One of Brian’s Favorite Quotes
How beautiful is death, when earn’d by virtue!”
Small Business Mentor Protégé Program; Small Business Size Regulations; Government Contracting Programs; 8(a) Business Development/Small Disadvantaged Business Status Determinations; HUBZone Program; Women-Owned Small Business Federal Contract Program; Rules of Procedure Governing Cases Before the Office of Hearings and Appeals
Definition of Joint Venture (13 CFR 121.103(h)).
This rule proposes to amend § 121.103(h) regarding the definition of what constitutes a joint venture for all of SBA’s programs. Currently, the rule recognizes that a joint venture may be an informal arrangement that exists between two (or more) parties through a written document, or may be a formal written arrangement existing as a separate legal entity. The current language has caused some confusion as to what an informal joint venture arrangement means. The proposed rule attempts to clarify SBA’s intent. As with the current regulation, the proposed rule explicitly requires that any joint venture be in writing. SBA never meant that an informal joint venture arrangement could exist without a formal written document setting forth the responsibilities of all parties to the joint venture. SBA merely intended to recognize that a joint venture need not be established as a limited liability company or other formal separate legal entity. The proposed rule attempts to clarify that distinction. In all instances where two (or more) parties execute a written document setting forth their responsibilities as joint venture partners, it is SBA’s view that the parties have formed a partnership. It may not be a formal partnership, but the responsibilities of the parties are as partners. The proposed rule specifies that a joint venture may be a formal or informal partnership or exist as a separate limited liability company or other separate legal entity. However, regardless of form, the joint venture must be reduced to a written agreement.
In addition, the proposed rule would specify that if a joint venture exists as a formal separate legal entity, it may not be populated with individuals intended to perform contracts awarded to the joint venture. This is a change from the current regulation which allows a separate legal entity joint venture to be unpopulated, to be populated with administrative personnel only, or to be populated with its own separate employees that are intended to perform contracts awarded to the joint venture. In the mentor-protégé joint venture context, if SBA continued to allow populated joint ventures, SBA is concerned that it will be difficult to definitively determine that a small protégé firm directly benefits from, and in fact controls, a joint venture with a large business mentor where that joint venture formed a limited liability company that hired its own employees to perform contracts for the joint venture. SBA believes that the benefits received by a protégé from a joint venture are more readily identifiable where the work done on behalf of the joint venture is performed by the protégé and the mentor separately. In such a case, it is much easier to determine that the protégé firm performed at least 40% of all work done by the joint venture, performed more than merely ministerial or administrative work, and otherwise gained experience that could be used to perform a future contract independently. Thus, the rule proposes to allow a separate legal entity joint venture to have its own separate employees to perform administrative functions, but not to have its own separate employees to perform contracts awarded to the joint venture.
SBA also requests comments regarding whether SBA should require all joint ventures formed under mentor-protégé agreements to be formed as separate legal entities. SBA believes that such a requirement would significantly enhance SBA’s ability to monitor and track awards to mentor-protégé joint ventures.
HUBZone Joint Ventures (13 CFR 126.616)
The HUBZone program is a community growth and development program in which businesses are incentivized to establish principal office locations in, and employ individuals from, areas of chronically high unemployment and/or low income in order to stimulate economic development. To further this purpose, the HUBZone program regulations currently permit a joint venture only between a HUBZone SBC and another HUBZone SBC. Joint ventures are not permitted with any non-HUBZone SBC. In authorizing a mentor-protégé relationship for HUBZone qualified SBCs, SBA considered whether this policy should be re-visited for joint ventures between HUBZone protégé firms and their SBA-approved mentors. SBA believes that if it continued to require that joint ventures in the HUBZone program could be between only two or more HUBZone qualified SBCs, then the business development assistance sought to be provided through the mentor-protégé program to HUBZone SBCs would be minimal. Large businesses and non-HUBZone small businesses would not be encouraged to participate in mentor-protégé relationships with HUBZone SBCs and HUBZone SBCs would not significantly benefit from such a program. For this reason, this rule proposes to allow joint ventures for HUBZone contracts between a HUBZone protégé firm and its mentor.
Under the proposed rule, the HUBZone program would be consistent with the other small business programs and would allow a joint venture between a qualified HUBZone SBC and one or more other SBCs. As with the other small business programs, the HUBZone SBC would be required to be the project manager and otherwise control the performance of a HUBZone joint venture contract. The joint venture would be required to perform the specified percentage of work of the contract, and the HUBZone firm would be required to perform at least 40% of the work done by the joint venture. SBA specifically requests comments as to whether allowing a joint venture between a HUBZone firm and a non-HUBZone firm (other than the HUBZone firm’s mentor) makes sense in light of the purposes of the HUBZone program.
SBA requests comments on whether the purposes of the HUBZone program would be appropriately served by allowing non-HUBZone firms to act as mentors and joint venture with protégé HUBZone firms, and whether SBA should allow any joint ventures with non-HUBZone firms.
Joint Venture Certifications and Performance of Work Reports (13 CFR 125.8, 125.18, 126.616, 127.506)
The proposed rule would require all partners to a joint venture agreement that perform a SDVO, HUBZone, WOSB/EDWOSB, or small business set-aside contract to certify to the contracting officer and SBA prior to performing any such contract that it will perform the contract in compliance with the joint venture regulations and with the joint venture agreement. In addition, the parties to the joint venture are required to report to the contracting officer and to SBA how they are meeting or have met the applicable performance of work requirements for each SDVO/HUBZone/WOSB/EDWOSB or small business set-aside contract they perform as a joint venture. Specifically, the joint venture must annually submit a report to the relevant contracting officer and to SBA certifying compliance with the regulations and joint venture agreement, and explaining how the performance of work requirements are being met, and once the contract is completed, a report certifying compliance and explaining how the performance of work requirements were met for the contract (see proposed § 125.8(h) for joint ventures between small business protégés and their SBA-approved mentors, proposed § 125.18(b)(8) for SDVO SBCs, proposed § 126.616(i) for HUBZone SBCs, and proposed § 127.506(j) for WOSBs/EDWOSBs). For SDVO SBCs, HUBZone SBCs, and WOSBs/EDWOSBs, this requirement would apply to all joint ventures.
