Significant Regulatory Changes Issued by SBA on October 16, 2020

The Small Business Administration (SBA) released a final rule on October 16 in which it made significant changes to a number of its programs.  The highlights are set forth below:

• • Consolidation of the Section 8(a) and All Small Mentor/Protégé Programs. The final rule consolidates the SBA’s Section 8(a) Mentor/Protégé Program with its All Small Mentor/Protégé Program which was established in 2016.  The rule is effective on November 16.  While both Mentor/Protégé Programs had similarities, the consolidation makes a big change with respect to Section 8(a) Mentor/Protégé joint ventures.  Under the existing Section 8(a) Mentor/Protégé Program regulations, a joint venture between a Section 8(a) Program Participant and its Mentor had to be approved prior to award of a contract to the joint venture pursuant to a Section 8(a) competitive procurement.  The new rule eliminates that requirement although Section 8(a) joint ventures still will need SBA’s approval before receiving a sole source award.

• • Revision of the “3 in 2” Rule. Another change included in the new regulation addresses the “3 in 2” rule.  Under the prior rule, a joint venture created under SBA’s set-aside programs could receive only 3 contract awards in 2 years if it wanted to be exempt from SBA’s “affiliation” rules.  The new rule eliminates the three-contract award restriction.  A joint venture still cannot bid on contracts after its two years are up, but it now can receive more than 3 contracts within that period.  However, as is the case under the current regulation, the parties to a joint venture whose two-year program has expired may form a new joint venture.  And as also is the case under the current regulation, the two-year term for the new joint venture will begin on the date the new joint venture receives its first contract award.

• • Joint Venture Security Clearances. Many agencies require joint ventures bidding on contracts requiring a facility security clearance to have the facility security clearance itself, although a joint venture often has not yet received a contract award and, typically, is unpopulated.  Some agencies, on the other hand, will award a joint venture a classified contract as long as the lead joint venture member has the requisite clearance and agrees to keep the contract records at its cleared facility.  The new regulation prohibits an agency from requiring a joint venture to have a security clearance in its own name, provided that one or more members of the joint venture holds the facility security clearance.  However, the facility security clearance must be held by the joint venture member who will perform he work requiring the clearance.  In addition, where a facility security clearance is needed to perform the “primary and vital” part of the agency’s requirements, the small business member to the joint venture must have the facility clearance.

• • Subcontractor Past Performance. Not all agencies allow small business offerors to use the offeror’s proposed subcontractor’s past performance to satisfy a solicitation’s past performance requirements.  The new regulation now requires agencies to consider a small business offeror’s first tier subcontractor past performance if the small business prime contractor does not have the past performance qualifications demanded by the agency.  But there are two caveats: (1) the first-tier subcontractor must be a small business and (2) the small business subcontractor must be included in the small business prime’s proposal.

• • Recertification for Orders Issued Under Multiple Award Contracts. The new regulation confirms that if a company has certified that it is a small business, or a certain type of small business, at the time it is awarded a multiple-award contract explicitly set aside for small businesses or that type of small business, it can continue to rely on that certification for any order issued under the contract unless the Contracting Officer requests offerors to recertify their size or status for that order.  The new rule, however, includes changes to the recertification requirement for multiple award contracts awarded on an unrestricted basis.   If an agency sets-aside an order  for a small business under such a multiple award contract, an awardee intending to bid on the order must certify to its size on the date it submits its offer for the order.  Similarly, if a multiple award contract is set aside for a specific type of small business, an offeror must recertify prior to award of an order that is set aside for another type of small business.  For example, if a multiple-award contract is set aside for small business and the agency sets-aside an order for SDVOSBs, offerors must certify their SDVOSB status at the order level.   The new rule, however, does NOT apply to orders issued under Federal Supply Schedule contracts or Blanket Purchase Agreements issued under those contracts.

• • Recertification after Merger, Acquisition or Sale. SBA’s existing regulations require a small business offeror that has experienced a merger, acquisition, or sale after submitting its proposal in response to a solicitation but before an award must recertify its size prior to the award.  In response to complaints from small businesses regarding the existing rule, the new rule states that, if the transaction occurs within 180 days of the small business’ initial offer, and  if the recertification results in the business no longer being “small”, it cannot receive the award.  However, if the transaction occurs after the 180 days and the recertification results in the business no longer being small,  the newly “large” business may receive the award but the agency may not count the award as one to a small business for purposes of meeting the agency’s contracting goals.

