The Administration’s recent announcement that it plans to boost Small Disadvantaged Business contracting by 50% means that we may see increased interest by government agencies and large prime contractors alike in doing business with self-certified SDBs.
But my guess is that the Administration’s push will come with additional oversight, too–after all, increasing the goal isn’t worth much if the government cannot be confident that the contracts it counts toward its SDB goals were awarded to eligible entities. In my experience, many contractors check the SDB box in SAM without fully understanding what it takes to be an eligible Small Disadvantaged Business under federal contracting laws.
So before you click that box (or re-click it on your next SAM update) here are five things you should know about eligibility for self-certified SDB status.
1. A “Self-Certified 8(a)”
It’s a slight oversimplification, but an SDB is essentially a self-certified 8(a) contractor. The SBA’s regulation at 13 C.F.R. 124.1002(a) establishes the general criteria to qualify as an SDB. That regulation states:
(a) Reliance on 8(a) criteria. In determining whether a firm qualifies as an SDB, the criteria of social and economic disadvantage and other eligibility requirements established in subpart A of this part apply, including the requirements of ownership and control and disadvantaged status, unless otherwise provided in this subpart.
Unlike the 8(a) Program, “potential for success” is not required for self-certified SDB status and the criteria set forth in 13 C.F.R. 124.108, such as good character, do not apply either. There also are a few other, more minor, differences set forth in 13 C.F.R. 124.1002. But, for the most part, the eligibility criteria for SDB status are the same as those for the 8(a) Program.
By the way, if you are in the 8(a) Program, you automatically qualify as an SDB. As stated in 13 C.F.R. 124.1001, “[a]ll current Participants in the 8(a) BD Program qualify as SDBs.”
2. Social Disadvantage Requirement
To qualify as a self-certified SDB, a company must be owned and controlled by socially disadvantaged individuals. But who is socially disadvantaged?
The criteria are set forth in 13 C.F.R. 124.103, and are the same for SDB eligiblity as they are for the 8(a) Program. Members of certain designated groups, such as Black Americans and Hispanic Americans, are presumed socially disadvantaged. The full list of designated groups is found in 13 C.F.R. 124.103(b)(1). Individuals who are not members of these groups must establish their personal social disadvantage, as provided in 13 C.F.R. 124.103(c).
Of course, for self-certification purposes, the SBA isn’t around to review a social disadvantage narrative, as it does for individuals trying to establish their personal social disadvantage for the 8(a) Program. But I think it is wise to carefully consider how you would explain your personal social disadvantage to the SBA in the event of an audit. You may even want to check out this post written by my colleague Nicole Pottroff, who explains what the SBA is looking for when it comes to establishing personal social disadvantage.
3. Economic Disadvantage Requirement
In my experience, if there is one thing that trips up self-certified SDBs the most, it is the requirement that the SDB be owned and controlled by economically disadvantaged individuals. There seems to be a fairly widespread misconception that disadvantage, for SDB purposes, is limited only to social disadvantage. Not so.
To qualify as disdvantaged, an individual must meet the economic disadvantage criteria established in 13 C.F.R. 124.104. These include, most notably, a requirement that the individual’s net worth be less than $750,000 (not including certain permitted exclusions) and that, in most cases, the individual’s three-year average adjusted gross income be less than $350,000 (again, less certain exclusions).
Again, in my opinion, the best practice is to be prepared to show that you meet these criteria in the event of an audit.
4. Unconditonal Ownership Requirement
An SDB must be at least 51 percent “unconditionally and directly” owned by disadvantaged individuals. These requirements are explained in 13 C.F.R. 124.105–but note that paragraphs (g) and (h) of the regulation do not apply to SDBs.
Direct ownership means that the disadvantaged individual must own his or her shares personally, rather than through another entity like a holding company. (Though there is a very limited exception for certain trusts). Unconditional ownership is defined at 13 C.F.R. 124.3, as well as portions of 13 C.F.R. 124.105.
Some relatively common corporate practices, such as the use of voting trusts and purchase options, can run afoul of the unconditional ownership requirement, so do your due diligence–and amend corporate documents as necessary–before self-certifying as an SDB.
5. Control Requirement
An SDB must also be controlled by disadvantaged individuals. Control is explained in 13 C.F.R. 124.106, and is defined as “including both the strategic policy setting exercised by boards of directors and the day-to-day management and administration of business operations.”
But the control requirements go well beyond this big-picture guidance, and include things like the disadvantaged individual serving as the highest officer, being the highest-compensated employee (usually), and working full-time for the company–although the full-time requirement is modified slightly in 13 C.F.R. 124.1002(h).
Before self-certifying as an SDB, it is essential to understand, and comply with, the regulatory control requirements.
A Few Final Words
The items I’ve mentioned are he most common problems I see when it comes to SDB eligibility, but they aren’t the only eligibility criteria. For instance, the business must be small (of course!) and in most cases the owners must be U.S. citizens. It is also worth noting that the requirements can vary for joint ventures, as well as for companies owned by tribes, Alaska Native Corporations, Native Hawaiian Organizations, and Community Development Corporations.
The potential penalties for misrepresenting SDB status are severe. Before clicking that box in SAM, it is important to do your due diligence and have a good faith, reasonable belief that you qualify.
Finally, if you are looking for more detailed information about social disadvantage, economic disadvantage, unconditional ownership and control, please check out our 8(a) Program GovCon Handbook on Amazon.
Need help with a government contracting legal matter? Email us or give us a call at 785-200-8919.