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Final Rule Amends SBA Regulations On Mentor-Protégé Programs, Joint Ventures and The 8(a) BD Program, Part 3: 8(a) BD Program

August 19, 2016
Part 3 of Our Summary of SBA's Changes To Regulations On Mentor-Protégé Programs, Joint Ventures and 8(a) BD Program
A few weeks ago, on July 25, 2016, the U.S. Small Business Administration (SBA) issued a final rule (the "Final Rule") amending SBA regulations to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013 (NDAA 2013).  The Final Rule, which becomes effective on August 24, 2016 and can be found here, did three things.  First, it established a government-wide mentor-protégé program for all small businesses and made clarifications and conforming changes to the mentor-protégé program under the 8(a) Business Development (“8(a) BD”) program. Second, it made several changes to the rules applicable to joint ventures. Lastly, it made clarifications to the rules applicable to the 8(a) BD program.  
In a prior editions of The GovCon Bulletin,™ we summarized the Final Rule's changes to the SBA's mentor-protégé programs (which you can read here) and the Final Rule's changes to the SBA's rules on joint ventures (which you can read here).  In this edition of The GovCon Bulletin,™ we summarize the Final Rule's changes to the SBA's regulations on the 8(a) BD program.  
Mark Amadeo

 
FINAL RULE AMENDS SBA REGULATIONS ON MENTOR-PROTÉGÉ PROGRAMS, JOINT VENTURES AND THE 8(a) BD PROGRAM, PART 3: 8(a) BD PROGRAM

In the Final Rule, the SBA made several changes to the rules that apply to the 8(a) BD program. These changes are described below.

Establishing Social Disadvantage for the 8(a) BD Program   

The Final Rule amends § 124.103(c) in order to clarify that an individual claiming social disadvantage must present a combination of facts and evidence that by itself establishes that the individual has suffered social disadvantage that has negatively impacted his or her entry into or advancement in the business world. Thus, the SBA can disregard a claim of social disadvantage where a legitimate alternative ground for an adverse action exists and the individual has not presented evidence that would render his/her claim any more likely than the alternative ground. For example, a statement that a male co-worker received higher compensation or was promoted over a woman does not amount to an incident of social disadvantage by itself. On the other hand, a statement that a male co-worker received higher compensation or was promoted over a woman and that the woman had the same or superior qualifications and responsibilities would constitute an incident of social disadvantage.

Control of an 8(a) BD Applicant or Participant

Section 124.106 of SBA's regulations currently provides that one or more disadvantaged individuals must control the daily business operations of an 8(a) BD applicant or 8(a) BD participant. The SBA's regulations require that the individuals must have managerial experience “of the extent and complexity needed to run the concern.” The regulations also provide that a “disadvantaged individual need not have the technical expertise or possess a required license to be found to control an applicant or Participant.” The SBA did not intend to require that a disadvantaged individual must always have managerial experience in the same or similar line of work as the 8(a) BD applicant or 8(a) BD participant. Rather, the words “of the extent and complexity needed to run the concern” were meant to look at the degree of management experience, not the field in which that experience was gained. Consequently, the Final Rule adds language to § 124.106 to specify that management experience need not be related to the same or similar industry as the primary industry classification of the 8(a) BD applicant or 8(a) BD participant.

8(a) BD Application Processing

Current SBA regulations require applicants to the 8(a) BD program to submit certain specified supporting documentation, including financial statements, copies of signed Federal personal and business tax returns, and individual and business bank statements. The regulations also required that an applicant must submit a signed IRS Form 4506T, Request for Copy or Transcript of Tax Form, in all cases.  A commenter questioned the need for every applicant to submit IRS Form 4506T, and in response, the Final Rule eliminates the requirement from § 124.203 that an applicant submit the IRS Form in every case, and clarifies that the SBA may request additional documentation when necessary.

In addition, the Final Rule amends § 124.202 to require applications to be filed electronically, with the understanding that certain supporting documentation may also be required under § 124.203. The Final Rule also eliminates the requirement under § 124.203 that an applicant provide a wet signature from each individual claiming social disadvantage status. As long as applicants know that the individual(s) upon whom eligibility is based take responsibility for the accuracy and truthfulness of any information submitted on behalf of the applicant, an electronic, uploaded signature should be sufficient.

Also, current SBA regulations provided that if during the processing of an application, SBA receives adverse information regarding possible criminal conduct by the applicant or any of its principals, SBA would automatically suspend further processing of the application and refer it to SBA's Office of Inspector General (OIG) for review. However, the SBA has now taken the position that referral to SBA's OIG should not occur in every instance, such as where a minor infraction occurred many years ago, and that SBA should have the discretion to refer matters to SBA's OIG in appropriate instances. Consequently, the Final Rule provides discretion to the SBA to determine when to refer a matter to the OIG.

Lastly, the SBA regulations provide that each individual claiming economic disadvantage must describe the economic disadvantage in a narrative statement, and must submit personal financial information to SBA. However, the SBA's determination as to whether an individual qualifies as economically disadvantaged is based solely on an analysis of objective financial data relating to the individual's net worth, income and total assets. Consequently, the Final Rule eliminates the requirement that each individual claiming economic disadvantage must submit a narrative statement in support of his or her claim of economic disadvantage.

