SBA recently issued a significant rule affecting Multiple Award Contracts (MACs) that implements Section 1331 of the Small Business Jobs Act of 2010.  Section 1331 focuses on several “tools” contracting officers can use to increase small business participation in MACs.  The final rule also addresses procedures related to the “consolidation” and “bundling” of federal contracts.  The final rule follows up SBA’s interim rule issued in November, 2011 which made clear that set-asides may be used in connection with the placement of orders under MACs, notwithstanding the requirement that each contract holder be afforded a fair opportunity to be considered.  SBA proposed the changes addressed in this final rule on May 12, 2012.

Set forth below are key aspects of the final rule.

Use of Set-Asides, Partial Set-Asides and Reserves in Connection with MACs.

The final rule clarifies that the term Multiple Award Contract (MAC) includes Multiple Award Schedule (MAS) contracts issued by GSA or agencies granted MAS contract authority by GSA (i.e., Department of Veterans Affairs).

Section 1331 Tools

Contracting Officers currently must set aside a MAC for exclusive small business participation if the contracting officer determines that at least two capable small businesses can meet the contract requirements.  The new rule provides contracting officers with additional tools that they can use at their discretion to increase small business participation in MACs where the “rule of two” cannot be satisfied:  (1) partial set-asides; (2) “reserves” and (3) set-asides of orders under MACs.

• Partial set-asides may be used when market research indicates that a total set-aside MAC is not appropriate but the procurement can be broken up into smaller or discreet portions or categories and two or more small business concerns are expected to submit an offer on the set-aside portion of the requirement at a fair market price.  The rule allows a small business to submit an offer on the set-aside portion, non-set-aside portion, or both.
• Reserves may be used when a requirement cannot be broken into discrete components to support a partial set-aside but market research shows that two small businesses could perform part of the contract or one small business could perform the entire contract.  Reserves are used when a MAC is awarded pursuant to full and open competition and the contracting officer “reserves” the award of one or more orders under the MAC for small businesses.
• Where a MAC is awarded pursuant to full and open competition, without a partial set-aside or without reserves, the new rule allows a contracting officer to make a “commitment” to set-aside orders under the MAC, or preserve the right to consider set-asides, when the “rule of two” is met.  The contracting officer must state this intention in the solicitation.

The ultimate decision of which, if any, of the tools described above a contracting officer will use is completely within the discretion of the contracting officer.  The rule only requires that contracting officers consider using these tools before awarding a MAC if the “rule of two” cannot be satisfied.  If the contracting officer foregoes using one of the tools above, the contracting officer must document the rationale for so doing in the contract file.

NAICS Codes

The rule provides that a contracting officer: (1) assign one NAICS code and corresponding size standard to the MAC if all of the orders issued against that contract can also be classified under that same NAICS code and corresponding size standard; or (2) divide the MAC for divergent goods and services into discrete categories, each of which is assigned a NAICS code with an corresponding size standard.  In the latter case, a business will have to represent its size status for each of the NAICS codes at the time of submitting its initial offer, including price.  For any order issued under the MAC, the NAICS code assigned to the order would be the same as the NAICS code assigned to that category in the contract.  The contracting officer is required to select a single NAICS code for the order which best represents the principal nature of the acquisition for that order (usually the component that accounts for the greatest percentage of contract value).  If the small business represented it was small for that NAICS code at the time of the initial offer, including price, then it will be considered small for that order with the same NAICS code.

Certification and Recertification

Size status of a small business concern typically is determined on the date a business self-certifies its size status as part of its initial offer, including price.  With respect to agreements such as BPAs, Basic Ordering Agreements etc., the rule requires a small business to self-certify when it submits its proposal, including price, for the agreement.  The small business need not self-certify for orders issued pursuant to these agreements; however, the business must “qualify” as a small business in order to receive the order. The only exception to this rule is BPAs issued against GSA Schedule MACs.  Since small businesses must self-certify when they submit their proposal, including price for the GSA MAS contract, the small business does not need to also self-certify for any BPA issued against the schedule contract.

The final rule clarifies two issues with respect to recertification.  The current recertification rule clearly requires a business to recertify if it is acquired by or merged with another entity.  The final rule clarifies that recertification also is required when a small business acquires another entity.  The final rule also clarifies that recertification is required when a participant in a joint venture is involved in a merger or acquisition regardless of whether the participant is the acquired concern or the acquiring concern.

Limitations on Subcontracting

The final rule amends the limitation on subcontracting provisions in SBA’s current regulations.  For total or partial set-asides MACs, the small business contractor must meet the limitations on subcontracting performance of work requirements (and related nonmanufacturer rule requirements, if applicable) in each period of the contract (i.e., base year and each option year).  Where an order is set-aside for small business under a full and open MA or a MAC with a reserve, the small business contractor must comply with the limitations on subcontracting/nonmanufacturer rule for that order. A small business’ failure to comply with the limitations on subcontracting/nonmanufacturer rule will be reported by the contracting officer in its evaluation (in PPIRS) of the small business’ contract performance.

Bundling and Consolidation

The Small Business Jobs Act included provisions addressing the bundling and consolidation of contracts.  The final rule defines “consolidation” as the solicitation for a single contract or a MAC to satisfy two or more requirements of the federal agency for goods or services that had been provided to or performed for the federal agency under two or more separate contracts each of which was lower in cost that the total cost of the contract for which the offers are solicited, the total cost of which exceeds $2 million (including options).  Under the final rule, an agency may not conduct an acquisition that is a consolidation of contract requirements with a total value of more than $2 million unless the senior procurement executive or chief acquisition officer: (1) justifies the consolidation by showing that the benefits of the consolidated acquisition substantially exceed the benefits of each possible alternative approach that would involve a lesser degree of consolidation and (2) identifies the negative impact on small businesses.

The Small Business Jobs Act amended the Small Business Act to require agencies to publish on the Web a list of the agency’s bundled contracts and a rationale for each bundled contract.  The final rule encourages agencies to post the list and rationale for bundled contracts at least 30 days prior to the issuance of the bundled solicitation.

• The Small Business Act states that for bundled contracts, a small business concern may submit an offer that provides for the use of a particular team of subcontractors (prime/sub or joint venture) for the performance of the contract and the agency must evaluate the offer in the same manner as other offers.  The final rule states that if a small business forms a team for this purpose (i.e., enters into a Small Business Teaming Relationship), and each team member is small under the applicable size standard, the team will be considered small.   Generally, small businesses in a joint venture relationship are considered affiliated unless the joint venture meets certain conditions.  The Small Business Teaming Relationship (prime/sub or joint venture) must be in writing and submitted to the contracting officer as part of the proposal.  The exemption from affiliation only applies to Small Business Teaming Relationships formed to bid on bundled MACs.

The final rule is effective December 31, 2013.  However, in the final rule, SBA recognizes that many of the changes set forth therein will require many years to implement successfully, particular those changes addressing the application of NAICS codes to MACs and MAC orders.