On November 29, 2019, the U.S. Small Business Administration (“SBA”) issued a final rule (“Rule”) that will implement several provisions of the National Defense Authorization Acts (“NDAA”) of 2016 and 2017 and the Recovery Improvements for Small Entities After Disaster Act of 2015 (“RISE Act”), as well as other clarifying amendments.  As we outlined nearly a year ago when the Rule was first proposed, these changes address key small business issues for government contractors, including: subcontracting plans, the non-manufacturer rule (“NMR”), Information Technology Value Added Reseller (“ITVAR”) procurements, limitations on subcontracting (“LOS”), recertification, size determinations, and the ostensible subcontractor rule.  Below, we summarize fundamental revisions, which take effect on December 30, 2019.

Subcontracting Plans
Consistent with the 2017 NDAA, the Rule provides that it will be a material breach of contract when a contractor or subcontractor fails to comply in good faith with its subcontracting plan requirements, including failing to provide reports and/or cooperate in studies or surveys to determine the extent of compliance.  The Rule provides a number of examples of what constitutes a failure to make “good faith” efforts, including, among others, (1) failing to timely submit subcontracting reports and (2) failing to pay small business subcontractors in accordance with the terms of the contract.  According to SBA, the examples set forth in the Rule are not intended to be inclusive and factors beyond those identified in the Rule may be considered in determining whether good faith efforts were made. The Rule also provides that failure to make a good-faith effort may be considered in any past performance evaluation of the contractor.

With respect to subcontracting plans, the Rule also requires other than small prime contractors with commercial subcontracting plans to include indirect costs in their subcontracting goals.

Small Business Contracting in Disaster Areas
As provided in the RISE Act, SBA is establishing contracting preferences for small business concerns (“SBC”) located in disaster areas and will provide agencies with double credit for awards to such concerns.  SBA will use the existing Federal Acquisition Regulation definitions to provide that an agency will receive credit for an “emergency response contract” awarded to a “local firm” that qualifies as an SBC under the applicable size standard for a “major disaster or emergency area.” According to the Rule, a concern is “located in a disaster area,” if, during the last twelve months, it had its main operating office in the area and that office generated at least half of the firm’s gross revenues and employed at least half of the firm’s permanent employees. The Rule provides a number of factors that SBA will consider if the firm does not meet the foregoing criteria in order to determine whether the firm resides or primarily does business in a disaster area.

NMR Size Standard Does Not Apply to ITVAR Procurements
The Rule amends the NMR to expressly state that a firm may qualify as an SBC to provide manufactured products or other supply items as a nonmanufacturer if, among other things, it does not exceed 500 employees “(or 150 employees for the Information Technology Value Added Reseller exception to NAICS Code 541519, which is found at § 121.201, footnote 18)”.  According to SBA, because contractors under the ITVAR exception are non-manufacturers, it would make no sense for SBA to retain a 150-employee size standard if concerns could also qualify under the NMR 500-employee size standard.

Allowing a Set-Aside Within a Set-Aside
The Rule provides contracting officers the authority to set aside orders for a socio-economic small business program (e.g., 8(a), HUBZone, SDVO, WOSB) under a multiple award contract (“MAC”) awarded as a generic small business set-aside. This is significant because although SBA has considered implementing such a rule in the past, it has chosen not to, in part because it was concerned that such a rule would unfairly deprive SBCs of an opportunity to compete for orders issued under their MACs.  Comments regarding this change were split, with those in opposition claiming that such a rule:

  1. is unfair to the original small business awardee of the MAC;
  2. will reduce competition for future task orders; and
  3. will discourage SBCs from bidding on MACs in the future.

SBA believes these concerns are eased because the rule will only apply proactively and will not affect already awarded MACs (unless socio-economic set-asides were contemplated thereunder).  More specifically, according to SBA, going forward, small businesses will know at the time of offer what kind of set-asides, if any, are available at the time of award and on future orders.  Notably, however, the text of the Rule does not require a procuring agency to inform offerors whether it plans to make socio-economic set-asides down the road.  Thus, it is unclear how this rule addresses the concerns raised by the opposition.

Size Recertification
SBA is clarifying that recertification is required on full-and-open contracts when such contracts are awarded to SBCs.  In addition, the Rule adds language to SBA’s 8(a) regulations to require recertification under 8(a) contracts.  Similar language can be found in SBA’s SDVOSB, HUBZone, and WOSB/EDWOSB[1] regulations, but had been missing from its 8(a) regulations.

Moreover, the Rule provides that, if a prime contractor relies on a similarly situated subcontractor to meet the applicable performance requirements—and the similarly situated subcontractor has to recertify—the prime cannot count the subcontractor towards its performance requirements if the subcontractor recertifies as an entity other than that for which it previously certified.  Interestingly, however, the Rule does not impose recertification requirements on the subcontractor, as the duty to recertify generally applies to prime contractors only. As such, it is unclear how this requirement will be administered.

