[Federal Register Volume 74, Number 207 (Wednesday, October 28, 2009)]
[Proposed Rules]
[Pages 55694-55723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-25416]
[[Page 55693]]
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Part IV
Small Business Administration
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13 CFR Parts 121 and 124
Small Business Size Regulations; 8(a) Business Development/Small
Disadvantaged Business Status Determinations; Proposed Rule
Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 /
Proposed Rules
[[Page 55694]]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 121 and 124
RIN 3245-AF53
Small Business Size Regulations; 8(a) Business Development/Small
Disadvantaged Business Status Determinations
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: This rule proposes to make changes to the regulations
governing the 8(a) Business Development (8(a) BD) and Small
Disadvantaged Business (SDB) programs, and to the U.S. Small Business
Administration's (SBA or Agency) size regulations. Some of the changes
involve technical issues such as changing the term ``SIC code'' to
``NAICS code'' to reflect the national conversion to the North American
Industry Classification System. Other changes are more substantive and
result from SBA's experience in implementing the current regulations.
For example, SBA has learned through experience that certain of its
rules governing the 8(a) BD program are too restrictive and serve to
unfairly preclude firms from being admitted to the program. In other
cases, SBA has determined that a rule is too expansive or indefinite
and has sought to restrict or clarify that rule. In one case wording
changes are being proposed to correct past public or agency
misinterpretation. Also, new situations have arisen that were not
anticipated when the current rules were drafted and the proposed rule
seeks to cover those situations. Finally, one of the changes, involving
Native Hawaiian Organizations (NHO's), implements a statutory change.
DATES: Comments must be received on or before December 28, 2009.
ADDRESSES: You may submit comments, identified by RIN: 3245-AF53, by
any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail, for paper, disk, or CD/ROM submissions: Joseph
Loddo, Associate Administrator, Office of Business Development, 409
Third Street, SW., Mail Code, Washington, DC 20416.
Hand Delivery/Courier: Joseph Loddo, Associate
Administrator, Office of Business Development, 409 Third Street, SW.,
Washington, DC 20416.
SBA will post all comments on www.regulations.gov. If you wish to
submit confidential business information (CBI) as defined in the User
Notice at www.Regulations.gov, please submit the information to LeAnn
Delaney, Deputy Associate Administrator, Office of Business
Development, 409 Third Street, SW., Washington, DC 20416, or send an e-
mail to [email protected]. Highlight the information that you
consider to be CBI and explain why you believe SBA should hold this
information as confidential. SBA will review the information and make
the final determination of whether it will publish the information or
not.
FOR FURTHER INFORMATION CONTACT: LeAnn Delaney, Deputy Associate
Administrator, Office of Business Development, at (202) 205-5852, or
[email protected].
SUPPLEMENTARY INFORMATION:
This rule proposes to make a number of changes to the regulations
governing the 8(a) BD and SDB programs, and several changes to SBA's
size regulations. Some of the changes involve technical issues. Other
changes are more substantive and result from SBA's experience in
implementing the current regulations.
The following specific changes are being proposed to SBA's
regulations. There are six proposed changes to SBA's size regulations,
two dealing with mentor/prot[eacute]g[eacute] situations, one amending
requirements for joint ventures, one clarifying how a procurement
should be classified, one further explaining the nonmanufacturer rule,
and one relating to who may request a formal size determination. The
remaining proposed changes are to the regulations governing SBA's 8(a)
BD and SDB programs. It is noted that all regulations governing the
8(a) program apply to the SDB program, unless otherwise specified.
While the SDB program no longer has an application and certification
component, the provisions specifying what constitutes an SDB are still
needed for self-certification and protest purposes.
Exception to Affiliation for Mentor/Prot[eacute]g[eacute] Programs
The first proposed change would clarify when SBA would consider a
prot[eacute]g[eacute] firm not to be affiliated with its mentor based
on assistance received from the mentor through a mentor/
prot[eacute]g[eacute] agreement. The current regulation may be
misconstrued to allow other Federal agencies to establish mentor/
prot[eacute]g[eacute] programs and exempt prot[eacute]g[eacute]s from
SBA's size affiliation rules. That was never SBA's intent. The
exception to affiliation contained in Sec. 121.103(b)(6) was meant to
apply to SBA's 8(a) BD mentor/prot[eacute]g[eacute] program and other
Federal mentor/prot[eacute]g[eacute] programs that specifically
authorize an exception to affiliation in their authorizing statute.
Because of the business development purposes of the 8(a) BD program,
SBA administratively established an exception to affiliation for
prot[eacute]g[eacute] firms. Specifically, prot[eacute]g[eacute] firms
are not affiliated with their mentors based on assistance received from
their mentors through an SBA-approved 8(a) BD mentor/
prot[eacute]g[eacute] agreement. That exception exists in the current
rule and remains in this proposed rule. The proposed rule merely spells
out more explicitly the affiliation exception for clarity purposes.
In addition, the proposed rule makes clear that an exception to
affiliation for prot[eacute]g[eacute]s in other Federal mentor/
prot[eacute]g[eacute] programs will be recognized by SBA only where
specifically authorized by statute (e.g., the Department of Defense
mentor/prot[eacute]g[eacute] program) or where SBA has authorized an
exception to affiliation for a mentor/prot[eacute]g[eacute] program of
another Federal agency under the procedures set forth in Sec. 121.903.
By statute, SBA is the sole agency responsible for determining size for
purposes of any Federal assistance. SBA does not believe that another
agency should be able to exempt firms from SBA's affiliation rules (and
in effect make program-specific size rules) by itself. There is a
formal process spelled out in Sec. 121.903 that an agency must use if
it would like to deviate from SBA's size rules, including those
relating to affiliation. This process must be followed and SBA must
specifically authorize an exception to affiliation for another Federal
mentor/prot[eacute]g[eacute] program in order for SBA to recognize the
exception. SBA does not anticipate approving exceptions to affiliation
to agencies seeking to have such an exception for their mentor/
prot[eacute]g[eacute] programs except in limited circumstances. SBA
believes that the 8(a) BD program is a unique business development
program that is unlike other Federal programs. If a program of another
agency is also intended to assist business development and an exclusion
from affiliation for joint ventures conducted under that agency's
mentor/prot[eacute]g[eacute] program would promote such business
development, SBA would be inclined to grant an exclusion from
affiliation because it would serve the same purpose as the exclusion
from affiliation for 8(a) mentor/prot[eacute]g[eacute] relationships.
Joint Ventures
The second proposed change to the size rules pertains to joint
ventures.
[[Page 55695]]
Under current Sec. 121.103(h), a joint venture is an entity with
limited duration. Specifically, the current regulation limits a
specific joint venture to submitting no more than three offers over a
two year period. Two firms (including an 8(a) prot[eacute]g[eacute]
firm and its mentor) are limited to pursuing three contract
opportunities under one joint venture, but there is nothing in the
regulations prohibiting the same two firms from forming a second joint
venture and pursuing three additional contract opportunities. The rule
limiting the number of contract opportunities any single joint venture
can pursue was actually intended to loosen the requirements of the
prior regulations. SBA's previous regulations defined a joint venture
to be an entity that was ``formed * * * to engage in and carry out a
single, specific business venture for joint profit * * *'' The genesis
for the change initially came from 8(a) firms, which complained that it
was hard and costly for them to go out and form a new joint venture
entity (usually in the form of a limited liability company (LLC)) for
every contract opportunity that they sought. SBA agreed, and decided to
provide more flexibility. SBA did so by changing the size regulations,
the place in SBA's regulations where the term joint venture was
defined. Because the provision appears in part 121 of SBA's
regulations, it applies to all of SBA's programs, including the 8(a) BD
program (as intended).
This provision, however, has caused confusion. Some firms
misunderstood that the limitation contained in the regulation was on
the number of offers submitted by the joint venture instead of the
number of contracts awarded to the joint venture. As such, some joint
ventures continued to submit offers beyond the three permitted by the
regulation and were determined not to be eligible for award where the
joint venture was otherwise the apparent successful offeror, but the
offer was a fourth (or more) offer. Firms have recommended to SBA that
if there is such a limit, it should be on contracts, not offers. Upon
further reflection, SBA agrees and proposes to change the limit of
three offers to a limit of three contract awards under one joint
venture agreement.
The proposed rule would clarify that three contract awards is not
an absolute limit for a specific joint venture agreement. A joint
venture could choose to pursue and be awarded a fourth (or more)
contract award, but in doing so would cause the partners to the joint
venture to be deemed affiliated for all purposes. Again, the two (or
more) firms could form a second joint venture and be awarded three
additional contracts, and a third joint venture to be awarded three
more. At some point, however, such a longstanding relationship or
contractual dependence would lead to a finding of general affiliation,
even in the 8(a) mentor/prot[eacute]g[eacute] joint venture context. As
an alternative, SBA also considered revising this provision to limit
the number of contract awards that the same partners to one or more
joint ventures could receive without the partners being deemed
affiliates for all purposes. SBA thought that three awards might be too
restrictive and considered limiting the number of contracts that the
same joint venture partners could be awarded to five. Under this
approach, the identical partners could form one joint venture and
receive five contracts or form several joint ventures and receive five
contracts in total before SBA would find the partners to be affiliated
for all purposes. SBA specifically requests comments on this approach,
specifically addressing whether this approach is preferable to the one
proposed.
In drafting the current three offers over two years requirement,
SBA did not intend to limit the number of contracting opportunities
that two (or more) firms could seek or contracts that they could be
awarded through a joint venture relationship. As noted above, SBA
believes that a ``joint venture'' is an entity of limited duration. If
SBA did not limit the number of contracting opportunities, or under
this proposed rule the number of contract awards, that a specific joint
venture could receive, then the joint venture could be an ongoing
entity with unlimited duration. In determining the size of a joint
venture, the receipts or employees of the joint venture partners are
generally aggregated (unless an exclusion from affiliation applies). If
the aggregated receipts or employees are less than the size standard
assigned to the relevant procurement, the joint venture qualifies as a
small business. If one of the joint venture partners seeks a different
contract opportunity apart from the joint venture, its size is
generally considered individually (unless there are other bases for
finding affiliation). If a specific ``joint venture'' could seek
unlimited contracting opportunities and be awarded unlimited contracts,
then the parties to the joint venture would necessarily be deemed
affiliates for all purposes because of their interdependent contractual
relations. This is the case because in effect the ``joint venture''
would be a new ongoing business entity that is owned by two individual
firms. Because of this affiliation, the revenues or employees would be
aggregated even where one of the firms sought a contract opportunity
individually.
The proposed rule also clarifies the time at which SBA will
determine whether this three in two years requirement has been met. SBA
understands that any offeror, including a joint venture offeror, may
seek more than one contract opportunity at the same time. Under SBA's
regulations, size is determined as of the date a concern submits a
written self-certification that it is small as part of its initial
offer including price. See 13 CFR 121.404(a). As long as a concern is
small as of that date, it may be awarded a contract as a small business
even if it has grown to be other than small as of the date of award. In
other words, even if a concern has received additional revenues which
would render it other than small after it certifies itself to be small
as part of its initial offer including price, it may be awarded a
contract as a small business. Having one specific point in time to
determine size gives certainty to the procurement process for both the
concern and the procuring agency. SBA believes that compliance with the
three awards in two years rule should be treated similarly. As such,
SBA proposes to determine compliance with the three in two years rule
as of the date of initial offer including price. An individual joint
venture may have submitted offers to perform two, three or more
procurements before it finds out that it has won any specific
competition. If at the time of offer the joint venture had not yet
received three contract awards, then the joint venture would be able to
submit offers for several procurement opportunities and ultimately be
awarded any contract for which it submitted an offer before receiving a
third contract. For example, Joint Venture AB has received two
contracts. On April 2, Joint Venture AB submits an offer for
Solicitation 1. On June 6, Joint Venture AB submits an offer for
Solicitation 2. On July 13, Joint Venture AB submits an offer for
Solicitation 3. In September, Joint Venture AB is found to be the
apparent successful offeror for all three solicitations. Even though
the award of the three contracts would give Joint Venture AB a total of
five contract awards, it could receive those awards without causing
general affiliation between its joint venture partners because Joint
Venture AB had not yet received three contract awards as of the dates
of the offers for each of three solicitations at issue.