SBA believes that joint ventures permitted by SBA’s regulations must benefit small businesses, and must not be used as vehicles to allow companies to fraudulently or improperly benefit from SBA contracting programs. The required certifications will help to ensure accountability within these programs, and assist the Government’s ability to deter wrongdoing through criminal and civil fraud prosecutions as well as other administrative remedies such as suspension and debarment. In this regard, the proposed rule would specify that the Government may consider the failure to comply with the joint venture regulations or to submit the required certifications and reports to be a ground for suspension or debarment.
Tracking Joint Venture Awards
SBA also believes that it is important to be able to track awards to the joint ventures permitted by SBA’s regulations, and is considering various methods of tracking awards. Possible approaches include: requiring all joint ventures permitted by these regulations to include in their names “small business joint venture,” and if a mentor-protégé joint venture to include in their names “mentor-protégé small business joint venture;” requiring contracting officers to identify awards as going to small business joint ventures or to mentor-protégé small business joint ventures; requiring SBCs to amend their System for Award Management (SAM) entries to specify that they have formed a joint venture; requiring each joint venture to get a separate DUNS number; or a combination of all of these actions. Ensuring that governmental agencies and members of the public can track joint venture awards will promote transparency and accountability, and thereby deter fraudulent or improper conduct, and promote compliance with SBA’s regulations. SBA seeks comments from interested parties on how best to accomplish this and whether these alternatives should be implemented in a final rule.
Applications for SBA’s Small Business Mentor-Protégé Program (13 CFR 125.9)
As noted above, SBA has proposed implementing one universal small business mentor-protégé program instead of a separate mentor-protégé program for each type of small business (i.e., HUBZone, SDVO, WOSB, and small business). In addition, the proposed rule would continue to authorize SBA’s separate mentor-protégé program for eligible 8(a) BD Program Participants. A small business seeking a mentor-protégé relationship would be required to submit information to SBA in accordance with this proposed rule. SBA’s Director of Government Contracting (D/GC) would review and either approve or decline small business mentor-protégé agreements. SBA’s Associate Administrator for BD (AA/BD) would continue to review and approve or decline mentor-protégé relationships in the 8(a) BD program. An eligible 8(a) BD Program Participant could choose to seek SBA’s approval of a mentor-protégé relationship through the 8(a) BD program, or could seek a small business mentor-protégé relationship through SBA’s D/GC. As noted above, SBA is considering having one office review and either approve or decline all mentor-protégé agreements to ensure consistency in the process, and specifically seeks comments as to whether that approach should be implemented.
SBA is uncertain of the number of various small businesses that will seek a mentor-protégé relationship through SBA once these regulations are finalized. If the number of firms seeking SBA to approve their mentor-protégé relationships becomes unwieldy, SBA may institute certain “open” and “closed” periods for the receipt of further mentor-protégé applications. In such a case, SBA would then accept mentor-protégé applications only in “open” periods.
Under the proposed small business mentor-protégé program, any for-profit business concern that demonstrates a commitment and the ability to assist small business concerns may be approved to act as a mentor and receive the benefits of the mentor-protégé relationship. Pursuant to the authority contained in the NDAA, SBA is attempting to make the small business mentor-protégé program identical to the 8(a) mentor-protégé program. Specifically, section 45(a)(2) of the Small Business Act, 15 U.S.C. 657r(a)(2), which was added by section 1641 of the NDAA, requires the mentor-protégé program for small businesses to be “identical to the [8(a)] mentor-protégé program . . . as in effect on the date of enactment of this section. . . ” Although the current rules for the 8(a) mentor-protégé program allow non-profit entities to act as mentors, this rule proposes to not allow non-profit mentors (i.e., to require mentors to be for-profit business concerns) for the small business mentor-protégé program due to the definition of the term mentor contained in the NDAA. In this regard, section 1641 of the NDAA added section 45(d)(1) of the Small Business Act, 15 U.S.C. 657r(d)(1), which defines the term mentor to be “a for-profit business concern of any size.” These two provisions of the NDAA are in conflict. The small business mentor-protégé program cannot be “identical” to the current 8(a) mentor-protégé program while at the same time excluding non-profit entities from being mentors. Because the NDAA definition may be read to apply only to the small business mentor-protégé program, and not the 8(a) BD mentor-protégé program (or to mentor-protégé programs for SDVOs, HUBZone SBCs, or WOSBs if SBA had chosen to implement separate mentor-protégé programs under the Jobs Act authority), SBA could have prohibited non-profit mentors only in the small business mentor-protégé program. SBA has not done that in this proposed rule because SBA seeks to have as much consistency between the various programs as possible. As such, this rule proposes not to allow non-profit mentors in any mentor-protégé program, including the 8(a) mentor-protégé program. For the 8(a) mentor-protégé program, this definition requires, and this rule proposes, a change to the current 8(a) regulations. See proposed § 124.520(b)(2).
Generally, a mentor participating in any SBA-approved mentor-protégé program will have no more than one protégé at a time. However, SBA may authorize a concern to mentor more than one protégé at a time where it can demonstrate that the additional mentor-protégé relationship will not adversely affect the development of either protégé firm (e.g., the second firm may not be a competitor of the first firm). Under no circumstances will a mentor be permitted to have more than three protégés in the aggregate at one time under either of the mentor-protégé programs authorized by § 124.520 or § 125.9. A mentor may choose to have: up to three protégés in the 8(a) BD program; or up to three protégés in the small business program; or one or more protégés in one program and one or more in another program, but no more than three protégés in the aggregate. In proposing this limitation, SBA did not believe it was good policy to allow one large business mentor to conceivably have up to three protégés in each of the two programs, or a total of possibly six protégé firms. If that were allowed, large businesses might benefit more from small business programs than the intended beneficiaries, the small business proteges. In reviewing a mentor-protégé agreement where a mentor has more than one protégé, SBA will determine whether the mentor has demonstrated that its protégés will not compete against each other.
