Proposed SBA Rule Would Drastically Change the Impact of Small Business Size/Status Recertifications

The SBA recently released a proposed rule that would bring significant changes to small business size and small business socioeconomic program (Woman-Owned Small Business Program, Veteran-Owned Small Business Program, etc.) recertifications. Such recertifications are especially important in the context of indefinite delivery/indefinite quantity (IDIQ) contracts, which contemplate the award of future task orders to the contractor pursuant to their base IDIQ contract. Thorny legal questions often arise when a contractor’s size and/or socioeconomic status changes during the IDIQ contract’s ordering period.

Generally speaking, a contractor’s size and socioeconomic status as they relate to a particular contract—including a set aside IDIQ contract—is determined at the time they submit a proposal for that contract. However, certain triggering events, such as a contract novation, a merger, acquisition, or sale, or the passage of time on a long-term set aside contract, require contractors to recertify their size and socioeconomic status to the government. Under the current SBA regulations governing recertifications, when a contractor holding a set aside IDIQ contract recertifies as other-than-small or as no longer possessing the relevant socioeconomic status, the government may not count the contractor for size/socioeconomic contract goaling purposes, but the contractor is not prohibited from performing pending or future set aside task orders issued against their IDIQ contract. Similarly, on any set aside contract, a contractor’s recertification that it is no longer small or no longer possesses the relevant socioeconomic status does not impact the contractor’s eligibility to receive options on that contract.

The SBA’s proposed rule seeks to change this status quo, making it more difficult for contractors to receive pending or future set aside task orders and options on existing set aside contracts in the event of size/status recertifications.

SBA’s proposed rule would consolidate the existing regulatory provisions addressing size/status recertifications into 13 CFR 125.12, Recertification of Size and Small Business Program Status. Under this subpart, recertifications would be required “within 30 calendar days of an approved novation, merger, acquisition, or sale, including agreements in principle, of or by a concern or an affiliate of the concern, which results in a change in controlling interest.” They would also be required “no more than 120 days prior to the end of the fifth year of the award, and no more than 120 days prior to exercising any option thereafter” or when explicitly requested by the contracting officer in connection with a solicitation for a set aside or reserved order or agreement. The requirement for recertification within 30 days of an “agreement in principle” of a merger, acquisition, or sale is a significant change; under the current rules, recertification is only required once such a transaction is finalized.

The proposed rule would also distinguish between “qualifying” and “disqualifying” recertifications. A “disqualifying recertification” “means a recertification as either other than small or other than a qualified small business program participant,” while “qualifying recertification” is defined as the opposite.

SBA’s proposed rule also described the impact of a disqualifying certification on pending set aside orders, future set aside orders, and options on existing set aside contracts:

• Pending Set Aside Orders:
  • If the triggering event occurred within 180 days following the date of an offer but prior to award, the contractor “is ineligible to receive the pending small business set aside or reserved award.”
  • If the triggering event occurred more than 180 days following the date of an offer but prior to award, the contractor “is eligible to receive a pending single award or reserve and the award will count as an award to a small business or small business program participant for up to five years from the date of the award unless there is a disqualifying recertification.” But, where the IDIQ contract “is a multiple award small business set aside or reserve,” the contractor “is ineligible for the pending award because the concern would not be eligible for orders set aside for small business or set aside for a specific type of small business.”

• Future Set Aside Orders:
  • If the disqualifying recertification occurs “in response to a contracting officer request for recertification on a specific order or agreement, the [contractor] is ineligible for the specific order or agreement but remains eligible for other set aside or reserved awards and unrestricted awards.”
  • For any other disqualifying recertifications, a contractor “is ineligible to submit an offer for a set aside or reserved award under a multiple award contract after the triggering event occurs,” but it “remains eligible for unrestricted awards under a multiple award contract and orders issued under a single award” set aside contract.

• Options:
  • Contractors remain eligible, following a disqualifying recertification, to receive options on single award set aside contracts.
  • However, a contractor that submits a disqualifying recertification on a multiple award set aside contract is ineligible to receive options on that contract.

The proposed rule’s prohibitions on contractors receiving certain pending set aside orders on multiple award contracts, future set aside orders on multiple award contracts, and options on multiple award set aside contracts represent a significant change to the current legal landscape. Assuming the rule goes into effect, it will undoubtedly have a major impact on the M&A market for small business contractors, who would face many more restrictions on their ability to receive set aside orders and options on set aside contracts following a merger, acquisition, or sale.

The public has until October 7 to submit comments on the proposed rule.