On February 11, 2011, SBA published revisions to the regulations governing the 8(a) Business Development (BD) program. The revisions to the 8(a) BD program are the first comprehensive revisions since 1998. The Small Business Act authorizes SBA to administer the 8(a) BD program, the purpose of which is to assist eligible small disadvantaged business concerns compete in the American economy through business development. The regulations governing the 8(a) BD program are located at Title 13 of the Code of Federal Regulations, Subpart A, Section 124. (13 CFR § 124)
Q. When do the rule changes take effect?
Except for the regulations concerning the reporting of benefits for firms owned by tribes, ANCs, NHOs and CDCs , the revisions to the 8(a) BD program apply to all applications for the 8(a) BD program pending before SBA and all 8(a) procurement requirements accepted by SBA on or after March 14, 2011.
These changed rules do not apply to any 8(a) BD appeals pending before SBA’s Office of Hearings and Appeals.
Section 124.604 is effective Sept. 9, 2011, unless SBA further delays implementation through a notice in The Federal Register.
The revisions to the size regulations apply with respect to all solicitations issued and all certifications as to size made by March 14, 2011.
Q. When Were the Proposed Changes to the 8(a) BD Program Regulations Introduced to the Public?
On October 28, 2009, SBA published proposed regulations in the Federal Register to revise the agency’s rules for the 8(a) BD program.
Q. How long was the comment period open in the Federal Register?
Initially, the comment period for the proposed revisions was open for 60 days and SBA requested that the public submit their comments by December 28, 2009. Later, SBA extended the comment period until January 28, 2010.
Q. Why did SBA extend the comment period?
SBA extended the comment period after many businesses requested more time to review the comprehensive proposed changes and to prepare their comments, particularly over the holiday season. Therefore, SBA provided the public with a 90-day period to comment on these proposed changes.
Q. Did the Public Have Any Other Input on the Proposed Changes to the 8(a) BD Regulations?
Yes, in addition to requesting written comments to the revisions, via the Federal Register, SBA conducted a “Listening Tour” and hosting public meetings in the following cities:
Dallas, TX o Los Angeles, CA
New York, NY
SBA also conducted Tribal Consultations pursuant to Executive Order 13175. The consultations included individuals and businesses in the following cities:
Albuquerque, New Mexico
Q. What Was the Outcome of the SBA’s “Listening Tour” and 90 Day Comment Period for the Proposed Changes to the 8(a) Regulations?
Ultimately, SBA received more than 230 comment letters, which contained over 2,500 individual comments from the public addressing the proposed changes to the 8(a) Regulations.
A substantial number of commenters supported SBA’s effort to clarify and address misinterpretations of the rules. For the most part, the comments supported the substantive changes proposed by SBA. Additionally, in response to specific requests for information, SBA received comments with alternative approaches on many aspects of the proposed rule.
Q. What Changes Were Made to the 8(a) BD Regulations?
Some of SBA’s changes are technical changes, such as replacing all the references to ‘SIC’ with ‘NAICS’.
Others are more substantive and result from SBA’s experience in implementing the current regulations. Some changes were made to mirror existing or new legislation since the last time SBA revised the rules. Most importantly, many of the changes were made to ensure that program benefits flow to intended beneficiaries and help to reduce potential waste, fraud and abuse in small business government contracting.
Q. What Are the Some of the Technical Changes in the Revised Regulations?
The revised rule has technical changes where the SBA regulations had not yet “caught up” to other regulatory changes or processes already in place.
For instance, the revised rule states SBA’s preference that firms use the online 8(a) application to apply, even though over 95% of firms already apply this way.
The revised rule removes all references to “SIC code” and changed it to “NAICS code,” which is consistent with the government-wide change.
The revised rule clarifies that both prime contracts and subcontracts are “small,” when awarded to a mentor/protégé joint venture where the protégé qualifies as small.
SBA has always considered prime contracts small when a federal agency awards a prime contract to an SBA–approved mentor/protégé joint venture. Yet, the prior SBA regulations did not expressly state the same for subcontracts - the changed rule does.
SBA expects these clarifications and other technical corrections to eliminate any confusion for businesses that are new to the government contracting arena and will assist business, contracting officers, and federal agencies in understanding the eligibility requirements.