[[Page 55696]]
The proposed rule also clarifies that while a joint venture may or
may not be a separate legal entity (e.g., an LLC), it must exist
through a written document. Thus, even an ``informal'' joint venture
must have a written agreement between the partners. In addition, the
rule clarifies SBA's current policy that a joint venture may or may not
be populated (i.e., have its own separate employees). Whether a joint
venture needs to be populated or have separate employees depends upon
the legal structure of the joint venture. If a joint venture is a
separate legal entity, then it must have its own employees. If a joint
venture merely exists through a written agreement between two or more
individual business entities, then it need not have its own separate
employees and employees of each of the individual business entities may
perform work for the joint venture.
There has also been confusion as to whether this three in two year
rule applies to the 8(a) BD program. Some individuals mistakenly
believed that it did not apply to joint ventures between mentors and
prot[eacute]g[eacute] firms in the 8(a) BD program. This is not the
case. Because the rule appears in SBA's size regulations, it applies to
all of SBA's programs. That is, it applies to all situations in which a
joint venture seeks to qualify as a ``small business concern.'' Because
this confusion is limited and SBA believes that the size regulations
clearly apply the three in two year rule to all joint venture
situations, SBA does not believe that a regulatory change is necessary
to specifically apply the rule to the 8(a) BD program.
This proposed rule would also amend Sec. 124.513(e) to clarify the
requirement that SBA approve 8(a) joint ventures prior to award for a
second or third 8(a) contract award to a specific joint venture. The
current regulation states that SBA must approve a joint venture for an
8(a) contract prior to contract award. There has been some confusion
about how this requirement relates to the size provision which would
now allow three contract awards over a two year period to a specific
joint venture. Prior to the first contract award, SBA would have to
approve the joint venture. SBA's review would examine the structure of
the joint venture and the work each joint venture partner would perform
on the proposed 8(a) contract. For the second (and third) 8(a)
contract, SBA would not need to examine the structure of the joint
venture again, but would need to determine that the work to be done by
the joint venture partners on the proposed second (or third) 8(a)
contract meets SBA's requirements. To this end, the 8(a) Participant to
the joint venture must submit to SBA an addendum to the joint venture
agreement explaining how the work will be performed on the contract,
specifying what resources will be provided by each joint venture
partner, and providing any other information necessary to fulfill the
requirements set forth in 13 CFR 124.512(c). If the second (and/or
third) contract to be awarded to a specific joint venture is not an
8(a) contract, the joint venture entity would not be required to submit
an addendum to SBA prior to award, but would, as explained in the
following paragraph, be required to meet the general 8(a) joint venture
requirements.
Exclusion from Affiliation for Mentor/Prot[eacute]g[eacute] Joint
Ventures
The third proposed change to the size regulations also pertains to
exceptions to affiliation. Currently, SBA's regulations authorize an
exception to affiliation where two firms approved by SBA to be a mentor
and prot[eacute]g[eacute] under the 8(a) BD program seek to joint
venture and perform a contract as a small business concern for any
Federal Government procurement. For a procurement to be awarded through
the 8(a) BD program, SBA's regulations at Sec. 124.513 require SBA to
approve the joint venture agreement prior to award and specify what
must be included in the joint venture agreement. There has been some
confusion as to whether the requirements for 8(a) joint venture
agreements apply to non-8(a) procurements. SBA believes that any joint
venture seeking to use the 8(a) mentor/prot[eacute]g[eacute] status as
a basis for an exception to affiliation requirements must follow the
8(a) requirements (i.e., it must meet the content requirements set
forth in Sec. 124.513(c) and the performance of work requirements set
forth in Sec. 124.513(d)). Although SBA does not approve joint venture
agreements for procurements outside the 8(a) program, if the size of a
joint venture claiming an exception to affiliation is protested, the
requirements of Sec. 124.513(c) and (d) must be met in order for the
exception to affiliation to apply. The reason SBA's 8(a) regulations
permit exceptions to affiliation on small business contracts outside
the 8(a) program (e.g., small business set asides, HUBZone set asides,
service disabled veteran owned small business set asides) is to further
assist prot[eacute]g[eacute] 8(a) BD Participants in their business
development. If the requirements ensuring control and performance of
work by the 8(a) prot[eacute]g[eacute] firm are not enforced, a large
business would be able to have unchecked and inappropriate access to
Federal procurements intended for small business. While this is not a
change to how SBA has interpreted this regulation, SBA believes that it
should be spelled out in the regulation to avoid any further confusion
and, thus, clarifying language has been added to Sec.
121.103(h)(3)(iii). SBA is also considering whether to limit the
exclusion to affiliation for a joint venture that is comprised of a
prot[eacute]g[eacute] firm and its SBA-approved mentor only to 8(a)
contracts. If this proposal were adopted, mentor/prot[eacute]g[eacute]
joint ventures for small business set aside contracts (or other small
business contracts) would not receive an exclusion from affiliation. As
such, if the mentor were a large business, the joint venture would be
large and, thus, ineligible for a small business set aside contract.
Proponents of this view believe that benefits for 8(a) firms should be
limited to contracts obtained through the 8(a) program, and not
extended to other small business programs. They believe that it is
unfair for non-8(a) small business concerns to have to compete against
a joint venture involving a prot[eacute]g[eacute] firm and a large
mentor for small business contracts outside the 8(a) program. SBA
specifically requests comments on whether this policy should be changed
in a subsequent final rule.
Classification of a Procurement for Supplies
SBA's current regulations provide that acquisitions for supplies
must be classified under the appropriate manufacturing NAICS code, not
under a wholesale trade NAICS code. The fourth proposed change to the
size regulations would clarify that a procurement for supplies also
cannot be classified under a retail trade NAICS code.
Application of the Nonmanufacturer Rule
The fifth proposed change to the size regulations would provide
further guidance to the current nonmanufacturer rule (i.e., the rule
that requires, in pertinent part, a firm that is not itself the
manufacturer of the end item being procured to provide the product of a
small business manufacturer). Several procuring agencies have
misconstrued when to apply the nonmanufacturer rule. The proposed rule
would explicitly state that the nonmanufacturer rule applies only where
the procuring agency has classified a procurement as a manufacturing
procurement by assigning the procurement a NAICS code under Sectors 31-
33. It would also clarify that the nonmanufacturer rule does not apply
to supply contracts that
[[Page 55697]]
do not involve manufacturing. For example, the nonmanufacturer rule
would not apply to situations where a procuring agency is acquiring
agricultural commodities that are not processed or changed and the
procuring agency classifies the contract as crop production under NAICS
Subsector 111.
In addition, the rule applies only to the manufacturing or supply
component of a manufacturing procurement. The rule provides two
examples to clarify SBA's position regarding the rule. Where a
procuring agency has classified a procurement as a manufacturing
procurement and is also acquiring services, the nonmanufacturer rule
would apply to the supply component of that procurement only. In other
words, a firm seeking to qualify as a small business nonmanufacturer
must supply the product of a small business manufacturer (unless a
nonmanufacturer waiver applies), but need not perform any specific
portion of the accompanying services. Since the procurement is
classified under a manufacturing NAICS code, it cannot also be
considered a services procurement and, thus, the 50% performance of
work requirement set forth in Sec. 125.6 for services does not apply
to that procurement. In classifying the procurement as a manufacturing/
supply procurement, the procuring agency must have determined that the
``principal nature'' of the procurement was supplies. As a result, any
work done by a subcontractor on the services portion of the contract
cannot rise to the level of being ``primary and vital'' requirements of
the procurement, and therefore cannot be the basis or affiliation as an
ostensible subcontractor. Conversely, if a procuring agency determines
that the ``principal nature'' of the procurement is services, only the
requirements relating to services contracts apply. The nonmanufacturer
rule, which applies only to manufacturing/supply contracts, would not
apply. Thus, although a firm seeking to qualify as a small business
with respect to such a contract must certify that it will perform at
least 50% of the cost of the contract incurred for personnel with its
own employees, it need not supply the product of a small business
manufacturer on the supply component of the contract. In order to
qualify as a nonmanufacturer, a firm must be primarily engaged in the
retail or wholesale trade and normally sell the type of item being
supplied. We are proposing to further define this statutory requirement
to mean that the firm takes ownership or possession of the item(s) with
its personnel, equipment or facilities in a manner consistent with
industry practice. This change is primarily in response to situations
where SBA has waived the nonmanufacturer rule and the prime contractor
essentially subcontracts all services, such as warehousing or delivery,
to a large business. Such an arrangement, where the prime contractor
can legally provide the product of a large business and then
subcontract all tangential services to a large business, is contrary to
the intent and purpose of the Small Business Act, i.e., providing small
businesses with an opportunity to perform prime contracts. Such an
arrangement inflates the cost to the Government of contract performance
and inflates the statistics for prime contracting dollars awarded to
small business, which is detrimental to other small businesses that are
willing and able to perform Government contracts.
Request for Formal Size Determination
The sixth proposed change to the size regulations would amend Sec.
121.1001(b) to give the SBA's Office of Inspector General (OIG) the
authority to ask for a formal size determination. Because the OIG is
not currently listed in the regulations as an individual who can
request a formal size determination, the OIG must currently seek a
formal size determination through the relevant SBA program office. SBA
believes that the Inspector General should be able to seek a formal
size determination when questions about a concern's size arise in the
context of an investigation or other review of SBA programs by the
Office of Inspector General.
Completion of Program Term
The first proposed change to SBA's 8(a) BD regulations is an
amendment to the current rule to specify that a firm that merely
completes its program term is not deemed to ``graduate'' from the 8(a)
program. Pursuant to the Small Business Act, a Participant is
considered to graduate only if it successfully completes the program by
substantially achieving the targets, objectives, and goals contained in
the concern's business plan, thereby demonstrating its ability to
compete in the marketplace without 8(a) assistance. 15 U.S.C.
636(j)(10)(H). Sections 124.2, 124.301 and 124.302 would be amended to
effect this change. In addition, the proposed rule would add a new
Sec. 124.112(f) to require SBA to determine if a firm should be deemed
to graduate from the 8(a) BD program at the end of its nine-year
program term. As part of the final annual review performed by SBA prior
to the expiration of a Participant's nine-year program term, SBA would
determine whether the firm has met the targets and objectives set forth
in its business plan.
Definitional Changes
This rule would amend Section 124.3, to add a definition of NAICS
code. Additionally, the term ``SIC code'' would be changed to ``NAICS
code'' everywhere it appears in part 124 to take into account the
replacement of the Standard Industry Classification (SIC) code system
with the North American Industry Classification System. The NAICS code
system is used to classify businesses for size purposes. Specifically,
the term ``NAICS code'' would replace the term ``SIC code'' in
Sec. Sec. 124.110(c), 124.111(d), 124.502(c)(3), 124.503(b),
124.503(b)(1), 124.503(b)(2), 124.503(c)(1)(iii), 124.503(g)(3),
124.505(a)(3), 124.507(b)(2)(i), 124.513(b)(1), 124.513(b)(1)(i),
124.513(b)(1)(ii)(A), 124.513(b)(2), 124.513(b)(3), 124.514(a)(1),
124.515(d), 124.517(d)(1), 124.517(d)(2), 124.519(a)(1), 124.519(a)(2),
124.1002(b)(1), 124.1002(b)(1)(i), 124.1002(b)(1)(ii), and
124.1002(f)(3).
The rule also proposes to amend the definition of primary industry
classification to specifically recognize that a Participant may change
its primary industry classification over time. The rule would allow a
Participant to change its primary industry classification from one
NAICS code to another where it can demonstrate that the majority of its
revenues during a two-year period have evolved from its former primary
NAICS code to another NAICS code. The proposed rule would also add a
new Sec. 124.112(e) to permit a Participant to request a change in its
primary industry classification with its servicing SBA district office
where it can demonstrate that its revenues have in fact evolved from
one NAICS code to another.
The rule would also add a definition of the term ``regularly
maintains an office.'' This definition is important in determining
whether a participant has a bona fide place of business in a particular
geographic location. While the definition proposed is not a change in
current SBA policy, SBA believes that the definition should be added to
the regulations for clarity purposes. Under the proposed rule, a
Participant would be deemed to regularly maintain an office in a
particular location if it conducts business activities as an on-going
business concern from a fixed location on a daily basis. The rule would
also provide that the best evidence of the regular maintenance of an
office is documentation that shows that third parties routinely
transact
[[Page 55698]]
business with a participant at that location. Such evidence includes
advertisements, bills, correspondence, lease agreements, land records,
and evidence that the participant has complied with all local
requirements concerning registering, licensing, or filing with the
State or County where the place of business is located. This means that
a firm would generally be required to have a license to do business in
a particular location in order to ``regularly maintain an office''
there. The firm would not, however, be required to have a construction
license or other specific type of license in order to regularly
maintain an office and thus have a bona fide place of business in a
specific location. SBA's bona fide place of business requirement is met
with a license to do business generally. Whether a firm is or is not
able to get a specific type of contract because it does not possess an
additional license is not a bona fide place of business issue.