Substantial Unfair Competitive Advantage by Tribally-Owned Business Entity

Under the Small Business Act, the size of a small business owned by a socially and economically disadvantaged Indian tribe (or a wholly owned business entity of such tribe) is determined independently without regard to its affiliation with the tribe, any entity of the tribal government, or any other business owned by the tribe, unless the Administrator determines that one or more such tribally owned business concerns have obtained, or are likely to obtain, a substantial unfair competitive advantage within an industry category.” The term “Indian tribe,” under the 8(a) BD program, includes any Alaska Native village or regional or village corporation and the SBA's regulations have extended this broad exclusion from affiliation to the other entity-owned firms authorized to participate in the 8(a) BD program (i.e., firms owned by Native Hawaiian Organizations (NHOs) and Community Development Corporations (CDCs)).

The Final Rule provides guidance as to how SBA will determine whether a business entity has obtained or is likely to obtain “a substantial unfair competitive advantage within an industry category.” Specifically, the exemption to affiliation will not apply to firms that have obtained or are likely to obtain a substantial unfair competitive advantage on a national basis in a particular NAICS code with a particular size standard. In making this assessment, the SBA will consider a firm's percentage share of the national market and other relevant factors to determine whether a firm is dominant in a specific six-digit NAICS code with a particular size standard. SBA will review Federal Procurement Data System (FPDS) data to compare the firm's share of the industry as compared to overall small business participation in that industry to determine whether there is an unfair competitive advantage. The rule does not contemplate a finding of affiliation where an entity-owned concern appears to have obtained an unfair competitive advantage in a local market, but remains competitive, but not dominant, on a national basis.

Management of Tribally-Owned 8(a) Program Participants

The Final Rule adds language to § 124.109(c)(4) specifying that the individuals responsible for the management and daily operations of a tribally-owned concern cannot manage more than two Program Participants at the same time.

Native Hawaiian Organizations (NHOs)

The Final Rule adds language to § 124.110(d) to clarify that the members or directors of an NHO need not have the technical expertise or possess a required license to be found to control an 8(a) BD applicant or 8(a) BD participant owned by the NHO. Rather, the NHO, through its members and directors, must merely have managerial experience of the extent and complexity needed to run the concern. As with individually owned 8(a) BD applicants and 8(a) BD participants, individual NHO members may be required to demonstrate more specific industry-related experience to ensure that the NHO in fact controls the day-to-day operations of the firm, such as when a non-disadvantaged owner (or former owner) who has experience related to the industry is actively involved in the day-to-day management of the firm.

The Small Business Act authorizes small business concerns owned by “economically disadvantaged” NHOs to participate in the 8(a) BD program. Currently, § 124.110(c)(1) provides that in determining whether an NHO is economically disadvantaged, SBA will look at the individual economic status of the NHO's members. The NHO must establish that a majority of its members qualify as economically disadvantaged under the rules that apply to individuals as set forth in § 124.104. Commenters recommended that NHOs should establish economic disadvantage in the same way that tribes currently do for the 8(a) BD program: that is, by providing information relating to members, including the tribal unemployment rate, the per capita income of tribal members, and the percentage of tribal members below the poverty level. For the Native Hawaiian community, this would mean that an NHO would have to describe the individuals to be served by the NHO and provide the economic data regarding those individuals. SBA agreed that basing the economic disadvantage status of an NHO on individual Native Hawaiians who control the NHO does not seem to be the most appropriate way to do so. Thus, the Final Rule makes NHOs similar to Indian tribes by requiring an NHO to present information relating to the economic disadvantaged status of Native Hawaiians, including the unemployment rate of Native Hawaiians and the per capita income of Native Hawaiians. As with economic disadvantage for tribes, once an NHO establishes that it is economically disadvantaged in connection with the application of one firm owned and controlled by the NHO because the intended beneficiaries are economically disadvantaged, it need not reestablish its economic disadvantage for another firm owned by the NHO. In addition, unless a second NHO intends to serve and benefit a different population than that of the first NHO that established its economic disadvantage status, the second NHO also need not submit information to establish its economic disadvantage.

Sole Source 8(a) Awards & Tribal and ANC 8(a) Businesses

Under the Small Business Act, 8(a) BD procurements that exceed an inflation-adjusted threshold of $7 million for those assigned a manufacturing NAICS code and an inflation-adjusted threshold of $4 million for all other procurements must generally be competed among eligible 8(a) BD program participants. The Final Rule amends the 8(a) BD regulations under § 124.506(a)(2)(ii) that reflect these competitive threshold amounts, by replacing the outdated $6.5 million competitive threshold for procurements assigned a manufacturing NAICS with the inflation-adjusted $7 million competitive threshold. The Final Rule also conforms the SBA sole-source regulations applicable to Indian tribes and Alaska Native Corporations with the rules under FAR.

8(a) BD participants that are owned by Indian tribes and ANC’s are exempt from the $4 million and $7 million competitive threshold limitations and, thus, are eligible for sole-source awards that exceed them. Nevertheless, the National Defense Authorization Act for Fiscal Year 2010 (NDAA 2010) imposed justification and approval requirements on any 8(a) sole source contract above a certain amount – currently $22 million as adjusted for inflation. Specifically, these requirements, which are implemented in FAR 19.808-1(a) and 6.303-1(b) state that the head of an agency cannot award an 8(a) sole source contract above the limitation “unless the contracting officer for the contract justifies the use of a sole-source contract in writing” and “the justification is approved by the appropriate official designated to approve contract awards for dollar amounts that are comparable to the amount of the sole-source contract.” The Final Rule incorporates these requirements into SBA's regulations. In addition, it requires a procuring agency that is offering a sole source requirement that exceeds $22 million for award through the 8(a) BD to provide a statement in its offering letter that the necessary justification and approval under the FAR has occurred. The SBA also included an explanation aimed at eliminating a misconception that there can be no 8(a) sole source awards that exceed $22 million. According to the SBA, nothing in NDAA 2010 or under the FAR prohibits 8(a) sole source awards to Program Participants owned by Indian tribes and ANCs above $22 million. Rather, all that is required is that a contracting officer justify the award and have that justification approved at the proper level.

