SBA Makes Significant Changes to Its Regulations Affecting Government Contractors

9 min

On October 16, 2020, the U.S. Small Business Administration (SBA) issued a final rule that makes significant changes to its regulations that will affect both small and other-than-small government contractors, including consolidation of the 8(a) and All Small Mentor-Protégé programs, elimination of the three-in-two rule (and other joint venture affiliation changes), and recertification for set-aside orders under unrestricted Multiple Award Contracts (MACs).

While this article covers several of the major changes to the SBA's regulations in the final rule, we encourage you to review the final rule in its entirety to ensure that you are familiar with all of the new provisions and changes that the SBA has made.

The final rule becomes effective November 16, 2020.

Key Takeaways
  • The final rule effectively eliminates the 8(a) Mentor-Protégé Program, consolidating it with the SBA's All Small Mentor-Protégé Program.
  • The final rule also eliminates the three-in-two rule, which limited joint ventures to receiving three contracts in two years.
  • 8(a) joint ventures are no longer required to obtain SBA approval prior to award of a competitive 8(a) procurement.
Consolidation of Mentor-Protégé Programs

The SBA is combining its 8(a) Business Development Mentor-Protégé Program and All Small Mentor-Protégé Program (ASMPP) into a single program. While the 8(a) Mentor-Protégé Program was established in 1998, the ASMPP was a more recent creation, having been established in 2016. The purpose of the consolidation is "to eliminate confusion regarding perceived differences between the two Programs, remove unnecessary duplication of functions within SBA, and establish one, unified staff to better coordinate and process mentor-protégé applications." Although the programs have been separate, both the purposes and the benefits available under the programs are identical. The consolidation eliminates the 8(a) Mentor-Protégé Program and continues the ASMPP. Mentor-protégé relationships that have already been approved through the 8(a) Mentor-Protégé Program will continue to operate under the ASMPP and will have the same remaining time in the ASMPP as they would have had under the 8(a) Mentor-Protégé Program. A mentor-protégé relationship approved under the 8(a) Mentor-Protégé Program will count as one of the two lifetime mentor-protégé relationships permitted under the ASMPP for small businesses.

Joint Venture Affiliation—Elimination of the Three-in-Two Rule and Other Changes

The SBA's final rule makes several important changes to the joint venture affiliation requirements at 13 C.F.R. § 121.103(h):

  • Elimination of the Three-in-Two Rule—No longer is a joint venture limited to being awarded only three contracts in two years in order for the joint venture partners to avoid being deemed affiliated. Now, a joint venture may be awarded an unlimited number of contracts within two years, starting from the date of the award of the first contract, without the partners being deemed affiliated. A joint venture may be awarded contracts after the two-year period as long as it submitted the offers (including price) prior to the end of the two-year period. If the joint venture submits an offer after the two-year period ends, the SBA will find the joint venture partners to be affiliated. A novation may occur after the two-year period without a finding of affiliation if the joint venture submitted the novation package to the contracting officer for approval prior to the end of the two-year period.
  • Administrative Personnel and FSOs Permitted—The final rule adds language to make clear that, while a joint venture may not be populated with its own separate employees to perform contracts awarded to the joint venture (i.e., the joint venture must be "unpopulated"), the joint venture is permitted to have its own separate employees to perform administrative functions, including one or more Facility Security Officers (FSOs).
  • Facility Security Clearances—The final rule permits a joint venture to be awarded a contract requiring a facility security clearance if either the joint venture itself or the individual partner(s) to the joint venture that will perform the necessary security work has a facility security clearance. Specifically, if the clearance is necessary to perform the primary and vital requirements of the contract, the lead small business partner to the joint venture must possess the clearance. But, if the security portion of the contract is ancillary to the principal purpose of the contract, then the joint venture partner that will perform such work must possess the clearance.
Recertification for Set-Aside Orders Under Unrestricted MACs

In its continued effort to clarify and address size status under MACs, the SBA questioned situations where concerns that certified as small under an unrestricted (i.e., not set-side) MAC are in fact no longer small. Specifically, the final rule states that "[t]o allow a firm's self-certification for the underlying MAC to control whether a firm is small at the time of an order years after the MAC was awarded does not make sense to SBA." The SBA is concerned with firms being able to rely on their size certification for the underlying unrestricted MAC to compete for orders set aside for small businesses, even though they are no longer small. Thus, the SBA is amending 13 C.F.R. § 121.404(a)(1) to require concerns to recertify their size status and qualify as a small business at the time that they submit their initial offer (including price) for any order under an unrestricted MAC that has been set aside for small businesses. This requirement to recertify for a set-aside order under an unrestricted MAC does not apply, however, to the Federal Supply Schedule (FSS) program.