Size for Primary NAICS Code
This rule proposes to amend Sec. 124.102(a) to require that a firm
remain small for its primary NAICS code during its term of
participation in the 8(a) BD program, and correspondingly to revise
Sec. 124.302 to permit SBA to graduate a Participant prior to the
expiration of its program term where the firm exceeds the size standard
corresponding to its primary NAICS code for two successive program
years. SBA has historically permitted a firm to remain in the 8(a)
program and receive 8(a) contracts in secondary NAICS codes as long as
it remains small for such secondary codes. SBA has reexamined this
policy and concluded that if a firm has grown to be other than small in
its primary NAICS code, it can reasonably be said that the firm has
achieved its goals and objectives. Understanding that the size of a
firm can vary from year to year based on the receipts/number of
employees in any given year, SBA is proposing that a firm be graduated
early only where it exceeds the size standard for its primary NAICS
code in two successive program years. SBA believes that it would be
unfair to early graduate a firm from the 8(a) program where it has one
very successful program year that may not again be repeated. This does
not mean that a firm cannot change its primary NAICS code during its
participation in the program. As noted in the Supplementary Information
corresponding to the definition of primary industry classification in
Sec. 124.3, the proposed rule would authorize a firm to change its
primary NAICS code by demonstrating that the majority of its revenues
during a two-year period have evolved from its former primary NAICS
code to another NAICS code. As such, SBA may early graduate a firm from
the 8(a) BD program if the firm exceeds the size standard corresponding
to its primary NAICS code (whether its initial primary NAICS code or a
revised primary NAICS code) for two successive program years.
Economic Disadvantage
SBA proposes to amend Sec. 124.104 Who is Economically
Disadvantaged? to incorporate into the regulations certain
interpretations and policies that have been followed informally by SBA.
Some of these policies and regulatory interpretations are currently set
forth in SBA's Standard Operating Procedures (SOPs) or in decisions
rendered by the SBA Office of Hearings and Appeals (OHA). A sentence
would be added to paragraph (b)(2) to clarify that SBA does not take
community property laws into account when determining economic
disadvantage. This means that property that is legally in the name of
one spouse would be considered wholly that spouse's property, whether
or not the couple lived in a community property state. Since community
property laws are usually applied when a couple separates and since
spouses in community states generally have the freedom to keep their
property separate while they are married, SBA has decided to treat
property owned solely by one spouse as that spouse's property for
economic disadvantage determinations. This policy also results in equal
treatment for applicants in community and non-community property
states. Community property laws will continue to be applied in Sec.
124.105(k) for purposes of determining ownership of an applicant or
Participant firm, but they will not be applied for any other purpose.
Paragraph (b)(2) would also be amended to provide that SBA may consider
a spouse's financial situation in determining an individual's access to
capital and credit. This addition reflects current practice.
Paragraph (c)(2) would be amended to exempt funds in Individual
Retirement Accounts (IRAs) and other official retirement accounts from
the calculation of net worth provided that the funds cannot currently
be withdrawn from the account prior to retirement age without a
significant penalty. Retirement accounts are not assets to be currently
enjoyed, rather they are held for purposes of ensuring future income
when an individual is no longer working. SBA believes it is unfair to
count those assets as current assets. Through experience SBA has found
that the inclusion of IRA's and other retirement accounts in the
calculation of an individual's net worth does not serve to disqualify
wealthy individuals from participation in the program; rather, it has
worked to make middle and lower income individuals ineligible to the
extent they have invested prudently in accounts to ensure income at a
time in their lives that they are no longer working. SBA is cognizant
of the potential for abuse of this proposed provision, with individuals
attempting to hide current assets in funds labeled ``retirement
accounts.'' Obviously, SBA does not believe such attempts to remove
certain assets from an individual's economic disadvantage determination
would be appropriate. Therefore, it has added the condition that in
order for funds not to be counted in an economic disadvantage
determination, the funds cannot be currently withdrawn from the account
without a significant penalty. A significant penalty would be one equal
or similar to the penalty assessed by the Internal Revenue Service for
early withdrawal. In order for SBA to determine whether funds invested
in a specific account labeled a ``retirement account'' may be excluded
from an individual's net worth calculation, the individual must provide
to SBA information about the terms and conditions of the account. SBA
is interested in hearing from the public concerning this proposed
revision, and specifically requests comments on how best to exclude
legitimate retirement accounts without affording others a mechanism to
circumvent the economic disadvantage criterion.
SBA is also proposing to amend paragraph (c)(2) to exempt income
from an S Corporation from the calculation of both income and net worth
to the extent such income is reinvested in the firm or used to pay
taxes arising from the normal course of operations of an S corporation.
Therefore, while the income of an S corporation flows through and is
taxed to individual shareholders in accordance with their interest in
the S corporation for Federal tax purposes, SBA will take such income
into account for economic disadvantage purposes only if it is actually
distributed to the particular shareholder. This change would result in
equal treatment of corporate income for C and S corporations. In cases
where that income is reinvested in the firm or used to pay taxes
arising from the normal course of operations of the S corporation and
not retained by the individual, SBA believes it should be treated the
same as C corporation
[[Page 55699]]
income for purposes of determining economic disadvantage. In order to
be excluded, the owner of the S corporation would be required to
clearly demonstrate that he or she paid taxes of the S corporation or
reinvested certain funds into the S corporation within 12 months of the
distribution of income. Conversely, the owner of an S corporation could
not subtract S corporation losses from the income paid by the S
corporation to him/her or from the individual's total income from
whatever source. S corporation losses, like C corporation losses, are
losses to the company only, not losses to the individual, and based
upon the legal structure of the corporation and the protections
affording the principals through this structure, the individual is not
personally liable for the debts representing any of those liabilities.
Thus, it is inappropriate to consider these personal losses and
individuals should not be able to use them to reduce their personal
incomes.
A new paragraph (c)(3) would be added to provide that SBA would
presume that an individual is not economically disadvantaged if his or
her adjusted gross income averaged over the past two years exceeds
$200,000. SBA considered incorporating into the regulation the present
policy that an individual is not economically disadvantaged if his or
her adjusted gross income exceeds that for the top two percent of all
wage earners according to Internal Revenue Service (IRS) statistics.
Under the current approach, SBA compares the income of the individual
claiming disadvantage to the most currently available final IRS income
tax return data. In some cases, SBA may be comparing IRS information
relating to one tax year to an individual's income from a succeeding
tax year because final IRS information is not available for that
succeeding tax year. Although that policy has been upheld by SBA's OHA
and the Federal courts (see SRS Technologies v. United States, 894 F.
Supp. 8 (D.D.C. 1995); Matter of Pride Technologies, Inc., SBA No. 557
(1996) SBA No. MSB-557), SBA believes that a straight line numerical
figure is more understandable, easier to implement, and avoids any
appearance of unfair treatment when statistics for one tax year are
compared to an income level for another tax year. SBA is proposing an
income level of $200,000 because that figure closely approximates the
income level corresponding to the top two percent of all wage earners,
which has been upheld as a reasonable indicator of a lack of economic
disadvantage. Although a $200,000 income may seem unduly high as a
benchmark, we note that this amount is being used only to presume,
without more information, that the individual is not economically
disadvantaged. We also note that average income for a small business
owner is higher than average income for the population at large. SBA
may consider incomes lower than $200,000 as indicative of lack of
economic disadvantage. However, it would not presume lack of economic
disadvantage in that case. It may also consider income in connection
with other factors when determining an individual's access to capital.
SBA specifically requests comments on both the straight line approach
proposed and the current comparison of income levels to the IRS
statistics. The rule also proposes to establish a two year average
income level of $250,000 for continued 8(a) BD program eligibility. SBA
believes that a higher income level may be more appropriate as a firm
becomes more developed, but does not want to sanction too high a level.
SBA requests comments on the $250,000 level, including whether the same
$200,000 level should be used for both initial and continued 8(a) BD
eligibility and whether some other level (e.g., $225,000) should be
used for continued eligibility.
The proposed regulation would permit applicants to rebut the
presumption of lack of economic disadvantage upon a showing that the
income is not indicative of lack of economic disadvantage. For example,
the presumption could be rebutted by a showing that the income was
unusual (inheritance) and is unlikely to occur again or that the
earnings were offset by losses as in the case of winnings and losses
from gambling resulting in a net gain far less than the actual income
received. SBA may still consider any unusual earnings or windfalls as
part of its review of total assets. Thus, although an inheritance of $5
million, for example, may be unusual income and excluded from SBA's
determination of economic disadvantage based on income, it would not be
excluded from SBA's determination of economic disadvantage based on
total assets. In such a case, a $5 million inheritance would render the
individual not economically disadvantaged based on total assets. This
paragraph would also provide that S corporation income will not be
considered in determining an individual's average income if the S
corporation owner submits evidence that such income was reinvested in
the firm or used to pay corporate taxes within 12 months of the
distribution of income. Again, while the income of an S corporation
flows through and is taxed to individual shareholders in accordance
with their interest in the S corporation, SBA will take such income
into account only if it is actually distributed to the particular
shareholder.
This rule also proposes to amend Sec. 124.104(c) to establish an
objective standard by which an individual can qualify as economically
disadvantaged based on his or her total assets. The regulations have
historically authorized SBA to use total assets as a basis for
determining economic disadvantage, but did not identify a specific
level below which an individual would be considered disadvantaged. The
regulations also did not spell out a specific level of total assets
above which an individual would not qualify as economically
disadvantaged. Although SBA has used total assets as a basis for
denying an individual participation in the 8(a) BD program based on a
lack of economic disadvantage, the precise level at which an individual
no longer qualifies as economically disadvantaged is not certain. SBA's
findings that an individual was not economically disadvantaged with
total asset levels of $4.1 million and $4.6 million have been upheld as
reasonable. See Matter of Pride Technologies, SBA No. 557 (1996), and
SRS Technologies v. U.S., 843 F. Supp. 740 (D.D.C. 1994).
Alternatively, SBA's finding that an individual was not economically
disadvantaged with total assets of $1.26 million was overturned. See
Matter of Tower Communications, SBA No. 587 (1997). This rule proposes
to eliminate any confusion as to what level of total assets qualifies
as economic disadvantage for 8(a) BD purposes. Under the proposed rule,
an individual would not be considered economically disadvantaged if the
fair market value of all his or her assets exceeds $3 million at the
time of 8(a) application and $4 million for purposes of continued 8(a)
BD program participation. While the proposed rule would exclude
retirement accounts from an individual's net worth in determining
economic disadvantage, it would not exclude such amounts from the
individual's total assets in determining economic disadvantage on that
basis.
Changes to Ownership Requirements
SBA is proposing to amend Sec. 124.105(g) governing ownership to
provide more flexibility in determining whether to admit to the 8(a)
program companies owned by individuals where such individuals have
immediate family members who are owners of current or
[[Page 55700]]
former 8(a) concerns. The current rule provides that ``the individuals
determined to be disadvantaged for purposes of one Participant, their
immediate family members, and the Participant itself, may not hold, in
the aggregate, more than a 20 percent equity ownership interest in any
other single Participant.'' Because of the wording of that provision,
SBA has been forced to deny 8(a) program admission to companies solely
because the owners of those firms have family members who are
disadvantaged owners of other 8(a) concerns. In some cases, the two
firms are in different industries and are located in different parts of
the country.
SBA believes that it serves no purpose to automatically disqualify
a firm simply because the individual seeking to qualify the firm has an
immediate family member already participating in the program. Although
there may be situations in which SBA would choose to deny admission to
a firm based on a family member's program participation, such a
decision must necessarily be made on a case-by-case basis. For example,
SBA may wish to deny admission to the program to a construction firm
owned by a woman whose father owns an 8(a) firm in the construction
industry where the program term of the father's firm is about to end,
if it appears that the daughter does not have sufficient management
experience to manage the firm and there are indications that the
applicant is simply a front for the current firm.
In order to prevent disadvantaged individuals from using family
members to extend their program terms and to prevent fronts, SBA
proposes to amend Sec. 124.105(g) to provide that an individual may
not use his or her disadvantaged status to qualify a firm if such
individual has an immediate family member who has used his or her
disadvantaged status to qualify another firm for participation in the
8(a) BD program. However, the proposed rule will permit the SBA's
Associate Administrator for Business Development (AA/BD) to waive this
prohibition under certain circumstances. Those circumstances are
similar to the clear line of fracture exception to the identity of
interest rule in the size regulations.
