United States: New SBA Subtracting Regulations Impact Size Status, Limitations

The U.S. Small Business Administration (SBA) issued its final rule on April 27, 2023, implementing a number of changes to various government contracting programs and regulations. In a previous article, changes pertaining to the 8(a) Program and joint ventures were discussed. This article will cover changes to the timing of size status determinations; new requirements for updating size status in SAM.gov; and the limitations on subcontracting requirements. The SBA's final rule can be found here.

Determining Size Status

According to the regulations, for indefinite delivery, indefinite quantity (IDIQ) multiple award contracts (MACs), where concerns are not required to submit price as part of the offer for the contract, a small business's size for the contract is determined as of the date of its initial offer (13 C.F.R. § 121.404(a)(1)(iv)). The final rule clarifies when size is determined for set-aside orders issued under IDIQ MACs – where offerors were not required to include price in their offer for the IDIQ contract. A small business' size for set-aside orders issued under IDIQ MACs is determined when it submits its initial offer for the IDIQ MAC and not when it submits an offer for each individual order, unless a contracting officer requests recertification in connection with an order. The SBA made this clarification because it does not believe there is any justification for treating orders issued under IDIQ MACs where offerors were not required to price in their initial offer differently from orders issued under other types of MACs.

Recertification in Connection With a Sale or Acquisition

Due to confusion about whether recertification is required in connection with a sale, merger, or acquisition, the SBA revised the language in 13 C.F.R. § 121.404(g)(2). A small business must recertify its size status if a merger, acquisition, or sale results in a change in controlling interest under 13 C.F.R. § 121.103. Change in control may be affirmative or negative.

Required Updates in SAM.gov

Three requirements pertaining to size and socioeconomic status determinations were included in Section 863 of the National Defense Authorization Act (NDAA) for fiscal year 2022. The final rule implements those requirements.

• First, if the SBA makes a determination that a business does not meet the size or socioeconomic status it has certified to, the business or the SBA, as applicable, must update the business' size status in SAM.gov within two days of the SBA's determination. The SBA interprets the NDAA as requiring the business concern to make the SAM.gov update itself, with the exception of HUBZone businesses, because only the SBA can identify a business as a certified HUBZone. When a determination involving a HUBZone has been made, the SBA must make the changes in SAM.gov within four business days of the determination.
• Second, if the business fails to timely update its size status in SAM.gov within two days of the SBA's determination, the SBA must make the required update in SAM.gov on behalf of the business.
• Third, if a business is required to make an update in SAM.gov, it must also notify the contracting officer for each pending bid or proposal of the SBA's determination if the small business concludes in good faith that the determination would affect its eligibility to be awarded the contract.

Businesses have 15 days to appeal a SBA size determination to the SBA Office of Hearings and Appeals (OHA). Filing an appeal with OHA will delay the two-day requirement for updating the size status in SAM.gov until the OHA issues its final decision. See 13 C.F.R. § 124.304(a). If the OHA agrees with the SBA's determination, the two-day requirement for updating SAM.gov is reinstated immediately. In addition, even if an appeal is filed with the OHA, the SBA's size determination is effective immediately under 13 C.F.R. § 121.1009(g).

Changes to the Limitations on Subcontracting

The final rule made two important changes to the Limitations on Subcontracting (LoS), 13 C.F.R. § 125.6.

First, language was added to address "multi-agency" set-aside contracts. The language mandates that ordering agencies use the period of performance for each order to determine LoS compliance. The language appears to create a different set of rules for "multi-agency" contracts and is different from the general rule that looks at orders in the aggregate over each IDIQ contract period to determine LoS compliance. The SBA's rationale for the addition is to avoid having one agency responsible for ensuring compliance on a contract-wide basis, where multiple agencies are responsible for monitoring performance under different task orders. Determining LoS compliance on multi-agency set-aside contracts is now the responsibility of the contracting officer assigned to the order awarded under the IDIQ contract.

Second, the SBA added language setting forth consequences when small businesses fail to comply with LoS requirements. If a contracting officer determines a small business failed to comply with the applicable LoS at the conclusion of contract performance, the contracting officer may not give a satisfactory or higher Contractor Performance Assessment Rating System (CPARS) past performance rating for the appropriate factor or sub factor in accordance with FAR 42.1503. The SBA's objective for implementing consequences for noncompliance is to ensure that the requirements are being met and that set-aside contracts are being performed in a manner consistent with SBA regulations. There is an exception that will allow contracting officers to give a satisfactory or higher CPARS rating when the contractor can establish mitigating circumstances or demonstrate that its failure to meet the applicable LoS requirement was beyond the contractor's control. Examples of mitigating circumstances include but are not limited to, unforeseen labor shortages, modifications requested by or directed by the government to the contractor's scope of work, and the contractor relying in good faith upon a "similarly situated subcontractor's representation of size or relevant socioeconomic status." However, an agency will not find mitigating and extenuating circumstances if the contractor's failure was due to circumstances within its control or if the contractor could have prevented the circumstance(s) without undue costs or burden. It will be up to the small business to prove its noncompliance was inescapable if it wants to avoid being assigned a negative CPARS rating.

Taft summer associate Celeste Friel contributed to this article.

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