As we recently highlighted, on October 16, 2020, the U.S. Small Business Administration (SBA) enacted a final rule (Rule) that merges the 8(a) Business Development Mentor-Protégé Program and the All Small Mentor-Protégé Program and makes a number of other significant changes that impact the small business contracting community. One modifies SBA’s recertification rules and will directly affect a contractor’s ability to pursue options and orders set aside under pre-existing contracts.
SBA’s regulations require a concern to recertify its small business size / socio-economic (e.g., Service-Disabled Veteran-Owned Small Business Concern (SDVO SBC), Women-Owned Small Business (WOSB) / Economically Disadvantaged WOSB (EDWOSB)) status (1) within 30 days of a contract novation; (2) within 30 days of a merger, sale, or acquisition; and (3) prior to the end of the fifth year of a contract exceeding five years in duration (including options) and prior to any option being exercised thereafter.
In 2018, in a case with wide-ranging implications, SBA’s Office of Hearings and Appeals (OHA) clarified that under a plain reading of SBA’s recertification rules, a concern that initially certifies and qualifies for a given status will retain its status for the life of a contract, including Multiple Award Contracts (MACs) (e.g., OASIS, Alliant, Eagle II, SEWP, CIO SP3, VETS 2). See In the Matter of Analytic Strategies, Inc., SBA No. VET-268 (Jan. 29, 2018). OHA explained that the only exception to this general rule occurs if the contracting officer requests recertification in connection with a specific order. In addition, OHA held that when a concern no longer qualifies for a given status and recertifies as such as a result of one of the three events outlined above, the procuring agency may still exercise options and issue orders pursuant to pre-existing contracts—but the agency can no longer count the options or orders toward its procurement goals. Notably, in that case, SBA unsuccessfully argued that when a concern is required to recertify and informs the agency that it no longer qualifies for a given status, not only can the agency no longer take credit, but the concern is no longer eligible to receive options and orders set aside under pre-existing contracts. OHA refused to give SBA’s interpretation of its regulations deference and explained that “a change to SBA’s regulatory scheme requires notice and comment rulemaking.”
Shortly thereafter, on May 25, 2018, SBA enacted a “technical correction” through a direct final rule, which, as we previously wrote, was intended to preclude contractors that recertify as no longer qualifying for a given status from being eligible for options and orders set aside under pre-existing contracts. When SBA adopted this “technical correction,” which did not proceed through notice and comment rulemaking, it claimed that it was not making any “substantive change” to its regulations. Yet, it is clear that in enacting the “technical correction,” SBA was attempting to codify the losing argument it advanced in Analytic Strategies. And, because SBA’s argument in that case stands in direct conflict with OHA’s ruling, the implication is that the “technical correction” was intended to enact a substantive change to SBA’s recertification rules.
Presumably aware of the issues associated with making substantive changes to its regulations by way of a “technical correction,” SBA appears to have used the Rule as an opportunity to change its recertification rules once and for all, this time allowing its revisions (which were not highlighted in the Rule’s preamble) to pass through notice and comment rulemaking procedures. Tracking OHA’s analysis in Analytic Strategies, the Rule tweaks SBA’s size recertification regulation to expressly state as follows:
Where a concern grows to be other than small, the procuring agency may exercise options and still count the award as an award to a small business, except that a required recertification as other than small under paragraph (g)(1), (2), or (3) of this section changes the firm’s status for future options and orders.
13 C.F.R. § 121.404(g) (emphasis added). SBA made similar changes to its status recertification rules for SDVO SBCs and EDWOSB / WOSBs. See 13 C.F.R. §§ 125.18(i) and 127.504(h).
The impact of this change is significant. Indeed, under SBA’s old rules, OHA explained that a concern retains its “status” and, thus, its eligibility for options and orders set aside under pre-existing contracts even after recertifying as no longer qualifying for such status. However, according to the Rule, mandatory recertification now changes a firm’s status, meaning that after a concern recertifies as no longer qualifying for such status it is no longer eligible for options and orders set aside under pre-existing contracts.
The Rule will have wide-ranging implications on both MACs and non-MACs. However, because the Rule expressly purports to not have a “retroactive or preemptive effect,” questions remain as to when and to what contracts the Rule applies. These questions create both risks and opportunities for small business contractors.
If you would like to know more about the Rule and its potential impact on your company, please contact Sam Finnerty, the author of this blog, or a member of PilieroMazza’s Government Contracts Group.