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Government Contracts Update

New, Tougher SBA 8(A) Program Requirements

Friday, April 29, 2011

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The Small Business Administration (SBA) has been busy. Previously, we reported on the SBA’s new, and long-awaited, Women-Owned Small Business Federal Contract Program. Now, for the first time in more than 10 years, the SBA is making significant changes to its 8(a) small business development program. 76 Fed. Reg. 8221 (Feb. 11, 2011). The changes – ten years in the making and which took effect on March 14, 2011 – overhaul SBA policy on the 8(a) mentor-protégé program, 8(a) joint venture agreements, and the treatment of Alaskan Native Corporations (ANCs). SBA claims these changes will "strengthen" the program and "better ensure that the benefits flow to the intended recipients and help prevent waste, fraud and abuse."

Among these changes are significant revisions to the qualifications for the 8(a) program itself. Specifically, the revised regulations at 13 CFR § 124 tighten the rules on entry to the 8(a) program and provide additional guidelines for continued eligibility. Some of the key changes to the 8(a) eligibility rules are outlined below:

  • Adds Annual Income Limits: The revised regulations add – for the first time – an objective criteria to determine "economic disadvantage." Under the rule, an individual’s adjusted gross income (averaged over three years) may not exceed $250,000 to enter the 8(a) program, and must be below $350,000 annually to maintain eligibility. § 124.101(c)(3).
  • Creates Total Asset Standard: The rule also adds a "total asset" standard to the regulations. The fair market value of an individual’s assets may not exceed $4 million for initial 8(a) eligibility and $6 million for continued eligibility. This includes the value of the individual’s primary residence and business. IRAs and other retirement accounts are now excluded from the total asset determination. § 124.101(c)(2)(ii), (c)(4).
  • Spousal Status: SBA will now consider a spouse’s "financial situation" in determining an individual’s access to credit and capital where the spouse has a role in the business or has lent money to, provided credit support to, or guaranteed a loan of the business. § 124.104(b)(2).
  • Family Businesses: Under the new rule, an individual is prohibited from using his or her disadvantaged status to qualify a concern if an immediate family member has used this status to qualify another concern for the 8(a) program. The SBA may waive this provision if there are "no connections" between the firms; however, there is a presumption against waiver if both concerns are in the same or similar line of business. § 124.105(g).
  • Exceeding the Size Standard as Grounds for "Early Graduation:" An 8(a) concern may now be "early graduated" from the program for exceeding the size standard corresponding to the primary NAICS code for three successive program years, unless the concern is able to demonstrate that it has taken steps to change its industry focus. § 124.302(c).
  • Excessive Withdrawals as Ground for Termination: The amended § 124.303 allows SBA to terminate a concern from the 8(a) program for "excessive withdrawals that are detrimental to the achievement of the targets, objectives, and goals contained in the Participant’s business plan ..." The final rule also amends § 124.112(d) to increase each of the existing "excessive" withdrawal thresholds by $100,000.
  • Preference for Online Applications: Although most applicants already use the online application, the rules now state SBA’s preference that firms use the online 8(a) application to apply. § 124.202.
Look for the new 8(a) eligibility rules to influence access to the program for applicants who have a spouse or family member in the same or a similar business. Likewise, the new rules appear likely to hasten the process of ushering successful 8(a) concerns out of the program. While these reforms will make it more difficult for certain businesses to enter and thrive in the program, they also create an opportunity for new 8(a) concerns to enter the void.

The new rules overhaul SBA policy in several other areas, including their impact on 8(a) mentor-protégé and joint-venture agreements.

The revised SBA 8(a) regulations create new opportunities to pursue government contracts and form business relationships between "mentor" or large firms and developing 8(a) businesses. SBA’s hope is that by expanding contracting opportunities for these firms – and by requiring 8(a) firms to perform more of this work – it will more effectively foster the development of 8(a) firms. Additionally, with these changes, look for 8(a) concerns to take up a larger chunk of federal small business contracts.

Effective March 14, 2011, the joint-venture and mentor-protégé agreements must now address the following new rules, which should significantly impact the ability of 8(a) firms to compete for government business:

  • Adds 40 Percent Requirement for "Unpopulated" JVs: The revised regulations set – for the first time – a minimum percentage of work that the 8(a) participant in a joint venture must perform. The rule now requires that in an "unpopulated" joint venture the 8(a) partner perform at least 40 percent of the work performed by the joint venture (as either a member of the JV or as a subcontractor). This work must be more than "administrative or ministerial" functions. § 124.513(d)(1)-(2). Note that no specific work requirement is set for "populated" joint ventures. Instead, in a "populated" JV the 8(a) participant must only "demonstrate what it will gain" from performance of the contract.
  • Limits on Non-8(a) Subcontractors: In a "populated" joint venture, a non-8(a) joint-venture partner may not act as a subcontractor to the joint-venture awardee, or to any other subcontractor of the joint venture. Instead, in cases in which a non-8(a) member seeks to do more work it must do so through the joint venture (in which it is limited to performing 60 percent of the total work). § 124.513(d)(2)(ii).
  • Management Responsibilities: The new rules also require 8(a) participants to manage the performance of joint-venture contracts. In an "unpopulated" joint venture this means that an employee of the 8(a) firm must serve as project manager. In a "populated" contract, the JV must "demonstrate that performance of the contract is controlled by the 8(a) managing venturer." § 124.513(c)(2).
  • Reporting Performance of Work Reporting: The 8(a) member of a joint venture must now report annually and at the conclusion of any contract to the local SBA office explaining how the performance of work requirements were met. § 124.513(i)(1)-(2).
  • "3 in 2" Rule Change: Previously the regulations limited a specific joint venture to submitting no more than three offers over a two-year period. The new rule changes this requirement to allow a joint venture to be awarded three contracts over a two-year period. In addition, JV partners may form an additional joint venture entity and that new entity may be awarded three additional contracts (SBA warns, however, that this may lead to a finding of affiliation). § 121.103(f). Multiple Mentors/Protégés Allowed: Although protégé firms were traditionally limited to having one mentor at a time, the new rule permits protégé firms with multiple lines of business to have a second mentor relationship pertaining to an unrelated NAICS code. § 124.520(c)(3). In addition, mentors may now have up to three protégé firms in cases in which the additional firms will not "adversely affect" the development of the protégés (for instance, by competing directly against each other). § 124.520(b)(2).

Written by

The members of Pepper's Government Contracts Practice Group.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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