In a proposed rule in August of 2024, SBA has unveiled a brand new regulation related specifically to recertification of size and status. A frequent question of federal contractors is whether they can continue to be small, or maintain a specific socio-economic status (i.e., WOSB, SDVOSB etc.) after a change in ownership or business structure. The SBA’s size and status recertification standards are currently found in multiple places: the size determination timing regulations, each socio-economic status regulation, and of course in case law. But this would presumably create a one stop shop for size recertification questions, while also changing some of the long relied-upon standards.
This SBA proposed rule has created quite a buzz among federal contracting. In fact, we alone have blogged about it multiple times in the past few weeks: Overview of HUBZone changes and SBA Changes (including the regulation discussed further here); Joint Venture Past Performance; 8(a) Program Changes; Mentor-Protégé Program Changes; and a two part examination of HUBZone Changes (Part 1 and Part 2). Now we will examine in more detail the new proposed size and status recertification regulation.
As explained in our first blog on this proposed rule, the SBA is proposing a new regulation that will contain both size recertification and small business program status recertification standards. Currently, contractors must look at each specific socioeconomic program’s regulations to determine standards around status recertification. And, for size recertification, contractors would have to wade through the SBA regulation regarding when size of a business is determined, and its accompanying case law (such as this case we blogged on regarding size under a GSA schedule). SBA now wants to change this as well as some of the recertification standards themselves.
SBA, in the proposed rule, notes the widespread confusion, and frankly frustration, with its current piecemeal size and status recertification standards. SBA also has taken issue with the applicable case law, (such as the one mentioned above that we blogged on). SBA in response states “the rules regarding recertification should be the same for size and status, across all SBA small business government contracting and business development programs.” Through this new regulation, SBA is trying to create that kind of uniformity, but may actually produce more issues for small businesses.
New 13 C.F.R. § 125.12
The new proposed regulation, 13 C.F.R. § 125.12, sets forth disqualifying size events, which would render a business “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” if it causes the business to be other than small.
Right off the bat, when reading the proposed regulation, in section (a) the SBA would require a size and status recertification “within 30 calendar days of an approved novation, merger, acquisition, or sale, including agreements in principle, of or by a concern or an affiliate of the concern, which results in a change in controlling interest.” As you may note, there is not an exception to this for GSA schedule contracts or other contracts, which is in contrast to many SBA OHA cases. This recertification applies to recipients of small business contracts, and if in a JV, “from any partner to the joint venture that has merged or is party to the sale or acquisition”
Next, the regulation at section (b) re-affirms the need to recertify size and status on long-term contracts within 120 days of the end of the fifth year of the contract (the so-called five year required recertification). The contracting officer however may “request size and/or status” as they deem appropriate “prior to the 120-day point in the fifth year of a long-term contract or order.” So, a Contracting Officer could trigger this required recertification outside of the 120 day window, so long as it is the fifth year of the contract. The regulation then further confirms that the other commonly known required recertification that could effect the ability to bid as a small business (or a certain status) is when the solicitation for an order or agreement (such as a BPA) explicitly asks for such re-certification. The regulation additionally carves out an exception to these required recertifications if a company that is “at least 51% owned by an Indian Tribe, Alaska Native Corporation, or Community Development Corporation changes to or from a wholly-owned business concern of the same entity, as long as the ultimate owner remains that entity.”
These recertifications in sections (a) and (b) sort of set up the new standard of required recertifications which can affect whether a business can bid as small business or not (referred to as “disqualifying recertifications” in the proposed regulation).
The regulation then includes a section about the effects of a disqualifying recertification, which contains what to do if an event in (a) and/or (b) occurs within 180 days of a bid. The proposed regulation then states that if a business is disqualified from bidding as a small business due to a CO’s explicit request for recertification, the business is then unable to bid on that specific order, but “remains eligible for other set aside or reserved awards and unrestricted awards.” So generally, a specific CO requested recertification would have a limited negative effect. However, any other required recertification would have much deeper impact.
If a business is found as other than small as part of a required recertification, or no longer the applicable socio-economic status, that business will be “ineligible to submit an offer for a set aside or reserved award under a multiple award contract after the triggering event occurs.” SBA also summarized this update as follows: “when the requirement for recertification is triggered, the date to determine size shifts to a date that coincides with either the triggering event or the date of initial offer for a particular award.” So a contractor would not be able to bid on any set-aside after that event. For a single award contract, if a disqualifying recertification occurs, that contractor can still receive options for that contract, the agency simply can’t count that option towards its small business goals. However, the proposed regulation makes it clear that such options would not be given to disqualified contractors on multiple award small business contracts.
Finally, the regulation specifically addresses a question many contractors face, how does a joint venture recertify? The SBA’s proposed regulation states that for a joint venture, it can recertify as small if “all parties to the joint venture qualify as small at the time of recertification, or the protégé small business in a still active mentor-protege joint venture qualifies as small at the time of recertification” and that recertifications of size can still occur more than two years after the joint venture’s first award. Of note, the SBA proposes that to recertify as small, the joint venture formed under an MPA must still have an active MPA, even though there are likely situations in which a mentor-protege joint venture is performing under a contract and the MPA expires while the joint venture is performing.
The SBA appears to be trying to make a proverbial one stop shop for size and status recertifications, but this attempt may create more confusion. The SBA’s displeasure with the SBA OHA and GAO decisions related to when size is determined is well noted in the long line of cases, but through this regulation SBA upends lines of cases and practice that contractors have come to rely on. SBA, through this proposed regulation does of course confirm some already existing size and status recertification events (i.e., the five year recertification and explicit CO request), but in updating the effect also risks small business participation by seemingly punishing small businesses for their success during contracts, especially when that success comes with an acquisition by another company.
This proposed rule seems to especially impact mentor-protégé joint ventures, who would under the proposed rule have to seemingly time their MPA approval and duration with any sort of contract award. For example, if a mentor-protégé joint venture is finally awarded its first multiple award contract towards the end of its MPA, it could have very limited small business opportunities on that contract as the MPA is soon to expire, which would now be a requirement for the joint venture to be seen as small. This proposed rule also hampers the ability for many small businesses on GSA schedule contracts to conduct any sort of novation, or structure change. While well-intentioned, this proposed rule seems to provide more confusion in an effort to be efficient. This is simply a proposed rule, so it is not final yet, and comments are open until October 7, 2024. If you have questions about your business’ size, or status, please reach out to a federal contracting attorney, such as ourselves.
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