQ contracts is determined by looking at orders in the aggregate over the course of each IDIQ contract period and appears to create a different set of rules for "multi-agency" contracts.

SBA's reasoning for this change is that where multiple agencies are responsible for monitoring performance under different task orders, no one agency will have responsibility for ensuring compliance on a contract-wide basis. This follows a long history of back and forth between SBA and procuring agencies (and the FAR Council) as to who is responsible for monitoring LoS compliance. This change appears to put such responsibility more squarely on the shoulders of contracting officers at the order level.

Second, and relatedly, the SBA added language intended to provide consequences where LoS requirements are not met. Specifically, the final rule adopted a provision providing that contracting officers "may not give a past performance rating of satisfactory or higher for the appropriate factor or subfactor in accordance with FAR 42.1503."

In support of this change, SBA noted that "there should be consequences for those business concerns that do not take seriously the limitations on subcontracting and make minimal, superficial efforts to meet the applicable requirement." To this end, SBA noted its current rules did not address what would happen if a contractor did not meet these requirements. SBA has apparently settled on the remedy for LoS non-compliance being through the Contractor Performance Assessment Reporting System (CPARS) process for the prime contractor.

In formulating the "consequence," the SBA's final rule noted that several commenters suggested there should be a safe harbor for contractors that made good faith efforts to meet LoS requirements. SBA acknowledged that contractors should not be penalized for circumstances beyond the contractor's control. SBA's final rule embraces this concept by providing that contracting officers should first give the contractor an opportunity to explain the non-compliance and identify "extenuating circumstances" to explain the non-compliance and allow a satisfactory or better past performance rating. SBA provides a non-exhaustive list of unforeseen labor shortages such as modifications to the contract's scope of work, emergency or rapid response requirements, unexpected changes to a subcontractor's status as a "similarly situated entity" (SSE), differing site or environmental conditions, force majeure events and a contractor's good faith reliance on a SSE's representation of its status.

This all presents a significant shift in the approach to LoS and will be the subject of a more detailed analysis.

Changes to the HUBZone, WOSB/EDWOSB and VOSB/SDVOSB Programs

The final rule also makes changes to the regulations governing the HUBZone Program, WOSB and Economically Disadvantaged Women-Owned Small Business (EDWOSB) Programs, and the Veteran-Owned Small Business (VOSB) and SDVOSB Programs. SBA issued the final rule with the intent to make the changes and clarifications to these regulations and requirements consistent across these programs to the extent possible.

Below are a few key changes and/or clarifications provided by the final rule that contractors should be aware of across these programs.²

• Agencies cannot restrict competitions to require offerors to meet two or more socioeconomic programs (e.g., a competition cannot be limited to only business concerns that are both SDVOSB or 8(a) concerns, etc.). See 13 C.F.R. § 126.609 (HUBZone); 13 C.F.R. § 127.503(e) (WOSB/EDWOSB); 13 C.F.R. § 128.404(d) (VOSB/SDVOSB).
• Agencies cannot give evaluation preferences to firms having one or more other certifications (e.g., an agency cannot give more evaluation credit to a concern that is both a WOSB and 8(a) business in comparison to a concern that is only an 8(a) business in an 8(a) set-aside procurement). See 13 C.F.R. § 126.609 (HUBZone); 13 C.F.R. § 127.503(e) (WOSB/EDWOSB); 13 C.F.R. § 128.404(d) (VOSB/SDVOSB).
• For program eligibility purposes, applicants can meet initial socioeconomic program certification requirements if they qualify as small under a size standard corresponding to any NAICS code listed in its SAM.gov profile. See 13 C.F.R. § 126.200 (HUBZone); 13 C.F.R. § 127.200 (WOSB/EDWOSB).
• Program participants cannot be a joint venture partner on more than one joint venture that submits an offeror for a specific socioeconomic set-aside contract. See 13 C.F.R. § 126.616(a)(2) (HUBZone); 13 C.F.R. § 127.506(a)(3) (WOSB/EDWOSB); 13 C.F.R. § 128.402(a)(3) (VOSB/SDVOSB).
• SBA can initiate decertification proceedings if SBA discovers after admission to a socioeconomic program that false information has been knowingly submitted by a small business concern. See 13 C.F.R. § 126.503(c) (HUBZone); 13 C.F.R. § 127.405(d) WOSB/EDWOSB); 13 C.F.R. § 128.310(d) (VOSB/SDVOSB).
• SBA will deny a concern's application to a socioeconomic program if 1) it is unable to determine a concern's compliance with any of the eligibility requirements due to inconsistent information in the application; and/or 2) it determines during the processing of an application that the concern knowingly submitted false information, regardless of whether correct information would cause SBA to deny the application and regardless of whether correct information was given to SBA in accompanying documents. See 13 C.F.R. § 306(b) (HUBZone); 13 C.F.R. § 127.304(c) WOSB/EDWOSB); 13 C.F.R. § 128.302(d) (VOSB/SDVOSB).
• Any HUBZone or WOSB/EDWOSB protests relating to ostensible subcontracting issues (i.e., whether a non-similarly situated subcontractor will perform primary and vital aspects of the contract) will be reviewed by the SBA Government Contracting Area Office serving the geographic area in which the principal office of the concern is located. See 13 C.F.R. § 126.601(d) (HUBZone); 13 C.F.R. § 127.603(d)(2) (WOSB/EDWOSB).