Change in Primary Industry Classification

The Final Rule authorizes the SBA to change the primary industry classification contained in an 8(a) BD participant's business plan where the greatest portion of the participant's total revenues during a three-year period have evolved from one NAICS code to another. The rule also requires the SBA to notify the participant of its intent to change the participant's primary industry classification and afford the participant the opportunity to submit information explaining why such a change would be inappropriate. A participant can demonstrate why it believes the primary industry classification in the business plan continues to be appropriate despite the increase in revenues in the secondary NAICS code. The participant should identify: all non-Federal work that it has performed in its primary NAICS code; any efforts it has made to obtain contracts in the primary NAICS code; all contracts that it was awarded that it believes could have been classified under its primary NAICS code, but which a contracting officer assigned another reasonable NAICS code; and any other information that it believes has a bearing on why its primary NAICS code should not be changed despite performing more work in another NAICS code.

The proposed rule also provided that if SBA determined that a change in a Participant's primary NAICS code was appropriate and that 8(a) BD participant was an entity-owned firm (i.e., owned by a tribe, ANC, NHO, or CDC) that could not have two BD participants in the program with the same primary NAICS code, the entity would be required to choose which participant should leave the 8(a) BD program if the change in NAICS codes caused it to have two 8(a) BD participants with the same primary NAICS code. However, agreeing with comments responding to the proposed change, the SBA’s Final Rule provides that where an SBA change in the primary NAICS code results in an entity having two 8(a) BD Participants in the same NAICS code, the second, newer, 8(a) BD participant may continue to participate in the 8(a)(BD program. However, for a period of time lasting until two years after the first older 8(a) participant leaves the 8(a) BD program  the entity will not be able to receive any 8(a) contracts in the six-digit NAICS code that is the primary NAICS code of the first older participant.

8(a) BD Program Voluntary Suspensions

The Final Rule adds two additional bases for allowing an 8(a) BD participant to elect to be suspended from 8(a) BD program participation: First, where the Participant's principal office is located in an area declared a major disaster area; or, second, where there is a lapse in Federal appropriations. The changes were intended to allow a firm to suspend its term of participation in the 8(a) BD program in order to not miss out on contract opportunities that the firm might otherwise have lost due to a disaster or a lapse in Federal funding.

Benefits Reporting Requirement

The Final Rule changes the timing of benefits reporting for entity-owned 8(a) BD participants from the time of a participant's annual review submission to the time of a participant's annual financial statement submission. The regulatory change will continue to require the submission of the data on an annual basis but within 120 days after the close of the concern's fiscal year instead of as part of the annual submission.

Reverse Auctions

The Final Rule adopts the SBA’s proposed amendment of §§ 125.2(a) and 125.5(a)(1) to address reverse auctions. Specifically, the Final Rule reinforces the principle that all of SBA's regulations, including those relating to set-asides and referrals for a Certificate of Competency, apply to reverse auctions.

Reconsideration of Decisions of SBA's OHA

The Final Rule adopts the proposed clarification to § 134.227(c) that recognizes that the SBA may file a request for reconsideration in a proceeding before the Office of Hearing Appeals in which it has not previously participated. The clarification overrules the decision in Size Appeal of Goel Services, Inc. and Grunley/Goel JVD LLC, SBA No. SIZ-5356 (2012), which held that SBA could not request reconsideration where SBA did not appear as a party in the original appeal.

Recertification When an Affiliate Acquires Another Concern

In the final rule, the SBA makes clear that recertification is required when an affiliate of an entity acquires another concern. Otherwise, firms can circumvent the SBA's recertification rules by simply creating affiliates to acquire or merge with other firms. According to the SBA, the intent of the recertification rule is to require recertification when an entity exceeds the size standard due to acquisition, merger or novation, and there is no public policy rationale for not requiring recertification based on the whether it is the entity in question that acquires another concern, or an affiliate of the entity in question.

Final Rule Amends SBA Regulations On Mentor-Protégé Programs, Joint Ventures and The 8(a) BD Program, Part 2: Joint Ventures

August 17, 2016
Part 2 of Our Summary of SBA's Changes To Regulations On Mentor-Protégé Programs, Joint Ventures and 8(a) BD Program
A few weeks ago, on July 25, 2016, the U.S. Small Business Administration (SBA) issued a final rule (the "Final Rule") amending SBA regulations to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013 (NDAA 2013).  The Final Rule, which becomes effective on August 24, 2016 and can be found here, did three things.  First, it established a government-wide mentor-protégé program for all small businesses and made clarifications and conforming changes to the mentor-protégé program under the 8(a) Business Development (“8(a) BD”) program. Second, it made several changes to the rules applicable to joint ventures. Lastly, it made clarifications to the rules applicable to the 8(a) BD program.  
In a prior edition of The GovCon Bulletin,™ which you can read herewe summarized the Final Rule's changes to the SBA's mentor-protégé programs.  In this edition of The GovCon Bulletin,™ we summarize the Final Rule's changes to the SBA's regulations on joint ventures.  
Mark Amadeo

 
FINAL RULE AMENDS SBA REGULATIONS ON MENTOR-PROTÉGÉ PROGRAMS, JOINT VENTURES AND THE 8(a) BD PROGRAM, PART 2: JOINT VENTURES

In the Final Rule, the SBA made several changes to the rules that apply to joint ventures between small businesses, joint ventures between SDVOSB’s (contained in § 125.15(b) and are now found in § 125.18(b), joint ventures between HUBZone small businesses (contained in § 126.616), and joint ventures between WOSB’s and EDWOSB’s (found in § 127.506). These changes, described below, were made in order to more closely align the requirements of the above-mentioned types of small business joint ventures not only to each other, but also to the requirements for 8(a) BD joint ventures.

