Rule2024-29393
HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs
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Published
December 17, 2024
Effective
January 16, 2025
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration (SBA or Agency) amends its regulations governing the Historically Underutilized Business Zone (HUBZone) Program to clarify certain policies. In 2019, SBA published a comprehensive revision to the HUBZone Program regulations, which implemented changes intended to make the HUBZone Program more efficient and effective. This rule clarifies and improves policies surrounding some of those changes. In particular, the rule requires any certified HUBZone small business to be eligible as of the date of offer for any HUBZone contract. The rule also makes several changes to SBA's size and 8(a) Business Development (BD) regulations, as well as some technical changes to the Women-Owned Small Business (WOSB) and Veteran Small Business Certification (VetCert) programs. Of note, the rule deletes the program specific recertification requirements contained separately in SBA's size, 8(a) BD, HUBZone, WOSB, and VetCert and moves them to a new section that covers all size and status recertification requirements. This should ensure that the size and status requirements will be uniformly applied.
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[Federal Register Volume 89, Number 242 (Tuesday, December 17, 2024)]
[Rules and Regulations]
[Pages 102448-102510]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-29393]
[[Page 102447]]
Vol. 89
Tuesday,
No. 242
December 17, 2024
Part VI
Small Business Administration
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13 CFR Parts 121, 124, 125, et al.
HUBZone Program Updates and Clarifications, and Clarifications to
Other Small Business Programs; Final Rule
Federal Register / Vol. 89 , No. 242 / Tuesday, December 17, 2024 /
Rules and Regulations
[[Page 102448]]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 121, 124, 125, 126, 127, 128, 134
[Docket ID SBA-2024-0007]
RIN 3245-AH68
HUBZone Program Updates and Clarifications, and Clarifications to
Other Small Business Programs
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) amends
its regulations governing the Historically Underutilized Business Zone
(HUBZone) Program to clarify certain policies. In 2019, SBA published a
comprehensive revision to the HUBZone Program regulations, which
implemented changes intended to make the HUBZone Program more efficient
and effective. This rule clarifies and improves policies surrounding
some of those changes. In particular, the rule requires any certified
HUBZone small business to be eligible as of the date of offer for any
HUBZone contract. The rule also makes several changes to SBA's size and
8(a) Business Development (BD) regulations, as well as some technical
changes to the Women-Owned Small Business (WOSB) and Veteran Small
Business Certification (VetCert) programs. Of note, the rule deletes
the program specific recertification requirements contained separately
in SBA's size, 8(a) BD, HUBZone, WOSB, and VetCert and moves them to a
new section that covers all size and status recertification
requirements. This should ensure that the size and status requirements
will be uniformly applied.
DATES: This rule is effective on January 16, 2025.
FOR FURTHER INFORMATION CONTACT: Alison Amann, Chief HUBZone Counsel,
Office of General Counsel, (202) 205-6841, <a href="/cdn-cgi/l/email-protection#76171a1f05191858171b1718183605141758111900"><span class="__cf_email__" data-cfemail="27464b4e54484909464a4649496754454609404851">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Background
On August 23, 2024, SBA published in the Federal Register a
proposed rule that primarily sought to amend the regulations relating
to SBA's HUBZone program, but also proposed changes to SBA's size
regulations and SBA's other small business contracting programs. 89 FR
68274.
The proposed rule first intended to clarify and amend several
HUBZone regulations that were implemented in the November 26, 2019,
final rule that was the first comprehensive revision of the HUBZone
Program regulations since the program's implementation more than 20
years ago. See 87 FR 68274. In the time since SBA published the
comprehensive revision, the Office of the HUBZone Program has received
questions and information that prompted refinement and clarification of
policies contained in that revision, which SBA published in
``Frequently Asked Questions'' in February 2020 and in subsequent
updates. The proposed rule sought to incorporate some of those
clarifications and make other refinements in the HUBZone regulations.
This rule finalizes revisions to the HUBZone regulations, including
requiring HUBZone firms to be eligible on the date of offer for a
HUBZone contract and relieving the burden of annual recertification by
moving to a triennial recertification requirement. In addition, this
rule clarifies policies related to ``Governor-designated covered
areas,'' which were authorized by the NDAA 2018 and implemented through
a direct final rule published by SBA on November 15, 2019 (84 FR
62447), and makes several changes to definitions pertinent to the
HUBZone program.
This final rule also makes several changes to SBA's size and 8(a)
business development (BD) regulations, as well as some technical
changes to the women-owned small business (WOSB) and the Veteran Small
Business Certification (VetCert) programs. Of note, the rule deletes
the program specific recertification requirements contained separately
in SBA's size, 8(a) BD, HUBZone, WOSB, and VetCert and moves them to a
new section that covers all size and status recertification
requirements. Currently, there is some language contained in the
program specific recertification rules that is not identical in each of
the programs. This has caused some confusion as to whether SBA intended
the rules to be different in certain cases. That was not SBA's intent.
Moving all size and recertification to new Sec. 125.12 should
alleviate any confusion between the different programs and ensure that
the size and status requirements will be uniformly applied.
During the proposed rule's 45-day comment period, SBA timely
received over 650 comments from 261 commenters, with a high percentage
of commenters favoring the proposed changes. A substantial number of
commenters applauded SBA's effort to clarify and address ambiguities
contained in the current rules. For the most part, the comments
supported the substantive changes proposed by SBA.
II. Section-by-Section Analysis
Sections 121.103(a)(3), 124.106(h), 127.202(h) and 128.203(j)(6)
SBA proposed to amend its rules on affiliation in the size
regulations and control in the 8(a) BD, WOSB and VetCert program
regulations regarding negative control. Specifically, the proposed rule
made the negative-control rules consistent across SBA's various
programs. The negative control provision states that a concern may be
deemed controlled by, and therefore affiliated with, a minority
shareholder that has the ability to prevent a quorum or otherwise block
action by the board of directors or shareholders. The rule does not
include any specific exceptions, though some have developed through
caselaw at SBA's Office of Hearings and Appeals (OHA). See, e.g.,
Southern Contracting Solutions III, LLC, SBA No. SIZ-5956 (Aug. 30,
2018).
The proposed rule amended Sec. 121.103(a)(3) (for affiliation
relating to size), Sec. 124.106(h) (for control in the 8(a) BD
program) and Sec. 127.202(h) (for control in the WOSB program) by
adding language currently contained in the VetCert rules that developed
from OHA case law to clarify that there are certain ``extraordinary
circumstances'' under which a minority shareholder may have some
decision-making authority without a finding of negative control.
Specifically, SBA will not find that a lack of control exists where a
qualifying individual or business does not have the unilateral power
and authority to make decisions regarding: (1) adding a new equity
stakeholder; (2) dissolution of the company; (3) sale of the company or
all assets of the company; (4) the merger of the company; (5) the
company declaring bankruptcy; and (6) amendment of the company's
governance documents to remove the shareholder's authority to block any
of (1) through (5). These exceptions to negative control are being
implemented to promote consistency with other SBA contracting programs.
Finally, since the current VetCert regulations have only the first five
exceptions for control and the proposed rule also added six to the
size, 8(a) BD and WOSB regulations, the proposed rule added that same
sixth exception to the VetCert regulations in a new Sec.
128.203(j)(6).
SBA received ten comments in response to the proposed changes
regarding extraordinary circumstances. All of the commenters agreed
with identifying ``extraordinary circumstances'' under which a minority
shareholder may have some decision-
[[Page 102449]]
making authority without a finding of affiliation or negative control.
Several commenters, however, believed that there should also be some
sort of a catch-all to allow similar treatment for another
extraordinary circumstance not specifically identified. One commenter
recommended that SBA adopt language stated in OHA size appeal cases
that super majority provisions crafted to protect the investment of the
minority shareholders, and not to impede the majority's ability to
control the concern's operations or to conduct the concern's business
as it chooses should be permitted. See Size Appeal of S. Contracting
Sols. III, LLC, SBA No. SIZ-5956 (2018) (citing Size Appeal of EA
Eng'g., Sci. & Tech., Inc., SBA No. SIZ-4973 (2008), Size Appeal of
Carntribe-Clement 8AJV #1, LLC, SBA No. SIZ-5357 (2012)). SBA agrees
and has adopted this catch all language in this final rule.
One commenter recommended that the extraordinary circumstance
identified as adding ``a new equity stakeholder'' should be broadened
to also allow increasing the investment amount of an equity
stakeholder. Similarly, another commenter recommended that SBA add a
separate extraordinary circumstance allowing issuing additional capital
stock. SBA adopts the first recommendation in this final rule, but
believes the second is unnecessary since that should be covered in a
provision which allows adding a new equity stakeholder or increasing
the investment amount of an equity stakeholder.
Section 121.103(h)
Section 121.103(h)(3) sets forth SBA's ``ostensible subcontractor''
rule, which may find a prime contractor ineligible for the award of any
small business contract or order where a subcontractor that is not
similarly situated (as that term is defined in Sec. 125.1) performs
primary and vital requirements of a contract, order, or agreement, or
where the prime contractor is unusually reliant on such a
subcontractor. Prior to this change, the regulatory text provided that
a contractor and its ostensible subcontractor are treated as joint
venturers for size determination purposes, and as long as each concern
is small under the size standard corresponding to the relevant North
American Industry Classification System (NAICS) code or the prime
contractor is small and the subcontractor is its SBA-approved mentor,
the arrangement will qualify as a small business. The proposed rule
sought to clarify SBA's intent, specifically in the context of a
subcontractor that is an SBA-approved mentor of the prime contractor.
There was some confusion that because a prime-subcontractor
relationship was treated ``as a joint venture'', then that relationship
would automatically be acceptable if the subcontractor were the mentor
of the prime contractor. That was not what SBA intended. SBA intended
to allow the relationship to qualify as a small business only if all
the joint venture requirements were met. That would mean that the
prot[eacute]g[eacute] and mentor must have an underlying joint venture
agreement that meets the requirements of Sec. 125.8(b), the
prot[eacute]g[eacute] will direct and have ultimate responsibility for
the contract, and the performance of work requirements set forth in
Sec. 125.8(c) will be met. In a prime-subcontractor relationship,
those requirements are not present and SBA would aggregate the
revenues/employees of such ``joint ventures'' in determining size. The
proposed rule simplified Sec. 121.103(h) by eliminating the reference
to a joint venture and instead specified that an offeror is ineligible
as a small business concern, an 8(a) small business concern, a
certified HUBZone small business concern, a WOSB/EDWOSB, or a VO/SDVO
small business concern where SBA determines there to be an ostensible
subcontractor relationship. The proposed rule also added a new Sec.
121.103(h)(3)(v) that provided that a joint venture offeror is
ineligible as a small business concern, an 8(a) small business concern,
a certified HUBZone small business concern, a WOSB/EDWOSB concern, or a
VO/SDVO small business concern where SBA determines that the managing
joint venture partner will not perform 40% of the work to be performed
by the joint venture, where a joint venture partner that is not
similarly situated to the managing venturer performs primary and vital
requirements of a contract, or of an order, or where the managing
venturer is unusually reliant on such a joint venture partner.
SBA received 14 comments in response to proposed Sec. 121.103(h).
Twelve commenters supported deleting the joint venture language from
the introductory language of Sec. 121.103(h)(3). Two commenters
opposed the language in proposed Sec. 121.103(h)(3)(v) that would find
a joint venture to be ineligible where a joint venture partner that is
not similarly situated to the managing venturer performs primary and
vital requirements of a contract, or where the managing venturer is
unusually reliant on such a joint venture partner. These commenters
noted that a primary reason why companies joint venture is because the
managing member is not able to perform the contract by itself and may
not be able to perform a significant amount of the primary and vital
work to be done under the contract. They believed that finding a joint
venture to be ineligible merely because a non-similarly situated
partner was performing primary and vital work is contrary to the entire
purpose of a joint venture. SBA agrees and has amended the regulatory
text in this final rule to eliminate the language finding a joint
venture to be ineligible where a joint venture partner that is not
similarly situated to the managing venturer performs primary and vital
requirements of a contract, or of an order, or where the managing
venturer is unusually reliant on such a joint venture partner.
A joint venture is not only permissible but encouraged where a
concern lacks the necessary capacity to perform a contract on its own.
It would be contradictory to say that a joint venture is permissible
where the managing member cannot perform the contract by itself but
then say it is ineligible if a non-managing member partner was
performing primary and vital work.
The proposed rule also made a corresponding change to Sec.
121.702(c)(7) for the SBIR program. That change provided that a concern
with an other than small ostensible subcontractor cannot be considered
a small business concern for SBIR and STTR awards. SBA received one
comment regarding proposed Sec. 121.702(c)(7). The commenter
recommended that SBA add language to Sec. 121.702(c)(7) to safeguard
the SBIR and STTR programs from foreign capture. SBA believes that the
language of proposed Sec. 121.702(c)(7)(iii) provides the necessary
safeguards. The commenter references an OHA size appeal where an
ostensible subcontractor was a foreign company. See Size Appeal of NFRL
LLC, SBA No. SIZ-6174 (28 September 2022). In that case, OHA found the
prime ineligible because the ostensible subcontractor did not also meet
the ownership and control requirements of Sec. 121.702(a) and (b).
Specifically, because the ostensible subcontractor was not more than
50% directly owned and controlled by one or more individuals who are
citizens or permanent resident aliens of the United States the
relationship, treated as a joint venture under the regulations in place
at that time, was ineligible. In eliminating the joint venture verbiage
from the ostensible subcontractor SBIR rule, SBA replaced it with
language specifically stating that the prime and any small
[[Page 102450]]
business ostensible subcontractor both must comply individually with
the ownership and control requirements. As such, SBA adopts the
proposed language without revision in this final rule.
Section 121.104
Section 121.104 defines the term annual receipts to mean all
revenue in whatever form received or accrued from whatever source,
including from the sales of products or services, interest, dividends,
rents, royalties, fees, or commissions, reduced by returns and
allowances. It goes on to state that generally, receipts are considered
``total income'' plus ``cost of goods sold'' as these terms are defined
and reported on Internal Revenue Service (IRS) tax return forms. The
section also provides that Federal income tax must be used to determine
the size status of a concern. There has been some confusion as to
whether SBA is restricted in all circumstances to examining only a
concern's tax returns or whether SBA may look at other information if
it appears or there is other information suggesting that the tax
returns do not adequately capture a concern's total revenue. The
proposed rule provided that SBA will always consider a concern's tax
returns, but may also consider other relevant information in
appropriate circumstances in determining whether the concern qualifies
as small.
SBA received seven comments regarding proposed Sec. 121.104, five
of which opposed the proposed language. Commenters believed that the
proposed language afforded SBA limitless discretion to go outside of a
firm's tax returns and was overly vague. One commenter noted that
financial statements may not reflect revenue the same way that it is
reported for tax purposes. The commenter believed that it would be
unfair to include revenue identified on financial statements that were
legally excluded on the firm's tax returns. SBA agrees. The final rule
clarifies that SBA will consider a firm's tax returns in every case and
that SBA will generally rely solely on those tax returns. The final
rule also specifies that where a concern may legally exclude certain
revenue for tax purposes, SBA will not include that revenue in its size
determination analysis. However, the final rule specifies that SBA may
consider other relevant information beyond the submitted tax returns
where there is reasonable basis to believe the tax filings are false.
Section 121.404
SBA proposed to simplify and reorganize Sec. 121.404, which
addresses the date used to determine size for size certifications and
determinations. The proposed changes sought to clarify the current
rules and make them easier to understand and apply. In addition to
these clarifications, SBA proposed substantive changes to the rules
regarding size recertification and proposed to remove paragraph (g) on
size recertification and relocate that paragraph to new section 125.12,
which addresses size and small business program status recertification.
Generally, a concern (including its affiliates) must qualify as
small under the NAICS code assigned to a contract as of the date the
concern submits a self-certification that it is small to the procuring
activity as part of its initial offer or response which includes price.
Once awarded a contract as a small business, a concern is generally
considered to be a small business throughout the life of that contract.
For orders and agreements issued under multiple award contracts, the
date that size is determined depends on whether the underlying multiple
award contract was awarded on an unrestricted basis or whether it was
set aside or reserved for small business (i.e., small business set-
aside, 8(a) small business, service-disabled veteran-owned small
business, HUBZone small business, or women-owned/economically
disadvantaged women-owned small business).
Where an order or agreement is to be set aside for small business
under an unrestricted multiple award contract, size is determined as of
the date of initial offer (or other formal response to a solicitation),
including price, for each order or agreement placed against the
multiple award contract. In that scenario, the order or agreement is
the first time that size status is important to eligibility. That is
the first time that only some contract holders will be eligible to
compete for the order or agreement while others will be excluded from
competition because of their size status. SBA never intended to allow a
firm's self-certification for the underlying unrestricted multiple
award contract to control whether a firm is small at the time an order
or agreement is set-aside for small business years after the multiple
award contract was awarded.
Where the underlying multiple award contract was set aside or
reserved for small business, size status will generally flow down from
the underlying contract to the order or agreement, unless
recertification is requested by a contracting officer with respect to
an agreement or order. As such, size status for an order or agreement
under a multiple award contract that itself was set aside or reserved
for small business is determined as of the date of initial offer,
including price, for the multiple award contract, unless size
recertification is requested by the contracting officer in connection
with a specific order or agreement.
SBA also proposed to clarify that where a contracting officer
requests size and/or status recertification with respect to a specific
order or agreement, size/status will be determined as of the date of
initial offer (or other formal response to a solicitation), including
price, for that specific order or agreement only. The requirement to
recertify applies only to the order or agreement for which a
contracting officer requested recertification. The recertification does
not apply to the underlying contract. Where an initially-small contract
holder has naturally grown to be other than small and could not
recertify as small for a specific order or agreement for which a
contracting officer requested recertification, it may continue to
qualify as small for other orders or agreements where a contracting
officer does not request recertification. Similarly, where an
initially-eligible 8(a), HUBZone, WOSB or SDVOSB contract holder on an
8(a), HUBZone, WOSB or SDVOSB set-aside or reserve cannot recertify its
status for a specific order or agreement for which a contracting
officer requested recertification, it may continue to qualify as
eligible for other competitively awarded orders or agreements where a
contracting officer does not request recertification.
If size recertification is triggered by a merger, sale, or
acquisition, or because it is a long-term contract in the fifth year of
performance, size will be determined as of the date of the merger,
sale, or acquisition, or the date of the size recertification in the
case of a recertification in the fifth year of a long-term contract.
The impact of a disqualifying recertification, the events that require
recertification, and the timing of recertification, are discussed in
detail in 125.12, which is a new proposed section of SBA's regulations.
SBA received 25 comments in response to the proposed changes to
Sec. 121.404. Most of the comments responded to the effect of a
disqualifying recertification. As noted above, the proposed rule moved
regulatory provisions regarding recertification from Sec. 121.404(g)
to a new Sec. 125.12. The effect of disqualifying recertifications is
addressed in new
[[Page 102451]]
Sec. 125.12. As such, the comments to Sec. 121.404 pertaining to the
effect of a disqualifying recertification will be addressed with other
comments to Sec. 125.12. Several commenters supported SBA's efforts to
simplify and clarify when size status is determined. Three commenters
also supported SBA's clarification that where a contracting officer
requests size recertification with respect to a specific order, size is
determined only with respect to that order. This clarification allows a
contract holder that has grown to be other than small and cannot
recertify as small for a specific order for which a contracting officer
requested recertification to continue to qualify as small for other
orders issued under the contract where a contracting officer does not
request recertification. SBA adopts those provisions as final in this
rule.
