SBA Proposes Big Changes to the HUBZone Program

The SBA’s Historically Underutilized Business Zone program intends well—by directing awards to contractors in regions that have been passed by economically, the federal government has tried to lift these areas up. But the HUBZone program has exacting regulations, which (ironically) have helped cause it to be an underutilized tool for contracting officers. This could soon change.

On October 31, the SBA published a proposed rule that, if adopted, would bring clarity to the HUBZone regulations. In this post, we wanted to bring you up to speed on some of the more substantive proposed changes regarding certification requirements and the HUBZone protest process. Changes to employee definitions and requirements will be handled in another post.

Annual Certification

Among the largest changes to the HUBZone program is the time at which HUBZone firms will certify their HUBZone program compliance. Currently, HUBZone concerns are required to comply with all of the HUBZone eligibility criteria both at the time of bid submission and contract award. Additionally, HUBZones are also required to undergo recertification every 3 years.

The eligibility requirements for HUBZone contracts, however, have frequently been a sticking point for participating small businesses. As such, the SBA has proposed revising its regulations to require concerns annually recertify compliance with the HUBZone requirements. Once certified (or recertified), however, the HUBZone small business will be eligible for HUBZone set-aside awards throughout the year, provided the HUBZone concern is small under the appropriate NAICS code.

According to the SBA, the revised requirements will ultimately be a benefit to HUBZone Small Businesses. As the SBA explains:

Although requiring annual recertification instead of every three years may appear to impose additional burdens on a HUBZone small business concern, the annual recertification burden would be easily offset by the elimination of the requirement that a firm must demonstrate that it continues to be an eligible HUBZone small business concern both at the time of offer and time of award for any HUBZone contract.

On this point, we agree: the requirement that HUBZone firms maintain eligibility at both the time of proposal submission and award has been a frequent issue for HUBZone small business—particularly in light of the employee residency requirement. If adopted, this new recertification requirement would be a welcomed change.

Minimum Threshold for Best Efforts

One of the hallmarks of the HUBZone program is its requirement that at least 35 percent of a concern’s employees reside within a HUBZone. Under the current regulations, the SBA recognizes that compliance with this requirement can fluctuate as employees move and businesses grow. Accordingly, the current HUBZone regulations require offerors to attempt to maintain compliance with the 35 percent requirement, which is currently defined as “making substantive and documented efforts such as written offers of employment, published advertisements seeking employees, and attendance at job fairs.”

The “attempt to maintain” requirement is fairly subjective. The proposed rule tries to eliminate the guesswork, by imposing a presumption that, if the HUBZone’s employee residency drops below 20%, the HUBZone will have failed to use its best efforts to comply.

Implementing the 20% threshold may pose a challenge. The SBA acknowledges that small businesses often need to hire additional staff after an award; under the proposed rule, however, the SBA will not penalize offerors for the order in which they hire employees. The SBA provides the following explanation of its intent in its proposed rule:

For example, if a certified HUBZone small business has 4 employees, 2 of which reside in a HUBZone, and wins a contract where it will be required to hire an additional 11 employees to perform the contract, SBA would not propose decertification if the first 8 new hires were non-HUBZone residents (meaning that for a time, only 2 employees out of 12 would be HUBZone residents, which is less than 20% of the firm’s total employees), as long as the firm makes documented efforts to hire HUBZone residents and at least 1 of the remaining individuals hired to perform the contract lives in a HUBZone (i.e., after hiring is complete, the firm employs 3 HUBZone residents out of a total of 15 employees, which equals 20%, thus allowing the firm to be deemed to have attempted to maintain the 35% HUBZone resident requirement).

The SBA’s elaborate discussion of up-staffing demonstrates some of the apparent difficulties with enforcing the 20 percent minimum. While the SBA does not want to penalize concerns for hiring staff in a particular order (for good reason), carving out an exception for contract ramp-ons undermines the SBA’s desire for an easily enforceable minimum threshold. For example, when is the contract ramp-on process deemed concluded? Will it be tied to contract transition periods? Could a contractor claim indefinitely that it was still hiring employees to staff its contract? As evidenced by these open questions, the SBA’s proposed attempt to bring clarity to the HUBZone requirements may ultimately create greater confusion.

Additionally, the proposed rule may disproportionately impact businesses with fewer employees. For example, the departure of a few HUBZone employees could quickly drop a 5 to 10 person firm out of compliance with the 20 percent requirement, whereas the same number of employees leaving a 50 to 100 employee business would not similarly jeopardize compliance with the 20 percent threshold.

Something that may alleviate some of these difficulties is the SBA’s proposal to revise the rounding procedures for calculating the 35 percent requirement. Currently, the HUBZone regulations require participants to round up any time the calculation of 35 percent of the business’ employees resulted in a fraction. Under the proposed rule, however, businesses would be allowed to “round[] to the nearest whole number, rather than rounding up in every instance.” This means that if 35% of a firm’s employees equates to, say, 3.33 employees, SBA would round down to 3 rather than rounding up to 4.

While the SBA’s desire to further clarify when a firm will violate the best efforts requirement is a welcome development, the implementation of a minimum threshold may provide more questions than answers. It will be interesting to see how the SBA does so, if the proposed rule is adopted.

Protest Process

The SBA has also proposed revisions to the HUBZone protest process. Notably, both HUBZone firms and HUBZone joint ventures may be protested by interested parties. Unfortunately, the SBA has also proposed reducing the time for protested concerns to respond to allegations to 3 business days. As the proposed rule explains, “SBA believes that businesses generally respond in a short period of time since an award on a contract is pending and the business has this information readily available.”

We’re not on board with this change. In our work assisting clients with responding to these challenges, we can say that small businesses don’t always have this information “readily available.” And even if they do, their attention is usually split between performing their contracts, running their business, and responding to these protests. Limiting the time to respond would only cause them additional stress.

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The HUBZone program serves an important purpose, by bringing federal spending to lower-income regions. Unfortunately, the current administrative burdens imposed by the HUBZone program have hampered its effectiveness. As such, the SBA’s proposed new rules provide needed opportunity to revitalize the program.

These proposed changes are just that—proposed. The SBA has invited public comments on these rules, which are due December 31, 2018. We’ll keep you posted on whether—and when—any of these revisions are adopted.

Questions about this post? Or need help with a government contracting legal issue? Email us or give us a call at 785-200-8919.

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