SBA would waive the prohibition where there are no or negligible
connections between the two firms, either in the form of ownership,
control or contractual relations, and where the individual seeking to
use his or her disadvantaged status to qualify the firm can demonstrate
he or she has sufficient management and technical experience to operate
the firm. If a firm seeking a waiver is in the same or similar line of
business as a current or former 8(a) Participant of a family member,
there would be a presumption against granting a waiver. The applicant
must provide clear and compelling evidence that no connection exists
between the two firms.
SBA believes that this narrow exception to the general prohibition
against family members owning 8(a) concerns in the same or similar line
of business will permit the Agency sufficient flexibility to admit
firms where they are clearly operating separately and independently
from the relative's firm. SBA also proposes to add a provision
specifying that it may terminate an 8(a) concern for which it had
granted a waiver if connections between the two firms become apparent
(e.g., sharing of employees, contractual relationships between the two
firms) or if that firm begins to operate in the same or a similar line
of business as the current or former 8(a) concern owned by the
disadvantaged immediate family member.
SBA also proposes to amend Sec. 124.105 to add a phrase that was
inadvertently omitted from the current rule. The words ``or a principal
of such firm'' were inadvertently omitted from Sec. 124.105(h)(2)
after the words ``A non-Participant concern.'' That provision prohibits
concerns in the same or a similar line of business as an 8(a) concern
from owning more than a 10 percent interest in an 8(a) concern in the
developmental stage of program participation or more than a 20 percent
interest in a Participant in the transitional stage of the program. The
intent was to also prohibit principals of such concerns from owning
these same percentages. However, the necessary language to effect this
was inadvertently omitted. This omission is made particularly evident
by the rule permitting former Participants and principals of former
Participants to own up to 20 percent of a program Participant in the
developmental stage of program participation and up to 30 percent of a
Participant in the transitional stage. The anomalous result of the
omission was to permit principals of non-8(a) concerns to own greater
percentages of 8(a) firms in the same or similar line of business than
principals of former 8(a) concerns even though the clear intent of the
rule was to afford former 8(a) firms and their principals greater
ownership rights. SBA has corrected that error in this proposed rule.
Changes to Control Requirements
SBA also proposes to amend Sec. 124.106, which addresses control
of an 8(a) applicant or Participant. SBA proposes to add an additional
requirement to this section that the disadvantaged manager of an 8(a)
applicant or Participant must reside in the United States and spend
part of every month physically present at the primary offices of the
applicant or Participant. This change is being proposed in response to
a recent Small Disadvantaged Business (SDB) eligibility appeal before
SBA's Office of Hearings and Appeals. In OHA's decision on that case,
which was vacated on other grounds, the Administrative Judge held that
a disadvantaged owner of a firm seeking SDB status controlled the firm
from her residence in Paris, France. SBA believes that an individual
seeking to qualify as eligible for the SBA's 8(a) BD program must
reside in the United States. There is a presumption in the regulations
for such residency, but it is not explicit. The regulations require an
individual seeking 8(a) eligibility to be a citizen of the United
States and individuals who are non-designated group members are
required to establish their individual social disadvantage based on
instances of bias or discrimination ``in American society, not in other
countries.'' In addition, SBA believes that in order for an individual
to exercise the requisite degree of control of an 8(a) firm, such
individual must be physically present at the offices of the firm at
least part of every month. In SBA's view, the potential for negative
control is great when an individual on-site manager is relied on by an
absent chief executive. The proposed rule would also add a conforming
change to the general requirements for 8(a) BD eligibility contained in
Sec. 124.104(a) to recognize the residency requirement.
The Agency recognizes that the 21st century has created new
opportunities for off-site management through the increased use of e-
mail and overnight express and decreasing interstate and international
telephone costs, and that these new and improved technologies enable
managers to maintain control over the operations of their businesses
without the need for a constant or consistent physical presence.
Nevertheless, SBA believes that in order to prevent negative control
and to ensure that the disadvantaged majority owner(s) are the true
managers of the 8(a) concern or applicant, the disadvantaged manager
must generally be present in the firm's primary offices at least part
of every month and must be
[[Page 55701]]
able to physically reach the firm in a matter of a few hours from his
or her residence should the need arise. SBA considered requiring
physical presence by the individual(s) claiming disadvantaged status in
the headquarters of the applicant or participant firm for a minimum
amount of time each month (e.g., 10 hours, 20 hours, or some other
higher number of hours) and specifically asks for comments on whether
such a requirement makes sense in today's world (and, if so, what
should the minimum number of hours be) or whether control should be
determined on a case-by-case basis. SBA also understands that any
provision requiring presence in every month may be unworkable. With
such a strict requirement, a disadvantaged owner who took a month-long
vacation one year would be ineligible for continued 8(a) BD
participation. As such, the proposed rule has the requirement that a
disadvantaged owner must ``generally'' spend part of every month at the
firm's principal office, imposing a monthly presence requirement while
at the same time allowing for unusual circumstances in any given month.
Section 124.106 would also be amended by deleting the word ``such''
from the second sentence in the preamble of paragraph (e) so as to make
clear that paragraphs (e)(1) and (e)(2) apply to all non-disadvantaged
individuals and not just to those non-disadvantaged individuals
involved in the management of an applicant or Participant or who are
stockholders, partners, limited liability members, officers, or
directors of the applicant or Participant. This change is needed to
correct a misinterpretation of this regulation by SBA's Office of
Hearings and Appeals (OHA). That decision, In the Matter of Avasar
Corporation, No. 209 (August 24, 2004), incorrectly held that
paragraphs (a)(1), (a)(2), and (a)(3) as well as paragraph (g) of Sec.
124.106 concerning non-disadvantaged control, applied only to non-
disadvantaged individuals involved in the management of an applicant or
Participant, or stockholders, partners, limited liability members,
officers, and/or directors of the applicant or Participant. The result
of that decision was that under certain circumstances, non-
disadvantaged individuals would be permitted to control an 8(a)
concern. This is an absurd result and contrary to statute. The proposed
change makes it clear that the above paragraphs apply to all non-
disadvantaged individuals, regardless of their current or former
relationship to the applicant or Participant.
The proposed rule would also add a new Sec. 124.106(h) regarding
control of an 8(a) BD Participant where a disadvantaged individual upon
whom eligibility is based is a reserve component member in the United
States military who has been called to active duty. Currently, there is
no statutory or regulatory authority to permit such a firm to stay in
the 8(a) BD program, whether on an active or inactive basis, while the
individual upon whom eligibility is based is away from the firm for an
extended period of time. Some have even questioned whether SBA should
in fact terminate such a firm from the 8(a) BD program for failure to
maintain control by one or more disadvantaged individuals. SBA believes
that termination in these circumstances would be inappropriate.
Specifically, the proposed rule would permit a Participant to designate
one or more individuals to control its daily business operations during
the time that a disadvantaged individual upon whom eligibility has been
called to active duty in the United States military. The proposed rule
would also amend Sec. 124.305 to authorize the Participant to suspend
its 8(a) BD participation during the active duty call-up period. If the
Participant elects to designate one or more individuals to control the
concern on behalf of the disadvantaged individual during the active
duty call-up period, the concern will continue to be treated as an
eligible 8(a) Participant and no additional time will be added to its
program term. If the Participant elects to suspend its status as an
eligible 8(a) Participant, the Participant's program term would be
extended by the length of the suspension when the individual returns
from active duty.
Benchmarks
The proposed rule would remove Sec. 124.108(f), as well as other
references to the achievement of benchmarks contained in Sec. Sec.
124.302(d), 124.403(d), and 124.504(d). When these regulations were
first implemented, the Department of Commerce was supposed to update
industry codes every few years to determine those industries which
minority contractors were underrepresented in the Federal market. It is
SBA's view that because these industry categories have never been
revised since the initial publication, references to them are outdated
and should be removed.
Changes Applying Specifically to Tribally-Owned Firms
The Small Business Act permits 8(a) Participants to be owned by
``an economically disadvantaged Indian tribe (or a wholly owned
business entity of such tribe).'' 15 U.S.C. 637(a)(4)(A)(i)(II). The
term Indian tribe includes any Alaska Native village or regional
corporation. 15 U.S.C. 637(a)(13). Pursuant to the Alaska Native Claims
Settlement Act, a concern which is majority owned by an Alaska Native
Corporation (ANC) is deemed to be both owned and controlled by Alaska
Natives and an economically disadvantaged business. As such, ANCs do
not have to establish that they are ``economically disadvantaged.''
Conversely, Indian tribes are not afforded the same automatic statutory
economic disadvantage designation. Current Sec. 124.109(b) requires
tribes to demonstrate their economic disadvantage through the
submission of data, including information relating to tribal
unemployment rate, per capita income of tribal members, and the
percentage of the tribal population below the poverty level. SBA
requests comments on how best to determine whether a tribe should be
considered ``economically disadvantaged.'' Some have advocated a bright
line assets or net worth test for tribes. SBA is not convinced that
such a test truly captures the economic disadvantage status of a tribe.
SBA continues to believe that the factors set forth in current Sec.
124.109(b)(2) paint a truer picture, but specifically requests comments
from tribes on this issue. The current regulation also requires a tribe
to demonstrate its economic disadvantage only once. SBA also requests
comments regarding whether this one time demonstration of economic
disadvantage makes sense.
The proposed rule would also amend Sec. 124.109(c)(3)(ii) to more
clearly define the type of work that a tribally-owned firm may perform
in the 8(a) program. One of the goals of the 8(a) BD program is to
develop businesses to the point where they can be independent, viable
businesses when they graduate or otherwise leave the 8(a) BD program.
In order to encourage a tribally-owned firm to continue to operate as
an independent business after it leaves the 8(a) BD program, SBA has
prohibited for many years a tribally-owned applicant from having the
same primary NAICS code as another firm in the 8(a) BD program owned by
the same tribe or one that has left the program within the last two
years. It could perform secondary work in such a NAICS code, but it
could not duplicate the primary NAICS code of another or recently
former tribally-owned 8(a) Participant. SBA believed that this
requirement would encourage tribes to expand their business activities
[[Page 55702]]
by having two or more viable businesses doing separate and distinct
work. In some cases, however, SBA admitted a second tribally-owned firm
into the 8(a) BD program under one primary NAICS code and it
immediately began to perform all or most of its work in a NAICS code
that was the primary NAICS code of a firm owned by the tribe that
recently graduated from the 8(a) BD program. This is not what SBA
envisioned. Again, the purpose of the 8(a) BD program is to promote
business development. Having one business take over work previously
performed by another does not advance the business development of two
distinct firms. In order to further encourage the continued, long-term
viability of two separate businesses, this rule proposes that a newly
certified tribally-owned Participant cannot receive an 8(a) contract in
a secondary NAICS code that is the primary NAICS code of another
Participant (or former participant that has left the program within two
years of the date of application) owned by the tribe for a period of
two years from the date of admission to the program. SBA also
considered allowing such secondary work on a limited basis (e.g., no
more than 20% or 30% of its 8(a) work could be in a NAICS code that
was/is the primary NAICS code of a former/other tribally-owned
Participant). SBA seeks comments on both approaches.
SBA also proposes to delete the word ``disadvantaged'' in Sec.
124.109(c)(4) to make clear that any tribal member may participate in
the management of a tribally-owned firm and need not individually
qualify as economically disadvantaged. Under current rules, a tribal
member would generally have to qualify as economically disadvantaged to
run the daily business operations of a tribally-owned concern. Tribal
representatives emphasized the need for this change to enable them to
attract the most qualified tribal members to assist in running tribal
businesses and further allow them to assist economic and community
development through their tribally-owned concerns. SBA agrees that the
current rule is overly restrictive and proposes this change. This
change would also eliminate the requirement that directors and officers
must submit copies of their individual tax returns to establish their
economic disadvantage. If, however, there is a question as to whether
an individual filed taxes, SBA could request proof of payment of taxes
to satisfy the good character requirement. SBA also requests specific
comments on whether the individuals involved in the management of a
tribally-owned concern should be members of the tribe that owns the
concern or, in the alternative, whether membership in any tribe should
suffice. Currently, the regulations generally require management by
individuals who are members of the tribe that owns the concern. SBA
requests comments on whether that is too restrictive for the tribal
community.
This rule also proposes to clarify the potential for success
requirement for tribally-owned applicants contained in Sec.