Three commenters disagreed with the exception set forth in proposed
Sec. 121.404(c)(4)(i) stating that for orders or BPAs to be placed
against the Federal Supply Schedule (FSS), size is determined as of the
date the business concern submits its initial offer, which includes
price, for the FSS contract and not with respect to each order set
aside for small business under the FSS. The commenters noted that the
FSS is an unrestricted contract and size is not relevant to the award
of the underlying contract.
They recommended that the general rule applicable to set-aside
orders under an unrestricted multiple award contract (i.e., that size
status for each such order placed against the multiple award contract
be determined as of the date a business concern submits its initial
offer which includes price for the order) should apply similarly to the
FSS. The commenters believe that this exception does not adequately
serve the interests of the small business community. SBA notes that GSA
has the statutory authority to establish FSS contracts and the
procedures used to order under them. As such, this rule adopts the
proposed language as final.
Section 121.1001
Section 121.1001 identifies who may initiate a size protest or
request a formal size determination in different instances. Paragraph
121.1001(b)(2)(ii) identifies who may request a formal size
determination where SBA cannot verify that an 8(a) Participant is small
for a specific sole source or competitive 8(a) contract. There have
been a few cases where SBA initially determined that a Participant
qualified as small for a sole source 8(a) contract, but later received
information that questioned that determination. Under a strict reading
of Sec. 121.1001(b)(2)(ii), SBA could not then request a formal size
determination because the wording of Sec. 121.1001(b)(2)(ii)
authorized such a request only where SBA ``cannot verify the
eligibility of the apparent successful offeror because SBA finds the
concern to be other than small.'' Since verification, albeit initial
verification only, had already occurred, some have questioned whether
SBA could request a formal size determination at all in that context.
SBA notes that it was never SBA's intent to prohibit further analysis
of an 8(a) Participant's size eligibility when new information becomes
available to SBA that questions the firm's eligibility at any point
prior to award. SBA seeks to ensure that only firms that qualify as
small receive 8(a) contracts. The proposed rule added a new Sec.
121.1001(b)(2)(iii) to specifically authorize SBA to request a formal
size determination where SBA initially verified the eligibility of an
8(a) Participant for the award of an 8(a) contract but then
subsequently receives specific information that the Participant may be
other than small and consequently ineligible. SBA received two comments
on this proposal, both supporting this clarification. One commenter
recommended that SBA clarify that the request for a formal size
determination contemplated here by SBA occurs prior to the award of the
8(a) contract at issue. SBA agrees and has made minor wording changes
to clarify its intent in this rule.
SBA also proposed to add a new Sec. 121.1001(b)(12) to
specifically authorize requests for formal size determinations relating
to size recertifications required by Sec. 125.12. Section 125.12
requires a concern to recertify its size when there is a merger,
acquisition, or sale and prior to the sixth year and every option
thereafter of a long-term contract. Although SBA and the relevant
contracting officer may file a size protest before or after the award
of a contract (see Sec. 121.1004(b)), the regulations do not currently
specifically authorize a protest or a request for a formal size
determination in connection with a size recertification. More
importantly, there currently is no mechanism to allow a protest or
request for a formal size determination from another interested small
business concern who believes that a size recertification is incorrect.
For example, on a multiple award contract, if after a merger or
acquisition a concern re-certifies itself to be small, another contract
holder on that multiple award contract could not currently challenge
that recertification. Because this rule will render a concern
ineligible for orders set aside for small business or set aside for a
specific type of small business under a multiple award contract where
the concern submits a disqualifying recertification (see Sec. 125.12
below), SBA believes that other contract holders should have the
ability to question a size recertification. The proposed rule
specifically authorized the contracting officer, the relevant SBA
program manager, or the Associate General Counsel for Procurement Law
to request a formal size determination. The relevant SBA program
manager is that individual overseeing the program relating to the
contract at issue. For an 8(a) contract, that would be the Associate
Administrator for Business Development; for a HUBZone contract, that
would be the Director of HUBZone; and for a small business set-aside,
WOSB/EDWOSB or SDVOSB contract, that would be the Director of
Government Contracting. The proposed rule also specified that in
connection with a size recertification relating to a multiple award
contract, any contract holder on that multiple award contract could
request a formal size determination in addition to the contracting
officer, the relevant SBA program manager, or the Associate General
Counsel for Procurement Law. As with a size protest, a request for a
formal size determination questioning the size of a concern after its
size recertification must be sufficiently specific to provide
reasonable notice as to the grounds upon which the recertifying
concern's size is questioned. SBA received five comments in response to
proposed Sec. 121.1001(b)(12). All five commenters supported the SBA's
proposal to allow a mechanism to challenge a size recertification. One
commenter, however, recommended that the challenge be a size protest in
Sec. 121.1001(a) as opposed to a request for a formal size
determination in Sec. 121.1001(b). The commenter believed that without
this clarification, it is unclear if/whether the protest time limits
apply. The final rule adopts this recommendation and moves proposed
Sec. Sec. 121.1001(b)(12) and (13) to a new Sec. 121.1001(a)(11). In
moving the proposed authority from a request from a formal size
determination to a protest, the final rule eliminates the specific
language contained in proposed Sec. 121.1001(b)(13) requiring a
challenge to a recertification to be specific. The requirement for
specificity applies to all size protests currently. There is no need to
repeat that requirement in new Sec. 121.1001(a)(11).
[[Page 102452]]
The proposed rule also noted that SBA was considering allowing 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 subcontractor rule. Whether a large business subcontractor
will perform primary and vital requirements or whether a small business
prime contractor will be unduly reliant on a large business
subcontractor will not be an issue at the time of award of an
underlying small business multiple award contract. It is at the order
level where undue reliance may become an issue. SBA requested comments
on this issue. Three commenters supported the inclusion of such a
protest, while two opposed. Two commenters supported the addition of
such a provision generally. One commenter noted that Sec.
121.1001(a)(1) already authorized a size protest ``in connection with a
particular . . . order.'' The commenter noted that if a protest is
currently authorized for an order, then it can relate to any protest
ground in SBA's regulations, including one based on the ostensible
subcontractor rule. Although the commenter believed it was unnecessary
to add language regarding the ostensible subcontractor rule to protests
regarding orders, the commenter did not object to such inclusion if SBA
thought it was necessary. The commenter also recommended that the
language in Sec. 121.1001(a)(1) authorizing a size protest in
connection with a particular order be more clearly apparent in a
separate paragraph. In response, SBA believes that it is not necessary
to add specific language authorizing a protest of an order based on the
ostensible subcontractor rule. SBA agrees that the language in Sec.
121.1001(a)(1) authorizing a size protest in connection with a
particular order generally allows a protest based on the ostensible
subcontractor rule. SBA also agrees that this authority should be
identified in a separate paragraph for clarity purposes, and adds a new
Sec. 121.1001(a)(10) to do so.
One commenter opposing such a provision believed that it would be
difficult for competitors to know whether a contractor intends to use a
subcontractor for a particular order since this information is not
public or consistently reported, and that this would lead to
speculative size protests. As with any size protest, the protest must
be specific. If a competitor cannot identify a subcontractor that will
perform primary and vital requirements or upon which the protested
concern is alleged to be unduly reliant upon, the protest will be
dismissed for lack of specific. The other commenter opposing adding
specific language authorizing a size protest relating to the ostensible
subcontractor rule with respect to an order believed that it would
create significant additional work for contracting officers, small
business specialists, and small businesses. As noted above, size
protests relating to specific orders is already authorized by SBA's
regulations and identifying or not identifying a specific ground upon
which a protest could be made will not cause any additional burden on
contracting officers, SBA or small businesses.
Section 121.1010
Section 121.1010 explains how a concern can become recertified as a
small business after receiving an adverse size determination. The
proposed rule made slight wording changes to Sec. 121.1010(b) to make
clear that size recertification is not required and the prohibition
against future self-certification does not apply if the adverse SBA
size determination is based solely on a finding of affiliation limited
to a particular Government procurement or property sale, such as an
ostensible subcontracting relationship or non-compliance with the
nonmanufacturer rule. SBA received two comments supporting this
provision and no comments opposing it. SBA adopts the proposed language
as final in this rule.
Section 124.3
Section 124.3 sets forth the definitions that are important in the
8(a) BD program. Included within this section is the definition of the
term Community Development Corporation or CDC. In 1981, Congress
enacted the Omnibus Reconciliation Act. Included within Title VI of
this Act was Sec. 626(a)(2), codified at 42 U.S.C. 9815(a)(2), which
required SBA to ``promulgate regulations to ensure the availability to
community development corporations of such programs as shall further
the purposes of this subchapter, including programs under section 8(a)
of the Small Business Act.'' Pursuant to 42 U.S.C. 9802, a CDC is
defined as a non-profit organization responsible to the residents of
the area it serves which is receiving financial assistance under 42
U.S.C. 9805, et seq. Under 42 U.S.C. 9806 the Secretary of Health and
Human Services (HHS) has the authority to provide financial assistance
in the form of grants to nonprofit and for-profit community development
corporations. The program authorized by 42 U.S.C. 9805, et seq. is the
Department of Health and Human Services (HHS) Urban and Rural Special
Impact Program. In 1998, as part of Community Opportunities,
Accountability, and Training and Educational Act of 1998, Public Law
105-285, 202(b)(1), 112 Stat. 2702, 2755 (1998), Congress moved HHS'
funding authority for the Urban and Rural Special Impact Program from
42 U.S.C. 9803 to 42 U.S.C. 9921. Thus, after that date CDCs could not
receive funding under 42 U.S.C. 9805, et seq. CDCs that have been in
existence for a long time may still be able to demonstrate that they
have received funding under 42 U.S.C. 9805, et seq. However, those
forming after 1998 could not do so. In order for such a CDC seeking to
participate in the 8(a) BD program after that date, SBA has required
the CDC to obtain a letter from HHS confirming that the CDC has
received funding through the successor program to that authorized by 42
U.S.C. 9805, et seq. However, SBA's regulations have not been changed
to acknowledge eligibility for a CDC-owned firm through that process.
The proposed rule recognized that process.
The proposed rule also made the same change to the definition of
the term Community Development Corporation or CDC contained in Sec.
126.103 for the HUBZone program.
SBA received two comments supporting the clarifications for CDC
8(a) and HUBZone eligibility. SBA adopts the proposed language as final
in this rule.
Sections 124.105(b), 127.202(d) and 128.202(c)
Sections 124.105(b) (for the 8(a) BD program), 127.202(d) (for the
WOSB program), and 128.202(c) (for VetCert program) set forth ownership
requirements pertaining to partnerships. The language of the three
sections is not consistent. The proposed rule sought to harmonize the
provisions so that a firm simultaneously applying to be certified in
more than one program must meet the same requirements. SBA does not
want possible contradictory determinations based on the same facts. In
other words, SBA believes that it would be inappropriate to find that a
qualifying individual controls a partnership firm for purposes of one
certification program but not to control the same partnership firm for
purposes of another certification program. This rule would revise the
ownership requirements for partnership to be identical for the 8(a) BD,
WOSB and VetCert programs. The final rule provides that in the case of
a concern which is a partnership, one or more individuals determined by
SBA to be
[[Page 102453]]
socially and economically disadvantaged must serve as general partners,
with control over all partnership decisions. In addition, at least 51
percent of every class of partnership interest must be unconditionally
owned by one or more individuals determined by SBA to be socially and
economically disadvantaged; and the ownership must be reflected in the
concern's partnership agreement.
SBA received four comments supporting the proposed clarifications
to create consistency between SBA's various programs, and no comments
opposing the changes. SBA adopts the proposed language as final in this
rule.
Section 124.105
Section 124.105 sets forth the ownership requirements that an
applicant to or Participant in the 8(a) BD program must meet in order
to be and remain eligible for the program. Paragraph 124.105(h)
provides certain ownership restrictions that are applicable to non-
disadvantaged individuals and concerns that seek to have an ownership
interest in an applicant or Participant. The proposed rule increased
the allowable ownership percentages for certain non-disadvantaged
individuals and business concerns (those owning more at least ten
percent in other 8(a) Participant and those in the same or similar line
of business) from 10 percent to 20 percent in the developmental stage
of program participation and from to 20 percent to 30 percent in the
transitional stage of program participation.
SBA received five comments supporting the increases in non-
disadvantage ownership. Commenters believed that these changes could
help 8(a) Participants attract additional partners, offering greater
opportunities for growth and development. One commenter supported the
increase to 30% in the transitional stage saying that it will
facilitate access to capital for 8(a) firms preparing to graduate,
enhancing their ability to compete in the open market. That commenter
also recommended, however, that SBA increase the percentage to 35% in
the transitional stage. SBA does not adopt this recommendation. SBA
does not want any one non-disadvantage individual or business entity to
unduly benefit from the program. The higher the percentage that SBA
allows a non-disadvantaged individual or business to own in multiple
8(a) Participants, the more it appears that non-disadvantaged
individuals are benefitting from the program instead of disadvantaged
individuals. Similarly, the restriction on ownership by an individual
or business in the same or similar line of work as the 8(a) firm is
intended to ensure that the disadvantaged individual(s) upon whom 8(a)
eligibility was based control the 8(a) Participant. The higher the
percentage that SBA allows a non-disadvantaged individual or business
in the same or similar line of business to own in an 8(a) firm, the
more it appears that the non-disadvantaged individual or business
concern is controlling the 8(a) firm. SBA adopts the proposed language
as final in this rule.
The proposed rule also aligned the language in Sec. 124.105(f)(1)
(for the 8(a) BD program) with that appearing in Sec. 128.202(g) (for
the VetCert program) regarding the distribution of profits. There was a
slight wording difference in the 8(a) BD and VetCert regulations and
the proposed rule made the wording consistent. The proposed rule also
added the same language to Sec. 127.201(g) for the WOSB program. SBA
received three comments all supporting these proposed changes.
Commenters noted that the revision more clearly states how profits
should be distributed for the various for-profit entities instead of
only referencing corporations, which is the case in the current
regulations. SBA adopts the proposed language as final in this rule.
Paragraph (i) sets forth the requirements relating to changes of
ownership. Generally, a Participant may change its ownership or
business structure so long as one or more disadvantaged individuals own
and control it after the change and SBA approves the transaction in
writing prior to the change. Section 124.105(i)(2) authorizes three
exceptions as to when prior SBA approval of a change of ownership is
not needed and provides four examples implementing the change of
ownership requirements, one showing when prior SBA approval is required
and three showing when it is not. Prior SBA approval is not needed
where all non-disadvantaged individual (or entity) owners involved in
the change of ownership own no more than a 20 percent interest in the
concern both before and after the transaction. To be consistent with
the change to Sec. 124.105(h) above, the proposed rule required prior
approval only where a non-disadvantaged individual owns more than a 30
percent interest in the 8(a) Participant either before or after the
transaction. The proposed rule also added a fourth exception as to when
prior SBA approval is not required. Specifically, the proposed rule
provided that prior SBA approval is not required where the 8(a)
Participant has never received an 8(a) contract. The proposed rule then
clarified that where prior approval is not required, the Participant
must notify SBA within 60 days of such a change in ownership, or before
it submits an offer for an 8(a) contract, whichever occurs first. SBA
must be able to determine the continued eligibility of the Participant
before it accepts a sole source 8(a) procurement on behalf of or
authorizes the award of a competitive 8(a) award to the Participant.
Finally, the proposed rule made changes to the examples set forth in
Sec. 124.105(i)(2) to reflect the change from 20 percent to 30 percent
and added a fifth example highlighting that prior SBA approval is not
required where a Participant has never received an 8(a) contract.
SBA received 11 comments regarding the proposed revisions to the
change of ownership requirements. The commenters generally supported
the proposed revisions. One commenter believed that the exception to
prior approval when the Participant has never received an 8(a) contract
is an improvement because it reduces the regulatory burden of obtaining
prior approval of an ownership change when the 8(a) Participant has not
yet received benefits from the program. That commenter also believed
that the notification requirement at Sec. 124.105(i)(2)(i)(D)(iii)
that requires a Participant to provide notice of the ownership change
within 60 days of such a change, or before it submits an offer for an
8(a) contract, whichever occurs first, will serve as a sufficient
safeguard to ensure that SBA has the opportunity to analyze ownership
changes before a contract award. Two commenters recommended that SBA
clarify Sec. 124.105(i)(2)(i)(C) to make clear that an increase of any
percentage of ownership by the disadvantaged individual obviates the
need for SBA's prior approval, even if it is a small amount. The final
rule makes that clarification. One commenter disagreed with allowing a
change of ownership without SBA approval where the 8(a) firm has not
received an 8(a) contract in all instances. Specifically, the commenter
objected to allowing such a change of ownership where the individual(s)
or entity upon whom eligibility would no longer own more than 50
percent of the Participant. The commenter noted that if the change in
ownership were permitted to take effect without SBA's approval, the
Participant could continue to market itself as an eligible 8(a)
Participant. Although the proposed rule requires SBA approval before an
8(a) contract award, the commenter thought that the
[[Page 102454]]
Participant's self-marketing efforts could allow the Participant to
advance far towards an award before contacting SBA and that either the
Participant would receive an expedited eligibility review allowing the
award to occur or an agency could be left without an eligible
Participant and be forced to start the process over again. Particularly
in the entity context, the commenter believed that this could allow a
newly established NHO or Tribe that has not previously participated in
the 8(a) program to acquire a Participant that has not yet received an
8(a) contract and obtain accelerated review of its 8(a) application,
and that that review may not be as comprehensive as it would have been
in the normal process. In order to alleviate any concern about possible
expedited application processing, the final rule amends this provision
to allow a change of ownership without SBA approval where the
Participant has never received an 8(a) contract and the individual(s)
or entity upon whom initial eligibility was based continues to own more
than 50% of the Participant.
In order to align the 8(a) BD ownership requirements with those
applicable in the WOSB and VetCert programs, SBA proposed to eliminate
the requirement contained in Sec. 124.105(k) that SBA consider State
community property laws in determining ownership interests when an
owner resides in a community property State. SBA received six comments
in response to the proposal to eliminate current Sec. 124.105(k). All
six comments supported the proposal. Two commenters specifically
addressed the statutory requirement that one or more disadvantaged
individuals must unconditionally own an 8(a) applicant or Participant.
Both believed that eliminating the requirement to consider community
property laws would not in any way contradict the unconditional
ownership requirement. One commenter also questioned SBA's authority to
require transmutation agreements (i.e., agreements between spouses
relinquishing some percentage of his or her community property
ownership rights in an applicant or Participant), and believed that
even if that could be done it is a better policy not to require them
since the commenter believed there was no specific statutory
requirement for transmutation agreements. SBA adopts the proposed
language as final in this rule.