In addition, consistent with the 8(a) mentor-protégé program, a protégé in the small business mentor-protégé program may not become a mentor and retain its protégé status. The protégé must terminate the mentor-protégé agreement with its mentor before it will be approved as a mentor to another small business concern. SBA requests comments regarding whether this policy makes sense in the small business mentor-protégé program, whether it continues to make sense in the 8(a) mentor-protégé program, or whether a firm should be permitted to be both a protégé and mentor in both programs in appropriate circumstances.
Protégés (13 CFR 124.520 and 125.9)
Currently, in order to qualify as a protégé for the 8(a) BD mentor-protégé program, an 8(a) Program Participant must: have a size that is less than half the size standard corresponding to its primary NAICS code; or be in the developmental stage of its 8(a) program participation; or not have received an 8(a) contract. There is no doubt that the second and third reasons permitting a firm to qualify as a protégé in the 8(a) BD mentor-protégé program (i.e., the firm must be in the developmental stage of its 8(a) participation, or the firm has not received an 8(a) contract) do not apply to a separately authorized small business mentor-protégé program. As such, SBA immediately eliminated those bases from consideration as criteria to qualify a protégé for the small business mentor-protégé program. The question then becomes whether these criteria continue to make sense in the 8(a) BD program. The 8(a) BD mentor-protégé program was designed to be an additional tool to assist in the business development of 8(a) BD Program Participants. Although it is true that the three types of firms identified as eligible to qualify as a protégé in the 8(a) BD mentor-protégé program would be the firms in most need of business development assistance, SBA questions whether 8(a) BD Participants that do not meet one of those three criteria could also substantially benefit from participating as a protégé in a mentor-protégé program. A Participant may have a size that slightly exceeds one-half the size standard corresponding to its primary NAICS code, be in its first year of the transitional stage of program participation, and have received one small 8(a) contract. Currently, that firm would be ineligible to be a protégé in the 8(a) BD program, even though it could substantially benefit from the assistance provided by a mentor and might not otherwise be able to advance its business development beyond its current level. And, considering that an 8(a) BD Participant that was not in the developmental stage of program participation or had received an 8(a) contract could nevertheless qualify as a protégé under the small business mentor-protégé program, SBA believes that it makes sense to have consistent rules between the mentor-protégé programs and, therefore, is proposing to eliminate those restrictions on qualifying as a protégé for the 8(a) BD mentor-protégé program as well.
SBA then considered whether the final restriction to qualify as a protégé for the 8(a) BD mentor-protégé program (i.e., the requirement that a firm be less than half the size standard corresponding to its primary NAICS code) continues to make sense in the 8(a) BD program, whether it makes sense for the new small business mentor-protégé program, and if not, what, if any, restriction should be imposed in its place. SBA recognizes that many small businesses may need some specific form of business development assistance, and that a mentor-protégé program may be the best vehicle for the small business to obtain such assistance. In addition, many small businesses may lack the tools necessary to advance to the next level. As such, this rule proposes to allow any firm that qualifies as a small business for the size standard corresponding to its primary NAICS code to also qualify as a protégé in either the small business or 8(a) BD mentor-protégé program. In the 8(a) BD program, however, the firm would also have to demonstrate how the business development assistance to be received through its proposed mentor-protégé relationship would advance the goals and objectives set forth in its business plan.
Although SBA has proposed to eliminate the less than half the size standard requirement from the 8(a) BD mentor-protégé program and not apply it to the small business mentor-protégé program, SBA specifically requests comments as to whether the focus of a mentor-protégé program should be restricted to smaller firms or whether, as proposed, the benefits of a mentor-protégé program should be open to any firm that qualifies as small.
A protégé participating in either of the mentor-protégé programs generally will have no more than one mentor at a time. However, a protégé may have two mentors where the two relationships will not compete or otherwise conflict with each other and the protégé demonstrates that the second relationship pertains to an unrelated, secondary NAICS code, or the first mentor does not possess the specific expertise that is the subject of the mentor-protégé agreement with the second mentor. SBA asks for comments regarding whether there should be a maximum of two mentors per protégé or another maximum.
SBA wants to ensure that only firms that truly qualify as small businesses under their primary NAICS code participate as protégés in the small business mentor-protégé program. Unlike the 8(a) BD program (where firms apply and SBA affirmatively certifies firms as eligible to participate in the program), there is no formal process by which a firm is certified as a “small” business. Status as a small business is based on a firm’s self-certification, and SBA understands that some firms may in good faith believe that they qualify as small but may not fully understand all of the affiliation issues required to be considered small. To ensure that only qualified firms participate as protégé firms, the proposed rule would require that SBA verify that a firm qualifies as a small business before approving that firm to act as a protégé in a small business mentor-protégé relationship. See proposed § 125.9(c)(1). Only those firms that are affirmatively determined to be small businesses and have not received a negative determination from SBA pursuant to a size protest may qualify as a protégé. SBA proposes that this affirmative determination may take place either as part of a firm’s request for participation in the small business mentor-protégé program, or as part of a size protest determination prior to that time. Where SBA previously found a firm to qualify as small as part of a formal size determination or size appeal, the firm would be required to certify that there has been no change in its small business status since that determination. In addition, for the two self-certification programs (SDVO and WOSB), SBA may examine status eligibility as part of its protégé approval process.
Mentor-Protégé Programs of Other Departments and Agencies (13 CFR 125.10)
As noted above, section 1641 of the NDAA provided that a Federal department or agency cannot carry out its own agency specific mentor-protégé program for small businesses unless the head of the department or agency submitted a plan for such a program to SBA and received the SBA Administrator’s approval of the plan. The NDAA specifically excluded the Department of Defense’s mentor-protégé program, but included all other current mentor-protégé programs of other agencies. Under its provisions, a department or agency that is currently conducting a mentor-protégé program (except the Department of Defense) may continue to operate that program for one year but must then go through the SBA approval process in order for the program to continue after one year. Thus, in order to continue to operate any current mentor-protégé program beyond one year after SBA’s mentor-protégé regulations are final, each department or agency would be required to obtain the SBA Administrator’s approval. These statutory provisions are proposed to be implemented in new § 125.10 of SBA’s regulations.
