The US Small Business Administration (SBA) has finalized multiple changes to its small business contracting rules, which should increase opportunities for small business prime contractors to partner with other businesses while preserving their status as eligible small business concerns.

On May 31, SBA published a final rule (“Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments”) (Final Rule) amending its regulations in order to implement changes mandated by the 2013 National Defense Authorization Act (NDAA). The new changes include clarifications to restrictive performance requirements for set-aside contracts, relaxation of rules pertaining to joint ventures under certain federal programs, additional guidance on where SBA will find affiliation, and information regarding application and waivers of the non-manufacturer rule.

These changes have significant implications for the manner in which small business prime contractors can partner with both large and small entities in the performance of their contracts and, for certain SBA programs, receive investments from venture capital companies. The changes also potentially are important for entities seeking to acquire small business concerns. We highlight several major changes below; however, the Final Rule enacts many additional changes of varying importance. Read the full text of the Final Rule.

PERFORMANCE REQUIREMENTS

SBA rules for small business set-aside contracts, 8(a) contracts, and specified woman-owned small business (WOSB) contracts previously have required that, in the case of a contract for services other than construction, the small business prime contractor itself perform at least 50% of the cost of the contract incurred for personnel with its own employees. For supply contracts, small business manufacturers are required to perform at least 50% of the cost of manufacturing the supplies, not including the cost of materials.[1] Small business non-manufacturers are required to provide products manufactured by a small business in the United States.[2] The Final Rule eliminates this requirement for contracts of value less than or equal to $150,000. Further, the Final Rule establishes standardized performance requirements applicable not only to small business set-aside contracts, 8(a) contracts, and specified WOSB contracts, but also to HUBZone contracts and service-disabled veteran-owned small business (SDVOSB) contracts. For all such entities, the Final Rule increases the flexibility of prime contractors to subcontract to similarly situated entities (entities having the same SBA small business program status, e.g., both HUBZone small business concerns, both SDVOSB concerns, etc.) by requiring only that the percentage of total dollars subcontracted to other than similarly situated entities not exceed 50%.

AFFILIATION

In determining a contractor’s size, SBA aggregates attributes of the contractor (either number of employees or revenues, depending on the size standard) with those of all affiliated entities, which may include joint venture partners, subcontractors, entities with certain ownership interests (as well as those entities’ respective affiliates), certain investors, and businesses owned by family members.[3] As such, SBA affiliation rules must be considered in the structuring of small businesses, in mergers and acquisitions of small businesses, in taking on investors, and in the selection of business partners as contracting partners at many levels.

The Final Rule establishes that a small business can team with other small businesses under a “Small Business Teaming Arrangement” without regard to affiliation as long as each team member is small under the size standard applicable to the procurement. Further, the Final Rule establishes a presumed affiliation between any two firms that are owned and controlled by persons who are married couples, parties to a civil union, parents and children, or siblings, but only where they conduct business with each other, or share or provide loans, resources, equipment, locations, or employees. This presumption is rebuttable.

The Final Rule also codifies a rebuttable presumption that affiliation exists where the contractor is economically dependent on another concern to the extent it derives 70% or more of its revenue from the other firm, based on receipts over the previous three years. The so-called “70% rule” historically has existed only as a creation of the case law of the SBA Office of Hearings and Appeals. The rule is of particular importance to small business resellers that, at different points, potentially may have a single primary business partner manufacturing the products being resold and small business service providers that regularly team with the same business partners.

The Final Rule amends SBA regulations to allow a joint venture of two or more business concerns to submit an offer as a small business for any federal contract or subcontract—without regard to affiliation—so long as each concern qualifies as small under the size standard corresponding to the North American Industry Classification System (NAICS) code assigned to the contract.

Finally, the Final Rule significantly modifies the requirements for affiliation under the “ostensible subcontractor” rule.[4] That rule previously considered a small prime contractor and its subcontractor affiliated for purposes of a procurement if the subcontractor performed “primary and vital requirements” of the contract or was a subcontractor upon which the prime contract was unusually reliant. The Final Rule redefines the term “ostensible subcontractor” to exclude small business subcontractors that are similarly situated entities. This change will afford more small businesses the opportunity to bid as small on contracts for which they need to team with other small businesses.