The proposed rule added a new Sec. 124.105(k) to allow a right of
first refusal granting a non-disadvantaged individual the contractual
right to purchase the ownership interests of a disadvantaged individual
without affecting the unconditional nature of ownership, if the terms
follow normal commercial practices. This aligns 8(a) ownership
requirements with those set forth in the VetCert program. Of course, if
those rights are exercised by a non-disadvantaged individual after
certification that result in disadvantaged individuals owning less than
51% of the concern, SBA will initiate termination proceedings. The
proposed rule added the same provision to Sec. 127.201(b) to conform
the WOSB unconditional ownership requirements as well. SBA received
four comments supporting this provision. One commenter requested that
SBA define what it believes normal commercial practices to be. SBA
believes that any definition might inadvertently disallow a practice
that could be deemed a normal commercial practice, and that it is
better to allow an applicant or Participant to demonstrate to SBA that
it has in fact followed normal commercial practices. Another commenter
was concerned that a right of first refusal could be tied to allowing a
non-disadvantaged individual to unduly benefit from the program.
Specifically, the commenter posed a hypothetical where a non-
disadvantaged individual owns a business concern and agrees to ``sell''
51 percent of the business concern to a disadvantaged individual with
the proviso that in nine years the disadvantaged individual would sell
the 51 percent back to the non-disadvantaged individual through a right
of first refusal provision in the corporate documents. SBA believes
that such an arrangement would not be a right of first refusal that
followed normal commercial practices, but rather a scheme to deceive
SBA and allow greater participation in the program by a non-
disadvantaged individual than would otherwise be permitted. If SBA were
aware of such a right of first refusal provision, it would not approve
the application for 8(a) certification. SBA adopts the proposed
language as final.
Sections 124.106(e), 127.202(g) and 128.203(h)
Sections 124.106(e) (for the 8(a) BD program), 127.202(g) (for the
WOSB program), and 128.203(h) (for VetCert program) address limitations
on the involvement of non-qualifying individuals that can affect a
business concern's eligibility for participation in the 8(a) BD, WOSB,
and VetCert programs based on a qualifying individual's lack of
control. Basically, each of these provisions generally prohibit a non-
qualifying individual from unduly influencing the day-to-day management
and control of qualifying individuals. The language of the three
provisions, however, is not entirely consistent. This has led to
questions as to whether SBA intended different application of the
control requirements for different programs. In order to clear up any
confusion, the proposed rule changed the wording of the three
provisions to bring them more in line with each other to ensure that
the control requirement is consistently applied. For example, the WOSB
regulations did not previously contain a provision that generally
required a qualifying woman to be the highest compensated individual in
the business concern unless the concern demonstrates that the
compensation to be received by a non-qualifying woman is commercially
reasonable or that the qualifying woman has elected to take lower
compensation to benefit the concern. Such a provision was contained
previously in both the 8(a) BD and VetCert regulations, and the
proposed rule added a similar provision for the WOSB program. In
connection with the 8(a) BD program, SBA proposed to change the
requirement that an 8(a) Participant must obtain the prior written
consent of SBA before changing the compensation paid to the highest-
ranking officer to be below that paid to a non-disadvantaged individual
to a requirement that the Participant must notify SBA within 30
calendar days of such an occurrence. SBA believes that notification is
preferable to prior approval because SBA does not want a Participant to
lose an individual with a particular expertise where the approval
process is lengthy. SBA would then have to determine that the
compensation to be received by the non-disadvantaged individual is
commercially reasonable or that the highest-ranking officer has elected
to take lower compensation to benefit the Participant before SBA may
determine that the Participant is eligible for an 8(a) award. SBA
received six comments regarding the proposed changes relating to the
involvement of non-qualifying individuals. Three commenters noted that
the proposed provisions for the 8(a) program required an 8(a)
Participant to notify SBA where the compensation paid to the highest-
ranking officer fell below that paid to a non-disadvantaged individual
and recommended that the same should apply to the WOSB and VetCert
programs also. The final rule adds that same notification requirement
to WOSBs/EDWOSBs and SDVOSBs.
Section 124.107
Section 124.107(a) currently provides that an applicant's income
tax returns
[[Page 102455]]
for each of the two previous tax years must show operating revenues in
the primary industry in which the applicant is seeking 8(a) BD
certification. The proposed rule revised this provision to require
merely that an applicant's income tax returns for each of the two
previous tax years must show operating revenues. Revenue on an income
tax return may not be aligned by industry or NAICS code and SBA does
not seek to deny entry to the 8(a) program to a firm that has performed
work in its projected primary industry but that work may not have been
properly captured on its tax return. SBA received five comments on this
provision, with all of them supporting the change. The commenters
believed that the change will make the 8(a) BD program more accessible
and remove an unnecessary barrier to entry. One commenter supporting
the change noted that it is burdensome for 8(a) applicants to
demonstrate ``operating revenues in the primary industry'' on income
tax returns, as IRS business activity codes often do not align with
NAICS codes. Where NAICS codes and IRS business codes do not align, the
commenter stated that applicants have been asked to obtain a letter
from their tax preparers to clarify code discrepancies, which adds an
unnecessary burden to applicants. SBA adopts the proposed language as
final in this rule.
Section 124.107(e) requires that, as a condition to show an 8(a)
applicant's potential for success, the applicant or individuals
employed by the applicant must hold all requisite licenses if the
concern is engaged in an industry requiring professional licensing
(e.g., public accountancy, law, professional engineering). Generally,
the potential-for-success requirements carry out the requirement in
section 8(a)(7)(A) of the Small Business Act, 15 U.S.C. 637(a)(7)(A),
that SBA determine that an 8(a) applicant have reasonable prospects for
success in competing in the private sector. That same statutory
provision, however, requires SBA to determine that with contract,
financial, technical, and management support the applicant will be able
to perform contracts which may be awarded to it. As such, SBA believes
that issues of current responsibility should not prevent an applicant
from being eligible for the 8(a) BD program where SBA believes that the
business concern will be able to perform contracts awarded to it with
certain contract, financial, technical, or management support. Although
a business concern applying to the 8(a) BD program that does not have a
required professional license may not currently be responsible to be
awarded certain 8(a) contracts, as long as SBA determines that the
concern would be able to perform such contracts with appropriate
support, SBA believes that the concern should be eligible for
participation in the 8(a) BD program. SBA proposed to remove the
professional-licensing requirement. It is not only inapplicable to most
applicants, it also can be overcome before any 8(a) contract
opportunity is sought by those concerns to which it applies. SBA
received six comments on the proposal to eliminate the license
requirement at the time of application. Four commenters supported the
removal of the license requirement as it will streamline the
application process. Two commenters opposed the proposal, with one
believing that eliminating the license requirement will encourage
unprepared firms to apply to the 8(a) program and waste limited time in
the program. SBA notes that an applicant must generally demonstrate
that it has been in business and received revenue for at least two
years. In addition, once admitted to the program, a Participant can
seek and be awarded any 8(a) contract that a procuring agency believes
that it is responsible to perform. SBA believes that applicants know
the industry or type of business activity they hope to receive
contracts in when they apply to the 8(a) BD program, so eliminating the
license requirement will not adversely impact them or the program. Two
commenters also recommended requiring an applicant to certify that it
will obtain a necessary license in an industry requiring such a license
where it does not possess a license at the time of application. SBA dos
not believe such a requirement would add anything substantive to the
process. Whether the firm certifies that it will obtain a license or
not, it must in fact have a license in order for a contracting officer
to determine the firm responsible to perform a contract in that
industry. The firm could not be awarded a contract without an
affirmative finding of responsibility. SBA also notes that there have
been times where applicants have disagreed with SBA as to whether a
license was required for the type of work the firm sought to perform.
Removing the license requirement at the time of application eliminates
those disagreements, which may unnecessarily delay the application
process and impose a burden on the applicant in demonstrating that a
license in fact is not needed in the work that the firm does. SBA
adopts the proposed language as final in this rule.
Section 124.108
Section 124.108 sets forth other eligibility requirements that
apply to 8(a) applicants and Participants. One of those requirements is
that SBA must determine that an applicant or Participant and all of its
principals possess good character. The 8(a) BD program is one of
several certification programs to help small businesses win Federal
contracting awards, but the scope of the 8(a) BD program is different.
For the WOSB and VetCert programs, SBA only determines whether a small
business applicant is owned and controlled by one or more qualifying
individuals. SBA does not look at character or business integrity in
determining whether a small business is owned and controlled by
qualifying individuals. Similarly, for the HUBZone program, SBA only
determines whether the small business applicant is located in and
employs residents of a historically underutilized business zone. SBA
certification of these qualifications allows the certified small
businesses to compete for certain Federal contracts. These are not
business development programs. Although SBA determines whether an 8(a)
small business applicant is owned and controlled by one or more
qualifying individuals, the program is not limited to this
certification. Its scope is broader and includes a multi-year business
development program with eligibility for specific management and
technical assistance from SBA to support the business's successful
competition in the marketplace. SBA requires ``good character'' to be
admitted to this development program.
SBA proposed to limit the grounds that would serve as an automatic,
mandatory bar from participation in the 8(a) BD program based on good
character (i.e., either an application denied or possible termination
action commenced against a current Participant). The proposed rule
amended the lack of business integrity bar to a lack of business
integrity as demonstrated by conduct that could be grounds for
suspension or debarment. SBA received six comments to this proposal,
with three favoring the change and three opposing the change as
written. Those favoring the change generally agreed with removing
``possible criminal conduct'' as grounds for declining based on
character. The comments opposing the change as written believed that
lack of business integrity based solely on conduct that could be
grounds for suspension or debarment did not go far enough. They noted
that suspension and debarment
[[Page 102456]]
should be imposed only in the public interest for the Government's
protection and not for purposes of punishment and that mitigating
factors or remedial measures could affect a suspension or debarment
decision despite a lack of business integrity. They believed that some
of the language currently in the regulation should be retained. These
comments misunderstand the proposed change. The proposal does not limit
the lack of good character requirement to suspension or debarment. When
the regulations state that a lack of business integrity that could be
grounds for suspension or debarment is needed to find a lack of good
character for 8(a) BD purposes, it does not mean to imply that
suspension or debarment needs to be imposed before SBA could find a
lack of good character. The underlying conduct alone which demonstrates
grounds for suspension or debarment is sufficient for SBA to find a
lack of good character. In addition, SBA does not believe that adding
back language providing that a lack of business integrity can be
demonstrated by information related to an indictment or guilty plea,
conviction, civil judgment, or settlement would be useful. A
demonstrated lack of business integrity in an indictment, guilty plea,
conviction, civil judgment, or settlement are all conduct that can be a
cause for suspension or debarment actions. Moreover, there are
instances in which an indictment, guilty plea, conviction, civil
judgment, or settlement has no bearing on business integrity. Given the
lack of connection to business integrity, they should not serve as a
barrier to program entry. As such, SBA does not believe that the
language as proposed needs to be amended and adopts it as final.
SBA will continue to conduct internal checks related to an
applicant's business integrity that includes the applicant's criminal
history, and consider all factors in evaluating whether an applicant
would be a good candidate to participate in the 8(a) BD program. SBA
will consider each application individually. This rule does not change
business integrity requirements of procuring agency contracting
officers or any business integrity evaluations done by them. Procuring
agency contracting officers evaluate offerors' responsibility to
perform Federal contracts prior to award, a process that can include an
evaluation of business integrity.
Sections 124.108(e), 126.200(h), 127.200(h), and 128.201(b)
Sections 124.108(e) (for the 8(a) BD program) and 128.201(b) (for
the VetCert program) provide generally that a small business concern is
ineligible for certification if the concern or any of its principals
has failed to pay significant financial obligations owed to the Federal
Government. A similar provision is not currently contained in the WOSB
or HUBZone eligibility requirements. SBA proposed to apply that
restriction to the WOSB and HUBZone programs as well. To ensure
consistency among the programs, SBA also proposed to revise the
language in Sec. Sec. 124.108(e) and 128.201(b) so that the regulatory
language applying to all four programs is the same. SBA received two
comments supporting these revisions and no comments opposing them. SBA
adopts the proposed language in this final rule.
Sections 124.204(d), 126.306(d), 127.304(d), and 128.302
Sections 124.204(d) (for the 8(a) BD program), 126.306(d) (for the
HUBZone program), 127.304(d) (for the WOSB program), and 128.302 (for
the VetCert program) set forth the date at which at applicant must be
eligible for each certification program. The wording of the regulations
is not consistent. Section 124.204(d) specifies that an applicant must
be eligible as of the date SBA issues a decision. Section 126.306(d)
specifies that an applicant must be eligible as of the date it
submitted its application and at the time SBA issues a decision.
Section 127.304(d) specifies that an applicant must be eligible as of
the date it submitted its application and up until the time SBA issues
a decision. Section 128.302 details how SBA processes applications for
VOSB and SDVOSB certification, but does not specifically address the
point at which eligibility is determined. SBA is in the process of
establishing a uniform application processing system. That system will
allow a firm to simultaneously apply for multiple certifications for
which it believes it is eligible. SBA believes that it is critical that
eligibility be determined at the same point in time for all
certification programs. If, for example, a firm amends a corporate
document to come into compliance with a specific control requirement
after initially submitting its application for the 8(a) BD program and
the WOSB program, the current regulations would support a finding that
a qualifying individual did control the applicant for 8(a) BD purposes
but did not control the applicant for WOSB purposes. SBA believes that
would be an inappropriate result. Therefore, the proposed rule amended
each of these sections to require consistent wording that an applicant
must be eligible as of the date SBA issues a decision. Although the
proposed rule specified that an applicant must be eligible as of the
date SBA issues a decision, implicitly a small business must believe
that it is eligible at the time it applies for certification for any
program. For purposes of applying for HUBZone certification, an
applicant must submit payroll records for the four-week period
immediately prior to its application date. It would be impossible to
require payroll records for some unknown future date. After submitting
an application for any program, a concern must immediately notify SBA
of any changes that could affect its eligibility and provide
information and documents to verify the changes. Four commenters
supported these changes without substantive comment. SBA adopts the
proposed language as final in this rule.
Section 124.207
Section 124.207 provides that a concern which has been declined for
8(a) BD program participation may submit a new application for
admission to the program at any time after 90 days from the date of the
Agency's final decision to decline. It also provides that a concern
that has been declined three times within 18 months of the date of the
first final Agency decision finding the concern ineligible cannot
submit a new application for admission to the program until 12 months
from the date of the third final Agency decision to decline. SBA
proposed to remove that second provision. SBA believes it is
unnecessary and does not seek to thwart firms who have made legitimate
attempts to overcome deficiencies from again applying to the 8(a) BD
program. Five comments supported the elimination of that provision, and
no comments opposed it. One commenter, however, also recommended that
SBA should eliminate the 90-day waiting period to reapply to the 8(a)
program after being declined because it may cause firms to miss
contracting opportunities. SBA first notes that prior to 2020, a
business concern was required to wait 12 months from the date of SBA's
final agency decision to reapply to the 8(a) BD program. SBA changed
the waiting period to 90 days in a rulemaking published in the Federal
Register on October 16, 2020. 85 FR 66146, 66185. The change to 90 days
has been enthusiastically supported and has worked well in practice.
SBA also notes that SBA works with business concerns during the
application process to address deficiencies and allow those concerns to
supplement and/or clarify their applications in order to attempt to
meet SBA's requirements. As such, SBA does
[[Page 102457]]
not believe that further change is necessary and adopts the proposed
language as final in this rule.
Sections 124.303(c), 126.503(c), 127.405(f), and 128.310(g)
SBA proposed to add a new provision to Sec. 124.303(c) (for the
8(a) BD program), to Sec. 126.503 (for the HUBZone program), to Sec.
127.405(f) (for the WOSB program), and to Sec. 128.310(g) (for the
VetCert program) providing that a firm that is decertified or
terminated from one SBA certification program due to the submission of
false or misleading information may be removed from SBA's other small
business contracting programs. In addition, SBA proposed to authorize
SBA to require a firm to enter into an administrative agreement as a
condition of admission or re-admission to one of the SBA certification
programs. SBA believes that a firm that submits false information to
obtain a certification in one program is more likely to submit false
information to other SBA programs, and SBA needs a mechanism by which
to investigate whether this has occurred and remove non-responsible
firms from its programs expeditiously. SBA received 14 comments
regarding these proposed changes. Commenters generally supported the
provisions, but believed there were inconsistencies in some of the
regulatory text. Commenters specifically pointed to the word
``knowingly'' submitting false or misleading information in Sec.
126.900 and stating that the submission of ``inconsistent'' information
126.503(c) would be cause for decertification. SBA agrees that
inconsistent or incorrect information that was provided in error should
not warrant decertification or termination. SBA is concerned about the
knowing submission of false or misleading information. As such, SBA has
amended the regulatory text to provide that a firm may be decertified
from the HUBZone, WOSB, or VetCert programs where SBA discovers that
the firm or its representative knowingly submitted false or misleading
information, and a firm that is decertified or terminated from the one
SBA program due to the submission of false or misleading information
may be decertified from another SBA program. The final rule amends
Sec. 127.405(d) (for the WOSB program) instead of adding a new Sec.
127.405(f), and amends to Sec. 128.310(d) (for the VetCert program)
instead of adding a new Sec. 128.310(g).
Section 124.503
Section 124.503 addresses how SBA will accept a procurement offered
for award through the 8(a) BD program. An agency may offer a sole
source procurement to SBA nominating a particular 8(a) Participant for
performance based on the firm's self-marketing efforts, or may offer it
as an open requirement (i.e., an offering to the program generally, but
not in support of a particular 8(a) Participant). SBA's acceptance
policies for such offerings are contained in Sec. Sec. 124.503(c) and
(d), respectively. SBA has long recognized the importance of self-
marketing in a Participant's business development and continued
viability. Thus, where an agency offers a sole source 8(a) procurement
in support of a particular Participant as a result of self-marketing
and SBA deems it suitable for the program, SBA will normally accept it
on behalf of the Participant recommended by the agency as long as
specified eligibility criteria are met. This policy was first
incorporated in SBA regulations in 1986, 51 FR 36132 at 36149, but had
been previously part of the standard operating procedure for the 8(a)
BD program.
Section 303 of the Business Opportunity Development Reform Act of
1988 (BODRA), Public Law No. 100-656, tit. III, sec. 303, 102 Stat.
3865 (1988), adopted and expanded SBA's sole source contract acceptance
procedures, mandating that SBA shall award a sole source 8(a) contract
to the 8(a) firm nominated by the offering agency, provided the
following three statutory criteria are met: (i) the Program Participant
is determined to be a responsible contractor with respect to
performance of such contract opportunity; (ii) the award of such
contract would be consistent with the Program Participant's business
plan; and (iii) the award of the contract would not result in the
Program Participant exceeding its 8(a) competitive business mix. This
mandate is codified in Section 8(a)(16)(A) of the Small Business Act,
15 U.S.C. 637(a)(16)(A). BODRA also directed SBA to promote--to the
maximum extent practicable--the equitable geographic distribution of
sole source 8(a) contracts. In response to BODRA, SBA promulgated a
rule stating that it would consider, among other things, equitable
geographic distribution for open 8(a) sole source contracts offered to
the 8(a) BD program. This policy is currently set forth in paragraph
124.503(d)(3).
There has been some confusion as to whether SBA considers equitable
contract distribution for a follow-on to an 8(a) procurement offered to
SBA on behalf of a specific 8(a) Participant. In SBA's view, the
imperative statutory command of Section 8(a)(16)(A) restricts its
authority to affirmatively deny a contract offering made on behalf of a
specific Participant based on considerations related to the equitable
distribution of sole source 8(a) contracts, irrespective of whether the
procurement is a ``new'' or repetitive 8(a) requirement. The proposed
rules sought to clarify this position by providing that Sec.
