On November 8, 2019, the U.S. Small Business Administration (SBA) issued a lengthy and wide ranging proposed rule to revise and clarify to its small business regulations, including, significantly, merging requirements for the 8(a) and all-small mentor-protégé programs. We provide an overview of some of the most significant proposed changes below, noting how these changes seek to bring the rules more in line with SBA's mission.

Overview of SBA's Mission

SBA is an independent agency of the U.S. Government with a mission "to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation." As part of that mission, SBA spearheads and oversees various initiatives, including "Small Business Saturday," the day after Black Friday that is intended to celebrate and support small businesses across the county.

With regard to federal contracting, SBA oversees various programs aimed at supporting small businesses in public procurement. To that end, SBA sets goals with other federal departments and agencies to award 23% in prime contract dollars to small businesses. The combined goals for the federal government are:

  • 23 percent of prime contracts for small businesses;
  • 5 percent of prime and subcontracts for women-owned small businesses;
  • 5 percent of prime contracts and subcontracts for small disadvantaged businesses;
  • 3 percent of prime contracts and subcontracts for HUBZone small businesses; and
  • 3 percent of prime and subcontracts for service-disabled veteran-owned small businesses.

Agencies also have individual goals for what percent of prime and subcontract dollars should go to small businesses, and these goals may be different than the federal government's overall goals.

Federal agencies turn to SBA's programs and resources to better position themselves to meet the government's overall small business goals, particularly through the use of set-aside and sole-source contracting. Thus, SBA's regulations set forth detailed requirements for federal contractors seeking to participate in various programs developed to advance the government's small business efforts.

Proposed Changes to SBA's Federal Procurement Regulations

SBA's regulations are both broad and complex. Recognizing that many of the rules governing federal procurement would benefit from streamlining and clarification, the SBA has undertaken to revise or eliminate confusing and duplicable requirements and programs, consistent with President Trump's Executive Order 13771, "Reducing Regulation and Controlling Regulatory Costs."

The Six Primary Areas of Change

SBA's summary of the proposed rule lists six primary changes to its regulations: (1) to merge the 8(a) Business Development (BD) Mentor-Protégé Program and the All Small Mentor-Protégé Program; (2) to eliminate the requirement that SBA review and approve a joint venture of two 8(a) participants prior to award of an 8(a) contract; (3) to reduce unnecessary or excessive burdens on 8(a) participants and eliminate confusion surrounding certain regulations; (4) to require re-certification of size and/or socio-economic status for all set-aside task orders under unrestricted multiple award contracts (MACs), with limited exceptions for orders and Blanket Purchase Agreements (BPAs) under the General Services Administration's (GSA) Federal Supply Schedule Program (FSS); (5) to require re-certification of socio economic status for all set-aside orders where the required socio-economic status for the order differs from that of the underlying MAC contract; and (6) except for BPAs issued under a Federal Supply Schedule contract, to allow size and/or socio-economic protests at the order-level for set-aside orders issued against unrestricted MACs, or set-aside orders based on a different socio-economic status from the underlying set-aside MAC.

Merging of the 8(a) BD Mentor-Protégé and the All Small Mentor-Protégé Programs

With regard to the merger of the two mentor-protégé programs, which is the heart of the proposed rule, the SBA concluded after internal review that both the purpose and the benefits available under these two programs are identical. Thus, SBA proposes to eliminate the 8(a) BD Mentor-Protégé Program and continue to allow 8(a) participants to enter a mentor-protégé relationship through the All Small Mentor-Protégé Program, which is the broader of the two programs and was established in 2016 to expand the benefits of the 8(a) BD Mentor-Protégé Program to all small businesses seeking to contract with the federal government.

The merger of the two programs, with the All Small Mentor-Protégé Program surviving, will see impacts that ripple throughout numerous other rules. For example, SBA requests public comments on whether it should limit mentor opportunities to those firms with average annual revenues of less than $100 million (Section 125.9), and offers additional thoughts and questions on how to avoid abuses by mentors that vitiate the purpose of the program (for example, by requiring small business concerns to attend information sessions prior to participating in the program (Section 124.201), requiring the protégé firm to have some experience in a secondary NAICS code to form a mentor-protégé relationship based on that NAICS code (Section 125.9), and requiring the protégé to submit annual reviews of its mentor) (Section 125.9)). SBA also seeks to expand the mentor program to benefit Puerto Rican small business by increasing the limit on the number of protégé firms that one mentor can have at a time, and offering incentives to mentors to take on a Puerto Rican small business protégé.

