January 28, 2015

Calculation of Annual Receipts, Recertification Requirements, and Service-Disabled Veteran-Owned and HUBZone Small Business Regulations

4 min

Part 3 of our 5-part discussion of the SBA's proposed rules, which implement the requirements under the 2013 NDAA, focuses on Calculation of Annual Receipts, Recertification Requirements, and changes to the Service-Disabled Veteran-Owned (SDVO) and HUBZone Small Business regulations.

A Change to the Calculation of Annual Receipts

The proposed rule seeks to amend 13 CFR § 121.104, which sets forth the requirements for calculating annual receipts when determining the size of a business. The revision to the rule is to clarify a perceived misinterpretation that the current definition did not require the inclusion of passive income. The SBA explicitly provides that this had never been the intent of the SBA. Indeed, the SBA explains in the preamble to the proposed rule that "the only exclusions from income are the ones specifically listed in paragraph (a) [of Section 121.104]. It was always SBA's intent to include all income, [including passive income]."

Contractors should be aware that the SBA is not merely proposing a clarification to its size status regulations, but also signaling an interest in how contractors are calculating their annual receipts. Contractors should be prepared to detail their calculation of annual receipts in anticipation of potential increased SBA scrutiny.

A New and Notable Recertification Requirement

Currently the small business rules require small business concerns to recertify their size within 30 days following a merger or acquisition, per 13 CFR § 121.404(g). However, the SBA seeks to amend this provision by adding language that requires small business concerns subject to a merger or acquisition that occurs after an offer has been submitted but before award, to recertify their size with the contracting officer prior to award.

This change is notable and could have a significant impact on small business concerns. As many government contactors know, awards can be delayed for any number of months, for varying reasons that have nothing to do with the offering entities. However, under this new rule, if a small business concern – or its affiliate – is subject to a merger or acquisition, the concern could disqualify itself from the award, which may have been scheduled for award many months before, perhaps well before the transaction was even contemplated. Such a rule would seem to have an unfair impact on growing small business concerns.

SDVO and HUBZone Changes

The SBA also proposes a few changes to the SDVO and HUBZone programs. For example, in order to comply with the changes to the limitations on subcontracting requirements (as addressed in Part 1 of this series), both the SDVO (13 CFR § 125) and the HUBZone (13 CFR § 126) programs include proposed changes to their respective regulations that will require SDVO and HUBZone concerns to represent that they will comply with the limitation on subcontracting requirements.

The proposed changes to the SDVO program also clarify that:

A joint venture of at least one SDVO SBC and one or more other business concerns may submit an offer as a small business for a competitive SDVO SBC procurement, or be awarded a sole source SDVO contract, so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement.

Thus, an SDVO small business can form a joint venture with another non-SDVO small business to submit an offer as a joint venture, and the joint venture still will qualify as an SDVO small business, provided that all members of the joint venture meet the size standard for the procurement.

Submitting Comments

Contractors wishing to submit comments on these proposed rules can do so through regulations.gov by searching for RIN: 3245-AG58. Comments are due by February 27, 2015.

Continue following Venable's Small Business Series for additional analysis and take-aways from the SBA's proposed rule implementing the 2013 NDAA. If you have any questions about how these proposed rules could affect your business, please contact any of our authors: Keir Bancroft, Paul Debolt, Dismas Locaria, Rob Burton, Rebecca Pearson, James Boland, or Nathaniel Canfield.