Finally, proposed § 125.10(d) would implement statutory reporting requirements imposed on each Federal department or agency that has its own mentor-protégé program. Specifically, the head of each Federal department or agency carrying out an agency-specific mentor-protégé program would be required to report annually to SBA the participants in its mentor-protégé program (broken out by various small business categories), the assistance provided to small businesses through the program, and the progress of protégé firms to compete for Federal prime contracts and subcontracts. These proposed changes may require corresponding revisions to agency contract reporting systems and the Government’s contract reporting system, FPDS-NG.
Because the SBA’s 8(a) BD and small business mentor-protégé programs will apply to all Government small business contracts, and thus to all Federal departments and agencies, conceivably other agency-specific mentor-protégé programs for small business would not be needed. For example, SBA notes that the Department of Veterans Affairs (VA) has separate Veteran-Owned Small Business (VOSB) and Service-Disabled Veteran-Owned Small Business (SDVOSB) mentor-protégé programs. Although this proposed rule would establish a government-wide small business mentor-protégé program, it would not establish mentor-protégé programs specific to either VOSBs or SDVOSBs. The question becomes whether either of those separate mentor-protégé programs would be necessary after SBA’s small business mentor-protégé program is established. A VOSB or SDVOSB could obtain a small business mentor-protégé relationship through SBA and then participate in programs specific to VA if VA determined that the firm did indeed qualify as a VOSB or an SDVOSB under VA’s rules. SBA requests comments as to whether the VA’s VOSB and SDVO mentor-protégé programs should continue after the one-year grace period expires.
SBA also specifically requests comments on whether there would be a continuing need for other small business mentor-protégé programs once SBA’s various mentor-protégé programs are implemented. SBA understands that many of the agency-specific mentor-protégé programs incentivize mentors to utilize their protégés as subcontractors. For instance, some agencies provide additional evaluation points to a large business submitting an offer on an unrestricted procurement where the business has an active mentor-protégé agreement, where the business has used the protégé firm as a subcontractor previously, or where the mentor and protégé are submitting an offer as a joint venture. In addition, some mentor-protégé programs give additional credit to a large business mentor toward its subcontracting plan goals when the mentor uses the protégé as a subcontractor on the mentor’s prime contract(s) with the given agency. SBA’s mentor-protégé programs assume more of a prime contractor role for protégés, but would also encourage subcontracts from mentors to protégés as part of the developmental assistance that protégés receive from their mentors. Because one or more mentor-protégé programs of other agencies ultimately may not be continued after SBA’s various mentor-protégé programs are finalized, SBA requests comments as to whether the subcontracting incentives authorized by mentor-protégé programs of other agencies should specifically be incorporated into SBA’s mentor-protégé programs.
Benefits of Mentor-Protégé Relationships (13 CFR 124.520 and 125.9)
As with the 8(a) BD program, under the proposed small business mentor-protégé program, a protégé may joint venture with its SBA-approved mentor and qualify as a small business for any Federal government contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement. In revising its 8(a) regulations in 2011, SBA considered allowing the exclusion from affiliation between a protégé and its mentor to apply only to 8(a) contracts. Comments to SBA’s proposed 8(a) rule argued that 8(a) protégé firms receive important developmental benefits in performing non-8(a) contracts and that many of these benefits would be missed if a protégé could not joint venture with a large business mentor. SBA agreed and decided to continue to allow the exclusion from affiliation for all contracts so that a joint venture between a protégé in the 8(a) BD program and its mentor equally qualifies as small for 8(a) and non-8(a) contracts so long as the protégé qualifies as small. That same rationale has been applied in this proposed rule to the small business mentor-protégé program. This means that a joint venture between a protégé and its approved mentor in the small business mentor-protégé program would be deemed to be a small business concern for any Federal contract or subcontract. It does not mean that such a joint venture affirmatively qualifies for any other small business program. For example, a joint venture between a small business protégé firm and its SBA-approved mentor would be deemed a small business concern for any Federal contract or subcontract for which the protégé qualified as small, but the joint venture would not qualify for a contract reserved or set-aside for eligible 8(a) BD, HUBZone SBCs, SDVO SBCs or WOSBs/EDWOSBs unless the protégé firm met those program-specific requirements as well.
Consistent with the 8(a) BD program, the proposed rule would permit a mentor to a small business to own an equity interest of up to 40% in the protégé firm in order to raise capital for the protégé firm. See proposed § 125.9(d)(2). SBA requests comments on whether this 40% ownership interest should be a temporary interest, being authorized only as long as the mentor-protégé relationship exists, or whether it should be able to survive the termination of the mentor-protégé relationship. Although the proposed rule allows the ownership interest to survive the termination of a mentor-protégé relationship, SBA is concerned that such a rule may allow far-reaching influence by large businesses that act as mentors and enable them to receive long-term benefits from programs designed to assist only small businesses.
Written Mentor-Protégé Agreement (13 CFR 124.520 and 125.9)
The proposed rule requires that all mentor-protégé agreements be in writing, identifying specifically the benefits intended to be derived by the projected protégé firms. Under the proposed rule, SBA must approve any mentor-protégé agreement prior to the firms receiving any benefits through the mentor-protégé program. SBA will not approve the agreement if SBA determines that the assistance to be provided is not sufficient to promote any real developmental gains to the protégé, or if SBA determines that the agreement is merely a vehicle to enable the mentor to receive small business contracts. The proposed rule would also require a firm seeking approval to be a protégé in either the 8(a) BD or small business mentor-protégé programs to identify any other mentor-protégé relationship it has through another federal agency or SBA and provide a copy of each such mentor-protégé agreement to SBA. The mentor-protégé agreement submitted to SBA for approval must identify how the assistance to be provided by the proposed mentor is different from assistance provided to the protégé through another mentor-protégé relationship, either with the same or a different mentor. For example, if a firm is a protégé in a mentor-protégé relationship approved by another agency and seeks to enter a mentor-protégé relationship with the same mentor firm through one of SBA’s programs, it cannot merely duplicate the same mentor-protégé agreement. It must demonstrate that the assistance to be provided to the protégé firm is different and in addition to the assistance provided to the firm through the other mentor-protégé relationship.