Joint Venture Formation   

The Final Rule adopts the language in the proposed rule clarifying that a joint venture under the SBA’s rules may be a formal or informal partnership or exist as a separate limited liability company or other separate legal entity. Regardless of form, however, under the Final Rule, the joint venture must be reduced to a written agreement.

In addition, the Final Rule adopts the proposed language that allows a separate legal entity joint venture to have its own separate employees to perform administrative functions, but not to have its own separate employees to perform contracts awarded to the joint venture. This requirement that joint ventures remain unpopulated for all but administrative functions is a departure from the current rules. 

Access To Joint Venture Files and Records

In the proposed rule, the SBA required joint venture partners to allow SBA's authorized representatives to access files and inspect and copy records and documents when necessary. In response to comments requesting that access should be limited to documents and records relating to the joint venture and not to unrelated documents of the joint venture partners themselves, the Final Rule amends the provisions related to the various types of joint ventures (§§ 124.513(i), 125.8(h), 125.18(b)(8), 126.616(h), and 127.506(i)) to clarify that SBA's access would be related to files, records and documents of the joint venture.

Place of Performance

In October 2013, the SBA issued a final rule that essentially overruled a GAO decision that limited small business acquisitions to those that were conducted only within the United States and outlying areas. That SBA rule, in § 125.2(a) and (c), recognizes that small business contracting can be used "regardless of the place of performance.” The Final Rule now adds similar language to §§ 124.501, 125.22(b), 126.600, and 127.500, thus specifically authorizing contracting in the 8(a) BD, SDVO, HUBZone and WOSB programs regardless of the place of performance, including overseas.

HUBZone Joint Ventures

Under existing regulations a HUBZone joint venture must be comprised of HUBZone small businesses only. However, under the Final Rule, the SBA permits joint ventures comprised of a HUBZone protégé firm and its mentor to compete for HUBZone contracts, regardless of whether the mentor is itself a HUBZone qualified small business. 

Joint Venture Certifications and Performance of Work Reports

The Final Rule adopts the proposed rule’s requirement that all partners to a joint venture agreement that perform under contracts set aside for SDVOSB, WOSB, HUBZone small businesses, or other small businesses certify to the contracting officer and the SBA prior to performing under the contract that they will perform in compliance with the joint venture regulations and with the joint venture agreement. The joint venture partners are also required to report to the contracting officer and to SBA how they are meeting or have met the applicable performance of work requirements for each SDVOSB, HUBZone, WOSB or small business set-aside contract they perform as a joint venture.

Tracking Joint Venture Awards

In the proposed rules, the SBA announced that it was considering different methods of tracking awards to the joint ventures permitted by SBA's regulations. The possible approaches included: Requiring joint ventures to include in their names “small business joint venture,” and, if a mentor-protégé joint venture, to include in their names “mentor-protégé small business joint venture;” requiring contracting officers to identify awards as going to small business joint ventures or to mentor-protégé small business joint ventures; requiring small businesses to amend their SAM entries to specify that they have formed a joint venture; requiring each joint venture to get a separate DUNS number; or a combination of all of these actions. The Final Rule requires joint ventures to be separately identified in SAM so that awards to joint ventures can be properly accounted for. A joint venture must be identified as a joint venture in SAM, with a separate DUNS number and CAGE number than those of the individual parties to the joint venture. In addition, the Entity Type in SAM must be identified as a joint venture, and the individual joint venture partners should also be listed.

Protesting the Size of 8(a) Joint Ventures

The Final Rule amends § 124.513 to clarify that interested parties, including unsuccessful offerors, may protest the size of an SBA-approved 8(a) joint venture that is the apparent successful offeror for a competitive 8(a) set-aside contract. This change is in response to a rule expressed in Size Appeal of Goel Services, Inc. and Grunley/Goel Joint Venture D LLC, SBA No. SIZ-5320 (2012), which concluded that the size of an SBA-approved 8(a) joint venture could not be protested because SBA had, in effect, determined the joint venture to qualify as small when it approved the joint venture pursuant to § 124.513(e). The SBA rejects this ruling and has taken the position that only its Office of Government Contracting may issue formal size determinations.

A few commenters to the proposed rule also sought clarification of SBA's regulations regarding when SBA will determine the eligibility of an 8(a) joint venture. The SBA's regulations provide that SBA approval of an 8(a) joint venture must occur prior to the award of an 8(a) contract.  The SBA has taken the position that a district office need not make this determination as part of the offer and acceptance process and that it has flexibility to determine the eligibility of a particular 8(a) joint venture depending upon its workload. As long as that determination occurs any time prior to award, SBA has complied with the regulatory requirement. 