SIGNIFICANT CHANGES TO THE 8(a) BD PROGRAM REGULATIONS
Q. What Are the Some of the Changes to the Rules on Economic Disadvantage?
For the first time, this rule adds objective criteria to determine economic disadvantage based on personal income and total assets. With the rule change applicants to the program must demonstrate economic disadvantage based on the following criteria;
Adjusted Net Worth must not exceed $250,000 for initial eligibility or $750,000 for continuing eligibility.
Personal Income must not exceed $250,000 (averaged over three years) for initial eligibility or $350,000 for continuing eligibility.
Total Assets must not exceed $4 million for initial eligibility and $6 million for continued eligibility (allows for growth during the 9-year term).
IRA Accounts – excluded from net worth and total asset determinations
The rule clarifies SBA’s treatment of Subchapter S Corporations when determining economic disadvantage. SBA’s intent is to make the treatment of S Corporations consistent with that for C Corporations, and not penalize a firm because of the different tax structures. If the business can demonstrate that funds reported on the individual tax return were used to pay taxes or reinvested into the firm SBA will not count those funds as personal income.
The Final Rule adds the same treatment for LLCs and Partnerships.
Q. What Are the Some of the Changes to the Rules on Joint Ventures?
The rule tightens the requirements for joint ventures (JV) to ensure that non-disadvantaged firms do not unduly benefit from the 8(a) BD program.
The JV agreement may be informal or formal (separate business structure) BUT must be in writing. Also, the JV may, but need not be populated (i.e., have its own separate employees).
The JV may not be awarded more than three contracts over 2-year period without a finding of general affiliation. The same two entities may form additional JVs and each may be awarded three contracts over two years.
Specific to the 8(a) BD program the 8(a) partner to the JV must perform at least 40% of the work performed by the JV. This change replaces the “significant portion” language of the previous regulations. The rule differentiates between populated and unpopulated joint ventures and applies different requirements.
Project Manager: For the unpopulated JV (or JV populated only with administrative personnel) an employee of 8(a) managing venturer must be project manager. For the JV Populated with individuals intended to perform contracts, the JV must demonstrate how performance of the contract is controlled by the 8(a) managing venture.
Performance of work: For the unpopulated JV (or JV populated only with administrative personnel) the amount of work done by all the partners will be aggregated and 8(a) partner must perform at least 40% of all work done by JV (includes all work done by non-8(a) partner and any of its affiliates at any subcontracting tier). For the JV Populated with individuals intended to perform contracts, the non-8(a) JV partner, or any of its affiliates, may not act subcontractor to JV or any subcontractor of the JV.
Q. Are There Reporting Requirements for Joint Ventures?
Yes, the rule introduces Performance of Work Reports. As part of the annual review the Participant must demonstrate how it is meeting the performance of work requirements for each 8(a) contract that is performing as a JV. At the completion of every 8(a) contract awarded to a JV, the Participant must explain how Performance of Work Requirements were met.
Q. What Are the Some of the Changes to the Rules Governing the Mentor/Protégé Program?
The changes to the rule specifically allow for non-profit Mentors and a Mentor can have up to 3 protégés at one time. A Protégé can have second Mentor, corresponding to an unrelated, secondary NAICS code. However, a firm cannot be both a Protégé and a Mentor at the same time.
The assistance to be provided by the Mentor must be tied to the Protégé’s SBA-approved business plan and the Mentor/Protégé Agreement must be approved by SBA before the firms can submit a joint venture offer on a procurement as a small business. In order to receive the exclusion from affiliation on any non-8(a) contracts, the agreement must comply with the 8(a) JV requirements (other than SBA approval).
The rule changes permit Mentor/Protégé joint ventures to be small for federal subcontracts (DOE).
The rule now prohibits SBA from approving a new Mentor/Protégé relationship within six months of the end of an 8(a) Participant’s program term.
The benefits derived from Mentor/Protégé relationship end once the protégé leaves the 8(a) BD program. In other words the exclusion from affiliation ends.
For the first time, the rule allows for a specific reconsideration process when a Mentor/Protégé Agreement is declined.
Q. Are There Consequences if the Mentor Fails to Provide the Agreed-Upon Assistance to the Protégé?
Yes. The changes require that the Mentor is notified and provided an opportunity to respond. If the Mentor fails to provide the agreed-upon assistance SBA may terminate the Mentor/Protégé Agreement. The Mentor is ineligible to participate for two years. SBA may recommend a stop work order for each contract the Mentor and Protégé are performing as a JV and where they have received the exclusion from affiliation. If a stop work order is authorized where the protégé can independently complete performance, SBA may authorize substitution of the protégé firm for the JV. Finally, a Mentor’s failure to provide the agreed-upon assistance may constitute grounds for Government-wide suspension or debarment.