SBA requests comments regarding whether SBA should consider limiting its review and approval of mentor-protégé agreements to a certain timeframe each year (i.e., allow submissions of agreements only during certain specified months), or allow submissions of agreements at any time, but limit the number of mentor-protégé agreements it will review and/or approve each year.
The proposed rule also provides that SBA will review a mentor-protégé relationship annually to determine whether to approve its continuation for another year. SBA will evaluate the relationship and determine whether the mentor provided the agreed-upon business development assistance, and whether the assistance provided appears to be worthwhile. SBA proposes to limit the duration of a mentor-protégé agreement to three years. The proposed rule also permits a protégé to have one three-year mentor-protégé agreement with one entity and one three-year mentor-protégé agreement with another entity, or two three-year mentor-protégé agreements (successive or otherwise) with the same entity. SBA invites comments regarding whether three years is an appropriate length of time and whether SBA should allow a mentor and protégé to enter into an additional mentor-protégé agreement upon the expiration of the original agreement.
In addition, SBA proposes to add clarifying language not currently contained in the 8(a) mentor-protégé regulations authorizing the continuation of a mentor-protégé relationship where control or ownership of the mentor changes during the term of the mentor-protégé agreement. Specifically, the proposed rule would provide (for the 8(a) BD and small business mentor-protégé programs) that if control of the mentor changes (through a stock sale or otherwise), the previously approved mentor-protégé relationship may continue provided that, after the change in control, the mentor expresses in writing to SBA that it acknowledges the mentor-protégé agreement and that it continues its commitment to fulfill its obligations under the agreement. This is current SBA policy for the 8(a) BD program, but SBA believes that setting it forth in the regulatory text would eliminate any confusion.
Size of 8(a) Joint Venture (13 CFR 124.513)
The proposed rule would amend § 124.513 to clarify that interested parties may protest the size of an SBA-approved 8(a) joint venture that is the apparent successful offeror for a competitive 8(a) contract. This change alters the rule expressed in Size Appeal of Goel Services, Inc. and Grunley/Goel Joint Venture D LLC, SBA No. SIZ-5320 (2012), which concluded that the size of an SBA-approved 8(a) joint venture could not be protested because SBA had, in effect, determined the joint venture to qualify as small when it approved the joint venture pursuant to § 124.513(e). Approval of a joint venture by its Office of Business Development should not immunize the awardee of an 8(a) competitive contract from a size protest. This revision would make clear that unsuccessful offerors on a competitive 8(a) set aside contract may challenge the size of an apparently successful joint venture offeror.
Establishing Social Disadvantage for the 8(a) BD Program (13 CFR 124.103)
The proposed rule would amend § 124.103(c) to clarify that an individual claiming social disadvantage must present a combination of facts and evidence which by itself establishes that the individual has suffered social disadvantage that has negatively impacted his or her entry into or advancement in the business world. This change would alter the rule expressed in several SBA OHA decisions that allowed an individual to establish social disadvantage despite the record lacking sufficient evidence supporting a discriminatory basis for the alleged misconduct. See Matter of Tootle Construction, LLC, SBA No. BDP-420 (2012), StretegyGen Co., SBA No. BDPE-460 (2012). SBA believes that the burden of establishing eligibility for the 8(a) BD program is on the applicant. Absent any facts or statements as to the qualifications of the individual claiming social disadvantage or those of another individual offered as evidence of discrimination in a statement, it is no more likely that an action or inaction was based on discriminatory conduct than it was based on a legitimate alternative reason. The individual claiming social disadvantage bears the burden of making his or her claims of social disadvantage more likely than possible non-discriminatory reasons for the same outcomes by providing additional facts.
As such, the proposed rule clarifies that SBA may disregard a claim of social disadvantage where a legitimate alternative ground for an adverse action exists and the individual has not presented evidence that would render his/her claim any more likely than the alternative ground. It is the responsibility of the applicant to establish all aspects of eligibility. A statement that a male co-worker received higher compensation or was promoted over a woman does not amount to an incident of social disadvantage by itself.
In addition, when SBA asks for evidence corroborating an individual’s claims of social disadvantage, what SBA is really requesting is for the individual to provide additional facts to make his or her claims of discriminatory conduct more likely than possible non-discriminatory reasons for the same outcomes. Because SBA usually has no way to verify the statements made by an individual claiming social disadvantage, and SBA recognizes that documentary evidence is often not available to support the statements, it is vitally important that the narrative contain sufficient detail (i.e., names, dates, location or other specific details) in order to be credible. To constitute sufficient detail to establish social disadvantage, the description of the individual’s claims of discriminatory conduct must generally include: (1) when and where the discrimination occurred; (2) who committed the discrimination; (3) how the discrimination took place; and (4) how the individual was adversely affected by such acts. See
Ace Technical, SBA No. SDBA-178, at 4-5 (2008) (citing Matter of Seacoast Asphalt Servs., Inc., SBA No. SDBA-151, at 8 (2001)).
In addition, SBA maintains that it needs the discretion to request corroborating evidence in certain circumstances. Such requests do not raise the evidentiary burden placed on an 8(a) applicant above the preponderance of the evidence standard. SBA is not seeking definitive proof, but rather additional facts to support the claim that a negative outcome (e.g., failure to receive a promotion or needed training) was based on discriminatory conduct instead of one or more legitimate non-discriminatory reasons. SBA expects an individual claiming social disadvantage to provide the level of detail consistent with someone with first-hand knowledge of the discriminatory conduct claimed. The proposed rule would add language to the regulations to specifically recognize SBA’s right to seek corroborating evidence where appropriate.
