Effective May 30, 2023, a Small Business Administration (SBA) final rule made some notable changes to SBA’s 8(a) Business Development (BD) program, a valuable resource for those firms owned by socially and economically disadvantaged individuals.
As part of a broader SBA effort to hone its programs and bring clarity to its regulations, SBA made a number of changes to 8(a) ownership rules, what constitutes good faith efforts made by an 8(a) participant to meet their applicable business activity targets, SBA business plan approvals, and much more.
In addition, the final rule also made a host of changes to other SBA regulations, including the ostensible subcontractor rule and limitations on subcontracting rule, which we previously wrote about. You can find that blog post here.
Business Activity Targets
13 CFR § 124.509 provides that “[t]o ensure that Participants do not develop an unreasonable reliance on 8(a) awards, and to ease their transition into the competitive marketplace after graduating form the 8(a) BD program, Participants must make good faith efforts to obtain business outside the 8(a) program.” The regulations make sense as the 8(a) program is limited to nine years, and its stated intention is to ensure small businesses obtain the experience needed to be successful in the contracting market.
13 CFR § 124.503 states that “the Participant must comply with its applicable non-8(a) business activity target.” The final rule clarifies that for sole source 8(a) orders on multiple award contracts, the participant must be compliant with the rules at the time of the order, not at the time of the award of the underlying contract. Some commenters opposed the rule arguing that 8(a) participants who have grown since the award of the underlying contract will be harmed, but their contestations were to no avail.
An exception to the rule requiring 8(a) businesses to meet their activity targets comes when contractors can prove they made “good faith efforts” toward their goals. The final rule clarifies what constitutes “good faith efforts” by providing the following two avenues:
- “A Participant could demonstrate to SBA either that it submitted offers for one or more non-8(a) procurements which, if awarded, would have given the Participant sufficient revenues to achieve the applicable non-8(a) business activity target during its just completed program year, or explain that there were extenuating circumstances that adversely impacted its efforts to obtain non-8(a) revenues.”
- “Identif[y] possible extenuating circumstances, which would include but not be limited to a reduction in government funding, continuing resolutions and budget uncertainties, increased competition driving prices down, or having one or more prime contractors award less work to the Participant than originally contemplated.”
The final rule also made tweaks to the 8(a) business plan requirement in 13 CFR § 124.509. First, it clarified that the regulations require SBA to approve an 8(a) entity’s business plan before the 8(a) entity can be awarded contracts. The final rule acknowledged “that some firms are admitted to the 8(a) BD program with self-marketed procurement commitments from one or more procuring agencies . . . [and] that several newly admitted Participants have missed 8(a) contract opportunities in the past because SBA did not approve their business plans before the procuring agencies sought to award such procurement commitments as 8(a) contracts.” Stuck between the practical and statutory requirements, the SBA said it would “prioritize business plan review and approval for new 8(a) firms that were offered a sole source 8(a) requirement or were the apparent successful offeror for a competitive 8(a) requirement.” Lastly, the final rule clarifies that 8(a) entities only need to resubmit their business plans if something has changed in the plan. There is no requirement to submit your business plan annually.
Transfer of Ownership
Under the previous regulations, when ownership of an 8(a) entity transferred to a different entity, the 8(a) contracts were terminated, absent a waiver. The final rule changes that by allowing current or former 8(a) participants performing on an 8(a) contract to “substitute one disadvantaged individual or entity for another disadvantaged individual or entity without requiring the termination of those contracts or a request for waiver . . . as long as it receives SBA’s approval prior to the change.”
In addition, the SBA received a comment questioning “why SBA would not grant a waiver with respect to a specific 8(a) contract if the work previously performed under the contract is not similar to the type of work previously performed by the acquiring 8(a) Participant . . . [as] SBA should be looking at the eligibility of the acquiring firm, as required by statutory authority, but should not be attempting to determine the responsibility of the acquiring firm to perform the contract prior to the acquisition or question the acquiring firm’s business strategy going forward.” The SBA agreed and deleted the last sentence of § 124.515(d), which prohibited 8(a) contracts from being transferred to entities who had not performed similar work.
Lastly, the SBA clarified that a mentor may only own up to 40% of a protégé. However, the mentor must be in the same or similar line of business as its protégé.
Other Notable Changes
- Private Sector Work: “There has been some confusion as to whether an applicant must demonstrate that it has specifically performed work in the private sector prior to applying to participate in the 8(a) BD program. That is not the case.”
- Bona Fide Place of Business Requirements: Since it is a statutory requirement, the SBA could not eliminate it, but it did issue a moratorium on enforcement of the rule until September 30, 2023.
- Financial Statements: Tribally-owned applicants to the 8(a) program may submit financial statements in lieu of tax returns as “not all tribally-owned concerns file federal income tax returns.”
- Follow-On Procurements Can Be Awarded on a Sole Source Basis. The final rule clarified that “[a] follow-on procurement is a new contracting action for the same underlying requirement, and if the procuring agency has not evidenced a public intent to fulfill it as a competitive 8(a) procurement it can be fulfilled on a sole source basis to an entity-owned Participant.” This change will further limit what parts of the procurement process can be protested.
These changes and clarifications are generally welcomed as the SBA continues to make its regulations for its small business programs more accessible and enforceable. While notable, these are only some of the changes. If you own or are employed by an 8(a) entity, please read through the final regulations here.
If you have any questions about the final rule and how it could affect your business, please contact the author.