Providing a Bright-Line Duration and Specific Size Requirements on Small Business Joint Ventures

In addition to the primary changes highlighted in SBA's summary of its proposed rulemaking, SBA proposes to make several changes to its regulations that clarify its requirements, eliminate unnecessary burdens on small businesses, and further bring the rules in line with SBA's mission. For example, SBA emphasizes that it "continues to believe that a joint venture should be a limited duration vehicle," and that it "never intended for the composition of joint ventures to be fluid." See Section 121.103(h). As such, SBA proposes to set a two-year limit on joint ventures (to commence on the date of the joint venture's first award, including where the first award is obtained via a novation to the joint venture). This rule would replace the existing "three-in-two" rule limiting small business joint ventures to three contracts within a two-year period, which SBA found to be unnecessarily restrictive of small business operations. While aiming to eliminate unnecessary restrictions on small business, the proposed rule also seeks to address potential abuses by small business conglomerates, whereby contractors find workarounds that arguably conflict with the spirit of the requirements to maintain their eligibility for set-aside and other small business incentive programs.

Similarly, SBA seeks public comment on whether it should specify that the size of the joint venture outside of the mentor-protégé program will be determined based on the current size status and affiliations of all past and present joint venture partners, even if a partner has left the joint venture. See Section 102.103(h). SBA views this requirement as more in line with its mission and better aimed at reducing abuses of the program.

New Requirements for Multiple Award Contracts

Recognizing that government agencies have, in some instances, also taken up practices that potentially conflict with the underlying purpose of its regulations, SBA proposes requiring contracting officers to assign a single NAICS code for each order issued against a Multiple Award Contract (MAC), and that NAICS code must be included in the underlying MAC and represent the principal purpose of the order. See Section 121.402. This rule aims to ensure that the NAICS codes assigned to specific procurement actions, and the corresponding size standards, are an accurate reflection of the contracts and orders being awarded and performed—and thereby require agencies to procure certain goods or services through a different contracting vehicle if the assignment of a NAICS code to the task order would not accurately reflect the principal purpose of the procurement. For example, SBA concluded that a task order that is nearly entirely for supplies should not be assigned a service NAICS code, as such mischaracterization increases burdens on contractors (particularly with respect to the non manufacturer rule). SBA acknowledges that "[t]here will still be anomalies where the procuring agency seeks to award an order whose principal purpose is different than the assigned NAICS code for the MAC until the Federal Acquisition Regulation (FAR) and the FPDS is amended to include multiple NAICS codes at the contract level."

SBA also responds to criticism concerning whether a business entity should remain eligible for task order awards where it self-certified as small for an unrestricted MAC, but later graduated from the program (becoming other-than-small). The general rule, which SBA does not propose to amend, provides that eligibility for a small business set-aside contract is determined as of the date of a firm's offer for the top-level contract. Thus, when a contracting officer seeks to set-aside an order for small business off an unrestricted MAC, the firm's size relates back to its self-certification for the underlying MAC—not the current size status as of the date it submits an offer for the task order.

SBA found that nearly half of small business set-aside orders issued off of government-wide acquisition contracts (GWACs) go to businesses that no longer qualify as small under the NAICS code size standard at the time of the order. Sections 121.404(a)(1), 124.503(i), 125.18(d), and 127.504(c). These "former" small businesses received 67% of GWAC task order dollars set-aside for small business. However, this same issue did not arise in the context of orders or Blanket Purchase Agreements (BPAs) issued under GSA's FSS contracts. To address the industry's concern while also avoiding adding unnecessary burden on contractors and agencies, SBA seeks to require re-certification of a company's size status for each order under an unrestricted MAC that is set-aside exclusively for small business. However, this rule would not apply to orders or BPAs issued under any FSS contract, as SBA found that such requirement would create undue inefficiency, and the data shows that the percentage of dollars going to other than small business off of FSS set-asides is limited.

Similarly, where the required status for an order differs from that of the underlying contract (e.g., if the MAC is a small business set-aside award, but the task order is restricted to HUBZone small business concerns), SBA proposes that all small business candidates qualify for the socio-economic status of the set-aside order at the time the firm submits an offer for that order. SBA notes that "[a]lthough size may flow down from the underlying contract, status in this case cannot."

Together with SBA's proposal to allow size protests at the order level for unrestricted MACs (and for SBA's Associate General Counsel for Procurement Law to initiate or file size protests), these proposed rules seek to bring small business regulations better in line with SBA's mission, to expand opportunities, and to protect against abuses of the program.

Takeaways for Federal Government Contractors

SBA is seeking feedback from interested parties on a number of issues that might be addressed in its final rule. Contractors can submit public comments online before the deadline on January 17, 2020.

SBA's rules are notoriously difficult to navigate—from eligibility requirements for various small business incentives and support programs, to limitations on subcontracting and the non-manufacturer rule (and exceptions thereto). While SBA intends to clarify and, in many instances, simplify its requirements to ensure that SBA regulations are in line with its mission, these revisions will require the attention of all those impacted to ensure future compliance. Federal contractors should monitor the public comments on SBA's proposed rule and consider how the final rule may impact their business and strategy for federal procurement.