Finally, the proposed rule would clarify that each instance of alleged discriminatory conduct must be accompanied by a description of the negative impact of the conduct on the individual’s entry into or advancement in the business world in order for it to constitute an instance of social disadvantage. This clarification would alter the rule expressed in Matter of Bartkowski Life Safety Corp., SBA No. BDPE-516 (2014), in which OHA ruled that “a petitioner’s claims can each be offered as evidence of social disadvantage, negative impact, or both.” SBA maintains that each claim of discriminatory conduct or bias experienced by an individual must also include negative impact on the individual’s entry into or advancement in the business world in order for it to constitute an instance of social disadvantage within the meaning of SBA’s regulations. This proposed change clarifies that point.
Substantial Unfair Competitive Advantage Within an Industry Category (13 CFR 124.109, 124.110, and 124.111)
Pursuant to section 7(j)(10)(J)(ii)(II) of the Small Business Act, 15 U.S.C. 636(j)(10)(J)(ii)(II), “[i]n determining the size of a small business concern owned by a socially and economically disadvantaged Indian tribe (or a wholly owned business entity of such tribe) [for purposes of 8(a) BD program entry and 8(a) BD contract award], each firm’s size shall be independently determined without regard to its affiliation with the tribe, any entity of the tribal government, or any other business enterprise owned by the tribe, unless the Administrator determines that one or more such tribally owned business concerns have obtained, or are likely to obtain, a substantial unfair competitive advantage within an industry category.” For purposes of the 8(a) BD program, the term “Indian tribe” includes any Alaska Native village or regional or village corporation (within the meaning of the Alaska Native Claims Settlement Act). 15 U.S.C. 637(a)(13). SBA’s regulations have extended this broad exclusion from affiliation to the other entity-owned firms authorized to participate in the 8(a) BD program (i.e., firms owned by Native Hawaiian Organizations (NHOs) and Community Development Corporations (CDCs)). See §§ 124.109(a), 124.109(c)(2)(iii), 124.110(b), and 124.111(c). This proposed rule will provide guidance as to how SBA will determine whether a firm has obtained or is likely to obtain “a substantial unfair competitive advantage within an industry category.”
First, in determining how best to define the term “industry category,” SBA considered how it has defined other similar terms in its regulations. In this regard, § 124.3 defines “primary industry classification” to mean “the six digit North American Industry Classification System (NAICS) code designation which best describes the primary business activity of the 8(a) BD applicant or Participant.” Further, § 124.109(c)(3)(ii) defines the “same primary NAICS code” to mean the six digit NAICS code having the same corresponding size standard. SBA believes that it makes sense to apply this same limitation when defining an industry category. Thus, the proposed rule would provide that an entity-owned business concern is not subject to the broad exemption to affiliation set forth in 13 CFR part 124 where one or more entity-owned firms are found to have obtained, or are likely to obtain, a substantial unfair competitive advantage in a particular NAICS code with a particular size standard.
In addition, SBA believes that entity-owned concerns may be found affiliated only if they have obtained, or are likely to obtain, a substantial unfair competitive advantage within a particular industry category on a national scale. Because NAICS codes and their associated size standards are established on a national basis, it is reasonable to conclude that Congress intended SBA to look at “an industry category” nationally to determine whether a particular firm has obtained or is likely to obtain a substantial unfair competitive advantage. In making this assessment, SBA will consider a firm’s percentage share of the national market and other relevant factors to determine whether a firm is dominant in a specific six-digit NAICS code with a particular size standard. SBA anticipates that it will review Federal Procurement Data System data to compare the firm’s share of the industry as compared to overall small business participation in that industry to determine whether there is a an unfair competitive advantage. The proposed rule does not contemplate a finding of affiliation where an entity-owned concern appears to have obtained an unfair competitive advantage in a local market, but remains competitive, but not dominant, on a national basis.
Management of Tribally-Owned 8(a) Program Participants (13 CFR 124.109)
The proposed rule would add language to § 124.109(c)(4) specifying that the individuals responsible for the management and daily operations of a tribally-owned concern cannot manage more than two Program Participants at the same time. This language is taken directly from section 7(j)(11)(B)(iii)(II) of the Small Business Act (15 U.S.C. 636(j)(11)(B)(iii)(II)), but did not also appear in SBA’s 8(a) BD regulations. SBA believes it is necessary to incorporate this provision into the regulations to more fully apprise tribally-owned 8(a) applicants and Participants of the control requirements applicable to them.
Native Hawaiian Organizations (NHOs) (13 CFR 124.110)
The proposed rule would add language to § 124.110(d) to clarify the control requirements applicable to NHO-owned firms for 8(a) BD program participation. Specifically, the rule would clarify that the members or directors of an NHO need not have the technical expertise or possess a required license to be found to control an applicant or Participant owned by the NHO. Rather, the NHO, through its members and directors, must merely have managerial experience of the extent and complexity needed to run the concern. As with individually owned 8(a) applicants and Participants, individual NHO members may be required to demonstrate more specific industry-related experience in appropriate circumstances to ensure that the NHO in fact controls the day-to-day operations of the firm. This would be particularly true where a non-disadvantaged owner (or former owner) who has experience related to the industry is actively involved in the day-to-day management of the firm.
Proposed § 124.110(g) would clarify that an NHO-owned firm’s eligibility for 8(a) BD participation is separate and distinct from the eligibility of individual members, directors or managers. As such, an individual Hawaiian Native who previously qualified his or her own business for 8(a) BD participation could be counted as a Native Hawaiian for NHO eligibility and could use his or her individual economic disadvantage to help qualify the NHO as economically disadvantage even if he or she previously used his or her disadvantaged status to qualify an individually-owned 8(a) applicant or Participant.
