The SBA has issued a new proposed rule addressing both the Historically Underutilized Business Zone
(HUBZone) Program and other small business updates. It is titled: “HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs.” In this post, we’ll provide an overview of some of the main highlights of the proposed rule, and will do a deeper dive on some aspects of the regulation in later posts.
The proposed rule was published on August 23, 2024 with comments due October 7, 2024. The rule is designed to “clarify and improve policies surrounding some of those changes” made in the 2019 comprehensive revision to the HUBZone Program regulations, which we discussed here.
Here are a few main items addressed in the proposed rule.
- Clarify HUBZone rules addressed in the 2019 changes.
- The rule will “require any certified HUBZone small business to be eligible as of the date of offer for any HUBZone contract.”
- The rule will bring uniformity to recertification requirements and “delete the program specific recertification requirements contained separately in SBA’s size, 8(a) BD, HUBZone, WOSB, and VetCert and move them to a new section that would cover all size and status recertification requirements.”
HUBZone Clarifications
The 2019 changes to the HUBZone program were the largest in 20 years. As we noted back then, some of the big changes detailed in these earlier posts are:
- Annual recertification of HUBZone status, rather than at time of bid and award.
- A minimum threshold for attempting to maintain compliance with the requirement that at least 35 percent of a concern’s employees reside within a HUBZone. SBA will impose a presumption that, if the HUBZone’s employee residency drops below 20 percent, the HUBZone will have failed to use its best efforts to comply.
- HUBZone small businesses will be able to keep counting employees that formerly resided in a HUBZone toward the required totals for the 35 percent residency requirement, even if those employees move out of a HUBZone.
SBA, in this proposed rule, is incorporating some of the guidance and FAQs it is has issued over the years. In addition, it adds some additional rules.
Employee Hours and Work. “SBA is proposing to amend the definition of the term ’employee’ by raising the minimum number of work hours necessary for an individual to count as an employee for HUBZone program purposes.” The “proposed rule would increase the number of hours that an individual must work to be considered an employee for HUBZone purposes to 80 hours per month. Under SBA’s current regulations, an employee is defined as an individual “employed on a full-time, part-time, or other basis, so long as that individual works a minimum of 40 hours during the four-week period immediately prior to the relevant date of review . . .” 13 CFR 126.103.”
This would double the hours needed to maintain employee status.
Along the same lines, the “proposed rule would provide that in order to ensure that an individual is performing work for the business concern, SBA may request a combination of job descriptions, resumes, detailed timesheets, sample work product and other relevant documentation.”
Principal Office. Among other proposed changes is one to “clarify the requirement that a firm must conduct business from the location identified as the firm’s principal office and may be required to demonstrate that it is doing so by providing documentation such as photos and/or providing a live or virtual walk-through of the space.” And “a virtual office (or other location where a firm only receives mail and/or occasionally performs business) does not qualify as a principal office.” In addition, “SBA proposes to allow 100% of a firm’s employees to telework, but where that occurs would require the firm to have 51% of its employees reside in a HUBZone instead of the normal 35%.”
Another change is the principal office rule, and “the proposed rule would provide that a firm is not eligible for this provision if its principal office is owner-occupied ( e.g., a location that also serves as a residence). In such a case, SBA does not believe that the investment in the HUBZone was primarily to develop a certified HUBZone small business.”
HUBZone Date of Eligibility
SBA is again proposing a big change to timing of eligibility. The 2019 changes, if you recall, required annual recertification of HUBZone status, rather than at time of bid and award. So, it got rid of the eligibility check at time of offer. SBA would reverse some of this change and have an eligibility check at time of offer.
“The proposed rule would revise §§ 126.500 and 126.601 to eliminate the one-year certification rule and instead require firms to be eligible on the date of offer for HUBZone contracts and only recertify once every three years.” “Under the current rules, once a firm annually recertifies its HUBZone status, it generally can submit offers for HUBZone contracts for one year without being required to meet the 35% HUBZone residency and principal office requirements at the time of offer.”