124.503(g)(1)(iii) applies only to open sole source 8(a) offerings. SBA
received four comments on this proposal, all of which were supportive.
As such, the final rule adopts this clarification as proposed.
Sections 124.504(a)
Section 124.504 identifies several reasons why SBA will not accept
a particular requirement for award through the 8(a) BD program. One of
those reasons is where the procuring activity issued a solicitation for
or otherwise expressed publicly a clear intent to award a contract as a
small business set-aside, or to use the HUBZone, VetCert, or WOSB
programs prior to offering the requirement to SBA for award as an 8(a)
contract. SBA proposed to authorize SBA to accept a requirement for the
8(a) program where the AA/BD determines that there is a reasonable
basis to cancel the initial solicitation or, if a solicitation had not
yet been issued, a reasonable basis for the procuring agency to change
its initial clear expression of intent to procure outside the 8(a) BD
program. This could happen, for example, where the procuring agency's
needs have changed since the initial solicitation was issued such that
the solicitation no longer represents its current need, or where
appropriations are no longer available for the requirement as
anticipated, and the solicitation must be cancelled until a following
fiscal year where funds are available. A change in strategy only (i.e.,
an agency seeks to solicit through the 8(a) BD program instead of
through another previously identified program) would never constitute a
reasonable basis for SBA to accept the requirement into the 8(a) BD
program.
SBA received six comments in response to this clarification, and
all six supported the proposal. One commenter recommended that the
Associate Administrator for Business Development should consult with
the head of the Government Contracting Office before accepting a
requirement to ensure that another SBA program is not adversely
affected. SBA believes that such coordination should not be required in
all instances (i.e., there will be clear instances where the Director
of Government Contracting's involvement is not needed), and that
coordination
[[Page 102458]]
between SBA offices routinely happens when necessary. Nevertheless, in
response to the comment, the final rule adds a provision specifying
that AA/BD may coordinate with the D/GC, where appropriate, before
accepting a requirement into the 8(a) BD program to ensure that another
SBA program is not adversely affected.
Section 124.509
Section 124.509 establishes non-8(a) business activity targets
(BATs) to ensure that Participants do not develop an unreasonable
reliance on 8(a) awards. The reason for requiring a certain percentage
of non-8(a) revenue during a Participant's last five years in the 8(a)
BD program is to strengthen the Participant's ability to prosper once
it exits the program. Congress believed that firms that were totally
reliant on the 8(a) BD program for their revenues would be ill prepared
to survive as on-going business concerns after leaving the program. As
such, Congress required a certain percentage of non-8(a) revenue during
the transitional stage of program participation to bolster
Participants' continued viability. SBA amended Sec. 124.509 as part of
a comprehensive final rule in October 2020. See 85 FR 66146, 66189
(Oct. 16, 2020). In that final rule, SBA recognized that a strict
prohibition on a Participant receiving new sole source 8(a) contracts
should be imposed only where the Participant has not made good faith
efforts to meet its applicable non-8(a) business activity target. SBA
sought to provide guidance regarding what SBA considers to be good
faith efforts in a final rule published in April 2023. See 88 FR 26164,
26208 (April 27, 2023). The proposed rule incorporated additional
guidance on how SBA considers unsuccessful offers in determining
whether good faith efforts have been made. Specifically, in determining
the projected revenue that SBA will consider in determining whether one
or more unsuccessful offers submitted by a Participant would have given
the Participant sufficient revenues to achieve the applicable non-8(a)
business activity target, the proposed rule provided that SBA will
consider only procurements for which the Participant had reasonable
prospects of success. The proposed regulatory text included an example
showing how revenue for an unsuccessful offer would be considered in
this context. The example explained that where a Participant has never
received a contract in excess of a relatively small amount (the example
cites $5M), SBA would not count any revenue from an unsuccessful offer
for a contract that greatly exceeds what the Participant has previously
performed (the example points to a $100M contract). In such a case, the
Participant would not have a reasonable prospect of success in
submitting an offer for a contract that was substantially higher than
anything it had performed in the past. The proposed rule also clarified
that only the value of the base year of the contract for which the
Participant's offer was unsuccessful would be considered in determining
whether the Participant made good faith efforts to achieve its non-8(a)
BAT. In this regard, there had been some confusion as to whether the
value of the entire contract or only the value of the base year should
be considered in determining whether the revenues from that contract,
if received, would have brought the Participant back into compliance
with its BAT. As explained in the proposed rule, had the Participant
been successful and received that contract, pursuant to Sec.
124.509(b)(3) SBA would measure the Participant's compliance with the
applicable BAT by comparing the Participant's non-8(a) revenue to its
total revenue during the program year just completed. This analysis
considers only the non-8(a) revenues received, not the total value of
the non-8(a) contract that a Participant is performing. The proposed
rule noted SBA's belief that same analysis should occur when
considering whether a Participant has made good faith efforts to meet
its BAT. In other words, it would not be appropriate for SBA to
consider projected revenue under a contract for which the Participant's
offer was unsuccessful beyond the contract's base year of performance.
SBA received 17 comments in response to the proposed changes to
Sec. 124.509. Commenters were generally supportive of SBA's proposal
to consider only projected revenue under procurements for which the
Participant had reasonable prospects of success in the good faith
efforts evaluation. However, the majority of these comments urged SBA
to provide additional clarity as to how SBA will determine whether a
Participant had reasonable prospects of winning a particular contract.
According to the commenters, the value of a Participant's prior
contracts is one of several relevant factors SBA should consider in
determining whether a Participant had reasonable prospects of winning a
contract. SBA agrees and notes that the business development assistance
provided through the 8(a) BD program is intended to improve a
Participant's capabilities and ability to pursue larger, more complex
contracts. In proposing this amendment to the BAT regulations, SBA
sought to discourage Participants from disingenuously submitting
offers, particularly for large dollar-value procurements, for the clear
purpose of circumventing the BAT policies; it certainly was not
intended to suggest that SBA would consider only projected revenues
from lost contract opportunities at or below its current capacity in
determining whether a Participant made good faith efforts to obtain
work outside the 8(a) BD program. Several commenters recommended that
for an entity owned Participant, SBA should consider the past
performance and experience of sister subsidiary companies. SBA
disagrees. SBA would consider the past performance and experience of
affiliated companies, but, under applicable statute and regulations,
individual business concerns owned by a Tribe, ANC, NHO or CDC are not
affiliated with each other. As SBA has stated previously, SBA believes
that the past performance of a sister company can be considered only
where that sister company is involved in the procurement under
consideration (i.e., as a subcontractor or joint venture partner). In
response to the comments, the final rule restructures Sec.
124.509(d)(1)(ii) and adds language clarifying that SBA will consider
all relevant factors, to include contract magnitude, and past
performance and experience of a joint venture partner and/or
subcontractor.
Most commenters agreed with SBA's clarification that only the value
of the base year of the contract for which the Participant's offer was
unsuccessful would be considered in determining whether the Participant
made good faith efforts to achieve its non-8(a) BAT. Two commenters,
however, urged SBA to consider the projected revenue under subsequent
periods of performance in determining whether the Participant made good
faith efforts during the appropriate compliance period. For example,
where a Participant made a good faith, but unsuccessful, effort to
capture a contract in the first year of its transitional stage of
program participation (i.e., program year five), SBA would consider the
projected revenue under the base year of the contract when evaluating
the Participant's compliance with its non-8(a) BAT for program year
five. According to the above commenters, SBA should also consider the
projected revenue of the first option period of performance when
evaluating the Participant's compliance with its non-8(a) BAT for
program year six (and continue doing so for the contract's
[[Page 102459]]
entire period of performance). SBA disagrees with this approach. As SBA
has previously explained, the non-8(a) BAT requirement ensures that
8(a) Participants do not become unreasonably reliant on 8(a) contract
support and are prepared to compete in the open marketplace after
exiting the 8(a) BD program. Recognizing a Participant's ``good faith
efforts'' to obtain non-8(a) work furthers this purpose while also
promoting the firm's business development through ongoing access to
sole source contract support. However, SBA is concerned that
considering projected non-8(a) revenues from a missed contract
opportunity over the total period of performance contract could
inadvertently incentivize Participants to submit fewer offers for non-
8(a) procurements, especially in years where their non-8(a) BAT
threshold is relatively higher. As previously explained, the BAT
requirement reflects legislative intent to prepare 8(a) Participants
for competition outside the 8(a) BD program. In the agency's best
judgment, limiting consideration to the value of the base year of
performance and only for the period of compliance in which the offer
was submitted strikes the right balance between this goal and continued
business development through sole source contract support. In addition,
options are not a guarantee of future revenue. If a firm received a
non-8(a) contract in year five, SBA would count the revenue received as
non-8(a) revenue in determining compliance with its applicable BAT. If
the relevant procuring agency did not exercise the first option after
the base year, SBA would not count the anticipated, but not received,
revenue in year six as non-8(a) revenue for BAT purposes. SBA adopts
the proposed clarification in the final rule.
Section 124.514(a)(1)
Section 124.514 provides guidance regarding the exercise of 8(a)
options and modifications. Paragraph 124.514(a)(1) currently states
that if a concern has graduated or been terminated from the 8(a) BD
program or is no longer small under the size standard corresponding to
the NAICS code for the requirement, negotiations to price the option
cannot be entered into and the option cannot be exercised. Because the
regulatory language specifies graduation and termination from the
program, SBA has received a few inquiries as to whether this provision
applies to firms that have voluntarily exited the program. SBA has
always intended this provision to apply to all firms that are no longer
active Participants in the program. The proposed rule merely made that
intent clear by specifically providing that this provision applies to
all firms whose term of participation in the 8(a) BD program has ended
or who have otherwise exited the program through any means. Three
commenters supported the clarification without substantive comment. As
such, SBA adopts the proposed language as final in this rule.
Section 124.518
Section 124.518(c) provides that SBA may authorize another
Participant to complete performance of an 8(a) contract and, in
conjunction with the procuring activity, permit novation of that
contract without invoking the termination for convenience or waiver
provisions of Sec. 124.515 where SBA determines that substitution
would serve the business development needs of both 8(a) Participants.
SBA has seen several instances where a joint venture between an 8(a)
Participant and a non-8(a) business concern was awarded an 8(a)
contract and for whatever reason the two firms seek to terminate the
joint venture and novate the 8(a) contract individually to the 8(a)
Participant that was the lead partner of the joint venture. If novation
would occur, performance of the 8(a) contract would remain with an 8(a)
Participant (i.e., the 8(a) Participant that was the lead partner of
the joint venture). As such the intent of the program would be
furthered. It could be argued that the current Sec. 124.518(c)
authority could be used to novate the 8(a) contract in this instance;
substitution would serve the business development needs of both the
initial 8(a) awardee (the joint venture) and the substituting 8(a)
Participant (the former lead 8(a) partner to the joint venture). The
proposed rule added a new Sec. [thinsp]124.518(d) to specifically
authorize such a substitution. SBA also requested comments on whether
it should further define how substitution ``would serve the business
development needs of both 8(a) Participants.'' For example, where a
Participant was not in compliance with its applicable business activity
target, sought to transfer an 8(a) contract to another eligible 8(a)
Participant through the substitution process and then sought to perform
a significant portion of that contract as a subcontractor to the new
8(a) Participant (to then count the revenue from the subcontract as
non-8(a) revenue), SBA explained that it would not determine that such
a transfer was in the best interests of the program or serve the
business development needs of both 8(a) Participants.
SBA received six comments on the proposed additional of new Sec.
[thinsp]124.518(d), all of which were supportive. SBA therefore adopts
this language as proposed. SBA notes, however, that this substitution
authority should not be construed as giving the managing 8(a) venturer
the option to request a substitution without the consent of the other
joint venture partners. While the 8(a) BD program regulations require
that an 8(a) Participant, among other things, own at least 51% of the
joint venture and serve as the managing venturer responsible for
controlling the day-to-day management of the joint venture's
contractual performance, nothing in SBA regulations or policy
authorizes or gives to the managing 8(a) venturer the unilateral
authority to transfer the joint venture's contracts to itself. SBA will
consider these principles when reviewing a substitution request under
Sec. [thinsp]124.518(d). Three commenters recommended that SBA provide
examples or guidance on what SBA would consider when determining
whether a proposed substitution ``would serve the business development
needs of both 8(a) Participants.'' As explained in the proposed rule,
SBA is concerned that some Participants could use the substitution
authority to circumvent important program policies, such as the BAT
requirement and the sole source follow-on contracting restriction
applicable to sister subsidiaries owned by the same Tribe/ANC/NHO/CDC.
In addition, SBA never intended for this substitution authority to
allow Participants to sell or otherwise transfer prime 8(a) contracts
when doing so would frustrate the program's interests or potentially
violate other applicable Federal procurement rules. To this end, SBA
has already received several substitution requests from contract
holders on 8(a) multiple award contracts, such as the 8(a) Streamlined
Technology Acquistion Resource for Services (STARS) III multiple award
contract. The contract holders requesting a substitution have typically
graduated from the 8(a) BD program or have exceeded the applicable size
standard and are therefore no longer eligible to receive sole source
orders under the 8(a) STARS III vehicle. Such firms have stated that a
substitution would serve their business development needs by raising
capital from the sale of STARS III contracting assets, and by
eliminating the cost and burden of administering the contract. SBA does
not believe a transfer under these and similar circumstances serves the
programmatic business development
[[Page 102460]]
needs of the contract holder requesting a substitution. Participation
in the competitive 8(a) procurement process has been and remains one of
the most valuable forms of business development assistance available
through the 8(a) BD program. Establishing and implementing a capture
strategy, critically evaluating a Request for Proposals, and technical
proposal writing are just some of the necessary skills for submitting a
successful offer in the Federal marketplace. In SBA's view, losing the
opportunity to acquire or hone these skills in the competitive 8(a)
context would be antithetical to a firm's business development even
where the transfer might provide other legitimate benefits.
Additionally, SBA notes that 41 U.S.C. 6305, as implemented at Federal
Acquisition Regulation (FAR) Subpart 42.1204, prohibits contractors
from selling or transferring a prime Government contract to a third-
party. The Government may novate a contract to recognize a third-party
as a successor in interest to a Government contract where that interest
arises out of the transfer of (1) all the contractor's assets; or (2)
the entire portion of assets involved in performing the contract. Where
a contract holder seeks to transfer an Indefinite Delivery, Indefinite
Quantity 8(a) contract without any task order awards, this may not
comply with the requirements of FAR Subpart 42.1204. SBA has and will
continue to consider all these factors in determining whether to
authorize a substitution on the grounds that doing so would serve the
business development needs of both 8(a) Participants. The final rule
adds clarifying language and examples to Sec. [thinsp]124.518(c) to
better explain SBA's intent.
Sections 124.602 and 124.604
Section 124.602 sets forth the kind of annual financial statement
an 8(a) BD Participant submits to SBA, depending upon its gross annual
receipts. Prior to this rule, Participants with gross annual receipts
of more than $10 million were required to submit to SBA audited annual
financial statements prepared by a licensed independent public
accountant; Participants with gross annual receipts between $2 million
and $10 million were required to submit to SBA reviewed annual
financial statements prepared by a licensed independent public
accountant; and Participants with gross annual receipts of less than $2
million were required to submit to SBA an annual statement prepared in-
house or a compilation statement prepared by a licensed independent
public accountant. SBA believes that with the value of Federal
contracts greatly increasing over the last few years, the top dollar
threshold of $10 million is being met by most Participants far more
frequently. Recognizing that requiring an audited financial statement
can be a significant cost to many small businesses, SBA proposed to
require audited financial statements for those Participants exceeding
$20 million, reviewed financial statements for those Participants with
gross annual receipts between $5 million and $20 million, and in-house
financial statements for those Participants with less than $5 million
in annual receipts. SBA received 11 comments responding to the proposed
increases to the thresholds for the annual financial statement
requirements for 8(a) Participants. Commenters overwhelmingly supported
the increased thresholds. One commenter appreciated SBA's
acknowledgment of the substantial expenses involved in obtaining
audited and reviewed financial statements, especially since compliance
costs can be a significant barrier for small businesses, particularly
in the Federal contracting industry. One commenter recommended that SBA
require only internal prepared financial statements. Two commenters
supported the increases generally but requested that the threshold to
require reviewed financial statements be raised so that the
Participants with lower revenues do not have to incur the added cost of
a reviewed financial statement. SBA does not believe that only internal
prepared financial statements should be required regardless of a
Participant's revenues. More sophisticated business concerns should
have audited financial statements, which may be required for certain
types of contracts as well. In response to the comments, the final rule
increases the threshold at which reviewed financial statements are
required from $5 million to $7.5 million.
In response to SBA's proposed changes to the financial statement
reporting requirement, one commenter suggested that SBA also amend
Sec. 124.604, which provides that a Participant owned by a Tribe, ANC,
NHO, or CDC must include with its annual financial statement submission
information showing how the Tribe/ANC/NHO/CDC has provided benefits to
its Native or underserved community through the Tribe's/ANC's/NHO's/
CDC's participation in the 8(a) BD program. Sec. 124.602 allows a
Tribe/ANC/NHO/CDC to submit consolidated financial statements prepared
by the parent entity with schedules for each 8(a) Participant instead
of separate audited financial statements for each individual 8(a)
Participant. According to this commenter, it would make sense to
provide a similar consolidated reporting option for community benefits
under Sec. 124.604. While SBA did not specifically propose any changes
to Sec. 124.604, we note SBA has long permitted Tribes/ANCs/NHOs/CDCs
to annually report consolidated community benefits. Because this
commenter's suggested revision merely recognizes current program policy
and the entity's discretion to consolidate benefits reporting but does
not require such consolidation, the final rule adds language to Sec.
124.604 to clarify that Tribes/ANCs/NHOs/CDCs may elect to submit a
consolidated report showing how the applicable Native or underserved
community has benefitted through the Tribe's/ANC's/NHO's/CDC's
participation in the 8(a) BD program. Of course, as noted above,
consolidated community benefits reporting is optional; Tribes, ANCs,
NHOs, and CDCs may continue to submit separate annual community
benefits reports through each 8(a) Participant.
Section 125.2
SBA's regulations currently make clear that a contracting activity
cannot conduct a competition requiring multiple socioeconomic
certifications. In this regard, Sec. 124.501(b) prohibits a
contracting activity from restricting an 8(a) competition to
Participants that are also certified HUBZone small businesses,
certified WOSBs or certified SDVO small businesses. There is a similar
restriction for the HUBZone program in Sec. 126.609, for the WOSB
program in Sec. 127.503(e), and for the VetCert program in Sec.
128.404(d). However, there is no similar specific restriction for small
business set-asides and reserves. Where a contracting activity seeks to
require 8(a), HUBZone, WOSB or SDVO certification in addition to status
as a small business, in essence the contracting activity would be
soliciting as an 8(a), HUBZone, WOSB or SDVO small business contract.