124.109(c)(6). SBA believes that the current regulation does not
adequately capture the realities of tribally-owned firms. In
substantial part, the current regulation for potential for success
applicable to tribally-owned firms is the same as that applicable to
firms owned by socially and economically disadvantaged individuals.
Under the current rule, the firm must generally be in business for two
years and have revenues in its primary industry classification. A firm
that is in business for less than two years may be deemed to possess
the necessary potential for success if the individuals who manage and
control its daily operations have substantial technical and managerial
experience, the applicant has a record of successful performance on
contracts in its primary industry category, and the applicant has
adequate capital to sustain its business operations. SBA believes that
those two approaches continue to be valid ways to find that a tribally-
owned firm meets the potential for success requirement. In addition,
SBA believes that a third basis to find potential for success should be
made available to tribally-owned firms. It is undisputed that a firm
owned by a tribe may have financial and physical resources available to
it that a firm owned by one or more disadvantaged individuals may not
have. While a firm owned by disadvantaged individuals is designed to
make a profit and its survivability depends on its ability to do so,
that is not necessarily the case for a tribally-owned concern. The
purpose of a tribally-owned concern may be to increase tribal
employment, assist in tribal community development, or serve other
tribal needs. If a tribe pledges to use the resources of the tribe to
support an applicant concern and to not allow that concern to cease its
operations, SBA believes that the concern should be deemed to meet the
potential for success requirement. As such, this rule proposes to find
potential for success where a tribe has made a firm written commitment
to support the operations of the applicant concern and the tribe has
the financial ability to do so.
The Government Accountability Office (GAO) and SBA's Office of
Inspector General have recently reviewed participation in the 8(a) BD
program by firms owned by ANCs. These reviews questioned certain
aspects of SBA's oversight of ANC-owned firms. In particular, there was
a concern that SBA did not adequately track the extent to which the
benefits of the 8(a) BD program reached individual Alaska natives or
the native community. As such, SBA proposes to amend the requirements
for annual reviews contained in Sec. 124.112(b) to require the
submission of such information. SBA also believes that the same
reporting requirements should apply to 8(a) Participants owned by
tribes, Native Hawaiian Organizations (NHOs), and Community Development
Corporations (CDCs). Specifically, the proposed rule would require each
Participant owned by a tribe, ANC, NHO or CDC to submit information
showing how its 8(a) participation has benefited the tribal or native
members and/or the tribal, native or other community as part of its
annual review submission. The firm should submit information relating
to funding cultural programs, employment assistance, jobs,
scholarships, internships, subsistence activities, and other services
to the affected community.
Excessive Withdrawals
The proposed rule would also amend Sec. 124.112(d) requiring what
amounts should be considered excessive withdrawals, and thus a basis
for possible termination or early graduation. SBA believes that the
current definition of withdrawal unreasonably restricts Participants.
For example, by including the income of all officers and all bonuses, a
Participant is hampered in its ability to recruit and retain key
employees or to pay fair wages to its officers. Under the current
regulation, if the income of all officers in the aggregate exceeds
$300,000 for a multimillion dollar firm, the income alone would be
deemed ``excessive'' and could be a basis for termination or early
graduation. SBA believes that this does not make sense, particularly in
light of the income level permitted in determining economic
disadvantage. In determining whether an individual is economically
disadvantaged, SBA has determined that individuals claiming
disadvantage may earn income of up to $200,000 without jeopardizing
their economic disadvantage status for initial eligibility, and as
noted above, up to $250,000 for continued 8(a) BD program eligibility.
As such, a firm could pay two officers $175,000 each and those
[[Page 55703]]
officers would be deemed economically disadvantaged under the
regulations, but in doing so, the firm would also be deemed to have
made excessive withdrawals to those two individuals and be a possible
basis for termination or early graduation. SBA also believes that the
definition of withdrawal restricts a Participant from exercising
business judgment in the operation of the concern. SBA's intent when
the definition was initially promulgated was to prevent a ``cashing
out'' of earnings from the Participant by its owners or managers. Thus,
this rule proposes to modify the definition of withdrawal to generally
eliminate the inclusion of officers' salaries within the definition of
the term withdrawal. The rule also proposes to generally exclude other
items currently included within the definition of withdrawal. SBA
acknowledges, however, that some firms may try to circumvent the
excessive withdrawal limitations through the distribution of salary or
by other means. To take that possibility into account, the proposed
rule would authorize SBA to look at the totality of the circumstances
in determining whether to include a specific amount as a
``withdrawal.'' If SBA believes that a firm is attempting to get around
the excessive withdrawal limitations though the payment of officers'
salaries, SBA would count those salaries as withdrawals in such a
situation.
The rule also would amend Sec. 124.112(d)(3) pertaining to
withdrawal thresholds for purposes of determining whether the
withdrawal is in fact excessive. The proposed rule would amend Sec.
124.112(d)(3) to increase the current ``excessive'' amounts by $50,000
at the two lower levels, and by $100,000 for the highest level. Thus,
for firms with sales of less than $1,000,000 the excessive withdrawal
amount would be $200,000 instead of $150,000, for firms with sales
between $1,000,000 and $2,000,000 the excessive withdrawal amount would
be $250,000 instead of $200,000, and for firms with sales exceeding
$2,000,000 the excessive withdrawal amount would be $400,000 instead of
$300,000. SBA also asks for comments as to whether the excessive
withdrawal level for higher revenue firms should be tied to each owner
or officer of the firm instead of to the firm as a whole, and, if so,
what level should be deemed excessive for an individual.
Applications to the 8(a) BD Program
The proposed rule would make minor changes to Sec. Sec. 124.202,
124.203, 124.204 and 124.205 to emphasize SBA's preference that
applications for participation in the 8(a) BD program be submitted in
an electronic format. The use of the electronic application not only
reduces the administrative burden on SBA, but is reflective of a
government-wide shift to use electronic applications and forms whenever
possible. Entering the application online is the most efficient method
to apply for 8(a) BD program participation since it allows SBA to
promptly process the application once the supporting documentation is
received. Most importantly, prior to entering the information into the
online 8(a) BD application, the system reminds the applicant to enter/
update the firm's Central Contractors Registration (CCR) and Dynamic
Small Business Search (DSBS) profiles. The information in these
databases ensures that the firm's capabilities are advertised to any
Federal, State or local government, prime contractor, or other business
organization looking for the capabilities the firm offers. The proposed
rule permits a concern that does not have access to the electronic
format or does not wish to file an electronic application to request a
hard copy application from the AA/BD. The rule also clarifies that in
all cases (whether an electronic or hard copy application is filed)
those individuals claiming disadvantage status must submit wet
signatures as part of the application.
The proposed rule would also change the location for SBA's initial
review of applications from ANC-owned firms. The current regulation
specifies that SBA's Anchorage, Alaska District Office would initially
review all applications from ANC-owned applicants. SBA believes that
the San Francisco DPCE unit is better suited to receive and review
applications from ANC-owned applicants because it has more knowledge of
SBA's eligibility requirements, in addition to having knowledge of
issues specific to ANC-owned firms. As such, the proposed rule would
provide that applications for 8(a) BD certification from ANC-owned
firms will be reviewed and processed by the San Francisco DPCE unit.
SBA would have the discretion to require an ANC-owned applicant to
submit its application to the Philadelphia DPCE unit in appropriate
circumstances, such as where there is an uneven distribution of
applications and the San Francisco DPCE unit as a backlog of cases
while the Philadelphia DPCE unit does not.
SBA is also proposing to add a new paragraph to Sec. 124.204,
which governs application processing, to clarify that the burden of
proof to demonstrate eligibility for participation in the 8(a) BD
program is on the applicant and to permit SBA to presume that
information requested but not submitted would be adverse. Under the
proposed regulation, if SBA makes a specific request for relevant
information and that information is not provided, SBA may presume that
the information would be adverse to the firm and conclude that the firm
has not demonstrated eligibility in the area to which the information
relates. A similar provision has existed as part of SBA's size
regulations for many years and is cited regularly in SBA size
determinations.
Graduation
Section 124.301 and 124.302 would be amended to utilize the terms
``early graduation'' and ``graduation'' in a way that matches the
statutory meaning of those terms. See amendment to Sec. 124.2,
explained above.
Termination From the 8(a) BD Program
The proposed rule would amend three paragraphs in Sec. 124.303
regarding termination from the 8(a) BD program. Section 124.303(a)(2)
would be amended to specifically clarify that a Participant could be
terminated from the program where an individual owner or manager
exceeds any of the thresholds for economic disadvantage (i.e., net
worth, personal income or total assets), or is otherwise determined not
to be economically disadvantaged, where such status is needed for the
Participant to remain eligible, and where the Participant has not met
the targets and objectives set forth in its business plan. This
regulatory change is needed to rectify a decision made by SBA's OHA in
the case of Digital Management, Inc., SBA No. BDP-288 (2008). The Small
Business Act provides, in pertinent part, that ``[i]f the [SBA]
determines * * * that a Program Participant and its disadvantaged
owners are no longer economically disadvantaged for the purpose of
receiving assistance * * * the Program Participant shall be graduated''
from the 8(a) BD program. 15 U.S.C. 637(a)(6)(C)(ii). In addition, as
noted above, the Small Business Act provides that ``the term
`graduated' or `graduation' means that the Program Participant is
recognized as successfully completing the program by substantially
achieving the targets, objectives, and goals contained in the concern's
business plan thereby demonstrating its ability to compete in the
marketplace without assistance * * *'' 15 U.S.C. 636(j)(10)(H). In
Digital Management, the individual upon whom 8(a) BD eligibility was
based no longer qualified as economically disadvantaged. Because the
Participant firm had not yet met the targets, objectives, and goals
contained
[[Page 55704]]
in its business plan, SBA did not believe that early ``graduation'' was
required, and instead commenced proceedings to terminate the
Participant from the 8(a) BD program. The basis for the termination
action was the Participant's failure to maintain its eligibility for
program participation, as set forth in current Sec. 124.303(a)(2). OHA
ruled that termination was inappropriate and that the SBA should have
utilized the early graduation procedures. SBA believes that early
graduation was not mandated under 15 U.S.C. 637(a)(6)(C)(ii) because
SBA had not determined that both the Program Participant and its
disadvantaged owners were no longer economically disadvantaged, but
rather that only the disadvantaged owner was no longer economically
disadvantaged. The SBA's early graduation regulations at Sec.
124.302(a)(2) authorize early graduation where one or more
disadvantaged owners upon whom eligibility is based are no longer
economically disadvantaged, but do not require it. While SBA must early
graduate a firm from the 8(a) BD program where one or more
disadvantaged individuals upon whom eligibility is no longer
economically disadvantaged and where the firm has met the targets,
objectives and goals set forth in its business plan, SBA believes that
it has the discretion to either terminate or early graduate a firm
where one or more owners claiming disadvantaged status are no longer
economically disadvantaged, but the firm has not met the targets,
objectives and goals set forth in its business plan. This proposed
change would more clearly provide for that discretion.
Section 124.303(a)(13) would be amended to be consistent with the
proposed changes to Sec. 124.112(d)(13) regarding excessive
withdrawals being a basis for termination.
Section 124.303(a)(16) would be amended to remove the reference to
part 145, a regulatory provision that addresses nonprocurement
debarment and suspension that was moved to 2 CFR parts 180 and 2700.
Effect of Early Graduation or Termination
SBA also proposes to amend Sec. 124.304(f) regarding the effect an
early graduation or termination would have. When SBA early graduates or
terminates a firm from the 8(a) BD program, proposed Sec.
124.304(f)(2) would generally not permit the firm to self certify that
it qualifies as an SDB for future procurement actions. If the firm
believes that it does qualify as an SDB and seeks to certify itself as
an SDB, the firm must notify the contracting officer that SBA early
graduated or terminated the firm from the 8(a) BD program. The firm
must also demonstrate either that the grounds upon which the early
graduation or termination was based do not affect its status as an SDB,
or that the circumstances upon which the early graduation or
termination was based have changed and the firm would now qualify as an
SDB. For example, if SBA terminates a firm from the 8(a) BD program for
a persistent pattern of failing to provide required financial
information, the reason for termination would not be connected to
ownership, control, social disadvantage or economic disadvantage. As
such, the firm could continue to qualify as an SDB, without making any
changes to its business structure or management. Whenever a firm
notifies a contracting officer that it has been terminated or early
graduated by SBA along with its SDB certification, the contracting
officer must protest the SDB status of the firm so that SBA can make a
formal eligibility determination.