Agency Consideration of the Past Performance and Capabilities of Team Members

Under the Final Rule, an agency must consider the past performance of the members of a joint venture when considering the past performance of an entity submitting an offer as a joint venture. The SBA originally proposed this only for 8(a) joint ventures (§ 124.513(f)) and small business joint ventures (§ 125.8(e)). The Final Rule, jowever, also adds similar language to SDVOSB joint ventures (§ 125.18(b)(5)), HUBZone joint ventures (§ 126.616(f)), and WOSB joint ventures (§ 127.506(f)).

Final Rule Amends SBA Regulations On Mentor-Protégé Programs, Joint Ventures and The 8(a) BD Program, Part 1: Mentor-Protégé Programs

August 15, 2016
Part 1 of Our Summary of SBA's Changes To Regulations On Mentor-Protégé Programs, Joint Ventures and 8(a) BD Program
A few weeks ago, on July 25, 2016, the U.S. Small Business Administration (SBA) issued a final rule (the "Final Rule") amending SBA regulations to implement provisions of the Small Business Jobs Act of 2010 and the National Defense Authorization Act of 2013 (NDAA 2013).  The Final Rule adopts, with some modifications, the changes that the SBA proposed on February 4, 2015 in a proposed rule.  The Final Rule does three things.  First, it establishes a government-wide mentor-protégé program for all small businesses and makes clarifications and conforming changes to the mentor-protégé program under the 8(a) Business Development (“8(a) BD”) program. Second, the Final Rule makes several changes to the rules applicable to joint ventures. Lastly, the Final Rule makes clarifications to the rules applicable to the 8(a) BD program.  The Final rule, which can be found here, becomes effective on August 24, 2016.
In this edition of The GovCon Bulletin,™ we summarize the Final Rule's changes to the SBA's mentor-protégé programs.  
Mark Amadeo

 
FINAL RULE AMENDS SBA REGULATIONS ON MENTOR-PROTÉGÉ PROGRAMS, JOINT VENTURES AND THE 8(a) BD PROGRAM, PART 1: MENTOR-PROTÉGÉ PROGRAMS


Establishment of Government-Wide Small Business Mentor-Protégé Program  

The Final Rule implements in a new § 125.9 of SBA's regulations one new small business mentor-protégé program for all small businesses rather than separate mentor-protégé programs for small businesses, SDVOSBs, WOSBs and HUBZone small businesses. The Final Rule maintains as a separate program the 8(a) BD mentor-protégé program, which the new small business mentor-protégé program is modelled after.

The Final Rule permits the SBA to terminate a mentor-protégé agreement (“MPA”) where it determines that the parties are not complying with any term or condition of the MPA. The Final rule also requires a reporting of the benefits to the non-8(a) small business protégé from the mentor-protégé relationship and similarly permits the SBA to terminate the mentor-protégé relationship where the benefits provided to the protégé firm do not adequately justify the relationship. The SBA indicated that this determination will be fact-specific based on the totality of the circumstances.

The SBA indicated that it would not terminate an MPA where the violations are de minimus or inadvertent and that it did not intend to terminate an MPA without consideration of the views of the protégé small business.

The requirements for joint ventures between small-business protégé firms and their mentors are found in a new § 125.8. 

Applications for the Government-Wide Small Business Mentor-Protégé Program

The proposed rule contemplated two separate processes for the review of applications for the small business mentor-protégé program and the 8(a) BD mentor-protégé program. Applicants to the small business mentor-protégé program would submit their applications to the SBA's Director of Government Contracting possibly at six different locations. Applicants to mentor-protégé program under the 8(a) BD program would, on the other hand, continue to submit their applications to the SBA's Associate Administrator for the BD program (“AA/BD”) as they do under existing regulations. In light of concerns over resources and inconsistent results, however, the Final Rule establishes a separate unit within the Office of Business Development whose sole function would be to process mentor-protégé applications and review the MPAs and the assistance provided under them once approved. The new unit will process and make determinations with respect to all small business MPAs, with the ultimate decision to be made by the AA/BD or his/her designee.

Mentors 

The Final Rule permits any for-profit business of any size that demonstrates a commitment and the ability to assist approved small businesses to act as a mentor and receive the benefits of the mentor-protégé relationship. In order to make the 8(a) BD mentor-protégé program consistent with the small business mentor-protégé program, the Final Rule provides that mentors in the 8(a) BD mentor-protégé program must be for profit businesses as well.

Although the proposed rule also required a firm seeking to be a mentor to demonstrate that it “possesses a good financial condition” the SBA decided that if a proposed mentor can fulfill its obligations under a mentor-protégé agreement and has the financial wherewithal to provide all of the business development assistance to the protégé firm as described in its MPA, the SBA should not otherwise care about the proposed mentor's financial condition. Consequently, the Final Rule changed the requirement that a mentor have good financial condition to one requiring that the mentor must demonstrate that it can fulfill its obligations under mentor-protégé agreement.

In addition, the Final Rule provides that a mentor participating in any SBA-approved mentor-protégé program would generally have no more than one protégé at a time. The SBA can authorize a concern to mentor more than one protégé at a time where it can demonstrate that the additional mentor-protégé relationship would not adversely affect the development of either protégé firm (e.g.,the second firm may not be a competitor of the first firm). No firm can be a mentor of more than three protégés in the aggregate at one time under either of the mentor-protégé programs authorized by § 124.520 or § 125.9. A mentor could choose to have: Up to three protégés in the 8(a) BD program; or up to three protégés in the small business program; or one or more protégés in one program and one or more in another program, but no more than three protégés in the aggregate.