That is permissible. Similarly, current Sec. 125.2(e)(6) specifies
that a contracting officer may set aside orders for eligible 8(a)
Participants, certified HUBZone small business concerns, SDVO small
business concerns, WOSBs, and EDWOSBs against total small business set-
aside multiple award contracts. As such, there should be no doubt that
there can be an order or agreement set-aside or reserved for a specific
type of small business (i.e., 8(a), HUBZone,
[[Page 102461]]
WOSB/EDWOSB, or SDVO) under a multiple award contract that itself was
set aside for small business. SBA has been asked whether a contracting
activity could require multiple certifications through ``a small
business set aside''. SBA believes that the current program specific
regulations identified above would prohibit that. In order to eliminate
any misinterpretation, the proposed rule added a new Sec. 125.2(c)(6)
that would clarify that a procuring activity cannot restrict a small
business set-aside or reserve (for either a contract or order) to
require multiple socioeconomic program certifications in addition to a
size certification.
SBA received eight comments supporting this clarification. One
commenter recommended that the regulatory text say ``multiple'' or
``various'' instead of ``one or more,'' since requiring size and one
socioeconomic status (8(a), HUBZone, WOSB, or SDVO) is permitted. SBA
agrees and has replaced the words one or more with the word multiple.
Two commenters also questioned whether there can be a partial set-aside
and a reserve on the same requirement. The commenters believe that it
makes sense that both should be allowed and that it is currently
permitted, but that the regulatory text should be clarified. SBA agrees
that both can occur with respect to one procurement requirement. A
partial set-side can be done for one or more CLINs that must be set-
aside for small business and a reserve could also be done on the same
procurement for other items or services where a contracting officer
would have discretion to utilize the small business reserve or not. The
final rule clarifies the regulatory text to eliminate any confusion as
to whether there can be both a partial set-aside and a reserve on the
same procurement requirement.
Section 125.3
Section 125.3 governs subcontracting plans and reporting of
subcontracting achievements. SBA proposed to extend the due dates for
subcontracting reports by 15 days, from 30 days to 45 days. SBA also
proposed to extend the time period for reviewing such reports by 15
days, from 60 days to 75 days. These extended time periods recognize
that prime contractors are under increased reporting burdens because of
order-level subcontract reporting. SBA received three comments
supporting these changes without substantive comment. SBA adopts the
proposed language as final in this rule.
Section 125.6(d)
Section 125.6 sets forth the limitations on subcontracting that
apply to a small business prime contractor. A small business prime
contractor, together with any similarly situated entity, must perform a
certain specified amount of a small business contract and cannot
subcontract more than that amount to another business concern that is
not similarly situated. Paragraph 125.6(d) provides that for a multi-
agency set aside contract where more than one agency can issue orders
under the contract, the ordering agency must use the period of
performance for each order to determine compliance. A question has
arisen as to who should monitor compliance with such an order, the
contracting officer for the underlying multi-agency contract or the
contracting officer for the ordering agency. SBA believes that the
contracting officer for the ordering agency is in the best position to
monitor compliance with the limitations on subcontracting for a
specific order. As such, the ordering contracting officer should
monitor compliance throughout performance. At the end of performance of
the order, the ordering contracting officer should inform the
contracting officer for the underlying multi-agency contract if the
ordering contracting officer knows that the contractor has failed to
meet the applicable limitations on subcontracting requirement.
Additionally, there has been some confusion as to how work
performed by leased employees is considered in determining compliance
with the applicable limitation on subcontracting. Paragraph 125.6(d)(3)
explains that work performed by an independent contractor shall be
considered a subcontract and will therefore count against the prime
contractor's limitation on subcontracting unless the independent
contractor qualifies as a similarly situated entity. Unlike independent
contractors, employees obtained from a temporary employee agency,
professional employee organization, or leasing concern perform work
under the primary direction and control of the recipient concern. For
this reason, such individuals are treated as employees of the recipient
concern for purposes of determining that concern's employee count under
Section 121.106(a). SBA believes the same logic should apply when
determining a recipient prime contractor's compliance with the
limitations on subcontracting. Work performed by employees leased to
the small business prime contractor shall be considered the prime
contractor's self-performance, and therefore will not count against the
prime contractor's limitation on subcontracting. The proposed rule
clarified this position in Sec. 125.6(d)(3). The final rule recognizes
an exception where a contract is a staffing contract. SBA believes that
it does not make sense to treat leased employees as employees of the
prime contractor where the prime contractor and the firm it is leasing
from are basically in the same business--staffing.
SBA received 12 comments in response to the two proposed changes to
Sec. 125.6. Eight comments agreed that, for a multi-agency set-aside
contract where multiple agencies can issue orders, the contracting
officer of the ordering agency should be responsible for monitoring
compliance with the limitations on subcontracting for a specific order.
The commenters believed that the ordering agency contracting officer is
in the best position to monitor compliance with the limitations on
subcontracting and noted that this approach allows the ordering
agency's contracting officer to more effectively oversee contract
performance, rather than the contracting officer of the overarching
multi-agency contract. One commenter recommended that the ordering
agency contracting officer should report a perceived violation only
where a concern exceeds the applicable limitation on subcontracting
requirement by more than a certain percentage. SBA disagrees. SBA
believes that the contracting officer for the underlying multi-agency
contract should be made aware of all instances of a contractor's
failure to comply with regulatory requirements, including here the
limitation on subcontracting requirements. If there are mitigating
reasons for a contractor's failure to comply with the applicable
limitation on subcontracting (e.g., the ordering changed made changes
to the procurement that required more subcontracting than anticipated),
the ordering agency contracting officer should identify those reasons
to the contracting officer for the underlying multi-agency contract.
SBA received six comments on the proposed language regarding leased
employees. All six supported the proposal. One commenter requested
clarification for an entity-owned Participant as to how leased
employees from a holding company or another company owned by the entity
will be treated, especially if assigned on an as needed basis. SBA does
not believe that further clarification is needed in the regulatory
text. If the other entity-owned company is a temporary employee agency,
[[Page 102462]]
professional employer organization, or leasing concern, then the work
done by those individuals will be considered the prime contractor's
self-performance, and therefore not count against the prime
contractor's limitation on subcontracting. If not, the work done by
those individuals would count as subcontracted work.
Section 125.8
Section 125.8(e) covers how agencies evaluate the capabilities,
past performance, and experience of joint ventures, including SBA
mentor-prot[eacute]g[eacute] joint ventures. For SBA mentor-
prot[eacute]g[eacute] joint ventures, section 125.8(e) provides that a
procuring activity may not require the prot[eacute]g[eacute] firm to
individually meet the same evaluation or responsibility criteria as
that required of other offerors generally. This provision recognizes
that prot[eacute]g[eacute]s may be less experienced when submitting an
offer but, if they win the award, will gain experience and capabilities
while performing with the mentor. SBA does not require, however, that
every contract competition include special evaluation criteria for
prot[eacute]g[eacute]s.
A recent decision by the Court of Federal Claims has caused some
confusion as to what past performance a procuring activity can require
of a prot[eacute]g[eacute] joint venture partner and how that past
performance should be evaluated. See SH Synergy, LLC v. United States,
165 Fed. Cl. 745 (2023). The SBA's mentor-prot[eacute]g[eacute] program
is designed to enhance the capabilities of prot[eacute]g[eacute] firms
by requiring approved mentors to provide business development
assistance to prot[eacute]g[eacute] firms and to improve the
prot[eacute]g[eacute] firms' ability to successfully compete for
Federal contracts. The program recognizes that many small businesses
may not have the necessary past performance and experience to
individually compete successfully for certain larger contracts. Thus,
it allows joint ventures between a prot[eacute]g[eacute] firm and a
large business mentor to qualify as small to allow
prot[eacute]g[eacute] firms to gain valuable experience overseeing and
performing larger contracts. While the joint venture as a whole must
meet the applicable limitation on subcontracting (or in other words
perform a certain percentage of the contract), the
prot[eacute]g[eacute] firm must perform at least 40% of all the work
done by the joint venture partners in the aggregate. Because of that
40% requirement, some procuring activities require
prot[eacute]g[eacute] joint venture partners to demonstrate some level
of past performance as part of a joint venture's offer. Although SBA's
current regulation provides that a procuring activity may not require
the prot[eacute]g[eacute] firm to individually meet the same evaluation
or responsibility criteria as that required of other offerors
generally, it does not provide guidance on what a procuring activity
could require. SBA proposed to provide such guidance. Specifically, SBA
proposed to permit a procuring activity to require some past
performance at a dollar level below what would be required of joint
venture mentor partners or of individual offerors. The proposed rule
provided an example of how this could work. In the example, where
offerors must generally demonstrate successful performance on five
contracts with a value of at least $20 million, a procuring activity
could require a prot[eacute]g[eacute] joint venture partner to
demonstrate one or two contracts valued at $10 million or $8 million.
In addition, if a procuring activity requires a prot[eacute]g[eacute]
joint venture partner to demonstrate successful performance on two
contracts valued at $10 million or more, successful performance by the
prot[eacute]g[eacute] firm on those $10 million contracts shall be
rated equivalently to successful performance by the mentor partner to
the joint venture or any other individual offeror on $20 million
contracts.
SBA received 26 comments in response to the proposed changes to
Sec. 125.8(e). Sixteen comments supported the proposed changes and ten
opposed them. Commenters supported giving less stringent requirements
for protege firms' past performance. Several commenters recommended
that SBA should highlight that the change is intended to limit the type
of past performance agencies can require of proteges rather than
authorizing the imposition of greater or more complex past performance
requirements. SBA agrees that the guidance provided is intended to
ensure that procuring activities do not require the same full level of
past performance and experience of prot[eacute]g[eacute] joint venture
members as they do of other offerors generally. This logically means
that if a procuring activity requires past performance of a
prot[eacute]g[eacute] joint venture partner, it must be at a reduced
level. The majority of the opposing comments objected to the ``change''
that allows the procuring activity discretion whether to require a
protege[acute] member of a joint venture to demonstrate some level of
past performance and/or experience, although one commenter recommended
that prot[eacute]g[eacute]s should always be required to demonstrate
some level of individual past performance. SBA notes that that is not a
change from current policy. Procuring agencies currently have the
discretion to require some level of past performance and experience of
prot[eacute]g[eacute] joint venture partners. If that were not the
case, there would not be GAO and Court of Claims cases considering if a
procuring agency required too much past performance and experience of
the prot[eacute]g[eacute] firm. The proposed rule merely provided
guidance on what a procuring activity could require. In response to the
comments, the final rule clarifies that a procuring activity
contracting officer may rely solely on the past performance and
experience of the mentor joint venture partner in its discretion. The
final rule also adds a provision to the regulatory text providing that
if a procuring activity requires a prot[eacute]g[eacute] joint venture
partner to demonstrate some successful performance and/or experience on
fewer previous contracts of lower values than that required of other
offerors generally, successful performance by the prot[eacute]g[eacute]
firm on the contracts it identifies shall be rated equivalently to
successful performance by the mentor partner to the joint venture or
any other individual offeror on the higher valued contracts they
identify. Although this was clearly set forth in the example to
paragraph (e), SBA believes that it should be specified in a separate
regulatory provision as well.
Where a joint venture is the apparent successful offeror for a
contract set aside or reserved for small business, Sec. 125.8(f)
currently authorizes the procuring activity to execute a contract in
the name of the joint venture entity or a small business partner to the
joint venture. There has been some confusion as to whether a procuring
activity can choose to either execute the contract in the name of the
joint venture entity or to a small business partner to the joint
venture. SBA did not intend such discretion. SBA's joint venture rules
set forth in Sec. 121.103(h)(1) provide that a joint venture may be in
the form of a formal or informal partnership or exist as a separate
limited liability company or other separate legal entity. Where a joint
venture exists as a separate legal entity, SBA intended a contract to
be executed in the name of the joint venture. SBA intended to allow
contracts successfully won by a joint venture to be awarded in the name
of the small business partner only where the joint venture was not a
separate legal entity, but rather an informal arrangement that had a
written joint venture agreement that complied with SBA's regulations.
The proposed rule clarified SBA's intent. Two commenters supported this
clarification, with one specifying that although they acknowledge that
it has always been the SBA's intent, they support explicitly
[[Page 102463]]
clarifying that a contract awarded to a joint venture shall be executed
in the name of the joint venture if the joint venture is a separate
legal entity. SBA adopts the proposed language as final in this rule.
Section 125.9
Section 125.9 sets forth the requirements relating to SBA's mentor-
prot[eacute]g[eacute] program. Paragraph 125.9(b) specifies rules
pertaining to firms seeking to become mentors and to firms which have
been approved as mentors in the program. The introductory language to
that paragraph provides that any concern that demonstrates a commitment
and the ability to assist small business concerns may act as a mentor,
including other than small businesses. There has been some confusion as
to whether non-profit entities may act as mentors. The statutory
authority for the mentor-prot[eacute]g[eacute] program specifies that
the term ``mentor'' means a for-profit business concern, of any size,
that has the ability to assist and commits to assisting a protege to
compete for Federal prime contracts and subcontracts. 15 U.S.C.
657r(d). Although Sec. 125.9(b) does not specifically state that a
mentor must be a for-profit entity, it requires a mentor to be a
``concern'', and that term is defined in SBA's regulations as a
business entity organized for profit under Sec. 121.105(1)(1). To
eliminate any confusion, the proposed rule clarified that only for-
profit business concerns may be mentors. Two commenters supported the
clarification, and SBA adopts the proposed language as final.
Paragraph 125.9(b)(3)(ii)(B) authorizes a mentor to purchase
another business entity that is also an SBA-approved mentor of one or
more prot[eacute]g[eacute] small business concerns where the purchasing
mentor commits to honoring the obligations under the seller's mentor-
prot[eacute]g[eacute] agreement. Paragraph 125.9(b)(3)(i) provides that
a mentor that has more than one prot[eacute]g[eacute] cannot submit
competing offers in response to a solicitation for a specific
procurement through separate joint ventures with different
prot[eacute]g[eacute]s. However, it is possible that the initial or
selling mentor may be a contract holder as a joint venture with a
prot[eacute]g[eacute] on the same multiple award contract where the
acquiring mentor is also a contract holder as a joint venture with its
prot[eacute]g[eacute]. In such a case, after the purchase and the
purchasing mentor committing to fulfill the obligations of the selling
mentor's mentor-prot[eacute]g[eacute] agreement, the purchasing mentor
could then have two different joint ventures as contract holders on the
same multiple award contract. This could allow the mentor to dictate
which joint venture could compete for any specific order under the
multiple award contract. SBA does not believe that the mentor should be
able to choose one prot[eacute]g[eacute] over another to compete for an
order. In order to clarify SBA's intent, the proposed rule provided
that where a mentor purchases another business entity that is also an
SBA-approved mentor that is a contract holder as a joint venture with a
prot[eacute]g[eacute] small business and the mentor is also a contract
holder with a prot[eacute]g[eacute] small business on that same
multiple award contract, the mentor must exit one of those joint
venture relationships. SBA understands that this could adversely affect
one of the prot[eacute]g[eacute] firms involved in a joint venture. To
alleviate harm to a prot[eacute]g[eacute], the proposed rule also
permitted the prot[eacute]g[eacute] firm connected to the joint venture
from which the mentor exits to seek to acquire the new mentor's
interest in the underlying multiple award contract or reserve and work
with the contracting officer to determine whether novation of such
contract or reserve to itself only may be appropriate. The
prot[eacute]g[eacute] may also seek to continue performance under the
contract by replacing the new mentor with another business in the joint
venture such that the revised joint venture continues to qualify as
small. Similarly, the proposed rule also added a new Sec.
125.9(d)(1)(iv) to give a prot[eacute]g[eacute] firm a right of first
refusal to purchase a mentor's interest in a mentor-
prot[eacute]g[eacute] joint venture where the mentor seeks to sell its
interest in the joint venture.
SBA received 14 comments on the proposed changes to Sec. 125.9(b).
Eight comments favored the proposed language, three questioned some of
the language and three had comments outside the scope of this
rulemaking. Those in favor believed that a prot[eacute]g[eacute] should
be able to novate its joint venture contract to itself where its mentor
is sold to another firm and that firm does not intend continue
performance in that joint venture. They felt that to do otherwise would
hurt the small business prot[eacute]g[eacute] and recommended that
contracting officers should be encouraged to process such novation
requests. One commenter supported prohibiting a mentor from having two
different joint ventures as contract holders on the same multiple award
contract since this situation could provide the mentor with an unfair
advantage, create a conflict of interest, and potentially harm one or
both prot[eacute]g[eacute]s. One commenter questioned whether the
proposed changes were intended to clarify existing guidance or
introduce new restrictions. As noted in the proposed rule, SBA's
current regulations provide that a mentor that has more than one
prot[eacute]g[eacute] cannot submit competing offers in response to a
solicitation for a specific procurement through separate joint ventures
with different prot[eacute]g[eacute]s. Because of that regulatory
provision, SBA believes that current regulations require a firm that
becomes the mentor of two prot[eacute]g[eacute]s on the same multiple
award contract to end one of those mentor-prot[eacute]g[eacute]
relationships. SBA views this change as a clarification of existing
policy, not the imposition of a new requirement. Similarly, SBA's
current regulations provide that SBA may approve a second mentor for a
particular prot[eacute]g[eacute] firm where the second relationship
will not compete or otherwise conflict with the first mentor-
prot[eacute]g[eacute] relationship. If a prot[eacute]g[eacute] firm
enters joint venture relationships with each of its two mentors, those
joint ventures cannot compete against each other. They cannot be
contract holders on the same multiple award contract. Although that is
currently policy, SBA has clarified that point in this final rule. One
commenter recommended that SBA clarify that novation would not be
necessary where there is merely a change in ownership of the joint
venture (e.g., another business buys the minority interest of the new
mentor in the joint venture). The commenter believed that as long as
there was merely a change in the ownership of the joint venture entity,
the joint venture could continue to perform the contract without the
need for a novation. SBA agrees that where a joint venture continues to
qualify as small and otherwise eligible after a change of ownership of
the joint venture, the joint venture can continue to receive orders
under the multiple award contract without requiring a novation. One
commenter supported the changes but was concerned that SBA assumed that
a prot[eacute]g[eacute] firm was financially positioned to buy out a
mentor's interest in an underlying multiple award contract or buy a
mentor's interest in a mentor-prot[eacute]g[eacute] joint venture. The
commenter recommended that the SBA provide that any financing that the
prot[eacute]g[eacute] receives from another entity in order to purchase
the mentor's interest in a multiple award contract or mentor-
prot[eacute]g[eacute] joint venture shall not be grounds for a finding
of affiliation. SBA agrees that as long as financing is on commercially
standard terms affiliation will not be found and makes that
clarification in this final rule. Finally, one commenter
[[Page 102464]]
sought clarification as to whether the time needed to find a substitute
mentor would be tacked on to the new mentor-prot[eacute]g[eacute]
agreement to give the protege its full six years. Under SBA's
regulations, a small business may generally have a total of two mentor-
prot[eacute]g[eacute] agreements with different mentors. Each mentor-
prot[eacute]g[eacute] agreement may last for no more than six years.
The current regulations also authorize the substitution of one mentor
for another where the initial mentor-prot[eacute]g[eacute] relationship
is terminated. SBA does not believe that the time it takes a
prot[eacute]g[eacute] small business to find a new mentor should be
subtracted from the six-year authorized mentor-prot[eacute]g[eacute]
relationship. That is SBA's current policy, but the final rule makes
that clear in a revised paragraph (c)(4)(iii).
