SBA has issued a final rule updating some of its rules relating to the 8(a) Program. The final rule will have an impact on some aspects of ownership and control requirements for the 8(a) Program, including providing some flexibility for change of ownership and making some 8(a) set-aside processes a little cleaner. The rule would also allow for populated joint ventures between similarly situated joint venture members.
We wrote about the proposed rule last year. Below are some of the key takeaways from the final rule and any changes from the proposed rule.
Under the new rule, SBA has included “a process for allowing a change of ownership for a former Participant that is still performing one or more 8(a) contracts.” The old rule used to say 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 updated rule specifies 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.” The one-time eligibility rule would mean that if a disadvantaged individual or a disadvantaged principal of a former 8(a) Participant, the buyer would use up its one-time eligibility for the 8(a) Program.
In addition, the rule makes clear that an SBA-approved mentor can own up to 40% of its protégé. 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, rule 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.”
Tribal, ANC and NHO 8(a) Community Benefits Rule
SBA did listening sessions for its proposed rule that would “require a Community Benefits Plan laying out how a tribe, Alaska Native Corporation (ANC) or Native Hawaiian Organization (NHO) that owned and controlled one or more 8(a) BD Participants intended to give benefits back to the Native community as a result of its 8(a) BD participation.”
In these sessions, the participants “overwhelmingly opposed SBA imposing any target that a certain percentage of an entity’s 8(a) receipts should be distributed to benefit the affected Native community or that there should be any specific consequences if the benefit targets were not reached.”
In response, SBA removed any the proposed changes on Community Benefits Plan from the final rule.
8(a) Contracting and other Rules
There are a number of other changes to clean up the 8(a) regulations.
- For potential for success, the rule clarifies that a company “can demonstrate potential for success with prior commercial and government contracts, including state and local government contract work.” No private sector contracts are needed.
- Where a company had federal debts, “if the Government has settled a debt (i.e., accepting less than the full amount owed to discharge the debt), the firm/individual would not be barred from participating in the 8(a) BD program on that basis alone.”
- Because some tribes don’t file tax returns, the rule says that a tribally-owned applicant can submit financial statements.
- The final rule clarifies that an agency cannot restrict “there is a prohibition on “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, the final rule will provide that “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 and Size Rules
Populated Joint Ventures
The final 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 work on contract performance for the joint venture. The joint venture could employ administrative personnel.
As SBA put it, “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 have a populated joint venture. Dissimilar joint venture partners, such as those commonly in a mentor-protégé relationship, could not form a populated joint venture.
For populated joint ventures, the rule also states that revenues must be divided according to the same percentage as the joint venture partner ownership share in the joint venture.
In addition, for size purposes a populated joint venture will aggregate the size of both members: “Where two or more parties form a separate business entity (e.g., a limited liability company or partnership) and populate that entity with employees intended to perform work on behalf of that entity, SBA similarly views that as an ongoing business entity and will aggregate the receipts/employees of the parties that formed the separate business entity in determining its size.”
Contracts versus Orders
The new rule cleared up the age old question about orders versus contracts. SBA said its current policy has been that the two-year rule applies only to contracts, not orders. But SBA was fed up with getting this same question over and over. (Government contracts attorneys also receive the question frequently). The rule at 12 C.F.R. 121.103(h) will now clearly state: “a joint venture may be issued an order under a previously awarded contract beyond the two-year period.” Unsurprisingly, all commenters praised this clarification.
Joint Venture Management
SBA has also clarified that “initiating contract litigation is outside the scope of the management of daily contractual performance and instead represents a decision that reasonably falls into the exception that allows other joint venture partners to participate in commercially customary decisions.” So, a non-managing venture could have a a veto power over this decision by a joint venture.
SBA feels the same way about deciding contract opportunities: “SBA believes that requiring the concurrence of a non-managing joint venture partner in deciding what contract opportunities the joint venture should seek is also something that would be commercially customary.” This is an important insight for those forming joint ventures, as it has not been clear from past SBA precedent.
The final rule says that “A non-managing venturer’s approval may be required in, among other things, determining what contract opportunities the joint venture should seek and initiating litigation on behalf of the joint venture.” Good on SBA for clarifying this, although I wish they would have done so when they updated the rule back in 2020.
Ostensible Subcontractor Rule
The final rule will specify what counts as the primary and vital parts of a contract for construction contracts for purposes of ostensible subcontractor affiliation. As SBA explains:
[T]he 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. . . .
In addition, the “prime contractor must retain management of the contract but may delegate a large portion of the actual construction work to its subcontractors.” SBA said that meeting the limitations on subcontracting is generally enough for overcoming ostensible subcontractor affiliation: “For a services, specialty trade construction, or supply contract or order, SBA believes that meeting the applicable limitation on subcontracting requirement is sufficient to overcome any claim of the existence of an ostensible subcontractor.” That is an interesting clarification from SBA, as it seems to make ostensible subcontractor analysis much easier based on simple percentages. Indeed, new language will state that, for contracts “for services, specialty trade construction or supplies, SBA will find that a small business prime contractor is performing the primary and vital requirements . . . and is not unduly reliant . . . where the prime contractor can demonstrate that it, together with any subcontractors that qualify as small businesses, will meet the limitations on subcontracting provisions. . . .”
But for general construction, the 15% minimum under the limitation on subcontracting is so low that a subcontractor could “subcontract out all the supervision and oversight responsibilities to another business entity.”
In addition, for unusual reliance on an ostensible subcontractor, the new rule 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.
In response to comments, SBA added a provision that “that no single factor is determinative” for ostensible subcontractor analysis.
For contracts below the Simplified Acquisition Threshold, SBA will now clarify that “a small business can subcontract to any business for such contracts and it does not matter who is performing the primary and vital functions of the contract.”
Other Size Rules
SBA requires recertification in connection with sales or mergers. SBA clarifies that recertification “in connection with a ‘sale’ or ‘acquisition’ is required only where the sale or acquisition results in a change in control or negative control of the concern.” The rule at 13 C.F.R. § 121.404 will now state: “In the case of a merger, acquisition, or sale which results in a change in controlling interest under § 121.103,” a recertification is required.
The new rules will make clear that “if a protest is pending before GAO [or COFC or the agency], the SBA Area Office will suspend the size determination case.” Once a GAO decision is issued, SBA will resume the size determination. 13. C.F.R. § 121.1009. “If the award is cancelled and re-evaluation or other corrective action takes place, interested parties may file a timely size protest with respect to the newly identified apparent successful offeror after the notification of award.”
This rule, effective May 27, 2023, clarifies a number of aspects of rules relating to 8(a) Program ownership and contracting issues. It also addresses some joint venture and size rules to make them clearer. (and there are many more provisions in the rule that we didn’t touch on this blog, so be sure to check these updated rules when they come out). Kudos to 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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