A small business concern that certified as small at the time it submitted its initial proposal, including price, is considered small for the life of a set-aside contract even if the concern subsequently grows to be “other than small.” This is a basic rule of small business contracting. The question that always follows is what happens when a contractor has to recertify its size status? Under the current U.S. Small Business Administration (SBA) regulations, a small business concern has to recertify its small business status in a number of instances, including after there has been a merger, acquisition or novation of a contract involving the concern. Specifically, if during contract performance a small business concern has acquired a company or been acquired by another company or merged into another company, it has to recertify its size. Even if the concern recertifies as “other than small,” the regulations are fairly clear that the small business contractor gets to keep the contract. The only difference recertification as “other than small” makes is that the agency can no longer take small business credit for the contract revenue after the recertification.
In a regulation issued on May 31, 2016, SBA has implemented a new recertification rule that may challenge these basic premises. Under the new rule, a small business concern that has participated in a merger, acquisition or novation after a proposal has been submitted but before award must recertify its size status prior to award. Under the basic premises noted above, if the concern recertifies as other than small, this recertification should not affect the contract award as the small business was small at the time of proposal submission including price. Thus, the only impact such a recertification should have is to deprive the agency of the ability to credit the contract revenue against its small business contracting goals.
While this is what should happen, it may not happen. When a small business concern recertifies its status during performance of a contract, even if permitted, an agency typically will not want to terminate the contract and recompete the work. The situation is different if the recertification occurs prior to award. Since the point of setting aside a contract for small business concerns is to have the small business concern perform the work, recertification of a concern as other than small before award may cause an agency to reconsider awarding the contract to that concern. Similarly, such a recertification also could invite protests from that concern’s competitors. The protester could argue that the parties to the transaction were affiliated at the time the concern submitted the proposal based on a letter of intent or other agreement in principle.
Unlike prior recertification rules that make clear the impact of recertification, this new rule is silent on its consequences. Therefore, the new rule introduces uncertainty for those concerns contemplating a merger or acquisition which was not present with the existing recertification rules.