There were also a few notable changes in the final rule to just the WOSB/EDWOSB Programs, including:

• Removing language requiring the woman or economically disadvantaged woman who holds the highest officer position of the business concern to manage the concern on a full-time basis and work full-time at the concern during normal working hours of concerns in the same or similar line of business, and replaces it with the requirement that the woman or economically disadvantaged woman who holds the highest officer position of the business not engage in outside employment that prevents her from devoting sufficient time and attention to the business concern to control its management and daily operations. The final rule also adds a rebuttable presumption of non-control where the woman or economically disadvantaged woman claiming to control a business concern devotes fewer hours to the business than its normal hours of operation. The intent of these revisions is to create more flexibility for women entrepreneurs juggling multiple priorities and remove overly restrictive requirements. See 13 C.F.R.§ 127.202(c).
• Amending the definition of WOSB to clarify that the definition applies to any certification as to a concern's status as a WOSB, not solely to those certifications relating to a WOSB contract, including certifications as a WOSB for goaling procurement purposes on an unrestricted procurement. See 13 C.F.R. § 127.102.
• Clarifying that the unconditional ownership requirement does not preclude a condition that can be given effect only after the death or incapacity of the woman owner. See 13 C.F.R. § 127.201(b).
• Removing the annual program representation requirement to SBA of meeting program eligibility, and replacing it with the requirement for certified concerns to undergo a program examination at least every three years to maintain program eligibility. See 13 C.F.R. § 127.400.

Although many changes slated in the proposed rule for VOSB/SDVOSB programs were resolved through the final rule implementing the Veteran Small Business Certification Program (and thus the changes already exist in SBA's regulations), it is worth flagging the following two changes:

• Addition of a new subsection that provides that a concern found not to qualify as a VOSB or SDVOSB in a status protest may not submit an offer on a future VOSB or SDVOSB procurement until the protested concern reapplies to the Veteran Small Business Certification Program and has been designated by SBA as a VOSB or SDVOSB into the certification database. It also provides that no later than two days after SBA's final determination of finding a concern ineligible as a VOSB or SDVOSB, the concern is required to update its VOSB or SDVOSB status in SAM.gov (and requires SBA to do so itself if the concern fails to do so within two days). See 13 C.F.R. § 128.500(d).
• Revised Section 128.203(i) to change "outside obligations" to "outside employment" to clarify that SBA does not intend to require or consider different factors in determining whether a woman or a veteran or service-disabled veteran controls the business concern at issue. Put another way, the requirements are now consistent between the WOSB and SDVOSB control analysis.

Finally, it is worth flagging a few changes for the HUBZone Program:

• Amends HUBZone regulations to address timeliness for HUBZone protests. First, the final rule adds a new subparagraph (d)(1)(i) to clarify the timeliness rules for protests relating to orders or agreements that are set aside for certified HUBZone small business concerns where the underlying multiple award contract was not itself set aside or reserved for certified HUBZone small business concerns. Second, the final rule adds a new subparagraph (d)(1)(ii) to clarify that where a contracting officer requires recertification in connection with a specific order under a multiple award contract that itself was set aside or reserved for certified HUBZone small business concerns, a protest challenging the HUBZone status of an apparent successful offeror will be considered timely if it is submitted within five business days of notification of the identity of the apparent successful offeror for the order. See 13 C.F.R. § 126.801(d).
• Clarifies that a HUBZone joint venture should be registered in SAM (or successor system) and identified as a HUBZone joint venture, with the HUBZone-certified joint venture partner identified. See 13 C.F.R. § 126.616(a)(1).
• Clarifies the bases on which a HUBZone protest may be filed, including: 1) the protested concern did not meet the HUBZone eligibility requirements set forth in Section 126.200 at the time the concern applied for HUBZone certification or on the anniversary date of such certification; 2) the protested joint venture does not meet the requirements set forth in Section 126.616; 3) the protested concern, as a HUBZone prime contractor, is unduly reliant on one or more small subcontractors that are not HUBZone-certified, or subcontractors that are not HUBZone-certified will perform the primary and vital requirements of the contract; and/or 4) the protested concern, on the anniversary date of its initial HUBZone certification, failed to attempt to maintain compliance with the 35 percent HUBZone residence requirement. See 13 C.F.R. § 126.801(b).

Conclusion

SBA's long-awaited final rule brings notable and important changes to its various socioeconomic procurement programs. Holland & Knight's Government Contracts Group is ready to assist you in navigating these changes and answer any questions specific to your business.

Notes

¹ Regarding instances in which a business fails to change its status in SAM.gov, SBA notes that it does not presently have the ability in SAM.gov to change a business's certification status unilaterally, but that it will work with SAM to exercise such authority. Given the significant number of issues businesses have had with SAM.gov to date, when and if this ability will come to fruition remains to be seen.

² Although the proposed rule made some of these changes to the VOSB/SDVOSB programs as well, the final rule does not amend certain regulations because SBA included the same provisions in the final rule implementing the Veteran Small Business Certification Program and thus the changes already exist in SBA's regulations. See 87 Fed. Reg. 73400 (Nov. 29, 2022).

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