The proposed rule also redesignated current Sec. 125.9(e)(6) as
Sec. 125.9(c)(4). This provision relates to rules affecting
prot[eacute]g[eacute] firms and SBA believes it should more
appropriately be located in Sec. 125.9(c), which has a heading
entitled ``Proteges.'' The proposed rule added clarifying language to
redesignated Sec. 125.9(c)(4)(iv) to make clear that a concern cannot
be a prot[eacute]g[eacute] for a total of more than 12 years. There has
been some confusion that if a prot[eacute]g[eacute] elects to extend
its mentor-prot[eacute]g[eacute] relationship with the same mentor for
an additional six-year period that the prot[eacute]g[eacute] could
somehow be able to participate in the mentor-prot[eacute]g[eacute]
program as a prot[eacute]g[eacute] for more than 12 years. SBA believes
that the current regulations clearly restrict such participation to a
total of 12 years. Nevertheless, in order to dispel any possible
contrary interpretation, the proposed rule specified that a firm could
be a prot[eacute]g[eacute] for up to 12 years, whether the concern has
a mentor-prot[eacute]g[eacute] relationship with two different mentors
or the same mentor for second six-year period. Two commenters supported
this clarification without substantive comment. SBA adopts the proposed
language as final in this rule.
Finally, the proposed rule added a new Sec. 125.9(c)(5). Within
the provisions relating to mentors in Sec. 125.9(b), the current
regulations authorize a firm to purchase another firm that is currently
an approved mentor in SBA's mentor-prot[eacute]g[eacute] program and to
continue that mentor-prot[eacute]g[eacute] relationship if the
purchasing firm commits to honoring the obligations under the seller's
mentor-prot[eacute]g[eacute] agreement. The regulations do not,
however, currently address any rights a prot[eacute]g[eacute] may have
where such a sale occurs. There are times that the former mentor-
prot[eacute]g[eacute] agreement would not be a good fit with the
purchasing business concern. The purchasing concern may have different
capabilities than the selling concern and may not be the best business
concern to carry out the previous mentor's commitments. Where the
purchasing concern is not able to fulfill the requirements of the
existing mentor-prot[eacute]g[eacute] agreements as written, SBA
believes that the prot[eacute]g[eacute] firm should be able to either
negotiate a revised mentor-prot[eacute]g[eacute] agreement with the
buying concern or terminate the mentor-prot[eacute]g[eacute] agreement
if the prot[eacute]g[eacute] believes the buying concern is not a good
fit for it. This right of the prot[eacute]g[eacute] is limited to where
the new mentor would not fulfill the former mentor-
prot[eacute]g[eacute] agreement. SBA would have to approve any revised
mentor-prot[eacute]g[eacute] agreement. If the mentor-
prot[eacute]g[eacute] agreement is terminated, the
prot[eacute]g[eacute] firm could seek another business concern to enter
a mentor-prot[eacute]g[eacute] relationship for a duration not to
exceed six years minus the length of the mentor-prot[eacute]g[eacute]
relationship with the former mentor.
SBA received four comments regarding this proposal. All four
supported the language generally. Two commenters sought clarification
that the prot[eacute]g[eacute] could terminate its mentor-
prot[eacute]g[eacute] relationship only where the purchasing business
concern (i.e., the new mentor) and the prot[eacute]g[eacute] cannot
agree on either continuing with the previous mentor-
prot[eacute]g[eacute] agreement or negotiating a new mentor-
prot[eacute]g[eacute] agreement that is acceptable to SBA. That was
SBA's intent and the final rule makes slight wording changes in order
to clarify that intent.
Sections 125.12, 126.619, 127.504(h), and 128.401(e)
SBA proposed to relocate size recertification and small business
program status recertification to new Sec. 125.12. Historically, size
and status recertification have been separately addressed in parts 121
(for size), 124 (for 8(a) BD), 126 (for HUBZone), 127 (for WOSB), and
128 (for service-disabled veteran-owned small business or SDVOSB) of
SBA's regulations. SBA sought to provide consistency among and clean up
differences in the regulatory text in the programs. SBA believes that
the rules regarding recertification should be the same for size and
status, across all SBA small business government contracting and
business development programs. The consolidation of the rules into one
section that is cross-referenced in each small business program
regulations will simplify the text and ensure easier, more consistent
interpretation and application of the regulations.
Size and status recertification is a complex area of SBA's
regulations that requires simplification and clarity, especially in the
context of exceptions to recertification and the impact of
recertification. The proposed rule made several clarifications to how
SBA always intended recertification to operate, but which may be
unclear from the existing regulatory text. First, a concern that
recertifies as other than the size or status required for an award that
it is currently performing may continue to perform the requirement for
the remainder of that particular period of performance. Whether it can
continue to receive future orders under an underlying contract or
agreement after it submitted a disqualifying recertification depends
upon whether the underlying contract or agreement is a single award or
a multiple award vehicle. A concern that has recertified as other than
small or other than a qualified program participant still may receive
orders or agreements issued under a single award small business
contract or agreement or unrestricted orders issued under an
unrestricted multiple award contract. In either case, a procuring
agency could not count the order as an award to small business or to
the specific type of small business (i.e., 8(a), WOSB, SDVOSB, or
HUBZone). For any multiple award contract or agreement, the concern
would not be eligible for orders set aside for small business or set
aside for a specific type of small business.
Similarly, for a single award small business contract or any
unrestricted contract, a concern that recertified as other than small
or other than the required small business program status remains
eligible to receive options. The procuring agency cannot count the
option period as an award to a small business or small business program
participant for goaling purposes. Such a concern may recertify as small
or as the required small business program status for a subsequent
option period if it meets the applicable size standard or becomes a
certified small business program participant at that time. Conversely,
for a multiple award small business set-aside or reserve, a concern
that recertified as other than small or other than the required small
business program would be ineligible to receive options.
The proposed rule also clarified SBA's intent as to the effect of a
disqualifying recertification that occurs after an offer is submitted
but prior to award. For an award set aside or reserved for small
business, a concern must recertify its size and, where
[[Page 102465]]
appropriate, status if a merger, sale or acquisition occurs after an
offer is submitted but prior to award. If the concern submits a
disqualifying recertification, it may or may not be eligible for the
award depending on when the sale, merger or acquisition occurred. If
the merger, sale, or acquisition occurs within 180 days of offer
submission and before award, the concern is ineligible for the award.
If the merger, sale, or acquisition occurs after 180 days of its offer
and before award, the concern would continue to be eligible for the
award.
Any disqualifying size or status recertification precipitated by
Sec. 125.12(a) or Sec. 125.12(b) (except for the 180-day rule
discussed above), renders a concern ineligible for future set-aside or
reserved awards, including awards of set-aside or reserved orders
against pre-existing unrestricted or set-aside multiple award
contracts. Additionally, in support of this interpretation, SBA
proposed to allow requests for size determinations following any size
recertification made in Sec. Sec. 125.12(a) and (b) as well as those
requested by a contracting officer as set forth in Sec. 125.12(c).
SBA notes that the requirement for size recertification has always
been interpreted by SBA to apply to Blanket Purchase Agreements in
addition to all other small business set-aside or reserved awards,
whether those awards are executed in the form of task orders,
contracts, or any other type of procurement mechanism. Following a 2022
bid protest decision from GAO, SBA explicitly added the word
``agreement'' at 13 CFR 121.404(g)(2)(iii).
SBA received 31 comments responding to the proposed changes. Two
commenters believed that recertifications should not be required in
response to agreements in principle since those agreements may never be
finalized or the ultimate sale or merger may take a long time,
conceivably beyond one or more additional fiscal years (upon which size
status is based). SBA agrees and has eliminated that language from
Sec. 125.12(a).
There were strong opinions on both sides of the significant
proposals. Many of the commenters were concerned that contract holders
on multiple award contracts would not be eligible for orders set aside
for small business or set aside for a specific type of small business
after disqualifying recertifications. These commenters believed that it
could diminish the acquisition value of small business concerns. Others
supported the proposed change, stating that to allow a firm that was
purchased by a very large business to remain an eligible contract
holder on a small business multiple award contract would sanction an
unfair competitive advantage in favor of such now large entities for
individual orders. These commenters believed that would only encourage
more purchases by large businesses, which would hurt individual small
businesses. Regarding decertifying recertifications on long-term
contracts, many comments also believed that this disincentives growth
and penalizes mid-tier businesses that have naturally evolved beyond
the small business size standards. Others stated that they did not
believe that a firm that becomes other than large or other than an
eligible, HUBZone, WOSB or SDVO small business should be able to be
eligible for any options beyond five years. They believed that even
though an agency could not count the options as awards to small
business, the opportunities would not be available to legitimate small
businesses. They posed that a firm that may have grown to be other than
small in year one of a 10-year contract would be able to benefit as a
small business for 9 years after it actually qualified as a small
business. Several commenters recommended a phased or delayed
implementation of these provisions to allow time to adapt. Commenters
recommended one year, two years and five years for a grace period.
SBA agrees that it makes sense to allow business concerns some time
to adapt and plan how best to comply with the recertification
provisions. The final rule adds a new Sec. 125.9(g) that would delay
the effective date of ineligibility for orders and options on
underlying small business multiple award contracts due to disqualifying
recertifications for one year after the effective date of this final
rule. As such, a firm that has a disqualifying size or status
recertification due to a merger, acquisition or sale that occurs prior
to one year after the effective date of this final rule will remain
eligible for orders issued under an underlying small business multiple
award contract. Similarly, a firm that has a disqualifying size or
status recertification prior to the end of the fifth year of a long-
term contract will remain eligible for any options to be exercised
prior to one year after the effective date of this final rule. However,
in both cases, the procuring activity cannot count any new or pending
orders issued pursuant to the contract or any such options exercised
under the contact towards its small business and socioeconomic goals.
This includes set-asides, partial set-asides, and reserves for 8(a) BD
Participants, certified HUBZone small business concerns, SDVOSBs, and
WOSBs/EDWOSBs.
In further response to comments, the final rule also amends which
business concerns will be ineligible for orders and options after a
disqualifying certification due to merger, acquisition or sale.
Specifically, the final rule will make ineligible only those contract
holders that have disqualifying recertifications involving a merger,
acquisition or sale with a large business. Where two business concerns
individually qualify as small before a merger, acquisition or sale but
do not in the aggregate after such occurrence, the final rule allows
the contract holder to remain eligible for orders issued under an
underlying small business multiple award contract. Although the
surviving entity may be eligible for orders after the merger, sale or
acquisition, a procuring activity could no longer count orders issued
to the entity as awards to small business.
One commenter encouraged SBA to specify in its final rulemaking
that the rule will become effective 30 days (or longer) after the date
of final rule publication and wanted to make sure that the rule will
not be applied retroactively. As noted in the Dates section of this
final rule, the provisions set forth in the rule will not be effective
for 30 days after the date of publication. In addition, SBA agrees that
any final rule should not be retroactively applied. SBA asserts that
this rule has no retroactive effect. Once in effect, the rule will
apply to existing contracts, but the provisions making firms ineligible
for orders or options after disqualifying recertifications will apply
only to future disqualifying recertifications (i.e., ones that occur
after one year from the effective date of this rule). Firms that have
made or will continue to make disqualifying recertifications prior to
one year after the effective date of this rule will continue to be
eligible to receive orders and options after the effective date of this
rule.
Sections 125.13 and 124.4
The proposed rule added a new Sec. 125.13 explaining the
restrictions on fees for representatives of applicants to and
participants in the 8(a) BD, HUBZone, WOSB, and VetCert programs. These
restrictions are currently contained in Sec. 124.4 for the 8(a) BD
program. The proposed rule took the language currently contained in
Sec. 124.4 for the 8(a) BD program and adds it to a new Sec. 125.13
that will be applicable to the 8(a) BD, HUBZone, WOSB, and VetCert
programs. SBA
[[Page 102466]]
considered making revisions to part 126, 127 and 128 of this title
adopting the same language contained in Sec. 124.4 for the WOSB,
HUBZone, and VetCert programs. Instead, SBA believes that it is more
expedient to add a new Sec. 125.13 that would apply to all of SBA's
certification programs than it would be to repeat the same language in
each of the specific program area's regulations. SBA received three
comments agreeing that the restrictions on fees for representatives
should apply to all programs, not just 8(a). SBA adopts the proposed
language as final in this rule.
Section 126.103
SBA proposed to revise, add, and eliminate certain definitions set
forth in 13 CFR 126.103, to clarify existing policies and to reduce the
burden on small businesses. Except where otherwise noted in the
discussion below, SBA implements these changes as proposed.
SBA proposed to delete the definition for the term ``AA/BD''
because this term no longer appears in Part 126. SBA received no
comments on this deletion.
SBA proposed to revise the definition of ``certify'' (or
``certification'') to clarify that this means the process by which SBA
determines that a concern is qualified for the HUBZone program and
eligible to be designated by SBA as a certified HUBZone small business
concern in DSBS. SBA received one comment supporting this clarification
without substantive comment.
As discussed above in the corresponding change to Sec. 124.3 for
the 8(a) BD program, SBA proposed to revise the definition of
``Community Development Corporation (CDC)'' for HUBZone purposes to
align this definition with current practices and that applying to the
8(a) BD program. SBA received two comments supporting this change
without substantive comment.
SBA proposed to revise the definition of ``contracting officer'' to
correct an outdated citation. SBA received one comment in support of
this update.
SBA proposed to revise the definition of ``decertify'' to clarify
that a firm may voluntarily withdraw from the program without SBA
needing to approve such withdrawal. SBA received one comment in support
of this change.
SBA proposed to revise the definition of ``Dynamic Small Business
Search (DSBS)'' to reference ``SAM, as defined in this section'' rather
than ``the System for Award Management (SAM)''. In addition, SBA
proposed to remove the words ``the Dynamic Small Business Search
(DSBS)'' wherever they appear and add in their place the acronym
``DSBS''. SBA received one comment in support of this change.
SBA proposed to make several amendments to the definition of
``employee'' to prevent abuse and strengthen the integrity of the
program. First, SBA proposed to increase the number of hours that an
individual must work to be considered an employee for HUBZone purposes
to 80 hours per month (up from 40 hours per month). The HUBZone program
was intended to provide meaningful work experiences to individuals who
reside in some of the nation's most economically distressed communities
to help them gain valuable skills, on-the-job experience, and upward
mobility. See 143 Cong. Rec. S730 (Jan. 28, 1997); S. Rpt. 105-62
(1997). In 2021, SBA HUBZone analysts identified a pattern in which
firms put HUBZone residents on their payroll but did not actually
employ them or give them work to perform. Rather, these individuals
were put on the payroll only to enable the firm to appear to be
eligible for the HUBZone program. This has never been permitted under
the HUBZone regulations because allowing this practice would undermine
the purpose of the HUBZone program. In response to the discovery of
this practice and to prevent further fraud and abuse in the program,
SBA proposed to increase the threshold to 80 hours.
As noted in the proposed rule, SBA was concerned that the minimum
40 hours per month was not sufficient to promote the purpose of the
HUBZone program. SBA also noted that an 80 hour per month requirement
would be consistent with how the 8(a) BD program treats employees
establishing a bona fide place of business. In that context, Sec.
124.3 defines the term bona fide place of business for 8(a)
construction contracts to mean a location where an 8(a) BD Participant
regularly maintains an office within the appropriate geographical
boundary which employs at least one individual who works at least 20
hours per week at that location. The 80 hours per month requirement in
the proposed rule would be in line with that 20 hours per week
requirement. SBA requested comments on whether 80 hours per month was
an appropriate threshold and whether there should be a minimum number
of hours per week. SBA also sought comments on whether there should be
an exception to the 80 hours per month threshold for a limited number
(or percentage) of individuals where such individuals are working at
least 40 hours per month.
SBA received 83 comments on this proposed change to the definition
of ``employee.'' The majority of comments opposed the proposed increase
in the minimum number of hours from 40 to 80 per month to meet the
definition of ``employee'' for HUBZone purposes. These commenters
argued that this change would disproportionately harm part-time
employees, particularly students, retirees, people with disabilities,
or individuals holding multiple jobs. The commenters noted that these
groups often rely on the flexibility that the current 40-hour
requirement allows. In addition, several commenters highlighted the
potential for businesses to face increased operational costs, reduced
hiring opportunities, and greater administrative burdens, which could
ultimately lead to firms leaving the program or being less competitive.
Many respondents also questioned the justification for this change,
noting that it may not effectively address fraud or abuse as intended
by the SBA. They suggested that the 80-hour threshold may simply create
more paperwork without leading to meaningful improvements. Some
commenters argued that the focus should be on addressing bad actors
rather than imposing blanket requirements that penalize responsible
businesses. Others proposed alternative solutions, such as requiring a
certain number of hours per week (e.g., 15-20 hours) instead of instead
of a specified number per month, or suggesting a phased implementation
to allow businesses to adjust. A number of commenters expressed
opposition to using driver's licenses for residency verification and
excessive documentation requirements for proving employee status. These
commenters viewed these processes as burdensome, particularly for non-
driving employees or those with disabilities. Several commenters urged
SBA to focus on practical solutions that recognize the realities of
running small businesses and supporting diverse workforces, including
students, retirees, and individuals with disabilities. A few commenters
expressed support for the increase to 80 hours, arguing that it would
help boost economic impact in HUBZone areas and ensure that businesses
are genuinely contributing to community development. However, even
supporters recommended a phased-in approach to avoid overwhelming
businesses and employees. Some suggested exceptions for certain types
of workers, such as students or specialized professionals, or a more
flexible workweek requirement to accommodate various needs. Overall,
the feedback indicated a strong desire for SBA to reconsider the 80-
hour rule
[[Page 102467]]
or provide more nuanced alternatives that balance the goals of the
HUBZone program with the practicalities of running small businesses and
supporting diverse employees.
SBA has considered the comments received and decided to maintain
the 40-hour threshold at this time. However, rather than requiring an
aggregate of 40 hours of work during the 4-week period preceding the
date of review, this final rule generally requires an individual to
work at least 10 hours per week during the 4-week period preceding the
date of review in order to be considered an ``employee'' for HUBZone
purposes. The final rule permits a business concern to allow an
employee less than 10 hours per week, provided that the employee works
at least 40 hours per month, if the business concern can demonstrate a
legitimate business reason for doing so. For example, if a business
concern demonstrates that there is seasonal work that requires more
work in one or two weeks than in the rest of the month, SBA could find
the individual to count as an employee for HUBZone purposes. SBA
believes this decision is responsive to the public comments while also
addressing some of the concerns outlined in the proposed rule.
Second, SBA proposed to add a provision clarifying the obvious
requirement that an individual must be performing work in order to be
considered an employee for HUBZone purposes. The provision provides
that SBA may request documentation demonstrating that an individual is
performing work, including job descriptions, resumes, detailed
timesheets, sample work product and other relevant documentation. SBA
received 12 comments on this clarification. Some commenters believed it
served the purposes of the program to pay HUBZone residents minimum
wage without giving them any work to do. SBA strongly disagrees.
Allowing such a practice would be akin to allowing companies to buy
their way into the HUBZone program, which is far from the purpose of
the HUBZone program. As noted above, the HUBZone program was created to
provide employment opportunities to residents of economically
distressed areas. Simply paying HUBZone residents, without giving them
work to do, does not create real employment opportunities.