Suspensions for Call-Ups to Active Duty
As noted above, the proposed rule would amend Sec. 124.305 to
permit SBA to suspend an 8(a) Participant where the individual upon
whom eligibility is based can no longer control the day-to-day
operations of the firm because the individual is a reserve component
member in the United States military who has been called to active
duty. Suspension in these circumstances is intended to preserve the
firm's full term in the program by adding the time of the suspension to
the end of the Participant's program term when the individual returns
to control its daily business operations. Suspension would not be
needed where one or more additional disadvantaged individuals remain to
control the Participant after the reservist's call-up to active duty,
or where the Participant elects to designate a non-disadvantaged
individual to control the concern during the call-up period pursuant to
proposed Sec. 124.106(h). In such a case, the firm would remain an
active Participant in the 8(a) BD program and could continue to receive
new 8(a) contracts and other program assistance.
Task and Delivery Order Contracts
SBA is proposing to amend Sec. 124.503(h), which addresses task
and delivery order contracts. Agencies are increasingly reserving prime
contract awards for small business concerns under multiple award
solicitations that are competed on a full and open basis. Agencies are
also awarding multiple award contracts that provide that competition
for certain orders will be limited based on socio-economic status,
including status as an 8(a) concern. Historically, agencies could count
an order towards their 8(a) prime contracting goals only if the
contract under which the order was placed was awarded either sole
source or based on competition limited exclusively to 8(a) concerns.
Over the years, the 8(a) BD program office has received numerous
requests from procuring agencies to receive 8(a) credit for orders
awarded to 8(a) concerns under contracts that were not set aside for
exclusive competition among 8(a) concerns. On June 7, 2000, SBA entered
into a Memorandum of Understanding (MOU) with the General Services
Administration which allowed ordering agencies to receive 8(a) credit
for orders awarded to 8(a) concerns under full and open Multiple Award
Schedule contracts. That MOU expired on September 30, 2003. SBA had
concerns with renewing the MOU as written because it did not provide
for competition solely among eligible 8(a) firms as required by the
Small Business Act for 8(a) competitive awards. SBA has also authorized
other agencies to take 8(a) credit for orders placed with 8(a) concerns
under full and open multiple award contracts, based on the procedures
applicable to the particular multiple award procurement. In order to
help 8(a) concerns compete in the current multiple-award contracting
environment, SBA is proposing to amend Sec. 124.503(h) to allow
agencies to receive 8(a) credit for orders placed with 8(a) concerns
under contracts that were not set aside for 8(a) concerns as long as
the order is offered to and accepted for the 8(a) BD program and
competed exclusively among eligible 8(a) concerns, and as long as the
limitations on subcontracting provisions apply to the individual order.
To be an ``eligible'' 8(a) concern, the firm must be a current
Participant in the 8(a) BD program as of the date specified for receipt
of offers contained in the solicitation for the order and otherwise
meet the requirements set forth in Sec. 124.507(b)(2). This proposed
change would merely allow contracting officers the discretion to
reserve orders for 8(a) concerns if they so choose. This rule would not
require any contracting officer to make such a reservation. If a
contracting officer chose not to reserve a specific order for 8(a)
concerns (e.g., if a contracting officer went to an 8(a) firm, a small
business, and a large business off a schedule or otherwise competed an
order among 8(a) and one or more non-8(a) concerns), the contracting
officer
[[Page 55705]]
could continue to take SDB credit for the award of an order to an 8(a)
firm.
Barriers to Acceptance and Release From the 8(a) BD Program
Current Sec. 124.504(a) provides that SBA will not accept a
procurement for award through the 8(a) BD program where a procuring
activity has issued a solicitation for or otherwise expressed publicly
a clear intent to reserve the procurement as a small business or SDB
set-aside prior to offering the requirement to SBA for award as an 8(a)
contract. This regulation was written prior to legislation authorizing
HUBZone and service disabled veteran-owned (SDVO) small business
contracts, either through set-asides or where appropriate on a sole
source basis. As such, this rule proposes to add a provision limiting
SBA's ability to accept a requirement for the 8(a) BD program where a
procuring agency expresses a clear intent to make a HUBZone or SDVO
small business award. In addition, the reference to SDB set-asides
would be eliminated as that provision is no longer applicable.
This rule also proposes to amend Sec. 124.504(e), regarding the
release of follow-on procurements from the 8(a) BD program. It has
always been SBA's policy, and implicit in the regulations, that once a
requirement is awarded as an 8(a) contract, any follow-on procurement
should generally also be awarded as an 8(a) contract. SBA's regulations
for both the HUBZone and service disabled veteran-owned small business
programs address the release of requirements from the 8(a) BD program
to those programs where no 8(a) firm can currently perform the
contract. The 8(a) BD regulations did not specifically address release
of requirements other than those where a firm is graduating from the
program and needs the follow-on contract to further its business
development. As such, the proposed rule would require that follow-on or
repetitive 8(a) procurements would generally remain in the 8(a) BD
program unless SBA agrees to release them for non-8(a) competition. If
a procuring agency would like to fulfill a follow-on or repetitive
acquisition outside of the 8(a) BD program, it must make a written
request to and receive the concurrence of the AA/BD to do so. Release
may be based on an agency's achievement of its SDB goal, but failure to
achieve its HUBZone or SDVO goal, where the requirement is not critical
to the business development of the 8(a) Participant that is currently
performing the requirement or another 8(a) BD Participant. The
requirement that a follow-on procurement must be released from the 8(a)
BD program in order for it to be fulfilled outside the 8(a) BD program
would not apply to orders offered to and accepted for the 8(a) BD
program pursuant to Sec. 124.503(h).
Competitive Threshold Amounts
SBA is also proposing to amend Sec. 124.506. That regulation
addresses the dollar threshold for competing 8(a) procurements among
eligible Participants and provides generally that a procurement offered
and accepted for award through the 8(a) BD program must be competed
among eligible Program Participants if the anticipated award price of
the contract, including options, will exceed $5,000,000 for
manufacturing contracts and $3,000,000 for all other contracts. In
2004, Congress passed new legislation requiring an inflationary
adjustment of statutory acquisition-related dollar thresholds every
five years. See 41 U.S.C. Sec. 431a. On September 28, 2006, the
Federal Acquisition Regulation (FAR) Council published in the Federal
Register a final rule implementing 41 U.S.C. Sec. 431a 71 Fed. Reg.
57363. With respect to the 8(a) BD competitive threshold, the final
rule amended FAR Sec. 19.805-1 by ``removing from paragraph (a)(2)
`$5,000,000' and `$3,000,000' and adding `$5.5 million' and `$3.5
million', respectively, in their place.'' This rule would incorporate
the FAR changes into SBA's regulations, so that the revised SBA
regulation would also set the competitive threshold amounts at
$5,500,000 and $3,500,000, respectively.
Based on statute, the regulation further provides an exemption from
the competition requirement for 8(a) Participants owned and controlled
by Indian tribes and Alaska Native Corporations (ANCs). Contracts may
be awarded through the 8(a) BD program on a sole source basis to
tribally or ANC-owned concerns above the competitive threshold amounts
if the procuring agency believes the firm is responsible to perform the
contract and SBA has not already accepted the requirement into the 8(a)
program as a competitive procurement, and adverse impact analyses, as
appropriate, have been conducted. See 13 CFR 124.506(b).
Historically, SBA has permitted sole source 8(a) contracts above
the competitive threshold amounts both directly to 8(a) Participants
owned and controlled by tribes or ANCs and to joint ventures with one
or more tribally or ANC-owned 8(a) Participants. There have been
complaints that non-8(a) firms have received substantial benefits
through the performance of large sole source 8(a) contracts as joint
venture partners with tribally-owned and ANC-owned 8(a) firms. The
perception of impropriety has been even greater where the joint venture
partner is a large business that performs a significant portion of the
8(a) contract. Under SBA's regulations, a joint venture between an 8(a)
firm and any business that SBA has approved as the 8(a) firm's
``mentor'' is considered to be small for a particular contract
opportunity if the 8(a) firm (i.e., the prot[eacute]g[eacute])
qualifies as small for the size standard corresponding to the
requirement. Thus, a joint venture between a large business mentor and
an 8(a) prot[eacute]g[eacute] is considered to be a small business for
any contract for which the prot[eacute]g[eacute] qualifies as small.
This provision currently applies to all Government contracts, including
sole source 8(a) contracts above the competitive threshold amounts
where the prot[eacute]g[eacute] firm is a tribally-owned or ANC-owned
concern.
In addition, pursuant to SBA's current regulations, where SBA
approves a joint venture for a particular 8(a) contract, the joint
venture, and not the individual 8(a) Participant(s), must meet the
applicable performance of work requirement (e.g., the joint venture as
a whole must perform at least 50% of the contract), and the 8(a)
Participant(s) must perform ``a significant portion'' of the contract.
In the context of a joint venture between a tribally-owned or ANC-owned
prot[eacute]g[eacute] and its large business mentor for a sole source
contract above the competitive threshold amounts, there is a perception
that large businesses may be unduly benefiting from the 8(a) program
where the large business is performing a significant amount of work
under the contract. This is particularly true where a large business
mentor also acts as a subcontractor to the prime joint venture
contractor in addition to its role as joint venture partner. In such a
case, a joint venture between a prot[eacute]g[eacute] firm and its
large business mentor could agree to perform 50% of the work through
the joint venture entity (with the 8(a) prot[eacute]g[eacute] firm
performing close to half of that work) and then subcontract the
remaining 50% to the large business mentor in its individual capacity.
In this scenario, a large business would be performing 70-80% of a
large 8(a) contract, while the prot[eacute]g[eacute] firm would be
performing somewhere in the 20-30% range of the contract. Even though
that 20-30% could be a significant amount of work for a developing
prot[eacute]g[eacute] firm, SBA does not believe that it is appropriate
for a large business to benefit to such an extent through an 8(a)
contract, particularly where that
[[Page 55706]]
contract is awarded on a sole source basis.
SBA recognizes that the mentor/prot[eacute]g[eacute] aspect of the
8(a) BD program can be an important component to the overall business
development of 8(a) small businesses. However, SBA does not believe
that non-8(a) businesses, particularly non-8(a) large businesses,
should benefit more from an 8(a) contract than 8(a)
prot[eacute]g[eacute] firms themselves. As such, this rule proposes
that non-8(a) joint venture partners to 8(a) sole source contracts
cannot also be subcontractors under the joint venture prime contract.
If a non-8(a) joint venture partner seeks to perform more work under
the contract, then the amount of work done by the 8(a) partner to the
joint venture must also increase. Because of the proposed change to
Sec. 124.513(d) contained in this rule (which would require the 8(a)
partner(s) to a joint venture to perform at least 40% of the work
performed by the joint venture), the additional amount of work required
to be performed by the 8(a) partner(s) to a joint venture would be
spelled out.
The proposed change to disallow subcontracts to non-8(a) joint
venture partners is not meant to penalize tribal and ANC 8(a) firms,
but, rather, to ensure that the benefits of the program flow to its
intended beneficiaries. SBA consulted with ANC and tribal groups, both
informally and formally, in drafting this proposal. These groups felt
that both the 8(a) program generally and tribal and ANC-owned
Participants in particular had received unfair criticism, but
understood the negative perception surrounding the performance of 8(a)
contracts where the majority of the contract is ultimately performed by
a non-8(a), large business. While they supported some change to
eliminate abuse in the program, they felt strongly that the mentor/
prot[eacute]g[eacute] joint venture program served an important
function. They believed that prot[eacute]g[eacute] firms gained
invaluable developmental assistance through this program and did not
want to see it unduly restricted or eliminated. SBA considered several
other alternatives to this proposal, including eliminating joint
ventures on sole source awards above the competitive threshold amounts,
requiring a majority of subcontract dollars under a sole source 8(a)
joint venture contract between a prot[eacute]g[eacute] firm and its
mentor to be performed by small businesses, and allowing sole source
joint venture contracts above the competitive threshold amounts only
where the 8(a) partner(s) to the joint venture performed a specified
percent (e.g., 40%) of the entire contract itself. SBA has attempted to
address the perceived abuse without unduly limiting this important
business development tool. SBA specifically requests comments on how
best to limit sole source awards to ensure that program benefits flow
to the intended beneficiaries, including comments on each of the three
identified alternatives. SBA also requests comments on whether it
should extend the prohibition against non-8(a) joint venture partners
from also being subcontractors under the joint venture prime contract
beyond sole source contracts and whether it should be applied to all
8(a) contracts awarded to any joint venture.