Lastly, the proposed rule provided that a protégé in the small business mentor-protégé program may not become a mentor and retain its protégé status. The Final Rule, however, provides that the SBA may authorize a small business to be both a protégé and a mentor at the same time where the firm can demonstrate that the second relationship will not compete or otherwise conflict with the first mentor-protégé relationship.

Protégés

In order to qualify as a protégé under the 8(a) BD or the small business program, the Final Rule requires a business to qualify as small for the size standard corresponding to its primary NAICS code or identify that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code. This is a change from the existing 8(a) BD mentor-protégé regulation, which required an 8(a) protégé to (i) have a size that is less than half the size standard corresponding to its primary NAICS code, or (ii) be in the developmental stage of its 8(a) program participation; or (iii) not have received an 8(a) contract.

The Final Rule provides that a protégé participating in either of the mentor-protégé programs generally would have no more than one mentor at a time. However, it authorized a protégé to have two mentors where the two relationships would not compete or otherwise conflict with each other and the protégé demonstrates that the second relationship pertains to an unrelated, secondary NAICS code, or the first mentor does not possess the specific expertise that is the subject of the mentor-protégé agreement with the second mentor.

In addition, § 125.9(c)(1) of the proposed rule required that SBA verify that a firm qualifies as a small business before approving that firm to act as a protégé in a small business mentor-protégé relationship. However, because the size protest procedures permit any interested party to protest the size of any apparent successful offeror, the SBA agreed with commenters that a protégé that was not small would ultimately be found ineligible for award of the contract and, thus, would not unduly benefit from its mentor-protégé relationship. Consequently, under the Final Rule small businesses may "self-certify" to qualify as small for a small business small business mentor-protégé relationship.  The SBA’s position is that as long as it is clear that SBA's approval of a mentor-protégé relationship does not amount to a formal determination of size eligibility, the size protest procedures are sufficient to protect the integrity of the program.

The Final Rule also provides that a protégé firm that graduates or otherwise leaves the 8(a) BD program but continues to qualify as a small business may transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship by notification, without applying to and receiving approval from SBA to do so. 

Mentor-Protégé Programs of Other Departments and Agencies

In the new § 125.10, the Final Rule implements the mandate under NDAA 2013 that a Federal department or agency, other than the Department of Defense, cannot carry out its own agency specific mentor-protégé program for small businesses unless the head of the department or agency submits a plan for the program to SBA and receives the SBA Administrator's approval of the plan. Within one year of the effective date of the Final Rule, a department or agency that is currently conducting a mentor-protégé program (except the Department of Defense) must submit a plan to the SBA for approval in order for the program to continue.

The SBA recognized that unlike the SBA’s mentor-protégé program which contemplates a prime contractor role for the protégé, other agency-specific mentor-protégé programs incentivize mentors to utilize their protégés as subcontractors. Consequently, the Final Rule identifies subcontracting incentives as a possible benefit to be provided by procuring activities in appropriate circumstances. 

Benefits of Mentor-Protégé Relationships

As with the 8(a) BD program, under the Final Rule, a protégé in the small business mentor-protégé program may joint venture with its SBA-approved mentor and qualify as a small business for any Federal government contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement. Thus, a joint venture between a protégé and its approved mentor in the small business mentor-protégé program will be deemed to be a small business concern for any Federal contract or subcontract. This does not mean that the joint venture affirmatively qualifies for any other small business program. For example, a joint venture between a small business protégé firm and its SBA-approved mentor will be deemed a small business concern for any Federal contract or subcontract for which the protégé qualified as small, but the joint venture will qualify for a contract reserved or set-aside for eligible 8(a) BD, HUBZone SBCs, SDVO SBCs, or WOSBs only if the protégé firm meets the particular program-specific requirements as well.

The Final Rule also clarifies that the individual identified as the project manager of the joint venture need not be an employee of the protégé firm at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the protégé firm if the joint venture is the successful offeror. The Final Rule also clarifies that the individual identified as the project manager cannot be employed by the mentor and become an employee of the protégé firm for purposes of performance under the joint venture.

Consistent with the 8(a) BD program, the Final Rule also permits a mentor to a small business to own an equity interest of up to 40% in the protégé firm in order to raise capital for the protégé firm.

Written Mentor-Protégé Agreement

The Final Rule requires that all MPAs be in writing, identifying specifically the benefits intended to be derived by the projected protégé firms. The Final Rule also clarifies that a subcontract from a protégé to a mentor can be developmental assistance authorized by a mentor-protégé agreement.

The Final Rule also requires a firm seeking approval to be a protégé in either the 8(a) BD or small business mentor-protégé programs to identify any other mentor-protégé relationship it has through another Federal agency or SBA and provide a copy of each mentor-protégé agreement to SBA. The rule requires that the mentor-protégé agreement submitted to SBA for approval must identify how the assistance to be provided by the proposed mentor is different from assistance provided to the protégé through another mentor-protégé relationship, either with the same or a different mentor.

Under the Final Rule, if certain specified assistance was identified in a mentor-protégé agreement of another agency, but that assistance had not yet been provided, a firm can choose to terminate the mentor-protégé relationship with the other agency and use the not yet provided assistance as part of the assistance that will be provided through the 8(a) BD or small business mentor-protégé relationship. 

The Final Rule also provides that SBA will review a mentor-protégé relationship annually to determine whether to approve its continuation for another year.

