December of 2018 brought many potential changes to the U.S. Small Business Administration’s (SBA) regulations that impact small businesses. First, on December 4, 2018, the SBA issued a lengthy proposed rule implementing several provisions of the National Defense Authorization Acts (NDAA) of 2016 and 2017, and the Recovery Improvements for Small Entities After Disaster Act of 2015 (RISE Act), as well as other clarifying amendments. Then, on December 17, 2018, President Trump signed Public Law No. 115-324, the Small Business Runway Extension Act, which modifies the method for determining the size standards for small businesses.

SBA’s Proposed Rule

The SBA’s proposed rule offers clarification on numerous topics, including but not limited to, recertification requirements, material breach of subcontracting plans for failure to comply in good faith, the inclusion of indirect costs in commercial subcontracting plans, setting aside an order under a set-aside multiple award contract (MAC), the status of independent contractors as employees in certain situations, and limitations on subcontracting compliance. Comments on the proposed rule are due on February 4, 2019. Some of the most significant proposed rules are summarized below.

Material Breach of Subcontracting Plans

The proposed rule states that it shall be a “material breach” of a contract/subcontract when the contractor/subcontractor with a subcontracting plan fails to comply in good faith with the periodic reporting requirement or duty to partake in studies or surveys as may be required by the government to determine compliance. Such a breach will be determined by analyzing under a “totality of the circumstances” approach, which is defined in the rule as “tak[ing] into account all actions, or lack thereof, the contractor made to promote subcontracting opportunity to small businesses to the extent agreed upon in the approved subcontracting plan.” Also, a breach of this kind can now be considered in any past performance evaluation of the contractor. Under the proposed rule, the SBA will have to provide examples of specific activities that would be considered a failure to comply in good faith with the small business subcontracting plan.

RISE Act

Pursuant to the RISE Act, the SBA has authority to establish contracting preferences for small businesses located in disaster areas, and provide agencies with double small business contracting credit for making awards to those small businesses. Under the proposed rule, agencies will be able to provide contracting preferences for small businesses located in major disaster areas (under declaration by the president pursuant to Section 401 of the Robert T. Stafford Disaster Relief and Assistance Act) if the small business will perform the contract work in that disaster area. Specifically, under the proposed rule, the SBA will expand existing FAR regulations to provide that agencies will receive credit for an “emergency response contract” awarded to a “local firm” that qualifies as a small business under the applicable size standard for a “major disaster or emergency area.”

Setting Aside an Order Under a Multiple Award Set-Aside Contract

SBA is proposing to give authority to agencies to set aside one or more orders for HUBZone SBCs, 8(a) BD SBCs, SDVO SBCs or WOSBs, where the underlying multiple award contract was initially set aside for small businesses. Set asides under multiple award set-aside contracts may be implemented by agencies in multiple ways, including: “(1) Establishing set asides to socioeconomic programs at the order solicitation level under multiple award small business set-aside contracts, and (2) establishing socioeconomic set-aside pools at the master contract solicitation level for a multiple award small business set-aside contract.” However, the SBA is seeking comments on the burden these approaches would have, as well as whether these approaches may make it difficult for small businesses to compete for and receive orders.

Recertification of Size and Status

The SBA is proposing to amend its regulations only requiring recertification on full and open competition contracts. SBA’s current rules require recertification of size and status for all contracts lasting more than five years. This requirement currently applies to indefinite delivery contracts with future order dates, and contracts that were not originally set aside for small businesses but were awarded to a small business. The SBA is also adding recertification requirements for 8(a) contracts. Similar requirements are already present in regulations for small businesses under other socioeconomic programs.

Independent Contractors’ Status as Employees

For a contract that is assigned a NAICS code having an employee-based size standard, an independent contractor could be deemed an ‘‘employee’’ of the business for which he/she is doing work. If such an individual is considered an employee for size purposes, he/she would also be considered an employee for limitation on subcontracting (LOS) purposes. Where a contract is assigned a NAICS code with a receipts-based size standard, an independent contractor would be considered a subcontractor rather than an employee. Regardless, as a subcontractor, an independent contractor may be considered a similarly situated entity for LOS purposes.

LOS Compliance

In order to maintain small business contracting preferences, the SBA has limited the ability of small businesses to subcontract to other than small business concerns, requiring that small businesses perform a certain percentage of contract work. As a matter of contract administration, the contracting officer is responsible for monitoring and enforcing these requirements. The proposed rule vests contracting officers with the authority to request certain information from contractors regarding their LOS compliance. The SBA proposed rule also clarifies that LOS compliance is not required in every contract.

SBA is requesting comment on whether all small business prime contractors performing set-aside or sole source contracts should be required to demonstrate compliance with LOS to the contracting officer, and if so, how often and what types of data should be produced.

Ostensible Subcontractor Rule Application to Small Businesses Under a Socioeconomic Program Set Aside

An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract, or a subcontractor upon which the prime contractor is unusually reliant. Unless an exception to joint venture affiliation exists, a prime contractor and ostensible subcontractor will be treated as joint venturers or affiliates for size determination purposes. However, if all joint venturers are small businesses per the size standard of the particular contract, the joint venture can qualify for award.

New language in the proposed rule will also allow the SBA to make an ostensible subcontractor determination concerning a small business program participant’s overreliance on a nonsimilarly situated subcontractor as part of an eligibility or status protest determination (except in service and construction contracts). If the SBA finds that the subcontractor is an ostensible subcontractor, the SBA will treat the arrangement between the contractors as a joint venture that is ineligible for award.

Size Determinations

The SBA is proposing to clarify the time at which an entity’s size is determined for purposes of a size determination. The SBA seeks to make clear that size will be determined at the time of the initial offer or response including price, except in the case of IDIQ contracts, where size determinations will be made on the date of initial offer without the inclusion of price.

Additionally, the SBA is proposing to amend its regulations to clarify that when two or more small businesses form a joint venture (or are deemed a joint venture), that the joint venture exception to affiliation in §121.103(h)(3)(i) applies if both firms are small under the size standard for the particular procurement.

The SBA also proposes to clarify that the ostensible subcontractor rule does not apply to a prime and subcontractor that are similarly situated entities (those with the same small business program status).

Other Proposed Amendments

Other proposed amendments include a requirement for the head of a contracting agency to publish notice of substantial bundling, the ability of procurement center representatives PCRs to review all acquisitions, the revision of the nomenclature of subcontracting compliance reviews, the amendment of rules regarding kit assemblers, and new rules allowing a contracting officer to make an award under a set aside where only one acceptable offer is received.

The SBA also clarified that while the non-manufacturer rule (NMR), which has a size standard of 500 employees, does apply to ITVAR procurements, that procurements under the ITVAR NAICS Code 541519 exception retain the 150 employee size standard.

Small Business Runway Extension Act of 2018

On December 17, 2018, President Trump signed into law the Small Business Runway Extension Act of 2018 (Runway Extension Act). The Runway Extension Act modifies the current method for determining a small business’ size. Previously, concerns in industries with receipt-based size standards calculated size based on annual average gross receipts over three years. The Runway Extension Act changes this period to five years.

The purpose of the law is to protect small businesses that experience a short period of large growth, allowing them to remain in the small business category for a longer period of time. But on the other side of that coin, large businesses who are declining in size and revenue will not qualify as a small business as quickly. Interestingly, while the Runway Extension Act is now law, it’s not presently effective, so small businesses should continue to use the three year average until SBA issues an interim rule implementing the Runway Extension Act.