Finally, although the rule does not propose to change the way in which SBA determines whether an NHO is economically disadvantaged, SBA specifically requests comments regarding whether an alternative approach is more suitable. Section 8(a)(4)(A) of the Small Business Act, 15 U.S.C. 637(a)(4)(A), requires that an NHO be economically disadvantaged in order to establish 8(a) eligibility for a concern owned by the NHO. Neither the statute nor its legislative history provide any guidance on how to determine whether an NHO is economically disadvantaged. Currently, § 124.110(c)(1) provides that in determining whether an NHO is economically disadvantaged, SBA will look at the individual economic status of the NHO’s members. The NHO must establish that a majority of its members qualify as economically disadvantaged under the rules that apply to individuals as set forth in § 124.104. SBA has received several inquiries from NHOs asking if this is the most sensible approach to establishing economic disadvantage. They have recommended that NHOs establish economic disadvantage in the same way that tribes currently do so for the 8(a) BD program: that is, by providing information relating to members, including the tribal unemployment rate, the per capita income of tribal members, and the percentage of tribal members below the poverty level. SBA asks for specific comments as to whether SBA should adopt for NHOs the same criteria used for determining whether a tribe is economically disadvantaged. One of the concerns SBA has in adopting such an approach is how to define the community for an NHO that would correspond to the tribal population for a specific tribe. Would the same Native Hawaiian community be used to establish the economic disadvantage of each NHO? If so, would that diminish the entire economic disadvantage requirement for NHOs? After reviewing comments received in response to this issue, SBA will determine how best to proceed in a final rule.
Change in Primary Industry Classification (13 CFR 124.112)
On February 11, 2011, SBA published a final rule in the Federal Register implementing comprehensive revisions to its 8(a) BD program. 76 FR 8221. Included within these revisions was an amendment to the definition of the term “primary industry classification” and provisions authorizing an 8(a) Participant to change its primary industry classification where it can demonstrate to SBA that the majority of its total revenues during a three-year period have evolved from one NAICS code to another. The supplementary information to that final rule stated that it was not SBA’s intent that SBA would be able to change a firm’s primary NAICS code on its own. 76 FR 8221. At that time, SBA did not recognize a need to require a Participant to change the primary industry classification contained in its business plan. SBA’s views have changed. In the context of an entity-owned Participant, SBA believes that it needs to have to ability to change the Participant’s primary industry classification in appropriate circumstances. An entity-owned applicant to the 8(a) BD program (i.e., one owned by an Indian tribe, Alaska Native Corporation (ANC), Native Hawaiian Organization (NHO), or Community Development Corporation (CDC)) cannot own more than 49% of another firm which, either at the time of application or within the previous two years, has been participating in the 8(a) BD program under the same primary NAICS code as the applicant. As such, an entity-owned applicant must select a primary business classification (as represented by a six digit NAICS code) that is different from the primary business classification of any other Participant owned by that same entity. After being certified to participate in the 8(a) BD program, however, there is no current requirement that the newly admitted Participant actually perform most, or any, work in the six digit NAICS code selected as its primary business classification in its application. SBA believes that this inconsistency could permit a firm to circumvent the intent of SBA’s regulations by selecting a primary business classification that is different from the primary business classification of any other Participant owned by that same entity merely to get admitted to the 8(a) BD program, and then performing the majority, or even all, of its work in the identical primary NAICS code as another Participant owned by the entity. In order to make the regulations more consistent, this rule proposes to allow SBA to change the primary industry classification contained in a Participant’s business plan where the greatest portion of the Participant’s total revenues during a three-year period have evolved from one NAICS code to another. See proposed § 124.112(e). The proposed language is not intended to imply that revenues from its primary NAICS code must account for at least 50% of the firm’s total revenues, but rather that revenues from its primary NAICS code must exceed revenues generated from any other NAICS code. The proposed language also provides discretion to SBA in deciding whether to change a Participant’s primary industry classification because SBA recognizes that whether the greatest portion of a firm’s revenues is derived from one NAICS code, as opposed to one or more other NAICS codes, is a snapshot in time that is ever changing. The proposed rule would require SBA to notify the Participant of its intent to change the Participant’s primary industry classification and afford the Participant the opportunity to submit information explaining why such a change would be inappropriate. Where the Participant provides information demonstrating that it has received one or more additional contracts in its primary NAICS code since the end of its most recently completed fiscal year, and such revenue would cause the revenue from its primary NAICS code to exceed the revenue generated from any other NAICS code, SBA would not change the Participant’s primary industry classification. Where the revenue generated under its primary NAICS code is close to but less than the revenue generated under another NAICS code, the Participant can demonstrate that it has made good faith efforts to obtain contracts in its primary NAICS code. For example, where a Participant details contract opportunities under its primary NAICS code that it submitted offers for in the last year, but was not successful in winning, and its concrete plans to continue to seek additional opportunities in that NAICS code, SBA may not change the Participant’s primary industry classification. SBA requests comments on whether a change in primary industry should instead be automatic, based on FPDS data.
8(a) BD Program Suspensions (13 CFR 124.305)
SBA is also proposing to add two additional bases for allowing a Participant to elect to be suspended from 8(a) BD program participation: where the Participant’s principal office is located in an area declared a major disaster area or where there is a lapse in Federal appropriations.
President Obama signed an Executive Order on December 7, 2012 creating the Hurricane Sandy Rebuilding Task Force. The President charged the Task Force with identifying and working to remove obstacles to rebuilding while taking into account existing and future risks and promoting the long-term sustainability of communities. The Final Task Force Implementation Plan made 69 recommendations to implement an effective Rebuilding Strategy, including several relating to small business. In particular, the Task Force recommended authorizing 8(a) BD program suspensions for Participants located in major disaster areas. The Task Force specifically recommended that, upon the request of a certified 8(a) firm in a major declared disaster area, SBA will suspend the eligibility of the firm for up to a one year period while they recover from the disaster to ensure they are able to take full advantage of the 8(a) BD program, rather than being impacted by lack of capacity or contracting opportunities due to disaster-induced disruptions. During such a suspension, a Participant would not be eligible for 8(a) BD Program benefits, including set-asides, however, but would not “lose time” in its program term due to the extenuating circumstances wrought by a disaster. This rule proposes to implement that recommendation into SBA’s 8(a) BD regulations.