SBA is worried about the annual recertification:
SBA believes that the current process can permit abuses that were not intended for the program. A firm could hire one or more individuals who reside in a HUBZone for four weeks prior to its application for certification and immediately dismiss those individuals from its employ after becoming certified and be eligible throughout the year for HUBZone contracts. Similarly, a firm could again re-hire one or more individuals who reside in a HUBZone for four weeks prior to its certification anniversary date and immediately release those individuals after the certification anniversary date and be eligible for additional HUBZone contracts for another year.
The proposed rule would focus on time of offer: “As long as a firm is eligible as of the date of its offer for a competitively awarded HUBZone contract, it will be eligible for award. This is similar to the size requirement where a firm must also be small on the date of its offer but may grow to be other than small between the date of its offer and the date of award.”
SBA would also clarify that “a concern is only eligible to submit offers for HUBZone contracts after SBA has formally approved its application and updated DSBS (or successor system) showing that the concern is a certified HUBZone small business concern.” In other words, a pending application won’t cut it, unlike the WOSB program.
SBA Certification Rules
Negative Control. The rule would create negative control provisions that are consistent across SBA’s various socioeconomic set-aside programs: size, 8(a) Program, HUBZone, WOSB, and VetCert. “The negative control provision states that a concern may be deemed controlled by, and therefore affiliated with, a minority shareholder that has the ability to prevent a quorum or otherwise block action by the board of directors or shareholders.”
As one example, the SBA would take the 5 extraordinary circumstances found in the SDVOSB rules, and apply those across the board for all small businesses as exceptions to a finding of negative control. This means that a minority investor would be able to have veto power over certain actions and not worry about affiliation because of that veto power. These circumstances are: “(1) adding a new equity stakeholder; (2) dissolution of the company; (3) sale of the company or all assets of the company; (4) the merger of the company; (5) the company declaring bankruptcy; and . . . amendment of the company’s governance documents to remove the shareholder’s authority to block any of (1) through (5).”
These exceptions would be added to the 8(a) and WOSB programs as well. This would be a big change to the WOSB and 8(a) program rules, and give minority investors more rights when investing in these companies. It will also help with uniformity across the various programs.
Recertification. SBA would create a new section 125.12 that would contain both size recertification and small business program status recertification. Before, they had been addressed in the sections for each particular program: parts 121 for size, 124 for 8(a) Program, 126 for HUBZone, 127 for WOSB, and 128 for SDVOSB. “SBA believes that the rules regarding recertification should be the same for size and status, across all SBA small business government contracting and business development programs.”
SBA notes some aspects of its recertification rules that were unclear in the current regulations. “A concern that has recertified as other than small or other than a qualified program participant still may receive orders or agreements issued under a single award small business contract or agreement or unrestricted orders issued under an unrestricted multiple award contract.” “Conversely, for a multiple award small business set-aside or reserve, a concern that recertified as other than small or other than the required small business program would be ineligible to receive options.”
SBA has taken issue with how OHA has interpreted the effect of recertification under SBA programs:
[I]f a concern recertifies as other than small following a merger, sale, or acquisition, the concern may remain eligible for future set-aside orders under an unrestricted multiple award contract, but not provide goaling credit. See Size Appeal of Saalex Corp. d/b/a Saalex Solutions, Inc., SBA No. SIZ-6274 at 11 (2024). This was not SBA’s intended interpretation of a size recertification following a merger, sale, or acquisition, or following the requirement to recertify size in the fifth year of a long-term contract.
Instead, SBA’s intent was that:
Any disqualifying size or status recertification precipitated by § 125.12(a) or § 125.12(b) . . . renders a concern ineligible for future set-aside or reserved awards, including awards of set-aside or reserved orders against pre-existing unrestricted or set-aside multiple award contracts. Additionally, in support of this interpretation, SBA proposes to allow requests for size determinations following any size recertification made in §§ 125.12(a) and (b) as well as those is requested by a contracting officer as set forth in § 125.12(c).
This is actually a big change that could allow for additional size and status protests throughout the lifetime of a multiple award contract, assuming this rule becomes final.
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There are many smaller changes contained in this proposed rule. After all, its text runs to 175 pages. Be sure to review this rule and we at SmallGovCon will continue to dig into it more and highlight some of these other changes. In addition, remember that this is a proposed rule and SBA is welcoming comments. In our experience, SBA will routinely change or remove rules if enough commenters have legitimate questions.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
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