On the other hand, where a MAC has established specific pools or reserves for individual types of small business concerns, a concern's size and status will flow down from the underlying MAC to the individual orders issued under the MAC. Therefore, a concern can continue to rely on its representations for the underlying MAC unless a contracting officer requests recertification in connection with a specific order.

Additional Size Status Changes
  • Where a concern recertifies as other than small as required by 13 C.F.R. §§ 121.404(g)(1) (within 30 days of a contract novation), (g)(2) (within 30 days of a merger, sale, or acquisition), or (g)(3) (before the end of the fifth year of a contract longer than five years), the concern is no longer eligible for future options or orders under the contract.
  • The SBA clarified that size status for purposes of compliance with the nonmanufacturer rule, the ostensible subcontractor rule, and the joint venture agreement requirements is determined as of the date of final proposal revisions or final bids.
  • The SBA clarified that, just as for individual small businesses, a partner to a small business joint venture that has been acquired, is acquiring, or has merged with another business entity must recertify its size status.
  • If a merger, sale, or acquisition (including agreements in principle) occurs within 180 days of the date that a concern submits an offer, the concern will be ineligible for award of that contract; however, if a merger, sale, or acquisition occurs more than 180 days after submission of an offer, then award can be made to the concern (but will not count as an award to a small business). SBA made this change to prevent discouraging legitimate business transactions that arise months after an offer has been submitted.
  • The SBA added a provision permitting a contracting officer to request a size recertification prior to the 120-day point in the fifth year of a long-term MAC—i.e., at any point during a long-term MAC—as deemed appropriate.
Joint Ventures

The final rule makes several changes to the joint venture regulations in 13 C.F.R. § 125.8:

  • Mentor-Protégé Joint Venture Agreements
    • The final rule changes the position that must be designated from the small business managing venturer from "project manager" to "responsible manager."
    • The SBA has added language to the requirement that the small business must be the managing venturer, stating that "[t]he managing venturer is responsible for controlling the day-to-day management and administration of the contractual performance of the joint venture, but other partners to the joint venture may participate in all corporate governance activities and decisions of the joint venture as is commercially customary." The final rule does not include any additional discussion of what constitutes "commercially customary" activities and decisions.
    • While previously joint venture profits had to be received by each joint venture partner commensurate with the work that each performed, now the joint venture partners may agree to distribute profits such that the small business participant(s) receive profits that exceed the percentage commensurate with the work performed.
    • Annual performance-of-work statements must be submitted to the SBA and the relevant contracting officer no later than 45 days after each operating year of the joint venture.
    • Project-end performance-of-work statements must be submitted to the SBA and the relevant contracting officer no later than 90 days after completion of a contract.
  • The final rule clarifies that a protégé cannot meet its 40% performance of work requirement by subcontracting to one or more similarly situated entities.
8(a) Program

The final rule also implemented numerous changes to the 8(a) BD program regulations set forth in 13 C.F.R. Part 124, including the following:

  • Eliminated the 8(a) Mentor-Protégé Program, consolidating it with the SBA's All Small Mentor-Protégé Program.
  • Eliminated the requirement for all 8(a) joint ventures to obtain approval from the SBA prior to award (except when seeking a sole source 8(a) award).
  • Clarified eligibility requirements: For a sole source 8(a) procurement, a concern must be a current Participant in the 8(a) BD program at the time of award. If the firm's term of participation in the 8(a) program expires or otherwise ends before the sole source 8(a) award can be made (including sole source order awards under MACs), that firm cannot receive the award. Under competitive 8(a) procurements, an entity must be a current Participant eligible for award of the contract on the initial date specified for receipt of offers contained in the solicitation.
  • Each individual claiming disadvantaged status must also now give the SBA authorization to request and receive tax return information directly from the IRS.
  • The final rule also made changes to numerous other 8(a) regulations concerning how to request reconsideration of an 8(a) BD program application, how to reapply to the program, voluntary withdrawal and early graduation processes, suspension from the program, exercise of 8(a) options and modifications, dollar limitations on 8(a) contracts that a Participant can receive during its participation in the 8(a) BD program, and regulations affecting Alaska Native Corporations (ANCs), Indian Tribes, and Native Hawaiian Organizations (NHOs).

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The final rule implements numerous Executive Orders and makes numerous changes to the SBA regulations in addition to those discussed in this article. Venable attorneys and subject matter specialists are available to assist contractors in interpreting and preparing for compliance with these new requirements.