The SBA initially proposed to limit the duration of an MPA to three years and to permit a protégé to have one three-year MPA with one entity and one three-year MPA with another entity, or two three-year MPAs (successive or otherwise) with the same entity. Understanding that it may take longer than three years to develop a meaningful mentor-protégé relationship, however, the SBA under the Final Rule continues to authorize two three-year MPAs with different mentors, but allows each to be extended for a second three years provided the protégé has received the agreed-upon business development assistance and will continue to receive additional assistance.

The SBA limits all small businesses, including 8(a) Participants, to having two mentors. Although an 8(a) Participant can transfer its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship after it leaves the 8(a) BD program, it can have only two mentor-protégé relationships in total. If it transfers its 8(a) mentor-protégé relationship to a small business mentor-protégé relationship after it leaves the program, it may enter into one additional mentor-protégé relationship.

The Final Rule also provides (for the 8(a) BD and small business mentor-protégé programs) that if control of the mentor changes (through a stock sale or otherwise), the previously approved mentor-protégé relationship may continue if, after the change in control, the mentor expresses in writing to SBA that it acknowledges the MPA and that it continues its commitment to fulfill its obligations under the agreement.

Sweeping Final Rule Amends SBA Regulations, Part 3: Procurement Center Representative Responsibilities, Size Protests, NAICS Appeals, Nonmanufacturer Rule, Adverse Impact and Construction Requirements, and the Certificate of Competency

July 11, 2016
Part 3 of Our Summary of SBA's Sweeping Amendments To Its Regulations!
On June 30, 2016, the U.S. Small Business Administration’s (SBA's) final rule amending SBA regulations to implement provisions of the National Defense Authorization Act of 2013 (NDAA 2013) became effective.
In Part 1 of our summary, which you can read here, we reviewed the changes to the HUBZone Program, Subcontracting Plans, Affiliation - Identity of Interest & Economic Dependence, Small Business Joint Ventures, Calculation of Annual Receipts, Recertification, & the SBIR/STTR Programs. In Part 2 of our summary, which you can read here, we reviewed the final rule’s changes to the rules concerning Limitations on Subcontracting.
In this edition of The GovCon Bulletin,™ we summarize the final rule's changes to the regulations on Procurement Center Representative Responsibilities, Size Protests, NAICS Appeals, Nonmanufacturer Rule, Adverse Impact and Construction Requirements, and the Certificate of Competency.  
Mark Amadeo

 
SWEEPING FINAL RULE AMENDS SBA REGULATIONS, PART 3: PROCUREMENT CENTER RESPONSIBILITIES, SIZE PROTESTS, NAICS APPEALS, NONMANUFACTURER RULE, ADVERSE IMPACT AND CONSTRUCTION REQUIREMENTS, AND THE CERTIFICATE OF COMPETENCY


Procurement Center Responsibilities

The final rule incorporates several revisions made to the Small Business Act by NDAA 2013 that are related to Procurement Center Representatives (PCRs).  Those revisions are aimed at clarifying that PCRs have the ability to review barriers to small business participation in Federal contracting and to review any bundled or consolidated solicitation or contract.  For example, the final rule added language to § 125.2(b)(1)(i)(A) and to § 125.2(b)(1)(ii) stating that PCRs advocate for the maximum practicable utilization of small business concerns in Federal contracting, including advocating against the unjustified consolidation or bundling of contract requirements.

The final rule also added a new § 125.2(b)(1)(iv), which states that PCRs will consult with the agency's Office of Small and Disadvantaged Business Utilization (OSDBU) regarding an agency's decision to convert an activity performed by a small business concern to an activity performed by a Federal employee. In addition, the final rule also added new § 125.2(b)(1)(v), which allows PCRs to receive unsolicited proposals from small business concerns and to provide those proposals to the appropriate agency's personnel for review and disposition.

The final rule also implements the elimination under NDAA 2013 of separate Breakout PCR's, which under the pre-amended regulations were responsible for recommending the breakout for competition of items and requirements which previously had not been competed. The final rule amends § 125.2(b)(1) and (2) in order to reassign the responsibilities held by BPCRs to PCRs.

The final rule also amends § 125.2(c)(1) by adding new paragraphs (vi) and (vii), which incorporate requirements under NDAA 2013 that each Federal department or agency provide opportunities for the participation of small business concerns during acquisition planning processes and in acquisition plans and that each Federal department or agency invite the participation of the appropriate OSDBU Director in acquisition planning processes and provide the Director with access to acquisition plans. .

Size Protests

SBA amended § 121.1001(a), which specifies who may initiate a size status protest. Some businesses and contracting officers found the prior language unclear because it contained a double negative, stating that any offeror that had not been eliminated for reasons not related to size could file a size protest. As amended by the final rule, § 121.1001(a) now more clearly states that any offeror that has not been eliminated from consideration for a procurement related reason, such as non-responsiveness, technical unacceptability or as outside the competitive range may initiate a protest.

In addition, the final rule added a new § 121.1001(b)(11) that authorizes the SBA's Director, Office of Government Contracting, to initiate a formal size determination in connection with eligibility for the SDVO SBC and the WOSB/EDWOSB programs.

NAICS Appeals

The SBA sought comments on the appropriate timeline for filing a NAICS code appeal. § 121.1103(b)(1) states that “[a]n appeal from a contracting officer's NAICS code or size standard designation must be served and filed within 10 calendar days after the issuance of the solicitation or amendment affecting the NAICS code or size standard.”  Most of the comments were supportive of the existing time limit so the SBA decided not to alter the timeliness rules for NAICS code appeals.