In addition, some of the comments opposed the collection of
employee resumes. A few commenters argued that instead of resumes,
which could contain false information that HUBZone companies cannot
verify, SBA should require specific work history from employees related
to their time at the applicant company. Some commenters also expressed
opposition to the proposed requirement for employees to perform work
that is ``commensurate'' with the hours charged. These commenters
argued that this expectation misrepresents the intent of the HUBZone
program, which is primarily focused on increasing employment
opportunities and economic development in underutilized areas, rather
than mandating specific work contributions. They emphasized that
HUBZone firms providing employment and wages are fulfilling the
program's goals, regardless of the nature of the work performed.
Commenters highlighted the need for simplification in the requirements,
advocating for limited proof related to hiring processes rather than
extensive documentation like job descriptions and sample work products.
They argued that such requirements complicate the certification
process, especially for smaller businesses that may lack the resources
to comply with such stringent documentation requirements. A few
commenters suggested that SBA provide further clarity on what
constitutes ``meaningful'' work and offer templates and training to
help businesses meet SBA's expectations. In response to these comments,
SBA reiterates its position that the HUBZone program was intended to
create meaningful employment opportunities in underserved areas. SBA
will continue to require individuals to perform some work in order to
be considered employees for HUBZone purposes and may require relevant
documentation to ensure this requirement is being met.
Third, SBA proposed deleting the provision within the definition of
``employee'' providing that individuals who receive in-kind
compensation may be considered employees. The current regulations
provide that an individual receiving in-kind compensation may be
considered an employee, where the compensation is commensurate with the
work performed by the individual and provides a demonstrable financial
value to the individual, and where the arrangement is compliant with
all relevant Federal and State laws, such as Federal tax laws. SBA
proposed to eliminate this provision because SBA has found that little
to no firms are able to meet these requirements. The process of
requesting and reviewing documentation that is ultimately insufficient
has only served to slow down application processing. SBA received five
comments in response to this proposed change, the majority of which
supported the deletion. Commenters agreed that removing this provision
would improve the efficiency of the eligibility review process. One
commenter recommended that SBA evaluate cases involving in-kind
compensation individually. The commenter noted that permitting in-kind
compensation was originally aimed at helping smaller startups,
particularly those with spouses or family members who contributed to
the business but did not hold ownership. SBA has considered the
comments and is adopting the proposal to delete the provision allowing
in-kind compensation. Despite the original intent of this provision,
SBA believes the significant delays in processing--including delays
caused when firms do not understand the provision or the requirements
for meeting it--outweigh its potential benefit.
Fourth, SBA proposed adding language to clarify that individuals
who are obtained ``from a concern primarily engaged in leasing
employees'' are generally considered employees for HUBZone purposes.
The current regulations provide that individuals obtained from a
``leasing concern'' are generally considered employees. However, it has
been SBA's policy for a number of years that leased employees will only
be considered employees for HUBZone purposes where they are leased from
a concern that is primarily engaged in leasing employees. This policy
is consistent with SBA's size regulations at Sec. 121.103(b)(4), which
provide: ``Business concerns which lease employees from concerns
primarily engaged in leasing employees to other businesses . . . are
not affiliated with the leasing company . . . solely on the basis of a
leasing agreement.'' SBA received three comments in response to this
proposal, all of which supported the change. The commenters noted that
this proposal will provide greater clarity for the HUBZone program. One
commenter noted that there is a need for clearer, more defined
standards to differentiate between leasing companies and
subcontractors, as the line between them is increasingly blurred,
leading to confusion and compliance issues. The commenter believes that
establishing specific criteria for what constitutes a leasing company
will help ensure consistent application of the rule and prevent
potential exploitation of this provision. SBA agrees with these
comments and adopts the language related to leased employees as
proposed.
[[Page 102468]]
Finally, SBA requested comments on when reservists should be
considered employees for HUBZone purposes. As SBA noted in the proposed
rule, when reservists are called up for active duty, companies may be
required to promptly reemploy them in an appropriate reemployment
position (which may or may not be the pre-service position) upon their
return from service. A company may list such individuals as employees,
which may mean those individuals appear on the company's payroll with
zero hours listed. SBA received 12 comments in response to this
request, 11 of which supported treating reservists as employees when
they are called up for active duty. The comments emphasized the
importance of recognizing reservists--as well as National Guard
members--as employees even during their periods of active duty. They
argued that this policy prevents penalties to HUBZone firms for
complying with the Uniformed Services Employment and Reemployment
Rights Act of 1994 (``USERRA''), 38 U.S.C. 4301-4335. Commenters
suggested that reservists should be counted as employees for the entire
duration of their call-up, ensuring that firms are not disadvantaged
when key personnel are deployed, particularly if they are critical for
meeting HUBZone employment requirements. A few commenters suggested
extending these protections to employees on long-term disability or
maternity leave, ensuring that they retain their employee status as
long as their positions are maintained. The comments also proposed
including military spouses and dependents residing near HUBZone areas
to promote employment opportunities for military families. Based on the
comments received, the final rule provides that, in general, reservists
and National Guard members will be treated as employees for HUBZone
purposes during their periods of active duty, even if they do not
receive compensation from the HUBZone company during this time. The
final rule does not adopt the suggestion that this treatment be
extended to military spouses or dependents, or to employees on long-
term disability or those on maternity leave who are not currently on
the company's payroll. In other words, if an individual is on medical
or maternity leave and is still being paid by the HUBZone concern
(i.e., being paid on sick or maternity leave), the individual will
count as an employee for HUBZone purposes. However, if the individual
has exhausted her/his paid leave and is taking additional time off from
employment, the individual would not count as an employee for HUBZone
purposes. SBA believes that at that point in time there is no certainly
that the individual would come back to be employed by the firm and
allowing such individual to be considered an employee for HUBZone
purposes would create a much larger exception to the rule and leave the
program vulnerable to abuse. The final rule clarifies that individuals
who are on sick or maternity leave and continue to be paid by the
business concern are considered employees.
SBA proposed to add a new definition for the term ``HUBZone
certification date'' providing that this is the date on which SBA
approves a concern's application for HUBZone certification and is the
date specified in the concern's certification letter. The definition
provides that if a concern leaves the HUBZone program and reapplies for
certification, their HUBZone certification date is the date SBA
approves the concern's most recent application.
SBA proposed to add a new definition for the term ``HUBZone Map''
providing that the HUBZone Map is a publicly accessible online tool
that depicts HUBZones.
SBA proposed to add a new definition for the term ``HUBZone
resident employee'' providing that this means an individual who meets
the definition of an employee and who SBA has determined resides in a
HUBZone.''
SBA proposed to amend the definition of the term ``HUBZone small
business concern'' by deleting the last sentence, which provides: ``A
concern that was a certified HUBZone small business concern as of
December 12, 2017, and that had its principal office located in a
Redesignated Area set to expire prior to January 1, 2020, shall remain
a certified HUBZone small business concern until June 30, 2023, so long
as all other HUBZone eligibility requirements are met.'' This was a
reference to the previous map freeze, and since the map freeze ended on
June 30, 2023, this language is no longer necessary.
SBA proposed to revise the definition of ``Indian Tribal
Government'' to make it consistent with the definition of the term
``Indian tribe'' in the 8(a) BD Program regulations at Sec. 124.3 of
this chapter. Specifically, SBA proposed to revise the definition to
explicitly allow participation by State-recognized Tribes. SBA received
one comment opposing this change, arguing that expanding eligibility
would significantly increase the number of competing entities. The
commenter argued that already, a large percentage of HUBZone dollars go
to Tribal 8(a) companies, creating an imbalance in contract awards and
urged SBA to explore this differentiation to foster a more level
playing field. SBA disagrees. State-recognized Tribes are legitimate
Tribes and Federal assistance programs should be equally available to
them and, in this case, to business concerns that they own. SBA does
not believe that it makes sense for a tribally-owned small business
concern to qualify as eligible for the 8(a) BD program and then, with
the same ownership and control, fail to qualify for the HUBZone program
as an eligible tribally-owned small business concern. One of the
purposes of this final rule is to make the eligibility requirements for
SBA's various programs as consistent as possible. As such, SBA adopts
the proposed language as final in this rule.
SBA proposed to revise the definition of ``interested party'' to
prevent non-HUBZone firms from filing a HUBZone protest on a HUBZone
set-aside procurement. Currently, an interested party is defined as any
concern that submits an offer for a specific HUBZone set-aside contract
or order, or any concern that submitted an offer in full and open
competition and its opportunity for award will be affected by a price
evaluation preference given a qualified HUBZone small business concern.
In the context of a HUBZone set-aside contract, SBA does not believe
that a firm that is not itself a qualified HUBZone small business
concern should be able to submit a protest. In other words, a large
business or a small business which is not a qualified HUBZone small
business should not be able to protest the HUBZone status of the
apparent successful offeror on a HUBZone set aside contract merely
because it submitted an offer for that contract or order. The large
business or small business which is not a qualified HUBZone small
business is not harmed by an award to the apparent successful offeror
since it has no right itself to that award. It is ineligible for that
award. Only firms that are capable of winning the HUBZone set-aside
contract or order should be able to protest the HUBZone status of an
apparent successful offeror. SBA has seen situations where a non-
eligible firm has submitted an offer and then protested the HUBZone
status of the apparent successful offeror. SBA believes this is not the
intent of the protest process and causes unnecessary delays. If such a
``protest'' raises a genuine concern, SBA can always adopt it as an
SBA-initiated protest. However, often this is a delay tactic used by an
incumbent contractor protesting the apparent successful offeror in
order to
[[Page 102469]]
continue to perform the underlying work while the protest is resolved.
This change would not affect the ability of a large business to protest
the HUBZone status of an apparent successful offeror where the apparent
successful offeror received the benefit of the HUBZone price evaluation
preference in an unrestricted competition and the large business
submitted an offer for that contract. In such a case, a large business
could otherwise be eligible for the award of the contract.
On May 16, 2024, SBA published a proposed rule in the Federal
Register to make several changes to the WOSB program. 89 FR 42816. In
that rule, SBA proposed to amend the definition of the term
``interested party'' to clarify who may submit a protest against an
apparent successful offeror's EDWOSB or WOSB status. 89 FR 42819. In
response to that proposed rule, commenters recommended that SBA should
also clarify the term ``interested party'' for both HUBZone and SDVO
status protests. SBA agreed and is amending the term ``interested
party'' for HUBZone status protests in that final rule. As such, it is
no longer necessary to make that change in this final rule.
SBA proposed to amend the definition of ``principal office'' to
make several changes and clarifications. First, SBA proposed to require
firms to provide a lease that commenced at least 30 days prior to the
date of SBA's review and ends at least 60 days after the date of SBA's
review. Second, SBA proposed to clarify the requirement that a firm
must conduct business from the location identified as the firm's
principal office and may be required to demonstrate that it is doing so
by providing documentation such as photos and/or providing a live or
virtual walk-through of the space. SBA also proposed to clarify that
for shared working spaces (or ``coworking'' spaces), firms will need to
provide evidence that the firm has dedicated space within any shared
location, and that such dedicated space contains sufficient work
surface area, furniture, and equipment to accommodate the number of
employees claimed to work from this location. SBA proposed to specify
that a virtual office (or other location where a firm only receives
mail and/or occasionally performs business) does not qualify as a
principal office. Third, SBA proposed to add a provision stating that
if 100% of a firm's employees telework (i.e., work the majority of the
time from their homes), then at least 51% of its employees must work
from HUBZone locations and the firm's principal office would be the
location where its records are kept. One of the purposes of the
principal office requirement is to provide an infusion of capital into
the HUBZone area with employees utilizing the services of other
business concerns located near the HUBZone firm's principal office.
Where all of a firm's employees telework, that intent cannot be
fulfilled. However, SBA understands that in today's business
environment, firms are utilizing telework employees more and more. With
that understanding, SBA proposed to allow 100% of a firm's employees to
telework, but where that occurs SBA required the firm to have 51% of
its employees reside in a HUBZone instead of the normal 35%. SBA
believes that such an additional requirement would make up for the lack
of additional capital infusion caused by not having a traditional
office located in a HUBZone. In addition, SBA sought comments on
whether SBA could allow teleworking employees who reside and work
within the same census tract as the firm's claimed principal office (or
an adjacent census tract) to be counted as working from the principal
office.
SBA received twenty-six comments on these proposed changes, some of
which supported the proposed revisions and some of which opposed them.
Most commenters opposed the proposed increase of the HUBZone residency
requirement from 35% to 51% for firms with teleworking employees. Many
argued that such a change would be detrimental to small businesses,
especially in sectors like IT and consulting, where high-wage positions
often operate remotely. These commenters believed that a 51%
requirement would be unmanageable and could discourage HUBZone
participation, ultimately undermining the program's goal of fostering
economic growth in underutilized areas. Instead, they suggested
maintaining the 35% threshold, which has historically facilitated
access for small businesses, allowing them to thrive while contributing
to local economies. Many commenters argued that the principal office
should not be limited to traditional office spaces, especially since
many small businesses operate from home offices. They advocated for
counting employees who reside and work in the same or adjacent census
tracts as those working from the principal office, even if it is owner-
occupied. Additionally, some commenters raised concerns about the
proposed requirement for a lease to be active for a specific period
before and after SBA reviews, which could impose burdensome compliance
challenges for businesses with shorter-term leases or those sharing
space with parent companies. Overall, the comments emphasized the need
for flexibility in the definition of the principal office and the
residency requirement to reflect contemporary work practices, such as
telework. Many suggested that SBA should consider alternatives that
recognize the realities of modern business operations without creating
barriers to entry for new firms. Additionally, they called for clear
guidance and documentation expectations to ensure compliance while
maintaining the program's integrity and supporting economic development
in HUBZone areas.
Given the volume of negative comments received, SBA has decided not
to implement the proposed provision requiring that if 100% of a firm's
employees telework, then 51% must reside in HUBZones in order to meet
the principal office requirement. SBA believes that allowing 35% of a
firm's employees to qualify the firm as HUBZone eligible where the firm
does not have a ``principal office'' would be inconsistent with the
statutory requirements. The principal office requirement is statutorily
required in addition to the 35% residency requirement. The proposed
rule attempted to recognize the increase in teleworking, but sought to
make up for the lack of a principal office being located in a HUBZone
by requiring a greater percentage of HUBZone resident employees. The
final rule does not adopt the proposed language. As such, the current
policy will continue to apply, meaning that HUBZone firms must always
have an office located in a HUBZone where more employees work compared
to any other location (unless all employees work in HUBZones and have
at least 35% HUBZone resident employees. SBA will continue to evaluate
the impact of the prevalence of telework on the HUBZone portfolio.
SBA proposed to revise the definition of ``Qualified Disaster
Area'' to provide that a census tract or non-metropolitan county shall
be considered to be a Qualified Disaster Area starting on the date on
which the President declared the major disaster for the area in which
the census tract or non-metropolitan county, as applicable, is located
(or in the case of a catastrophic incident, on the date on which the
catastrophic incident occurred in the area in which the census tract or
non-metropolitan county, as applicable, is located) and ending on the
date when SBA next updates the HUBZone Map in accordance with Sec.
126.104(a). This is SBA's current interpretation of the statutory
definition of ``Qualified
[[Page 102470]]
Disaster Area'' and SBA proposed to make that interpretation clearer.
SBA received two comments on this, both of which supported SBA's
clarifications.
SBA proposed to revise the definition of ``Redesignated Area'' to
delete the last sentence, which currently reads: ``However, an area
that was a redesignated area on or after December 12, 2017, shall
remain a redesignated area until June 30, 2023.'' This is a reference
to the previous map freeze, and since the map freeze ended on June 30,
2023, this language is no longer necessary. SBA received one comment
supporting this update.
SBA proposed to revise the definition of ``reside'' to provide that
to determine residence, SBA will first look to an individual's address
identified on his or her driver's license ``or other government-issued
identification.'' The current regulation provides that SBA will rely on
an individual's voter registration card. However, voter registration
cards generally do not specify the date that they were issued and thus
SBA cannot rely on them to determine how long an individual has resided
at a location. In addition, SBA proposed to change the requirement for
an individual to have lived at a location for 180 calendar days
immediately prior to the relevant date of review. SBA proposed to
decrease this to 90 calendar days because it would allow firms to enter
the program more quickly where they have employees who have resided in
HUBZones for less than 180 days.
SBA received 13 comments on these proposed revisions to the
definition of ``reside.'' Eight commenters supported these changes and
five opposed them. The commenters who supported the reduction to 90
days argued that it would streamline the certification process and
encourage companies to hire HUBZone residents more efficiently. They
emphasized that the current rules create rigidities that can hinder
businesses from fully benefiting from HUBZone participation.
Suggestions for improvement included allowing greater flexibility in
how residency is verified, such as accepting various forms of
documentation and aligning verification processes with existing
employment and tax records. Commenters argued that this flexibility
would also accommodate special circumstances, like those faced by
military personnel and students living in HUBZones, ensuring that these
individuals can still contribute to and benefit from the HUBZone
program. Commenters who opposed the change to 90 days were concerned
about the potential for companies to hire employees only temporarily to
meet certification requirements. They argued that employees should be
permanent members of the company, which would foster a more stable
workforce. Additionally, there was significant opposition to using
driver's licenses for address verification. Some commenters argued that
it imposes unnecessary financial burdens on employees, especially those
who may not regularly update their identification due to economic
constraints. Alternative verification methods, such as lease
agreements, were suggested as more practical solutions.
SBA agrees that some flexibility in demonstrating residency is
required, and that there may be good reasons why a driver's license
does not match the address of the claimed HUBZone residence. For
example, where a claimed HUBZone employee's spouse is in the military
and that individual has accompanied the spouse to a new residence where
the spouse is currently deployed, the individual's driver's license may
legitimately identify a residence in a totally different State.
However, SBA still believes that a driver's license is the easiest way
to demonstrate residency and that it should not be eliminated as a
means of verifying an individual's address. The final rule clarifies
that SBA will ask for a driver's license in all cases, but if a
driver's license is not available (e.g., an individual lives in a city
and uses only public transportation) or the residence on the driver's
license does not match the claimed HUBZone residence, SBA will accept
other proof of residency. In such case, the final rule requires that an
individual also provide an explanation as to why a driver's license is
unavailable or inconsistent. This is a change from the proposed rule,
which required an individual to submit a signed statement explaining
why a driver's license is unavailable and attesting to the individual's
dates of residency. SBA believes that the final rule is a more
reasonable requirement. The final rule adopts the 90-day residency
requirement set forth in the proposed rule. SBA believes that 90 days
strikes a good balance between ensuring that individuals actually
reside in a specified location and allowing firms seeking HUBZone
certification to avail themselves of a streamlined application process.
SBA is not concerned with the commenters who believed that companies
could hire employees only temporarily to meet certification
requirements because the final rule also adds the requirement that a
firm must qualify as an eligible HUBZone small business concern as of
the date it submits an offer for a HUBZone contract.
SBA proposed to revise the definition of ``Small business concern
(SBC)'' to make it consistent with the definition contained in Sec.