SBA proposes to further amend Sec. 124.506(b) to implement a
provision contained in Sec. 8021 of the Department of Defense (DoD)
appropriations act for fiscal year (FY) 2004. That provision gave DoD
agencies the authority to make sole source awards for 8(a) contracts
above the competitive threshold amounts to 8(a) concerns owned and
controlled by Native Hawaiian Organizations (NHOs). See Public Law 108-
87, 117 Stat. 1054. However, the statute limited the exemption to
contracts issued by DoD. This authority was initially tied to specific
appropriations, and hence limited in duration. The words ``and
hereafter'' were included in Section 8020 of the DoD Emergency
Supplemental Appropriation to Address Hurricanes in the Gulf of Mexico,
and Pandemic Influenza Act, 2006, Pub. L. 109-148, 119 Stat. 2680,
2702, making this authority permanent. The proposed addition to Sec.
124.506(b) implements the statutory authority.
Bona Fide Place of Business
The proposed rule would also amend the bona fide place of business
requirements set forth in Sec. 124.507. Certain 8(a) contracts are
restricted to 8(a) Participants having a ``bona fide place of
business'' within a particular geographic location. There has been some
confusion regarding the procedures a Participant must follow to
establish a bona fide place of business in a new location. This rule
clarifies that a Participant must first submit its request to be
recognized as having a bona fide place of business in a different
location to the SBA district office that normally services it. This
will ensure that there is proper coordination between the two SBA
district offices. The servicing district office will forward the
request to the SBA district office serving the geographic area of the
particular location for processing. The SBA district office in the
geographic location of the purported bona fide place of business will
then contact the Participant and may ask for further information in
support of the Participant's claim. In order for a Participant to
establish a bona fide place of business in a particular geographic
location, the SBA district office serving the geographic area of that
location must determine if that location in fact qualifies as a bona
fide place of business under SBA's requirements. A Participant cannot
submit an offer for an 8(a) procurement limited to a specific
geographic area unless it has received from SBA a determination that it
has a bona fide place of business within that area. In other words,
eligibility in terms of having a bona fide place of business in a
particular geographic location will be determined at the time a
Participant submits its offer. This coincides with the time at which
size status is determined.
Competitive Business Mix
Section 124.509(a)(1) would also be amended to clarify that work
performed by an 8(a) Participant for any Federal department or agency
other than through an 8(a) contract, including work performed on orders
under the General Services Administration (GSA) Multiple Award Schedule
program, and work performed as a subcontractor, including work
performed as a subcontractor to another 8(a) Participant on an 8(a)
contract, qualifies as work performed outside the 8(a) BD program.
Several 8(a) Participants specifically questioned whether orders off
the GSA Schedule and subcontracts on 8(a) contracts counted against
their competitive business mix requirement. SBA believes that the
current regulation clearly provides that only 8(a) contract awards
count against a Participant's competitive business mix. Nevertheless,
to avoid any confusion, SBA has clarified that all Federal contracts
other than 8(a) contracts, and any subcontract to a Federal contract,
including a subcontract to an 8(a) contract, do not count against the
firm's competitive business mix. Such revenue is not an 8(a) award to
the Participant and, thus, cannot act to limit further sole source 8(a)
awards.
Administration of 8(a) Contracts
The proposed rule would also add clarifying language to Sec.
124.512. Administration of 8(a) contracts has been delegated to
procuring agencies. The current regulation specifies that the procuring
activity is accountable for ``all responsibilities for administering an
8(a) contract.'' Despite this broad language, the Government
Accountability Office (GAO) and others have asked what role
[[Page 55707]]
SBA plays in tracking whether an 8(a) firm has met the performance of
work requirements set forth in Sec. 124.510 throughout the life of an
8(a) contract. As part of contract administration, compliance with the
performance of work requirements is a responsibility of the procuring
activity. While SBA believed that was clear from the current broad
regulatory language, the proposed rule would specifically recognize
that tracking compliance with the performance of work requirements is a
contract administration function which is performed by the procuring
activity. Also included within the delegation of contract
administration is the authority to exercise priced options and issue
appropriate modifications. The regulation has required contracting
officers who issued modifications or exercised options on 8(a)
contracts to notify SBA of these actions. Because there was no clear
guidance as to when SBA must be notified, there was often a delay
between the issuance of a modification (or exercise of an option) and
notification being supplied to SBA. This proposal would require
contracting officers to submit copies of modifications and options to
SBA within 10 days of their issuance or exercise. If SBA has a question
regarding whether a particular 8(a) contractor has complied with
applicable regulatory requirements, the proposed rule would
specifically authorize SBA to review the procuring activity's 8(a)
contracting files.
Changes to Joint Venture Requirements
This rule would also amend Sec. 124.513(c)(3) to provide that the
8(a) Participant(s) to an 8(a) joint venture must receive profits from
the joint venture commensurate with the work performed by the 8(a)
Participant(s). Currently, SBA's regulations provide that the 8(a)
Participant(s) must receive at least 51% of the net profits of the
joint venture. SBA believes that such a requirement may be untenable
where more work is done by a non-8(a) joint venture partner than the
8(a) Participant partner(s). Under current regulations, the joint
venture must perform at least 50% of an 8(a) contract and the 8(a)
Participants must perform a significant portion of the amount performed
by the joint venture. If, for example, a joint venture will perform 60%
of an 8(a) contract, with the 8(a) partner performing 25% of the
contract and the non-8(a) partner performing 35% of the contract, it
does not make sense that the 8(a) partner should receive at least 51%
of the net profits of the joint venture where it is performing less
than the non-8(a) firm on the contract. SBA understands the concern
that 8(a) firms should receive their fair share of the profits from
such a joint venture, and believes that profits commensurate with the
work performed should ensure this result.
SBA also proposes to amend the requirement setting forth the amount
of work that an 8(a) Participant must perform as part of a joint
venture. Sections 124.510 and 125.6 of SBA's regulations require that
the 8(a) Participant being awarded an 8(a) contract must perform a
specific amount of work on the contract (generally at least 50%). For a
joint venture on an 8(a) contract, Sec. 124.513(d) requires that the
joint venture perform the applicable percentage of work set forth in
Sec. 124.510 and that the 8(a) Participant(s) to the joint venture
must perform a ``significant portion'' of the contract. The term
``significant portion'' was not defined in SBA's regulations. As such,
various procuring agencies and SBA field offices interpreted this
requirement differently. This rule proposes to impose a more objective
requirement. Specifically, the rule proposes that the 8(a)
Participant(s) to a joint venture for an 8(a) contract must perform at
least 40% of the work done by the joint venture. So, for example, if
the joint venture proposes to perform 50% of the contract, the 8(a)
Participant(s) must perform at least 40% of the 50% or at least 20% of
the entire contract.
The proposed rule would also add a new paragraph 124.513(i) to
require 8(a) firms that joint venture to perform an 8(a) contract to
report on contract performance at the conclusion of the contract.
Specifically, each 8(a) firm that performs an 8(a) contract through a
joint venture would be required to report to SBA how the performance of
work requirements (i.e., that the joint venture performed at least 50%
of the work of the contract and that the 8(a) participant to the joint
venture performed at least 40% of the work done by the joint venture)
were met on the contract. This requirement is needed to reinforce the
performance of work requirements. Several audits performed by SBA's
Office of Inspector General have revealed that the performance of work
requirements are not always met. SBA needs to know when and why the
requirements are not met. This could affect the firm's future
responsibility to perform additional contracts and, depending upon the
circumstance, could be cause for termination from the 8(a) BD program.
Sole Source Limits for NHO-Owned Concerns
SBA proposes to amend Sec. 124.519, which imposes limits to the
amount of 8(a) contract dollars a Participant may receive on a sole
source basis. The current rule exempts ANC and tribally owned concerns
from the limitations set forth in the rule. The amendment would add
NHO-owned concerns to the list of 8(a) concerns exempted from the
limitations. SBA believes that all three of these types of firms should
be treated consistently, and the failure to include NHO-owned concerns
in the exemption in the current regulation was an inadvertent omission.
The proposed rule would also change the SBA official authorized to
waive the requirement prohibiting a Participant from receiving sole
source 8(a) contracts in excess of the dollar amount set forth in Sec.
124.519. Under the current regulations, only the SBA Administrator, on
a non-delegable basis, may grant such a waiver. SBA believes that such
waivers have been requested and acted on sparingly because of the high
level approval required. While SBA continues to believe that such
waivers should not be commonplace, SBA does believe that a change from
the Administrator to the AA/BD is warranted in order to facilitate
waivers where appropriate.
Changes to Mentor/Prot[eacute]g[eacute] Program
The proposed rule would make several changes to Sec. 124.520,
governing SBA's mentor/prot[eacute]g[eacute] program. The rule would
specifically require that assistance to be provided through a mentor/
prot[eacute]g[eacute] relationship be tied to the prot[eacute]g[eacute]
firm's SBA-approved business plan. Although SBA believed that this was
implicit in the current regulations, SBA feels that it is important to
reinforce that the mentor/prot[eacute]g[eacute] program is but one tool
that can be used to help the business development of 8(a) Participants
in accordance with their business plans.
Section 125.520(b)(2) would be amended to provide for an absolute
limit of three prot[eacute]g[eacute]s per mentor. SBA is proposing this
rule to prevent mentor firms from being able to take advantage of the
program by collecting prot[eacute]g[eacute]s in order to benefit from
8(a) contracts. SBA is interested in hearing from the public on this
proposed limitation. In addition, Sec. 124.520(b)(3) would be amended
to allow a firm seeking to be a mentor to submit Federal income tax
returns or audited financial statements, including any notes, or other
evidence from the mentor in order to demonstrate the firm's favorable
financial health. The current regulation requires the
[[Page 55708]]
submission of Federal tax returns only. SBA believes that it may be
unnecessary in all cases to require the Federal tax returns of the
proposed mentor, provided the firm submits audited financial
statements, including any notes, or in the case of publicly traded
concerns the filings required by the Securities and Exchange Commission
(SEC) for the past three years, or other relevant documentation to SBA
for review. SBA's concern is to ensure that the firm seeking to be a
mentor evidences its financial wherewithal.
SBA is also considering amending who may be a mentor under the 8(a)
BD mentor/prot[eacute]g[eacute] program. SBA's current regulation
states that a mentor can be ``[a]ny concern that demonstrates a
commitment and the ability to assist developing 8(a) Participants * *
*'' Section 121.105 of SBA's size regulations defines the word
``concern'' to be a for profit entity. As such, non-profit businesses
have not been eligible to be mentors under the mentor/
prot[eacute]g[eacute] program. SBA is considering making a change to
Sec. 124.520(b) to specifically allow non-profit business entities to
be mentors, and seeks public comment on this issue.
Section 124.520(c)(1) would be amended for clarity purposes. There
appears to be some confusion regarding the use of the conjunction
``or'' at the end of paragraph (ii) in SBA's current regulation. Some
have questioned whether the current regulation requires a firm to be in
the developmental stage of program participation in all instances and
either have never received an 8(a) contract or have half the applicable
size standard. That was not SBA's intent. The intent of the 8(a)
mentor/prot[eacute]g[eacute] program is to assist Participants that are
in the early stages of the 8(a) BD program (i.e., thus, paragraph (i)
allows any firm in the developmental stage of program participation to
be a prot[eacute]g[eacute]) or need additional assistance in their
business development (i.e., paragraphs (ii) and (iii) allow a firm that
has never received an 8(a) contract or one that has a size standard
that is less than half the size standard corresponding to its primary
NAICS code to be a prot[eacute]g[eacute], respectively). A firm that
has never received an 8(a) contract or has a size standard less than
half the size standard corresponding to its primary NAICS code may need
developmental assistance regardless of the number of years it has spent
in the 8(a) BD program. In fact, a firm that is in the transitional
stage of program participation that has never received an 8(a) contract
may very well need greater assistance than a similar firm in the
developmental stage of program participation. Thus, the regulation
would be amended to make clear that a firm may qualify as a
prot[eacute]g[eacute] if it is in the developmental stage of program
participation, or has never received an 8(a) contract, or has a size
standard that is less than half the size standard corresponding to its
primary NAICS code.
This rule would also add clarifying language to Sec. 124.520(c)(2)
to make it clear that the benefits derived from the mentor/
prot[eacute]g[eacute] relationship end once the prot[eacute]g[eacute]
firm graduates from or otherwise leaves the 8(a) BD program. While this
is implicit in the current regulations which provide that ``[o]nly
firms that are in good standing in the 8(a) BD program * * * may
qualify as a prot[eacute]g[eacute],'' SBA wanted to specifically make
clear that the exclusion from affiliation enjoyed by joint ventures
between prot[eacute]g[eacute]s and their mentors generally ends when
the prot[eacute]g[eacute] leaves the 8(a) BD program. Of course, a
joint venture between a mentor and prot[eacute]g[eacute] would be
expected to complete any contract awarded to the joint venture while
the prot[eacute]g[eacute] was a Participant in the 8(a) BD program and
a contracting officer could continue to count such contract as an award
to an 8(a) or small business concern, as the case may be.
