The SBA has issued new proposed rules relating to the 8(a) Program. The rules clarify some aspects of ownership and control requirements for the 8(a) Program, including making change of ownership a little easier and cleaning up some 8(a) set-aside processes. The rule would also allow for populated joint ventures between similarly situated joint venture members.
Here are some of the key changes from the proposed regulation. This doesn’t cover everything, so please review the regulations closely if you are in the 8(a) Program. There are a number of tweaks throughout the regulations. Comments are due November 8, 2022.
Under the proposed changed, SBA includes “a process for allowing a change of ownership for a former Participant.” The current rule provides that “any Participant that was awarded one or more 8(a) contracts may substitute one disadvantaged individual for another disadvantaged individual without requiring the termination of those contracts or a request for waiver under § 124.515.”
The change would specify that a change of ownership could apply to a former Participant as well as to a current Participant under 13 C.F.R. § 124.105(i). This is most likely to benefit “an entity (tribe, ANC), Native Hawaiian Organization (NHO), or Community Development Corporation (CDC)) [that] seeks to replace the principal of a former 8(a) Participant.”
In addition, the proposed rule clarifies that an SBA-approved mentor can own up to 40 percent of its protégé. This would apply to an 8(a) protégé, even where the mentor is in in the same or similar line of business. This would allow a mentor in the same line of business as its 8(a) protégé to own up to 40% of the 8(a) protégé.
Under the ownership rules, an 8(a) Participant can change its ownership “where all non-disadvantaged individual owners involved in the change of ownership own no more than a 20 percent interest in the concern both before and after the transaction.” To avoid issues where two or more immediate family members try to purchase ownership and get around the 20% cap, “the proposed rule would provide that SBA will aggregate the interests of all immediate family members in determining whether a non-disadvantaged individual involved in a change of ownership has more than a 20 percent interest in the concern.”
8(a) Contracting and other Rules
There are a number of proposed changes to clean up the 8(a) regulations.
- For potential for success, the proposed rule would clarify that a company “that has performed no private sector work but has demonstrated successful performance of state, local or federal government contracts is eligible to participate in the 8(a) BD program.” No private sector contracts are needed.
- Where a company had federal debts, it may still qualify if it can “demonstrate that the financial obligations have been settled and discharged/forgiven by the Federal Government.”
- Because some tribes don’t file tax returns, the proposed rule would state that a tribally-owned applicant can submit financial statements.
- “The proposed rule would merely add a sentence to § 124.501(b) to clarify SBA’s current position that would prohibit a contracting activity from restricting an 8(a) competition to Participants that are also certified HUBZone small businesses, certified WOSBs or eligible SDVO small businesses.”
- Also, “an agency may award an 8(a) sole source order against a multiple award contract that was not set aside for competition only among 8(a) Participants.”
Joint Venture Rules
Populated Joint Ventures. The proposed rule essentially revives populated joint ventures in limited circumstances. SBA had years ago decided that a joint venture must be unpopulated, meaning that if a joint venture exists as a formal separate legal entity, it may not be populated with individuals intended to perform contracts awarded to the joint venture.
“The proposed rule would clarify, however, that a populated joint venture could be awarded a contract set aside or reserved for small business where each of the partners to the joint venture were similarly situated ( e.g., both partners to a joint venture seeking a HUBZone contract were certified HUBZone small business concerns).” In other words, two small businesses with the same socioeconomic designation as the set-aside designation for the solicitation could do a populated joint venture. Dissimilar joint venture partners, such as those commonly in a mentor-protégé relationship, could not have a populated joint venture.
For populated joint ventures, the rule would also state that revenues must be divided according to the same percentage as the joint venture partner ownership share in the joint venture.
Contracts versus Orders. Finally, SBA has cleared up the age old question about orders versus contracts. “SBA’s current policy is to allow orders to be issued under previously awarded contracts beyond the two-year period.” But SBA was fed up with getting this same question over and over. (Government contracts attorneys also receive the question frequently). As SBA put it: “Although SBA’s current policy is to allow orders to be issued under previously awarded contracts beyond the two-year period (since the restriction is on additional contracts, not continued performance on contracts already awarded), SBA continues to receive questions as to whether orders beyond the two-year period are permissible.”
So, the rule will now clearly state that “a joint venture may be issued an order under a previously awarded contract beyond the two-year period.”
Ostensible Subcontractor. The proposed rule would specify what counts as the primary and vital parts of a contract for construction contracts for purposes of ostensible subcontractor affiliation. As SBA explains:
The primary role of a prime contractor in a general construction project is to superintend, manage, and schedule the work, including coordinating the work of various subcontractors. Those are the functions that are the primary and vital requirements of a general construction contract and ones that a prime contractor must perform. . . .
SBA believes that the ostensible subcontractor rule for general construction contracts should be applied to the management and oversight of the project, not to the actual construction or specialty trade construction work performed. The prime contractor must retain management of the contract but may delegate a large portion of the actual construction work to its subcontractors.
In addition, for unusual reliance on an ostensible subcontractor, SBA will specifically mention two risk factors when affiliation is more likely: reliance on incumbent contractor’s management personnel and the reliance on the subcontractor’s experience. These would just be part of the overall consideration in a size determination.
This rule clarifies a number of aspects of rules relating to 8(a) Program ownership and contracting issues. It also addresses some joint venture rules to clear those up. Good on SBA for continuing to sharpen the clarity of its rules. Those in the 8(a) Program or working with joint venture would do well to review it in full.
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