126.200(b)(1). In order to be eligible for the HUBZone program, SBA
previously required that a concern qualify as small for the size
standard corresponding to its primary industry. That requirement was
contained both in Sec. 126.103 and Sec. 126.200(b)(1). In 2023, SBA
amended Sec. 126.200(b)(1) to specify that a concern must qualify as
small under the size standard corresponding to any NAICS code listed in
its profile in the System for Award Management. 88 FR 26164, 26212
(Apr. 27, 2023). SBA inadvertently did not make a corresponding change
to the definition of small business concern contained in Sec. 126.103.
Thus, SBA proposed to amend Sec. 126.103 to be consistent with Sec.
126.200(b)(1). SBA implements this change in the final rule.
SBA proposed to add a new definition for the term ``System for
Award Management (SAM)'' providing that this term has the same meaning
as that which is in FAR 2.101. SBA also proposed to remove the words
``System for Award Management'' wherever they appear in this part and
add in their place the acronym ``SAM''.
Finally, SBA proposed to remove the word ``SBC'' wherever it
appears in this part and add in its place the phrase ``small business
concern''.
Section 126.104
SBA proposed to make several amendments to Sec. 126.104, which
explains how Governor-designated covered areas become designated.
First, SBA proposed to insert language providing that a State Governor
may annually submit a petition to the SBA Office of the HUBZone Program
requesting that certain covered areas be designated as Governor-
designated covered areas. This is not a change from current policy, but
rather a restatement of that policy in a more clear and direct way.
Second, SBA proposed to clarify that a petition need not seek SBA
approval for those covered areas previously designated as Governor-
designated covered areas. Third, SBA proposed to specify that a
Governor-designated covered area will be treated as a HUBZone until SBA
next updates the HUBZone Map in accordance with Sec. 126.104(a), or
one year after the petition is approved, whichever is later. Fourth,
SBA proposed to authorize the Associate Administrator for Government
Contracting and Business Development or designee, instead of the SBA
Administrator, to approve specific
[[Page 102471]]
covered areas to be considered as Governor-designated covered areas.
SBA believes that this will reduce the amount of time to approve a
petition, which will allow small businesses located in such areas the
opportunity to participate more expeditiously in the HUBZone Program.
Finally, SBA proposed to remove the term ``urbanized area'' in the
definition of ``covered area'' in Sec. 126.104(d)(1). The HUBZone
statute and the current regulations provide that only certain areas are
eligible to become Governor-Designated Covered Areas. Such areas are
referred to as ``covered areas.'' A ``covered area'' is defined in the
statute and regulations as ``an area in a State . . . (i) [t]hat is
located outside of an urbanized area, as determined by the Bureau of
the Census; (ii) [w]ith a population of not more than 50,000; and (iii)
[f]or which the average unemployment rate is not less than 120 percent
of the average unemployment rate of the United States or of the State
in which the covered area is located, whichever is less, based on the
most recent data available from the American Community Survey conducted
by the Bureau of the Census.'' 15 U.S.C. 657a(b)(3)(F)(v)(I); 13 CFR
126.104(d)(1). Thus, the statute and implementing regulations provide
that ``covered areas'' must be located outside of ``urbanized areas.''
At the time this provision was implemented, the Census Bureau defined
``urbanized areas'' as ``urban areas'' with populations of 50,000 or
more. In addition, the Census Bureau defined ``urban clusters'' as
``urban areas'' with populations of more than 2,500 and less than
50,000. Given these definitions, SBA interpreted the statute to mean
that areas located in ``urban clusters'' could be eligible for
Governor's designation if they also met the unemployment requirement.
In addition, SBA interpreted ``area'' to mean either a census tract or
a county. Following the 2020 census, the Census Bureau changed the
definition of ``urban area'' in several ways, including by removing the
distinction between ``urbanized areas'' and ``urban clusters'' and
discontinuing the use of those terms. As a result, areas that
previously were known as urbanized areas or urban clusters are both now
simply designated as urban areas. In a Federal Register notice
published on December 29, 2022, the Census Bureau noted: ``Agencies
using the [urban area] classification for their programs are
responsible for ensuring that the classification is appropriate for
their use.'' 87 FR 80114, 8011. To be consistent with Congressional
intent, SBA proposed to amend the definition of ``covered area'' to
remove the term ``urbanized area'' and instead provide that the term
``covered area'' means a census tract or a county ``that is located
outside of an urban area, as determined by the Bureau of the Census,
with a population of not more than 50,000.'' SBA received no comments
on proposed Sec. 126.104 and adopts it as final in this rule.
Section 126.105
SBA proposed to add a new Sec. 126.105, explaining when the
HUBZone Map will be updated in accordance with statutory requirements.
Proposed Sec. 126.105 provided that Qualified Census Tracts and
Qualified Non-Metropolitan Counties will be updated every five years.
This is consistent with the statutory requirement for SBA to update
these designations on a five-year cycle. The proposed rule provided
that Redesignated Areas will be added to the HUBZone Map when areas
cease to be designated as Qualified Census Tracts or Qualified Non-
Metropolitan Counties, in accordance with the five-year cycle, and will
expire after three years. The proposed rule provided that Qualified
Base Closure Areas will be added to the HUBZone Map after SBA receives
information that the Department of Defense has created a new base
closure area and will expire after eight years. The proposed rule
provided that Qualified Disaster Areas generally will be added to the
HUBZone Map on a monthly basis, based on data received by SBA from the
Federal Emergency Management Agency (FEMA), and generally will expire
on the effective date of the five-year HUBZone Map update following the
declaration. Finally, the proposed rule provided that Governor-
designated covered areas will be added to the HUBZone Map after SBA
approves a petition in accordance with Sec. 126.104 and will expire on
the effective date of the five-year HUBZone Map update following the
approval, or one year after the petition is approved, whichever is
later.
SBA received three comments on this new section, all of which were
supportive. One commenter noted that the five-year cycle offers
businesses greater stability and minimizes disruptions, fostering long-
term planning and investment in HUBZone areas. To further improve this
area of the program, the commenter suggested including active-duty
military bases in eligibility criteria to increase participation from
military families and extending the re-designation period from three to
five years to reduce administrative burden on SBA and to provide more
stability for affected communities. SBA notes that these changes would
require statutory amendments. As such, SBA is implementing this section
as proposed.
Sections 126.200(b)(1), 127.200(e), and 128.204(a)
Section 126.200 sets forth the requirements a concern must meet to
be eligible as a certified HUBZone small business concern. Pursuant to
Sec. 126.200(b)(1), a concern, together with its affiliates, must
qualify as a small business concern under the size standard
corresponding to any NAICS code listed in its profile in SAM. This
paragraph does not, however, explain how SBA will determine whether a
business concern qualifies as small. Some have questioned whether SBA
performs a formal size determination with respect to each application.
That is not the case. In determining whether a concern seeking to be a
certified HUBZone small business (or one seeking to recertify its
HUBZone status) qualifies as small under the size standard
corresponding to a specific NAICS code, SBA will accept the concern's
size representation in SAM, unless there is evidence to the contrary.
SBA will request a formal size determination pursuant to Sec.
121.1001(b)(8) of this chapter where any information it possesses calls
into question the concern's SAM size representation. The proposed rule
clarified SBA's intent in this regard. The proposed rule also provided
the same guidance for WOSB/EDWOSB certifications by adding a new Sec.
127.200(e) and to VOSB/SDVOSB certifications by revising Sec.
128.204(a).
SBA received two comments that supported this change. Both
commenters agreed that SBA should not perform a formal size
determination for every applicant to the HUBZone, WOSB, and VetCert
programs. One commenter noted that size is generally a self-
certification function that is properly addressed by protests from
competitors with respect to the award of specific contracts, and it
would be burdensome for both SBA and individual applicants to require
formal size determinations on every application. One commenter also
recommended that the applicable provisions be clarified to apply the
same rule to certification and recertification. Although SBA believes
the proposed rule adequately captured firms applying for HUBZone, WOSB
and VetCert certifications and those seeking to recertify such status,
the final rule makes minor wording changes to make that clear.
[[Page 102472]]
Section 126.200
SBA proposed to revise Sec. 126.200(c)(1) to incorporate policy
updates to the ``long-term investment'' provision, which was
implemented through SBA's final rule published on November 26, 2019 (84
FR 65222). This provision incentivizes firms to make long-term
investments in qualifying HUBZones by allowing them to maintain their
principal office for up to 10 years and continue to be considered to
meet the principal office requirement even if the area loses its
HUBZone designation. First, SBA proposed to specify that the 10-year
``clock'' starts to run on the firm's HUBZone certification date (if
the investment was made prior to the firm's certification) or on the
firm's recertification date that follows the execution of the lease or
deed (if the investment was made after the firm's certification).
Second, SBA proposed to clarify SBA's current policy that a firm is not
eligible to take advantage of the long-term investment provision if its
principal office is in a Redesignated Area or a Qualified Disaster Area
at the time of the investment. Redesignated Areas and Qualified
Disaster Areas are areas that have already lost their designation as
Qualified Census Tracts or Qualified Non-Metropolitan Counties because
the income, poverty, and/or unemployment levels of those tracts/
counties have improved beyond the statutory levels necessary to qualify
as HUBZones. SBA does not believe it would be in line with the purpose
of the HUBZone program--to encourage investment in low-income and high-
unemployment areas--to encourage firms to invest in areas that have
already surpassed the HUBZone thresholds for these socioeconomic
indicators. SBA notes that if a firm's principal office is in a
location that falls within both a qualifying area (i.e., Qualified
Census Tract, Qualified Non-Metropolitan County, Governor-Designated
Covered Area, Qualified Base Closure Area) and a non-qualifying area
(e.g., Redesignated Area that was previously a Qualified Non-
Metropolitan County) at the time of the investment, the firm would be
eligible for this provision. In addition, SBA proposed to provide that
this provision would not apply to an investment made within 180 days of
the expiration of an area's designation as a Qualified Census Tract,
Qualified Non-Metropolitan County, Governor-Designated Covered Area, or
Qualified Base Closure Area. Third, SBA proposed to provide that a firm
is not eligible for this provision if its principal office is owner-
occupied (e.g., a location that also serves as a residence). In such a
case, SBA does not believe that the investment in the HUBZone was
primarily to develop a certified HUBZone small business.
SBA received four comments on proposed Sec. 126.200(c), three of
which were supportive of the clarifications related to the long-term
investment provision. One commenter opposed the proposed exclusion for
an owner's residence, but this commenter mistakenly believed that the
rule proposed to disallow an owner's residence to qualify as a
principal office, when in fact the rule proposed this exclusion only
for the long-term investment provision. Another commenter supported the
timing of the 10-year clock but encouraged SBA to allow exceptions to
the owner-occupied exclusion. For example, if a company purchases a
property and is in the process of building or intends to build, the
commenter suggested that the property could be considered eligible if
it is commercially zoned. Additionally, the commenter suggested that
SBA should consider providing flexibility for properties like duplexes
that serve dual purposes (both residential and office), as more
companies are adopting such models. SBA does not believe that it makes
sense to allow an exception for future construction. At the time of
certification, a firm must demonstrate that it currently has a
principal office in a HUBZone. Unless it does so, it would not be
eligible for participation in the program. Construction of a new
principal office could take several years. If it does not currently
have a principal office located in a HUBZone and SBA counted the
projected new construction site as its principal office, the firm would
in essence would be certified into the program without currently
meeting all of the necessary requirements and could be in this non-
compliance state for a lengthy time while construction takes place. SBA
does not believe that was the intent of the program. Conversely, if a
firm currently has a principal office located in a HUBZone but has
purchased another property in a HUBZone to construct a new principal
office at the time of its application, it again does not make sense to
invoke the long-term investment provision. If SBA considered the
projected construction site to be an applicant's principal office, the
firm would lose the construction time from the 10-year protection
period. As such, SBA does not adopt this suggestion. Regarding a
duplex, SBA believes that a duplex, where residence and business are
truly separated, would qualify for the long-term investment protection.
A duplex has two separate addresses. The final rule states that an
owner's residence cannot qualify for the long-term investment
protection. However, where a residence is located in one half of a
duplex with a separate address from the business concern which is
located in the other half of the duplex with its own distinct address,
the business duplex address would qualify for the long-term investment
protection. It would not, however, where the address of the residence
is the same as the address of the business.
The final rule amends the principal office long-term investment
provision to state that the 10-year protection period starts to run on
the firm's HUBZone certification date (if the investment was made prior
to the firm's certification) or on the date of the investment (if the
investment was made after the firm's HUBZone certification date). The
language stating that the protection period started on the date of
recertification was a holdover from when HUBZone recertification was
required annually. Because this rule changes recertification from an
annual requirement to a requirement that occurs every three years, SBA
does not believe it makes sense to tie the 10-year protection period to
the date of recertification where the investment is made after the date
of the firm's certification. If an investment occurs soon after
certification, and recertification is not required for three years, a
firm could receive almost 13 years of protection instead of the
intended 10 years. That was not SBA's intent.
SBA proposed to revise Sec. 126.200(d)(1) to clarify that if a
firm has one employee, that employee must reside in a HUBZone for the
firm to be eligible for HUBZone certification. That has always been
SBA's interpretation of the HUBZone requirements, and SBA proposed to
make that explicit. SBA did not receive any comments on this
clarification and is implementing it as proposed.
SBA proposed to revise Sec. 126.200(d)(3), which addresses
``Legacy HUBZone Employees,'' to clarify certain requirements and place
limits on who can qualify as a Legacy HUBZone Employee. First, SBA
proposed to clarify that a Legacy HUBZone Employee is an individual
who: (a) resided in a HUBZone (other than a Redesignated Area) for at
least 90 days preceding, and 180 days following, the concern's HUBZone
certification date or most recent recertification date, and (b) remains
an employee at the time of the concern's current recertification date.
Second, SBA proposed to clarify
[[Page 102473]]
that an individual cannot reside in a Redesignated Area and qualify as
a Legacy HUBZone Employee. This does not mean to imply that an
individual who resided in a HUBZone when a firm was first certified as
a HUBZone eligible firm and continued to live at that same location
while the area transitioned to a Redesignated Area cannot be considered
a Legacy HUBZone Employee if that individual moves to a non-HUBZone
area. SBA proposed to clarify that an individual who qualifies as a
HUBZone employee for the first time while living in a Redesignated Area
cannot later be deemed a Legacy HUBZone Employee. Third, SBA proposed
to specify that a certified HUBZone small business may only have one
legacy HUBZone employee at a given time. SBA supports the growth of
individual HUBZone employees and allowing such employees to improve
their personal residential situation. However, SBA is concerned that
the Legacy HUBZone Employee concept could be abused. Without a limit on
the number of Legacy HUBZone Employees permitted by SBA, a firm could
potentially move all individuals into a HUBZone for a one-year period
and qualify all of those individuals as Legacy HUBZone Employees
without those individuals ever intending to live long-term in the
HUBZone area. SBA sought comments on: what the limit on Legacy HUBZone
Employees should be and whether there should be any other limitations;
whether SBA should limit the duration of Legacy HUBZone employee status
to a certain number of years, and if so, how many years would be
appropriate; whether individuals who were students when they resided in
a HUBZone should be eligible for treatment as Legacy HUBZone Employees;
whether Legacy Employees should be limited to full-time employees only;
and whether an owner of the concern should be able to qualify as a
Legacy HUBZone Employee. SBA is concerned that not imposing some
restrictions on Legacy Employees could open the provision to abuse. The
purpose of this provision is to allow HUBZone firms to retain employees
who have managed to improve their position and move out of a HUBZone.
This purpose is not relevant to many owners of HUBZones because they
are not at risk of being fired for moving out of a HUBZone.
The majority of comments opposed the proposed limitations on the
number of ``Legacy HUBZone Employees.'' Many commenters argued that the
proposed limitations would negatively impact businesses that rely on a
broader pool of legacy employees for stability and workforce retention,
especially in light of HUBZone redesignations. Commenters argued that
restricting legacy employees to one per firm would punish HUBZone
companies for successfully retaining staff, discourage employee
development, and create unnecessary administrative burdens. They
emphasized that companies have relied on the legacy employee provision
as it was originally written and that reducing the number of eligible
legacy employees would harm long-term employee retention and growth.
Some commenters pointed out that limiting legacy employees
disproportionately affects smaller firms with fewer employees, making
it harder for them to meet the HUBZone requirements while maintaining
staff. Commenters suggested several alternatives, such as allowing up
to 50% of a firm's employees to be legacy employees, or implementing a
scalable approach based on company size. There was also support for
grandfathering existing legacy employees and suggestions that the
legacy designation should be based on the duration of time an employee
has worked in a HUBZone, not just their residency status. Many
commenters opposed limiting the duration of legacy status or suggested
that it should match the amount of time an employee lived in a HUBZone.
A few argued for a a specific timeframe, such as five years, to provide
stability for businesses. Overall, there was significant concern that
restricting legacy employees contradicts the intent of the HUBZone
program. These commenters believed that hiring an individual that lives
in an area of high unemployment or low income (i.e., a HUBZone) and
providing that individual with a good salary that enables the
individual to move to a better neighborhood should be celebrated as a
success of the HUBZone program, and should not be discouraged. One
commenter stated that a HUBZone firm may be forced to fire a good
employee in order to remain eligible for the program because that
employee moved to a better neighborhood due to the success of the
HUBZone program.
The comments were mixed on whether to limit legacy employee status
to full-time employees only, excluding students who lived in a HUBZone
while attending school, and whether business owners should be
considered legacy employees.
Based on the comments received, SBA has decided not to limit firms
to only one Legacy HUBZone Employee. Instead, this final rule provides
that a HUBZone small business concern may have up to four Legacy
HUBZone Employees at a given time, but must have at least one other
HUBZone employee in order for any employee to count as a Legacy HUBZone
resident employee. This means there could never be a scenario where a
HUBZone firm has zero employees residing in HUBZones. In addition, the
final rule provides that an individual who initially qualified as a
HUBZone Resident Employee by residing in a Redesignated Area or a
Qualified Disaster Area will not qualify as a Legacy HUBZone Employee
and that individuals who work fewer than 30 hours per week at any time
during their employment with the HUBZone concern cannot qualify as
Legacy HUBZone Employees. Of course, that would not include normal time
off for vacation or sick leave (including extended time off for
maternity/paternity leave). SBA believes this compromise strikes the
right balance between the concern related to risk that were raised in
the proposed rule and the concerns raised in the comments.
SBA proposed to revise Sec. 126.200(e), which addresses the
``attempt to maintain'' requirement, to clarify when HUBZone firms must
certify that they will attempt to maintain compliance with the 35%
HUBZone residency requirement during the performance of a HUBZone
contract. The proposed rule provided that firms must make this
certification when they apply for HUBZone certification, at the time
they complete their recertification, and at the time of offer for any
HUBZone contract. SBA received one comment on this change, which
requested that SBA clarify how it intends to monitor and enforce the
``attempt to maintain'' requirement for contracts that count toward
agency HUBZone goals but are not HUBZone set-asides (such as
subcontracts). The commenter urged SBA to ensure consistent oversight
across all types of HUBZone contracts, including subcontracts. In
response to this comment, SBA notes that the ``attempt to maintain''
requirement is statutory, and is specifically tied to HUBZone set-
asides, HUBZone sole source contracts, and contracts where the HUBZone
price evaluation preference is applied. Thus, this final rule does not
[…truncated; see source link]Indexed from Federal Register on December 17, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.