Q. Are There Changes Specific to the Rules Governing the Tribally Owned Firms, Alaska Native Corporations, Native Hawaiian Organizations or Community Development Corporations Program?
A Participant owned by a tribe, ANC, NHO or CDC may not receive a sole source 8(a) contract that is a follow-on contract to an 8(a) contract immediately performed previously by another Participant (or former Participant) owned by the same tribe/ANC/NHO/CDC in the secondary NAICS code.
Potential for Success may be established for a firm if the tribe, ANC, NHO, CDC makes a firm written commitment to support the operations of the applicant concern and the entity has the financial ability to do so.
The changes require firms owned by tribes, ANCs, NHOs, and CDCs to report benefits flowing back to natives/disadvantaged communities. The implementation of this change is delayed for 6 months to allow further discussions with tribal/ANC community, and to make revisions if necessary.
The Tribal Management of the Participant can be by any tribal member; and the member need not be a disadvantaged.
SBA keeps the current approach for determining Economic Disadvantage for Tribes but clarified that SBA does not expect a tribe to demonstrate economic disadvantage as part of every tribally-owned application.
NHOs and Economic Disadvantage
The majority of an NHO’s members must establish that they individually qualify as economically disadvantaged. For the first firm the same thresholds apply as the individually-owned firms for initial eligibility. For the second firm and any other firms thereafter, the individuals must qualify under the thresholds for continued eligibility. The NHO must control the board of directors of the applicant or Participant and the individual responsible for day-to-day management of a NHO-owned firm need not establish personal social and economic disadvantage.
Q. How Does SBA Define Primary NAICS Code?
Primary NAICS code means the six digit code having the same size standard (e.g., 541330 Engineering Services, $4.5M, is different from Military & Aerospace Equipment and Military Weapons, $27M).
Q. Are there Changes to the Rules on Early Graduation and Size for the Primary NAICS Code?
SBA may graduate a Participant where the firm exceeds the size standard corresponding to its primary NAICS code, as adjusted, for three successive program years. If the firm can demonstrate that through its growth and development its primary NAICS code is changing to a secondary NAICS code in its adjusted business plan, SBA will not early graduate the firm.
Q. Do the Rules Address Participants Owned by Individuals Called to Active Military Status?
Yes. The changes to the rule allow the disadvantaged individual owners of the 8(a) firm called to active military status to elect to be suspended from program participation so as not to lose any of the 9-year term in the program. The length of suspension time is added to program term when individual returns to control the firm. If one or more other disadvantaged individuals can continue to control the firm in absence, the firm may elect to continue to operate as an 8(a) firm.
Q. Are There Changes to the Rules on Excessive Withdrawals?
The final rule amends the definition of withdrawal and the amounts SBA will consider excessive, and thus a basis for possible termination or early graduation. SBA believes that the new definition of withdrawal better addresses the original legislative intent behind the prohibition against excessive withdrawals.
The final rule also clarifies that withdrawals that exceed the threshold amounts indentified in the regulations in the aggregate will be considered excessive.
The new definition for withdrawal excludes officers’ salaries; but SBA will count those salaries if it believes the firm is attempting to circumvent the regulations through the payment of salaries.
The withdrawal amounts will be in the aggregate and are as follows:
Firms with sales up to $1M, $250,000;
Firms with sales between $1M and $2M, $300,000;
Firms with sales exceeding $2M, $400,000.
These limits do not apply to tribes, ANCs, NHOs, CDCs where withdrawal is made for the benefit of the tribe/ANC/NHO/CDC or the native or shareholder community; however, it does apply to withdrawals that do not benefit the relevant entity or community. A large salary to a non-disadvantaged individual will be treated as an excessive withdrawal and SBA will look at the totality of circumstances in determining whether withdrawal is excessive.
Q. What Changes Where Made to the Rules That Apply to Applicant and Participant Representatives?
The compensation received by any packager, agent or representative of any 8(a) applicant or Participant for assisting in obtaining certification, 8(a) contracts or other assistance must be reasonable in light of services provided. The fee charged cannot be a percentage of gross contract value. For good cause, SBA may suspend a packager, agent or representative from assisting 8(a) applicants or Participants.