SBA requires that its 8(a) Business Development Program applicants demonstrate “reasonable prospects for success in competing in the private sector if admitted to the 8(a) BD program” by meeting a number of criteria. This aptly named potential for success rule is easily one of the most common reasons for 8(a) Program application denials. But even still, it seems to be one of the least understood 8(a) application requirements out there. Below, I dig into some of the most important features of this rule with the top five things you should know.
1. The applicant must meet the two-year requirement.
The potential for success rule requires that the applicant “must be in business in its primary industry classification for at least two full years immediately prior to the date of its 8(a) BD application[.]” To demonstrate this, the applicant must submit its income tax returns for the prior two tax years, which must show “operating revenues in the primary industry in which the applicant is seeking 8(a) BD certification.” When a firm is denied 8(a) participation on the basis of potential for success, this requirement is often the culprit. But the silver lining there (where noncompliance with the two-year requirement is the sole basis for denial) is that the applicant can simply wait it out and reapply once it meets the two-year requirement–so long as the 90-day reapplication clock continues to run as well.
2. SBA can waive the two-year requirement (but doesn’t do so often).
Many applicants see the word “waiver” and get overly optimistic that they should just apply right away–without waiting the two years. But oftentimes, that is not the case. This waiver contains five separate conditions that must be met to qualify, setting the bar pretty high. Those conditions are:
(i) The individual or individuals upon whom eligibility is based have substantial business management experience;
(ii) The applicant has demonstrated technical experience to carry out its business plan with a substantial likelihood for success if admitted to the 8(a) BD program;
(iii) The applicant has adequate capital to sustain its operations and carry out its business plan as a Participant;
(iv) The applicant has a record of successful performance on contracts from governmental or nongovernmental sources in its primary industry category; and
(v) The applicant has, or can demonstrate its ability to timely obtain, the personnel, facilities, equipment, and any other requirements needed to perform contracts as a Participant.
With this waiver, the applicant can’t simply check each of these boxes either. It must be able to provide evidence of current and completed “governmental and nongovernmental” contracts (including letters of reference or past performance reports) to establish its history of successful contract performance. It should also provide any additional information demonstrating performance of work in the industry in which it is seeking 8(a) certification.
Generally, the more the better, as SBA will consider the “applicant’s performance on both government and private sector contracts in determining whether the firm has an overall successful performance record.” But the rule does clarify, if the applicant only has experience performing government contracts or only private sector contracts, that is not necessarily a deal-breaker for the waiver (assuming all other criteria are met). In those situations, the SBA will review the applicant’s “performance on those contracts alone to determine whether the applicant possesses a record of successful performance.”
All in all, the waiver is a valid option for an applicant that hasn’t been in business in its primary industry for two full years if the applicant can still demonstrate that it has already has: the requisite technical experience and successful performance under multiple contracts in that industry; a disadvantaged owner/manager with substantial business management experience in that industry; and financial stability (including adequate capital to sustain operations and the ability to acquire and retain the requisite personnel, facilities, equipment, and resources needed to successfully perform contracts). But again, the applicant must also have the documentation to prove it. Otherwise, waiting for the two-year clock to run may be the only option.
Additionally, and importantly, this is still only a waiver of the two-year requirement–not the entire potential for success rule. So even if an applicant receives the waiver, it must still demonstrate potential for success on the other bases set forth in the rule (as described below).
3. The applicant must demonstrate access to credit and capital.
In addition to demonstrating compliance with the two-year requirement (or receiving SBA’s waiver of that requirement) the applicant is also required to demonstrate its “access to credit and capital, including, but not limited to, access to long-term financing, access to working capital financing, equipment trade credit, access to raw materials and supplier trade credit, and bonding capability.” SBA will consider those factors in making its ultimate determination on the applicant’s potential for success in the 8(a) Program.
Essentially, SBA wants to ensure that the applicant has the ability to acquire and retain the necessary personnel, facilities, equipment, bonding, and any other resources needed to perform any contractual work it may be awarded. You might have noticed that this language is similar to conditions (iii) and (v) of the two-year requirement waiver. But it is still a distinct requirement the applicant must meet whether it was granted the waiver or not.
4. The applicant must demonstrate technical knowledge, management experience, and any requisite licenses.
The final items listed in SBA’s potential for success rule requires that the applicant “as a whole must demonstrate both technical knowledge in its primary industry category and management experience sufficient to run its day-to-day operations.” In determining whether the firm meets these requirements, the SBA will
consider the technical and managerial experience of the applicant concern’s managers, the operating history of the concern, the concern’s record of performance on previous Federal and private sector contracts in the primary industry in which the concern is seeking 8(a) BD certification, and its financial capacity.
Additionally, the applicant or its employees “must hold all requisite licenses if the concern is engaged in an industry requiring professional licensing (e.g., public accountancy, law, professional engineering)” and must provide documentation of any such licensing with its application.
These requirements primarily go to the applicant’s ability to carry out its day-to-day business operations, making sure it is licensed (if applicable) and has the technical expertise and qualified management to perform work in its industry. But it is important to note here that some of these items also touch on another 8(a) eligibility rule–one unrelated to potential for success. In applying to the 8(a) Program, you should certainly keep both rules in mind.
As relevant here, SBA’s rule for disadvantaged individual control says that the disadvantaged owner and manager must “have managerial experience of the extent and complexity needed to run the concern[,]” and that they “need not have the technical expertise or possess a required license to be found to control an applicant” so long as they can demonstrate the “ultimate managerial and supervisory control over those who possess the required licenses or technical expertise.” Thus, the managerial experience of the applicant is crucial for compliance with both rules. But where the required managerial experience and/or any required license is held by someone other than the disadvantaged individual, the SBA may raise control issues even where the potential for success rule is met.
5. SBA can deny the applicant if 8(a) contract opportunities are not available (but doesn’t often do so).
SBA’s potential for success rule ends with a provision establishing that SBA may deny “admission into the 8(a) BD program due solely to a determination that potential 8(a) contract opportunities are unavailable to assist in the development of the concern” but will not do so unless:
(1) The Government has not previously procured and is unlikely to procure the types of products or services offered by the concern; or
(2) The purchase of such products or services by the Federal Government will not be in quantities sufficient to support the developmental needs of the applicant and other Participants providing the same or similar items or services.
Now this is not something we see very often in our line of work. But it is still worth noting for any 8(a) applicant in a unique or uncommon line of work that the government may not often procure through the 8(a) Program. Applying for 8(a) Program participation is a whole lot of work. So, this provision should definitely make its way into your initial eligibility analysis if you have any concerns to this effect.
* * *
Well, there you have it: the five things you should know about SBA’s 8(a) potential for success rule. But don’t forget, this is just one of SBA’s many 8(a) eligibility rules. There are rules for size, social disadvantage, economic disadvantage, ownership, control, and many more. Although potential for success is a big one, and one we see a lot of SBA denials under, compliance with it does not put you in the clear for 8(a) Program participation.
Need help with applying to or navigating the SBA’s 8(a) Program or another government contracting legal matter? Email us or give us a call at 785-200-8919.