Regulatory Update: SBA Moves to Clean Up Small Disadvantaged Business Rules

Last month, the SBA moved to edit its regulations, taking a red pen to its current rules governing Small Disadvantaged Businesses (or SDBs), as described in the Federal Register. This blog post will highlight what the new rule will mean for current SDBs—and how businesses can become eligible for SDB subcontractor status under the new rule. While the SDB program is still alive and kicking, the rules will be simplified to eliminate a lot of language that is simply no longer applicable.

Why is the new rule important?

The federal government aims to set aside certain percentages of its awarded contracts to particular groups on an annual basis. Right now, agencies strive to set aside at least 5% of all prime and subcontracts for SDBs each year. Despite this stated goal, “all Federal programs for SDB prime contractors have been discontinued, with only the government-wide and agency-specific goals for the percentage of Federal contract and/or subcontract dollars awarded to SDBs each year remaining.” According to the SBA, “[c]urrently, there is no SDB set-aside program; there is no statutory authority for the SDB price evaluation adjustment; and SBA does not administer an SDB certification program.” Still, agencies utilize the SDB status as a designation for federal subcontracting programs.

Enter the new rule. The new rule updates regulatory standards for SDB subcontracting programs which will be implemented on “August 6, 2020 without further action, unless significant adverse comment is received by July 7, 2020.”

What does the new rule do?

Functionally, the new rule does two things.

First, it will amend § 124.1001 of the SBA’s regulations (located in chapter 13 of the CFR). Essentially, it moves the previous definition of SDB to a new location and eliminates any references to SBA’s SDB protest and appeal procedures. The amended § 124.1001 will also describe eligibility requirements for SDBs (which we discuss below).

Because SDB status will be utilized exclusively by agency administered subcontracting programs, the SBA is formally stepping back, which brings us to the second thing the new rule will do. It will remove a lot of excess regulations. If implemented as anticipated, the new rule will remove 13 C.F.R. § 124.1002 through § 124.1016, which currently cover how the SBA used to oversee SDB issues.

So how do I become an SDB under the new rule?

Under the proposed amendments to 13 C.F.R. § 124.1001, an SDB for purposes of any Federal subcontracting program must meet two main criteria. It must:

  1. Qualify as small under a contract’s assigned NAICS code; and
  2. Be “owned and controlled by one or more socially and economically disadvantaged individuals.”

A business “may represent that it qualifies as an SDB for any Federal subcontracting program if it believes in good faith that it is owned and controlled by one or more socially and economically disadvantaged individuals” and, unlike the 8(a) program, need not go through an extensive certification process overseen by SBA to do so.

Instead, SDB participants must self-certify that they meet “the criteria of social and economic disadvantage and other eligibility requirements established” for 8(a) participants under 13 C.F.R. §§ 124.1–124.704. For any of our readers familiar with the 8(a) eligibility requirements (which we discuss frequently on the blog, including here and here), this is no small feat.

Under the new rules, can my SDB status be challenged?

While there is no direct way for an entity to actively challenge another business’ self-proclaimed SDB status under the new rules (although there are indirect options such as an inspector general complaint), penalties for misrepresenting eligibility are intense. If a business misrepresents that it is “small business concern owned and controlled by socially and economically disadvantaged individuals” for the purposes of obtaining a federal prime or subcontract, it may: (1) “be punished by a fine of not more than $500,000 or by imprisonment for not more than 10 years, or both”; (2) “be subject to the administrative remedies prescribed by the Program Fraud Civil Remedies Act”; (3) “be subject to suspension and debarment”; and (4) be ineligible for almost any small business contracting programs for up to three years under 15 U.S.C. § 645(d).

To that end, it is incredibly important for all businesses claiming SDB status to ensure that they meet the requirements for social and economic disadvantage and control applicable to 8(a) participants. For a cautionary tale, see the claim settlement in a SDB misrepresentation case we recently noted.

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All in all, the new rule, if implemented as anticipated, will help streamline and clean up the regulations related to SDB status. If you have questions about the new rule, or SDB status more generally, email us or give us a call at 785-200-8919.