In a noteworthy decision earlier this year, the Small Business Administration’s (“SBA”) Office of Hearings and Appeals (“OHA”) confirmed the broad nature of SBA’s general rule that a contractor maintains its size and socio-economic status for the life of a contract. See In the Matter of Analytic Strategies, Inc., SBA No. VET-268 (Jan. 29, 2018). This case required OHA to interpret the SBA regulation establishing the recertification rule in the context of Service-Disabled Veteran-Owned Small Business Concern (“SDVO SBC”) status. The regulation permits a concern that initially qualifies as an SDVO SBC for a contract, including a Multiple Award Contract, to retain its SDVO SBC status for the life of that contract with certain exceptions. See 13 C.F.R. § 125.18(e)(1)(i-iii). In that case, the appellant asserted that the only exception to this general rule occurs when a contracting officer requests recertification in connection with a specific order. Conversely, SBA argued that, in addition, exceptions for novations, mergers, acquisitions, and negative status determinations also apply to this general rule. In other words, SBA argued that where, as a result of one of the foregoing events, a concern recertifies and informs the agency that it is no longer an SDVO SBC, the agency can no longer take SDVO SBC credit for an award to the concern and the concern is no longer eligible to compete for SDVO SBC orders. Quite simply, SBA stated that “[t]here is no authority permitting a concern that loses SDVO SBC status after a merger or acquisition to continue to receive SDVO SBC set-aside orders.” OHA was not convinced.
Indeed, OHA rejected SBA’s argument and held that, under a plain reading of the regulation, the only exception to the general rule that a concern maintains its SDVO SBC status for the life of a contract occurs if the contracting officer requests recertification in connection with a specific order. According to OHA “there are no other exceptions enumerated at this point in the regulation.”
At the time, we wrote about the wide-ranging impact of this decision, including its implication that, where a concern recertifies as “other than small” or as no longer a certain socio-economic status (i.e., SDVO SBC, HUBZone, WOSB/EDWOSB), it would still be eligible to compete for set-aside orders issued against its pre-existing long-term contracts (e.g., Alliant, Eagle II, SEWP, CIO SP3, OASIS, VET 2)—the agency simply would not be able to take small business or socio-economic credit for such an award. This could have created a number of opportunities for small businesses that anticipate losing their status over the next few years because, barring a certification request at the task order level, they may have been able to compete for small business work long after exceeding the applicable size standard. However, these opportunities and the impact of Analytic seems to have been short lived.
In what appears to be a clear reaction to Analytic, SBA recently issued a final rule (“Rule”) that essentially overturns that case by codifying the unsuccessful argument that SBA put forth in Analytic. In an effort to clarify the effect of recertification, the Rule amends one sentence in the recertification provisions contained in SBA’s small business, SDVO SBC, HUBZone, and WOSB/EDWOSB regulations. More specifically, it modifies the last sentence in 13 C.F.R. §§ 121.404(g); 125.18(e)(1); 126.601(h)(1); and 127.503(h)(1). As the language and intent of each regulation is the same, the size recertification requirements in § 121.404(g) can be used to illustrate this change.
Prior to the amendments in the Rule, § 121.404(g) read, in pertinent part, as follows:
(1) Within 30 days of an approved contract novation, a contractor must recertify its small business size status to the procuring agency, or inform the procuring agency that it is other than small. If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals.
(2) (i) In the case of a merger, sale, or acquisition, where contract novation is not required, the contractor must, within 30 days of the transaction becoming final, recertify its small business size status to the procuring agency, or inform the procuring agency that it is other than small. If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals. The agency and the contractor must immediately revise all applicable Federal contract databases to reflect the new size status.
. . .
(3) For the purposes of contracts (including Multiple Award Contracts) with durations of more than five years (including options), a contracting officer must request that a business concern recertify its small business size status no more than 120 days prior to the end of the fifth year of the contract, and no more than 120 days prior to exercising any option thereafter. If the contractor certifies that it is other than small, the agency can no longer count the options or orders issued pursuant to the contract towards its small business prime contracting goals. The agency and the contractor must immediately revise all applicable Federal contract databases to reflect the new size status.
13 C.F.R. § 121.404(g) (emphasis added). According to the Rule’s preamble, “[i]t has been brought to SBA’s attention that as drafted, it is not clear which sentence or clause the final sentence [italicized above] is referencing.” By way of example, in Analytic, OHA held that the final sentence and the events triggering recertification that follow (e.g., novation, merger, acquisition) were the only exceptions to the rule that, if a concern later fails to qualify as an SDVO SBC, an agency may still exercise options and count those awards as ones to an SDVO SBC. However, according to the Rule, and as argued by SBA in Analytic, “[i]t was SBA’s intent, as made clear in the proposed and final rule enacting this regulation . . . that SBA wanted the [final] sentence and the referenced exceptions to be applied to the entirety of the preceding paragraph. 78 FR 61114, 61119-20 (Oct. 2, 2013). Therefore, SBA is adding additional language to clearly align the paragraph to the intent of the regulation.” (emphasis added). Pursuant to the Rule, the last sentence of § 121.404(g) now provides as follows:
83 FR 12849 (March 26, 2018) (emphasis added). By stating that the exceptions (i.e., events triggering recertification) apply the entirety of paragraph (g), we assume that SBA is trying to make it clear that the occurrence of any event triggering a duty to recertify is also an exception to the general rule, outlined in the first sentence of paragraph (g), that a concern retains its size status for the life of a contract. And, since SBA has made identical changes to the recertification provisions in its SDVO SBC, HUBZone, and WOSB/EDWOSB regulations, the strong implication of these amendments is that if a concern recertifies as “other than small” or as no longer a certain socio-economic status (i.e., SDVO SBC, HUBZone, EWOSB/EDWOSB), it is no longer eligible to compete for orders set-aside under its former status. Notably, this is the exact opposite of the outcome in Analytic, whereby OHA vacated a status determination that had rendered Analytic ineligible to compete for an SDVO SBC order because the concern had been acquired by a non-SDVO SBC prior to submitting its proposal for a task order and had informed the agency that it was no longer an SDVO SBC.
However, it should be noted that the Rule does not explicitly state that the events triggering recertification are an exception to the general rule that a concern maintains its status for the life of a contract. And, since OHA’s decision in Analytic applied a “plain reading” of the regulation, it is certainly possible that if presented with that type of case in the future, OHA would, again, conclude that the only explicit exception to the general rule that a concern maintains its status for the life of a contract is where recertification is requested in connection with a specific order. However, given the strong language in the Rule’s preamble and the background of the Analytic case, it seems more likely that if OHA were presented with a case like Analytic again, it would reach the opposite result. Indeed, whereas OHA’s decision in that case was premised on the notion that “there are no other exceptions enumerated at this point in the regulation[,]” the Rule can now be read as establishing the specifically enumerated events triggering recertification as exceptions to the general rule that a concern retains its status for the life of a contract.
The Rule will automatically become effective on May 25, 2018.
About the Author: Sam Finnerty is an associate with PilieroMazza in the Government Contracts Group. He may be reached at [email protected].