This rule was adopted as proposed despite the fact that 25 of the 32 comments received opposed the change and noted that the “requirement would be overly burdensome and would add ‘complexities to an already difficult compliance system.’”

Limitations on Subcontracting
The Rule implements a number of revisions pertaining to LOS compliance.  First, in response to public comment regarding a proposed revision that sought to clarify when an independent contractor can be counted as an employee for size and LOS purposes (a rule which commentators thought was confusing and unnecessarily difficult to comply with), SBA revised its LOS regulation to clarify that contractors should simply apply the analysis in 13 C.F.R. §121.106(a) (i.e., SBA’s rule regarding how it calculates a concern’s number of employees) to determine whether independent contractors are employees or subcontractors.  And, in situations where the independent contractor is a subcontractor—its work will count toward meeting the applicable LOS if it is a similarly situated entity.  In other words, if the individual at issue is not an employee for size purposes, work performed by that individual must be considered a subcontract for LOS purposes.

Second, SBA is adding language to the LOS regulation to clarify that contracting officers may request information from contractors regarding LOS compliance and that evidence of compliance includes, but is not limited to, invoices, copies of subcontracts, or a list of the value of tasks performed.

Lastly, in a welcome development, SBA is creating several exclusions from calculating LOS compliance where there are no small business providers, such as airline travel, cloud computing services, mass media purchases, or work performed by a transportation or disposal entity for a contract assigned under the environmental remediation NAICS code 562910.  According to SBA, this list is not meant to be exhaustive.  It allows a small business in another industry in a similar situation to the four delineated categories above to also demonstrate that certain direct costs should be excluded because they are not the principal purpose of the acquisition, and small business concerns do not provide the service.

Ostensible Subcontractor
SBA is amending its regulations to allow an unsuccessful offeror, SBA, or a contracting officer to file a size or status protest regarding a socio-economic set-aside or sole-source award to a prime contractor that is unduly reliant on a small, but not similarly situated subcontractor or where the small, non-similarly situated subcontractor is performing the primary and vital requirements of the contract (commonly referred to as ostensible subcontractor affiliation).  This is significant, as SBA’s regulations have never provided such bases to protest.  And, the allowance for a status protest is particularly significant.  Indeed, it is possible that even if a prime contractor and its small (but not similarly situated) subcontractor are affiliated under the ostensible subcontractor rule as the result of a size protest, the prime contractor may still qualify as a small business and, therefore, remain eligible for the award.  Thus, by providing for an ostensible subcontractor status protest in such a scenario, SBA has created a basis for such awardees to be deemed ineligible for award.  Of further note, the Rule specifies that SBA will not find that a prime contractor is unduly reliant on one or more non-similarly situated subcontractors where the prime contractor can demonstrate that it, together with any similarly situated entity, will meet the LOS.

Finally, in response to a public comment recommending a comparable change with respect to SBA’s rules regarding protests of SDVO eligibility for contracts awarded by the Department of Veterans Affairs (“VA”), SBA is adding a rule that authorizes a protest challenging whether a prime contractor is unusually reliant on a subcontractor that is not Center for Verification and Evaluation (“CVE”) verified, or a protest alleging that such subcontractor is performing the primary and vital requirements of a VA procurement contract.

Kit Assemblers
SBA is also removing the kit assembler exception to the NMR. Instead, SBA will apply the multiple-item rule to kit assembler acquisitions. Under this rule, if the majority of the items in a kit are made by a small business, no waiver of the NMR is required.  However, if the majority of the items are not made by a small business, a waiver of the NMR must be obtained.

Size Determinations
SBA is also amending 13 C.F.R. § 121.404(a) to make it clear that size is generally determined at the time of initial offer or response including price—and not when other formal responses are received after the initial offer, such as final proposal revisions. Furthermore, SBA is adding a paragraph to the foregoing regulation to articulate an exception to this general rule. Namely, when an agency awards a MAC that does not require offers for the contract to include price, size will be determined on the date of initial offer for the contract, which may not include price.

Other Changes
The Rule addresses a few other topics such as posting notice of substantial bundling, subcontracting compliance reviews, procurement center representative reviews, and set-asides where one offer is received.

If you would like to know more about the Rule and its potential impact on your company, please contact a member of PilieroMazza’s Government Contracts Group.

Samuel Finnerty, the author of this Client Alert, is a member of the Firm’s Government Contracts, Small Business Programs & Advisory Services, and Government Contracts Claims and Appeals practice groups.

[1] SDVOSB = Service-Disabled Veteran-Owned Small Business; HUBZone = Historically Underutilized Business Zones; WOSB = Woman Owned Small Business; EDWOSB = Economically Disadvantaged Women-Owned Small Business.