The Small Business Administration (SBA) issued a final rule last week, officially transferring the responsibility for certification of veteran-owned small businesses (VOSB) and service-disabled veteran-owned small businesses (SDVOSB) to SBA, effective January 1, 2023. We previously blogged about this change here, indicating that Section 862 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2021 provided for the elimination of the Department of Veterans Affairs’ (VA) certification program altogether and implementation of a certification requirement for all VOSB / SDVOSB sole source and set-aside contracts across the Federal Government. As this PilieroMazza client alert highlights, SBA’s final rule not only transfers the VOSB and SDVOSB certification program to SBA, but implements several other notable regulatory changes.
Establishment of SBA’s Veteran Small Business Certification Program
The final rule establishes SBA’s Veteran Small Business Certification Program. The Veteran Small Business Certification Program primarily combines pre-existing regulatory requirements for SDVOSBs (13 C.F.R. Part 125) and VOSBs (38 C.F.R. Part 74) together into a more uniform, consistent certification program. Previously, to bid on VOSB / SDVOSB set-asides procured by the VA, firms had to be certified by the VA’s Center for Verification and Evaluation (CVE). For other agencies seeking to award SDVOSB set-asides (VOSB set-asides are limited to the VA), firms were permitted to self-certify. Now, however, firms seeking to become eligible VOSBs and SDVOSBs will have to comply with the Veteran Small Business Certification Program regulations, which will be codified at 13 C.F.R. Part 128.
One-Year Grace Period and Additional One-Year Extension for Firms Certified by CVE
The final rule contains several important deadlines, extensions, and grace periods for VOSB / SDVOSB firms. Section 862 of the NDAA for FY 2021 created a one-year grace period for self-certified SDVOSBs until January 1, 2024. This grace period grants SDVOSBs one year to file an application for SDVOSB certification, which will allow them to continue to rely on their self-certification to compete for non-VA, SDVOSB set-asides. Self-certified SDVOSBs that submit a complete application before December 31, 2023, will maintain eligibility until the SBA makes a final eligibility decision. Once this grace period ends, VOSBs and SDVOSBs that are not certified by SBA will be ineligible to bid on sole source or set-aside VOSB / SDVOSB awards across the Federal Government. Companies who wait to submit an application until January 1, 2024, or later must wait for a final decision before bidding on SDVOSB sole source or set-aside contracts.
For firms verified by CVE prior to January 1, 2023, these will be deemed certified by SBA during the time that remains on their three-year term of eligibility, plus an additional year. In a recent press release, SBA Administrator Isabella Casillas Guzman announced that all firms verified by the VA as of January 1, 2023, will receive a one-time, one-year extension to their eligibility term, giving veterans an extra year to get recertified under the new SBA system. This extension, she noted, “will allow SBA to process applications from new entrants into the program and grow the base of certified firms.”
Critically, though, the above exceptions and grace periods do not apply to VA procurements (including prime and subcontracts for which the VA is the procuring agency). For VA procurements, offerors must be certified prior to offer.
Eligibility and Certification Requirements for the Veteran Small Business Certification Program
Other notable highlights from the final rule include:
In the past, SDVOSBs had to be small under their primary North American Industry Classification System (NAICS) code. Moving forward, to be eligible for certification as a VOSB / SDVOSB, a firm must qualify as small under any NAICS code under which it currently conducts business activities. This makes sense, as the relevant question for contract pursuits is whether the entity qualifies as small for the particular NAICS code assigned to each contract, which may be different than a company’s primary NAICS code.
In addition, the final rule will still permit self-certification outside of VOSB and SDVOSB set-aside and sole source awards for calculating socioeconomic goals, as the SBA currently permits in the 8(a) business development and women-owned small business (WOSB) programs. Interestingly, though, SBA noted that in a separate rulemaking, it anticipates sunsetting these forms of self-certification after five years.
In the hopes of reducing the administrative burden between the different socioeconomic programs, the final rule will allow for reciprocity between the 8(a) / economically disadvantaged WOSB / WOSB and the new Veteran Small Business Certification Program. This means that if an applicant is currently a certified participant in either the 8(a) or WOSB program, it may rely on such certification (still must apply for verification), provided that it demonstrates that the individual(s) who own and control it are qualifying veterans and certifies that there have been no material changes. Additionally, there will be no annual recertification for VOSB / SDVOSB firms, but rather a recertification every three years, similar to how the process currently works at CVE. However, companies will be required to notify SBA of any changes that may affect eligibility within 30 days of any such change.
Notably, however, while the ownership and control requirements for 8(a), WOSB, and VOSB / SDVOSB firms are similar, they are not exactly the same. As you may be aware, there are five extraordinary circumstances (permissible unanimous consent items) that do not impact a veteran’s or service-disabled veteran’s, as applicable, control over a company. SBA received a comment suggesting that amendments to the bylaws, operating agreement, or other corporate governance documents be added to this list. SBA considered this comment, but it has decided not to expand the list. It is, however, clarifying that the sale of the company also includes sale of all assets of the company. In addition, SBA is expanding the exceptions to the unconditional ownership requirement. Specifically, SBA has added an exception for a right of first refusal. Namely, granting a non-qualifying veteran a right to purchase the ownership interests of the qualifying veteran does not affect the unconditional nature of ownership if the terms follow normal commercial practices. SBA is also implementing somewhat of a “lighter approach” to the control requirement.
Lastly, in the past, the VA determined whether an applicant possessed good character (a requirement to be an eligible VOSB / SDVOSB) by considering whether the individual in control or owning the firm was currently incarcerated, on parole, or on probation. SBA removed this consideration under the new program, reasoning that this issue is one of responsibility, which is within the discretion of the contracting officer, not SBA. On a related note, SBA decided not to incorporate the VA’s “good character” provision, but it will still consider whether an entity is debarred or suspended.
While many of the rules for the Veteran Small Business Certification Program are similar to those for the previous (and separate) VA and SBA regulations for VOSBs and SDVOSBs, firms should be aware of the requirements for certification and recertification, which are not identical to prior regulations. Failing to certify or maintain compliance with the eligibility requirements may prevent you from getting certified and successfully winning VOSB and SDVOSB set-aside contracts. In addition, it is important to understand the other new, subtle rule changes as discussed above.
