On August 23, the U.S. Small Business Administration (SBA) issued a proposed rule that would make significant changes to SBA’s recertification requirements. Most notably, the rule would change when size and socioeconomic status are determined and amend when a contractor’s eligibility under certain multiple-award contracts upon recertification.
The change could have significant ramifications for small businesses performing on multiple-award contracts and could impact the valuation of small businesses for M&A purposes.
Recertification under Multiple-Award Contracts
It has been well understood that unless a contracting officer requires size recertification, a small business that loses its status as a result of a transaction remains eligible for the award of task orders because it was eligible as the appropriate small business when it was awarded the underlying contract. However, the proposed rule seeks to change that by “clarifying” the regulations by noting “three narrow exceptions” to the general rule that small business set-aside/reserved multiple-award contracts are treated as small for the life of the contract.
First, the proposed rule carves out an exception for Federal Supply Schedule (FSS) orders and Blanket Purchase Agreements (BPAs). The company’s size will continue to be measured as of the date of the underlying contract; however, if a size recertification is required or a “triggering event” occurs and a company is unable to recertify as small, that company is ineligible to compete on the set-aside FSS order or BPA. The proposed rule suggests that certain “triggering events” like a contract novation, merger, sale, or acquisition, and prior to the initial five-year period of a long-term contract, a contractor must recertify its size and socioeconomic status.
Second, contractors competing for 8(a) sole source awards issued under multiple-award contracts must qualify as small and meet the socioeconomic eligibility requirements at the time of the sole source award. Qualifying for the size standard of the corresponding NAICS code and socioeconomic status at the time the underlying multiple-award contract was awarded is no longer controlling.
Third, the rule posits that upon a “triggering event” the date to determine size “is typically the date of the triggering event, but may be the date of initial offer for a particular order or agreement if a contracting officer requested recertification with the offer.” SBA believes this exception is necessary to ensure fair competition and “[a]s such, when the requirement for recertification is triggered, the date to determine size shifts to a date that coincides with either the triggering event or the date of initial offer for a particular award.”
Simplifying Size and Status Recertification
The proposed rule acknowledges that recertification requirements can be complex and attempts to simplify the regulations by placing requirements for every program in a newly created 13 C.F.R. 125.12. According to the proposed rule, this clarification was necessary given that recent Office of Hearings and Appeals (OHA) and Government Accountability Office (GAO) decisions inaccurately concluded that changes in status do not affect eligibility for future orders. To explain the SBA’s understanding of the regulations, the proposed rule differentiates between orders issued under a single award and those issued under a multiple-award contract vehicle.
Under a single-award vehicle, a concern that recertifies and is other than small or is ineligible due to another small business program status requirement is eligible to receive options as well as order or agreements issued, however the procuring agency cannot count the options or orders toward its small business contracting goal. In contrast, under a multiple-award small business set-aside, a concern that recertifies as other than small or is ineligible due to another small business program status requirement will now be ineligible to receive options or orders set aside for small businesses or those earmarked for certain small business statuses.
In the event that a recertification is required and a concern becomes ineligible after an offer is submitted but prior to award, the concern’s eligibility depends on when the “triggering event” occurred. If the triggering event occurred within 180 days after the offer date, but before the award, the concern is ineligible for the order. If it happened after 180 days of the original offer, but before the award, the concern would remain eligible.
Size Protests
The SBA rule also proposes to “specifically authorize requests for formal size determinations relating to size recertification.” There is currently no such mechanism to question recertifications. The proposed rule “would specifically authorize the contracting officer, the relevant SBA program manager, or the Associate General Counsel for Procurement Law to request a formal size determination.” In addition, the SBA proposal would allow “a size protest in connection with the award of an order issued under a multi-agency multiple award contract where the protest relates to the ostensible subcontracting rule.”
Contractor Takeaways
Impact on M&A Activity
With mergers, acquisitions, and even novations triggering a need to recertify, the proposed rule could certainly devalue small businesses as potential acquisition targets. Larger businesses will no longer find small businesses with multiple-award contracts as valuable given that once they are acquired, these large businesses will no longer be eligible to perform on future task orders. With that said, the proposed rule would likely bring greater clarity as to how the acquisition may affect the target’s current contract vehicles and future orders.
More broadly, this change could negatively impact the government’s goals of increasing competition and innovation. As businesses grow into the mid-size market, competition becomes fierce, and many growing small businesses cannot survive. For some growing small businesses, a sale is the only path to remain operational. Prohibiting participation on multiple award set-aside contracts post-acquisition will limit the pool of eligible bidders and could drive up costs and decrease innovation.
More Protests
The proposed rule would invariably lead to increased litigation. While protests can increase transparency and accountability in government decision-making, they can also come at considerable cost to the government and contractors involved and slow the issuance of contracts impairing the government’s ability to function properly.
Affiliates
The proposed rule would also require small businesses to actively monitor their affiliates as the size status of a concern implicates the size status of itself, but also that of its affiliates. For example, if a triggering event occurs at one of the small business affiliates, the affiliate must recertify.
Overall, the proposed rule, characterized by the SBA as “updates and clarifications,” will dramatically impact small businesses with multiple-award contracts. The new requirements on when a small business must pursue recertification combined with a “clarification” that small businesses who cannot recertify as small following certain transactions may be ineligible to continue receiving awards on multiple-award contracts could chill interest in them as potential targets. Current participants in the SBA’s programs should carefully review the proposed rule and consider submitting comments. Comments are due by October 7, 2024.