In addition, SBA proposes to allow a firm-initiated suspension where there is a lapse in Federal appropriations that could adversely affect a Participant’s ability to be awarded one or more 8(a) contracts. The need for such a suspension was brought to light during the Government shutdown at the beginning of fiscal year 2014. During the lapse of federal appropriations at the end of fiscal year 2013, several Program Participants’ term of participation in the 8(a) program ended, and they were unable to finalize 8(a) contracts because there was no funding during the shutdown and they were no longer in the 8(a) BD program (because their term of program participation had ended) by the time the shutdown ended and appropriations were available. Therefore, this rule proposes to allow a Participant to elect to suspend its participation in the 8(a) BD program where: Federal appropriations for one or more federal departments or agencies have expired without being extended via continuing resolution or other means and no new appropriations have been enacted (i.e., during a lapse in appropriations); SBA has previously accepted an offer for a sole source 8(a) award on behalf of the Participant; and award of the 8(a) sole source contract is pending. A Participant could not elect a partial suspension of 8(a) BD program benefits; if it elects to be suspended during a lapse in Federal appropriations, the Participant would be ineligible to receive any new 8(a) BD program benefits during the suspension. For example, if Department X was funded during a partial Government shutdown but Agency Y was not, a Participant could not elect to be suspended for purposes of executing 8(a) contracts with Agency Y, but not be suspended for purposes of executing 8(a) contracts with Department X. The suspension would start immediately upon the date requested by a Participant and would last the length of the lapse in Federal appropriations. However, once the Government is fully funded and the suspension is lifted, the contracts from both Department X and Agency Y could be finalized.
Benefits Reporting Requirement (13 CFR 124.602)
The proposed rule amends the time frame for the reporting of benefits for entity-owned Participants in the 8(a) BD program. SBA’s current regulations require an entity-owned Participant to report benefits as part of its annual review submission. See § 124.604. SBA believes it is more appropriate that this information be submitted as part of a Participant’s submission of its annual financial statements pursuant to § 124.602. SBA wants to make clear that benefits reporting should not be tied to continued eligibility, as may be assumed where such reporting is part of SBA’s annual review analysis. In response to comments to the proposed rule which initially placed benefits reporting in the continued eligibility section of SBA’s regulations (§ 124.112), see 74 FR 55694 (Oct. 28, 2009), SBA moved the benefits reporting requirement to a new section (§ 124.604) under miscellaneous reporting requirements contained in SBA’s 8(a) BD regulations to evidence SBA’s intent that benefits reporting not be considered a part of continued eligibility. 76 FR 8221 (Feb. 11, 2011). Although SBA changed the place in the regulations where the benefits reporting requirement appeared, it still collected that information with other information relating to a firm’s annual review and believed that a perception could still exist that benefits reporting was, nevertheless, somehow tied to continued 8(a) BD eligibility. In order to further clarify SBA’s intent and eliminate any doubt that benefits reporting is not in any way tied to continued 8(a) BD eligibility for any entity-owned Program Participant, this proposed rule changes the timing of benefits reporting from the time of a Participant’s annual review submission to the time of a Participant’s annual financial statement submission. In addition, SBA believes that the data collected by certain Participants in preparing their financial statements submissions may help them report some of the benefits that flow to the native or other community. The regulatory change will continue to require the submission of the data on an annual basis but within 120 days after the close of the concern’s fiscal year instead of as part of the annual submission.
Reverse Auctions (13 CFR 125.2 and 125.5)
SBA is also proposing to amend §§ 125.2(a) and 125.5(a)(1) to address reverse auctions. Specifically, SBA is proposing to reinforce the principle that all of SBA’s regulations, including those relating to set-asides and referrals for a Certificate of Competency, apply to reverse auctions. With a reverse auction, the Government is buying a product or service, but the businesses are bidding against each other, which tends to drive the price down (hence the name reverse auction). In a reverse auction, the bidders actually get to see all of the other bidders’ prices and can “outbid” them by offering a lower price. Although SBA believes that the small business rules apply to reverse auctions, the proposed rule is intended to make it clear to contracting officials that there are no exceptions to SBA’s small business regulations for reverse auctions. Thus, the “rule of two,” which directs whether a small business set-aside is appropriate, applies equally to reverse auctions as it does to regular procurement actions.
Processing Applications for HUBZone Certification (13 CFR 126.306)
SBA is proposing to amend § 126.306, which addresses how SBA processes HUBZone applications. SBA is clarifying that the burden to prove eligibility is on the small business applying for certification into the program. Finally, SBA is proposing to amend the regulation to state that SBA will process the application within 90 days, if practicable, to more accurately reflect the amount of time it takes to process a HUBZone application along with all of the documents needed to verify eligibility and to make that process consistent with the 8(a) BD application process.
Reconsideration of Decisions of SBA’s OHA (13 CFR 134.227)
The proposed rule would add clarifying language to § 134.227(c) to permit SBA to file a request for reconsideration in an OHA proceeding in which it has not previously participated. This provision alters the rule expressed in Size Appeal of Goel Services, Inc. and Grunley/Goel JVD LLC, SBA No. SIZ-5356 (2012), which held SBA could not request reconsideration where SBA did not appear as a party in the original appeal.
Administrative Record in 8(a) Appeals (13 CFR 134.406)
The proposed rule incorporates language from a line of OHA cases regarding SBA 8(a) decisions and the administrative record. In reviewing 8(a) cases on appeal, SBA’s regulations require the Administrative Law Judge to review SBA’s decision to determine whether the Agency’s determination is arbitrary, capricious, or contrary to law. As long as the Agency’s determination is reasonable, the Administrative Law Judge must uphold it on appeal. OHA cases have stated that so long as SBA’s path of reasoning may reasonably be discerned, OHA will uphold a decision of less than ideal clarity. See, e.g.
, Matter of Alloy Specialties, Inc., No. SDBA-108 at 6 (1999). The proposed rule would include this language in the regulatory text of § 134.406 in order to more fully apprise the public how OHA must review an 8(a) case on appeal.