Nonmanufacturer Rule

The final rule makes several changes to regulations related to the nonmanufacturer rule. The statutory nonmanufacturer rule, found in Section 8(a)(17) of the Small Business Act, is an exception to the limitations on subcontracting and provides that a business may not be denied the opportunity to compete for a supply contract simply because it is not the actual manufacturer or processor of the product.

The final rule clarifies, in § 121.406(d), that neither the nonmanufacturer rule nor the limitations on subcontracting apply to small business set-aside contracts valued between $3,000 and $150,000.

In order to provide more clarity SBA also added new language in § 121.406(b)(4) stating that the rental of an item is a service and not a supply and will be treated as such for purposes of the nonmanufacturer rule and the limitation on subcontracting. In § 121.406(e), the SBA added additional language regarding how the nonmanufacturer rule should apply to multiple item acquisitions.

The SBA also made several changes to § 121.1203 regarding waivers to the nonmanufacturer rule. SBA amended § 121.1203(a) to specifically authorize the SBA to grant a waiver for an individual contract award after a solicitation has been issued, provided the contracting officer agrees to provide all potential offerors additional time to respond. § 121.1203(b), as amended by the final rule, allows waivers to be granted after a contract has been awarded when the contracting officer has determined that the modification is within the scope of the contract and the agency followed the regulations prior to issuance of the solicitation and properly and timely requested a waiver for any other items under the contract, where required. SBA also added § 121.1203(d), which deals with waivers to the nonmanufacturer rule for the purchase of certain software that can be readily treated, and is almost universally perceived, as a supply item rather than a service - specifically, readily available software that is generally available to both the public and private sector unmodified.

In the final rule, SBA amended § 121.201 by adding a footnote to NAICS code 511210, Software Publishers, explaining that this is the proper NAICS code to use when the government is purchasing software that is eligible for a waiver of the nonmanufacturer rule. The 2012 NAICs manual explains that this industry comprises establishments primarily engaged in computer software publishing or publishing and reproduction. Establishments in this industry carry out operations necessary for producing and distributing computer software, such as designing, providing documentation, assisting in installation, and providing support services to software purchasers. The SBA believes that this accurately reflects the type of companies that would be producing and supplying the government with the type of software eligible for a waiver.  SBA reiterated that the custom design or modification of software for the government will generally continue to be treated as a service. If the software being acquired requires any custom modifications in order to meet the needs of the government, it is not eligible for a waiver of the nonmanufacturer rule because the contractor is performing a service and is not providing a supply.

The SBA also amended § 121.406(b)(5) to make a technical correction. Section 121.406(b) addresses how a nonmanufacturer may qualify as a small business concern for a requirement to provide a manufactured product or other supply item. Before the amendment, paragraph (b)(5) stated that the SBA's Administrator or designee may waive the requirement set forth in paragraph (b)(1)(iii) that requires nonmanufacturers to supply the end item of a small business manufacturer, processor or producer made in the United States. The citation to paragraph (b)(1)(iii) was incorrect and so the SBA amended this paragraph to include the correct citation to paragraph (b)(1)(iv).

In the final rule the SBA amended § 121.406(b)(7) to clarify that SBA's waiver of the nonmanufacturer rule has no effect on requirements external to the Small Business Act which involve domestic sources of supply, such as the Buy American Act and the Trade Agreements Act.

In order to clarify whether the nonmanufacturer rule applies, or whether a general or specific waiver is attached to a procurement, SBA added a new § 121.1206 to require contracting officers to receive specific waivers prior to posting a solicitation, and also to provide notification to all potential offerors of any waivers that will be applied (whether class or specific) to a given solicitation. 

Adverse Impact and Construction Requirements

SBA amended § 124.504, which generally addresses when the SBA must conduct an adverse impact analysis for the award of an 8(a) contract. SBA is not required to perform an adverse impact analysis for new requirements. Before SBA’s amendment, paragraph (c)(1)(ii)(B) stated that “Construction contracts, by their very nature (e.g., the building of a specific structure), are deemed new requirements.” SBA clarified the definition of “new requirement” for construction contracts by specifying that generally, the building of a specific structure is considered a new requirement. However, recurring indefinite delivery or indefinite quantity (IDIQ) procurements for construction services are not considered new.

Certificate of Competency

SBA amended § 125.5(f), which addresses SBA's review of an application for the Certificate of Competency (COC) program. SBA inserted new § 125.5(f)(3) to address how SBA should review an application for a COC based on a finding of non-responsibility due to financial capacity where the applicant is the apparent successful offeror for an IDIQ task order or contract. The changes provide that the SBA's Area Director will consider the firm's maximum financial capacity and if such COC is issued, it will be for a specific amount that serves as the limit of the firm's financial capacity for that contract. The contracting officer cannot deny the award of an order or contract on the basis of financial incapacity if the firm has not reached the financial maximum identified by the Area Director.

SBA also revised 13 CFR 121.408(a), which provides the size procedures for the COC program. The revision is a technical correction. This paragraph currently refers to 13 CFR 121.1009 to explain how SBA would initiate a formal size determination; however, § 121.1009 relates to the process SBA uses to make a formal size determination. The correct regulatory reference is to 13 CFR 121.1001(b)(3)(ii), which explains how the SBA initiates a formal size determination for the COC program.

SBA also revised 13 CFR 121.409 to remove the second sentence, which stated that in an unrestricted procurement, the small business concern must supply a domestically furnished product. This sentence may or may not have been true, depending on whether or how the Buy American Act or the Trade Agreements Act apply to the procurement. The Small Business Act itself does not impose such a requirement on full and open or unrestricted procurements.