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Final Rule Revises Many Small Business Administration Regulations

The Small Business Administration (“SBA”) has released a final rule revising many small business size and contracting program regulations found in 13 C.F.R. Parts 121, 124-127, effective on June 30, 2016.  The revisions, which implement reforms required by the FY2013 National Defense Authorization Act, include the following:

Consequences of Noncompliance with Subcontracting Plans

  • Under the final rule, a contractor that fails to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for its subcontracting plan performance, or that fails to make a good faith effort to comply with its subcontracting plan, is in material breach of the contract and will have such failure considered in any past performance evaluation.  (We have discussed in previous posts similar measures by the FAR Council.)  If there is “reasonable basis to believe” that a prime contractor or subcontractor “may have made” a false statement with respect to a subcontracting plan to an employee or representative of the Federal Government or the prime contractor, the matter must be reported to the SBA Office of Inspector General.  Any other concern as to whether a prime contractor or subcontractor “has complied with SBA regulations or otherwise acted in bad faith” may be reported to the appropriate SBA Area Office.

Limitations on Subcontracting by Small Business Concerns

  • The final rule alters the method for calculating compliance with SBA regulations limiting the amount of work that can be subcontracted by the recipient of a small business set-aside or sole-source award.  Currently, the method for calculating compliance is based on the percentage of work requirements performed by the prime contractor.  The final rule requires that compliance be evaluated based on the percentage of the overall award amount that a prime contractor spends on its subcontractors, excluding subcontract awards made to the same type of small business concern.

Rebuttable Presumptions of Affiliation

  • The final rule provides that there is a rebuttable presumption of affiliation between firms owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings.  The SBA rejected suggestions to include all familial relations, such as relations with grandparents and/or cousins.  In addition, a presumption of affiliation exists if a firm derived 70% or more of its revenue over the previous year from another firm.

Joint Ventures of Small Business Concerns

  • The final rule establishes that a joint venture of two or more small business concerns may submit an offer as a small business for any procurement.  The separate concerns will not be considered affiliated so long as the concerns are not otherwise affiliated and each concern qualifies as small under the relevant size standard for the procurement.

Recertification Following a Merger or Acquisition

  • The final rule states that if a merger with or acquisition of a small business concern occurs after an offer is submitted but prior to award, the offeror must recertify its size to the contracting officer prior to award.

Some of these requirements are alarmingly ambiguous. For example, the SBA has provided no guidance concerning what would constitute a “reasonable basis” to believe that a false statement “may have been made.” Nor has the SBA explained the type of conduct that would constitute “bad faith.” Hopefully, additional guidance will be forthcoming.  In the meantime, large and small contractors alike should closely review these and other provisions of the final rule.

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About this Author

J. Hunter Bennett, Covington Burling, Litigation attorney
Special Counsel

Hunter Bennett regularly represents government contractors in bid protests before the Government Accountability Office and the U.S. Court of Federal Claims. He also counsels clients in a wide range of formation and disputes issues. Prior to entering private practice, he served as a Trial Attorney with the U.S. Department of Justice, where he was a member of the Department’s Bid Protest Team and frequently defended the United States against bid protests filed in the Court of Federal Claims.

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