• Clarification of Workshare Requirements. Small businesses often confuse the different work share requirements included in SBA’s regulations.  One workshare rule limits the ability of a small business prime contractor to subcontract work received by the small business under its small business set-aside prime contract.  This rule is known as the “limitations on subcontracting” rule and it restricts a small business from subcontracting more than 50% of the amount an agency pays the small business under its small business set-aside prime contract.  The other workshare requirement relates to the amount of work a “protégé” must perform in a Mentor/Protégé joint venture which is 40% of the work performed by the joint venture.  A small business can satisfy this workshare requirement by including the value of the work performed by a “similarly situated entity.”  A similarly situated entity is a subcontractor that has the same status on which the small business prime relied in receiving the small business set-aside prime contract award.  The new regulation clarifies that the “similarly situated entity” exception does not apply to the “protégé” workshare rule.  A protégé, therefore, cannot rely on a “similarly situated” subcontractor as a means of fulfilling the 40% workshare requirement included in Mentor/Protégé joint venture agreements.

Woman Owned Small Business Certification Requirement

Reminder: as of October 15, SBA requires all Women Owned Small Businesses (WOSBs) and Economically Disadvantaged Small Businesses (EDWOSBs) must be certified as such by either SBA or a third party (other agencies or a certifying entity approved by SBA).  Certification by SBA is free; the application for certification can be found at beta.certify.sba.gov.  If a WOSB/EDWOSB has already been certified by a third party, the business still must upload the relevant documents to this portal.  (Documents related to a company’s WOSB certification previously uploaded to SBA’s certify.SBA.gov portal will be available only through March 31, 2021).  If a WOSB/EDWOSB already has applied for certification with SBA and has not yet received a response, the company may continue to participate in WOSB/EDWOSB set-aside procurements.   SBA has published a useful chart identifying the various certification options available to small businesses interested in receiving certification as a WOSB/EDWOSB.  Once a WOSB/EDWOSB is properly certified, it must attest to SBA annually that it fulfills the eligibility requirements for the WOSB/EDWOSB program and must notify SBA within 30 days of any “material” change that could affect its eligibility for the program.  WOSBs/EDWOSBs must undergo a full program examination every three years.  The certification requirement only applies to those WOSBs/EDWOSBs that intend to participate in procurements set-aside for WOSBs/EDWOSBs under SBA’s WOSB/EDWOSB program, WOSBs/EDWOSBs who have not been formally certified may certify as WOSBs/EDWOSBs for contracts awarded outside SBA’s program and agencies can continue to count those awards against their set-aside goals.

Executive Order on Diversity Training by Federal Contractors

On September 22, 2020, President Trump signed an Executive Order entitled “Combatting Race and Sex Stereotyping.”   The Executive Order prohibits federal contractors and grant recipients from providing “diversity” training to their employees that includes “divisive concepts.”  These divisive concepts include training which suggests that the U.S. or an individual is “inherently racist, sexist, oppressive, whether consciously or unconsciously.”  For example, the Executive Order bars training materials that teach that “men and members of certain races are . . . inherently sexist and racist.”  The President signed the Executive Order after the Office of Management and Budget issued a memorandum which chastised agencies for holding diversity training that referred to “white privilege” or other “critical race theory.”  The Executive Order restrictions will be incorporated in federal contracts entered on or after November 21, 2020.  Prime contractors, likewise, will have to “flow-down” these requirements to their subcontractors and vendors.

The Office of Federal Contract Compliance Programs (OFCCP) will have responsibility for enforcing the Executive Order.  The Executive Order requires OFCCP to establish a hotline to investigate complaints about contractors using training practices prohibited by the Executive Order.  OFCCP announced on September 28, 2020 that it had put the hotline into place and published an email address pursuant to which it could receive reports of noncompliance with the order.  On October 21, the Department of Labor issued a Request for Information to contractors and their employees seeking information about the company’s diversity training.

The Executive Order likely will be challenged in court.  And if Trump is not re-elected, the Executive Order likely will be rescinded by the new President.