SBIR CONTRACTS

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are important sources of federal funding for small business research and commercialization activities. The Final Rule slightly relaxes the SBIR program’s ownership and control eligibility requirements by permitting a venture capital operating company, hedge fund, or private equity firm to own more than 50% of the concern if the venture capital operating company, hedge fund, or private equity firm itself qualifies as a small business concern that is more than 50% directly owned and controlled by individuals who are citizens or permanent resident aliens of the United States.

JOINT VENTURES

The Final Rule eases the restrictions on eligibility of joint ventures to bid on 8(a) contracts, competitive and sole source SDVOSB procurements, and competitive WOSB procurements by requiring that only one concern in the joint venture hold the designated status as long as all other participating concerns are small under the size standard applicable to the procurement.

NON-MANUFACTURER RULE

The SBA non-manufacturer rule requires that, to be eligible for certain important categories of small business set-aside contracts for procurement of supplies, a small business either itself must manufacture the products in the United States or supply the end items of another small business manufacturer. Under certain circumstances, SBA may waive the requirements of the non-manufacturer rule. However, waiver cannot be granted by the procuring agency and instead must be sought from SBA through a separate process. The Final Rule establishes that, for multiple-item acquisitions, if a least 50% of the estimated aggregate contract value is composed of items that are manufactured by small business concerns, then the rule is satisfied and no waiver of the non-manufacturer rule is required. The Final Rule further establishes that the non-manufacturer rule does not apply to small business set-aside contracts valued between $3,500 and $150,000. Finally, the Final Rule conforms the rule applicable to HUBZone non-manufacturers by removing a requirement—imposed only on HUBZone non-manufacturers—that the prime contractor either supply products manufactured by the contractor or end items of another HUBZone small business concern (as opposed to the end items of another small business). Accordingly, small business resellers will now have more opportunities to compete for set-aside contracts, and small business manufacturers may face increased competition for such contracts.

SBA waivers of the non-manufacturer rule are of two varieties. A waiver for a class of products (class waiver) will be granted when there are no small business manufacturers or processors available to participate in the federal market for that class of products. An individual waiver for a product in a specific solicitation will be approved when the SBA Director, Office of Government Contracting, reviews and accepts a contracting officer's determination that no small business manufacturer or processor can reasonably be expected to offer a product meeting the specifications of a solicitation, including the period of performance.

The Final Rule clarifies limitations on the timing of such waivers, namely that SBA generally will grant waivers for an individual contract or order prior to the issuance of a solicitation, or after issuance and before award, when the contracting officer provides all potential offerors additional time to respond. SBA also will grant waivers post award in relation to contract modifications properly within the scope of the contract. Finally, SBA is authorized to grant individual waivers of the non-manufacturer rule for the procurement of certain commercial software treated as a product or supply item rather than as a service.

The Final Rule now requires contracting officers to provide written notification to potential offerors of any waivers being applied to a specific acquisition. This notice should be provided at the time the solicitation is issued. If the notice is provided after issuance of the solicitation, the contracting officer must provide a reasonable amount of additional time for potential offerors to respond to the solicitation. This notice requirement is important because it will permit small business contractors that actually manufacture products or resell the products of other small business manufacturers to protest waiver of the rule where adequate small business sources of supply reasonably can be expected to offer products meeting the specification terms.

RECERTIFICATION OF SIZE IN MERGERS AND ACQUISITIONS 

SBA rules specify that the size status of a business is determined as of the date the concern submits a written self-certification that it is small to the procuring activity as part of its initial offer (or other formal response to a solicitation), which includes price. At this point, the concern is considered to be a small business throughout the life of the contract. Where a concern grows to be other than small, the procuring agency may exercise options and generally still may count the award as an award to a small business. However, in the context of mergers and acquisitions causing the concern to be other than small, the concern must, within 30 days of the transaction becoming final, recertify its small business status to the procuring agency, at which point the agency no longer can count options or orders issued pursuant to the contract towards its small business goals. The Final Rule further establishes an additional requirement that, if the merger, sale, or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.

CONCLUSION

The Final Rule becomes effective on June 30, 2016. Contractors, subcontractors, and joint-venture participants should become familiar with the changes now so that they can properly apply the new requirements to upcoming procurements on which they wish to bid.