Section 124.520(c)(3) currently provides that a
prot[eacute]g[eacute] firm can have only one mentor. As part of SBA's
tribal consultation under Executive Order 13175, Consultation and
Coordination with Tribal Governments, SBA received comments that this
provision was too restrictive, not just for tribally owned 8(a) firms,
but for all 8(a) firms. While SBA continues to believe that the norm
should continue to be one mentor for any given prot[eacute]g[eacute]
firm, SBA concedes that there may be unusual circumstances where a
second mentor/prot[eacute]g[eacute] relationship is warranted. This
proposed rule would allow the AA/BD to approve a second mentor for a
prot[eacute]g[eacute] firm in limited circumstances. Specifically, a
second mentor may be approved where the prot[eacute]g[eacute] firm
demonstrates that the second relationship pertains to an unrelated,
secondary NAICS code, the first mentor does not possess the specific
expertise that is the subject of the mentor/prot[eacute]g[eacute]
agreement with the second mentor, and the two relationships will not
compete or otherwise conflict with each other.
Section 124.520 would also be amended to preclude 8(a) firms from
being mentors and prot[eacute]g[eacute]s at the same time. The
amendment would provide that an 8(a) concern must give up its status as
a prot[eacute]g[eacute] if it becomes a mentor. SBA believes that if an
8(a) concern has the expertise and experience to be a mentor, it no
longer has the need for a mentor itself. This amendment is intended to
reduce the risks of questionable mentor/prot[eacute]g[eacute]
relationships entered into solely to enable mentors to take advantage
of 8(a) contracts.
The proposed rule would also add a new Sec. 124.520(c)(5), which
would prohibit SBA from approving a mentor/prot[eacute]g[eacute]
agreement if the proposed prot[eacute]g[eacute] firm has less than one
year remaining in its program term. Recently, SBA received a request to
approve a mentor/prot[eacute]g[eacute] agreement for a firm whose
program term was ending within weeks. It appeared that the real reason
that the mentor/prot[eacute]g[eacute] relationship was proposed was to
pursue a particular 8(a) contract for which the prot[eacute]g[eacute]
sought to joint venture with the proposed mentor. With the firm's
program term and SBA's oversight of the firm ending, there was no
assurance that the prot[eacute]g[eacute] firm would ever receive the
business development assistance identified in the mentor/
prot[eacute]g[eacute] agreement. In such a case, the mentor/
prot[eacute]g[eacute] relationship becomes more of a convenient
contracting tool (by which the mentor can largely benefit) than a
business development tool. To ensure that prot[eacute]g[eacute] firms
actually receive identified business development assistance, SBA is
proposing not to approve any mentor/prot[eacute]g[eacute] agreement
where the proposed prot[eacute]g[eacute] has less than one year
remaining on its program term. SBA asks for comments as to what the
appropriate length of time before the end of a firm's program term
should be for SBA not to permit new mentor/prot[eacute]g[eacute]
agreements (e.g., 6 months, 9 months, 1 year, 18 months).
The proposed rule would amend Sec. 124.520(d)(1) to allow a joint
venture between a mentor and prot[eacute]g[eacute] to be small for
Federal subcontracts. A similar change would also be made to Sec.
121.103(h)(3)(iii) of SBA's size regulations to ensure consistent
implementation throughout SBA's regulations. Currently, SBA's
regulations permit such a joint venture to be small for any
``government procurement.'' This provision has been interpreted as
applying solely to Federal prime contracts. SBA believes that if this
benefit applies to all Federal contracts it should also be available
with respect to subcontracts. SBA believes that the current
interpretation is particularly onerous for the Department of Energy
(DOE), which has a significant amount of contracting activity go
through government owned contractor operated (GOCO) facilities, and the
contracts between the GOCO and a contractor technically are
[[Page 55709]]
government subcontracts for which the exclusion from affiliation for a
mentor/prot[eacute]g[eacute] joint venture do not apply. SBA initially
considered allowing mentor/prot[eacute]g[eacute] joint ventures to
qualify as small businesses only for DOE subcontracts, but felt that
the business development afforded to prot[eacute]g[eacute]s would be
beneficial government-wide. SBA specifically requests comments on both
the proposed language and a provision which would limit its
applicability solely to DOE subcontracts. SBA also understands concerns
raised with applying the exclusion from affiliation for mentor/
prot[eacute]g[eacute] joint ventures to contracts that are not Federal
contracts and seeks input as to whether an extension of the affiliation
exclusion is appropriate. In addition, as mentioned in the
supplementary information regarding changes to Sec. 121.103(h)(3), SBA
is also considering allowing an exclusion to affiliation only for
mentor/prot[eacute]g[eacute] joint ventures for 8(a) contracts. SBA
specifically requests comments on such a proposal.
SBA also proposes to clarify that if a mentor and a
prot[eacute]g[eacute] joint venture on a procurement, in order to take
advantage of the special exception to the size requirements for that
procurement, the mentor/prot[eacute]g[eacute] agreement must be
approved by SBA prior to the submission of the bid or offer on the
procurement. One of the benefits of the mentor/prot[eacute]g[eacute]
relationship is that mentors and prot[eacute]g[eacute]s are permitted
to joint venture on 8(a) procurements and procurements set aside for
small business as long as the prot[eacute]g[eacute] qualifies as small
for the procurement. This change clarifies that the mentors and
prot[eacute]g[eacute]s may take advantage of this size advantage only
if the mentor/prot[eacute]g[eacute] agreement is approved by SBA prior
to the submission of the bid or offer on the procurement. Although this
is the current practice, SBA felt it was useful to make this practice
clear in its regulations, as some companies have mistakenly assumed
that, like joint ventures between mentors and prot[eacute]g[eacute]s on
8(a) procurements, a mentor/prot[eacute]g[eacute] agreement could be
approved after submission of an offer as long as it was approved prior
to the date of award. This is not the case. Joint ventures are tied to
procurements and often there is insufficient time to obtain SBA's
approval between the issuance of a solicitation and the submission of
an offer. Therefore, SBA has permitted joint ventures to be approved on
8(a) procurements after the submission of offers, as long as the
approval takes place prior to the actual award. Unlike joint ventures,
mentor/prot[eacute]g[eacute] agreements should not be specifically
connected with procurements. Size benefits for purposes of joint
ventures are a benefit of engaging in a mentor/prot[eacute]g[eacute]
agreement, not the reason for the relationship. Therefore, there are no
strict time limitations at issue. Because it is possible that SBA might
not approve a mentor/prot[eacute]g[eacute] agreement in a given
situation, it believes that it is important that approval occur prior
to a joint venture's submission of its bid or offer.
Under SBA's size regulations, size is determined at a fixed point
in time (i.e., as of the date of the initial offer, including price).
See 13 CFR 121.504. If the entity submitting an offer is small as of
that date, it will qualify as small for the procurement even if it
grows to be other than small at the date of award. If the entity
submitting an offer does not qualify as small as of the date it submits
its initial offer, it cannot later come into compliance and qualify as
small for that procurement. Thus, in order for a joint venture to be
eligible as a small business, it must be small at the time it submits
its offer including price. Generally, the revenues or employees of
joint venture partners are aggregated when determining whether a joint
venture qualifies as small. However, where there is an SBA-approved
8(a) mentor/prot[eacute]g[eacute] relationship, the receipts or
revenues of the two joint venture partners are not aggregated. In such
a case, size for the joint venture depends on the size of the
prot[eacute]g[eacute] firm by itself. It seems obvious to SBA that if
SBA has not yet approved a mentor/prot[eacute]g[eacute] agreement, a
joint venture between proposed prot[eacute]g[eacute] and mentor firms
is not entitled to receive the benefits of the 8(a) mentor/
prot[eacute]g[eacute] program, including the exclusion from
affiliation.
In addition, the proposed rule would add a provision making it
clear that in order to receive the exclusion from affiliation for both
8(a) and non-8(a) procurements, the joint venture must comply with the
requirements set forth in Sec. 124.513(a). This has been SBA policy,
but may not have been as clearly identified as SBA had hoped. There
never has been any doubt or confusion as to the application of Sec.
124.513(a) to 8(a) contracts. Unfortunately, not all contracting
officers and 8(a) Participants understood that the Sec. 124.513(a)
joint venture requirements applied to non-8(a) contracts as well. It is
SBA's view that in order to obtain a benefit derived from the 8(a)
program (i.e., the exclusion from affiliation for joint ventures
between approved prot[eacute]g[eacute]s and mentors), the same
restrictions that are applicable to 8(a) contracts apply to non-8(a)
contracts. For example, the performance of work requirement (i.e., 50%
rule) applies equally to small business set-aside and 8(a) contracts.
SBA believes that it would not make sense for the requirement that the
prot[eacute]g[eacute] firm perform a ``significant portion'' of the
procurement not apply to small business set-aside contracts. The whole
purpose of the mentor/prot[eacute]g[eacute] program is to help
prot[eacute]g[eacute] firms develop so that they can better compete for
future contracts on their own. If they are not required to perform a
significant portion of or be the project manager on a contract, the
development purposes of the mentor/prot[eacute]g[eacute] program would
not be served.
The proposed rule would also clarify procedures for requesting
reconsideration of SBA's decision to deny a proposed mentor/
prot[eacute]g[eacute] agreement. Where SBA declines to approve a
specific mentor/prot[eacute]g[eacute] agreement, the
prot[eacute]g[eacute] may request the AA/BD to reconsider the Agency's
initial decline decision by filing a request for reconsideration with
its servicing SBA district office within 45 calendar days of receiving
notice that its mentor/prot[eacute]g[eacute] agreement was declined.
The prot[eacute]g[eacute] should revise its mentor/
prot[eacute]g[eacute] agreement to more fully detail the business
development assistance that the mentor will provide and provide any
additional information and documentation pertinent to overcoming the
reason(s) for the initial decline. If the AA/BD declines to approve the
mentor/prot[eacute]g[eacute] agreement on reconsideration, the 8(a)
firm seeking to become a prot[eacute]g[eacute] could not submit a new
mentor/prot[eacute]g[eacute] agreement with that same mentor for one
year. It may, however, submit a proposed mentor/prot[eacute]g[eacute]
agreement with a different proposed mentor at any time after the SBA's
final decline decision.
The rule also proposes to add a new Sec. 124.520(h) which would
set forth consequences for a mentor that fails to provide the
assistance it agreed to provide in its mentor/prot[eacute]g[eacute]
agreement. This recommendation was also received in response to SBA's
tribal consultations to ensure that prot[eacute]g[eacute] firms do
obtain beneficial business development assistance through their mentor/
prot[eacute]g[eacute] relationships. Under the proposal, where SBA
determines that a mentor has not provided to the prot[eacute]g[eacute]
firm the business development assistance set forth in its mentor/
prot[eacute]g[eacute] agreement, SBA will afford the mentor an
opportunity to respond. The response must explain why the assistance
set forth in the mentor/prot[eacute]g[eacute] agreement has not been
provided to date and must set forth a
[[Page 55710]]
definitive plan as to when it will provide such assistance. If the
mentor fails to respond, does not supply adequate reasons for its
failure to provide the agreed upon assistance, or does not set forth a
definite plan to provide the assistance SBA will recommend to the
relevant procuring agency to issue a stop work order for each Federal
contract for which the mentor and prot[eacute]g[eacute] are performing
as a small business joint venture and received the exclusion from
affiliation authorized by Sec. 124.520(d)(1). The stop work order
could be withdrawn when SBA is satisfied that the assistance has been
or will be provided to the prot[eacute]g[eacute]. If the work is
critical to and any delay in contract performance would harm the
procuring activity, SBA may request that another Participant be
substituted for the joint venture to continue performance. Where SBA
terminates a mentor/prot[eacute]g[eacute] agreement because the mentor
has failed to provide the agreed upon developmental assistance, the
firm would be ineligible to again act as a mentor for a period of two
years from the date SBA terminates the mentor/prot[eacute]g[eacute]
agreement. If SBA believes that the mentor entered into the mentor/
prot[eacute]g[eacute] relationship solely to obtain one or more Federal
contracts as a joint venture partner with the prot[eacute]g[eacute] and
had no intent to provide developmental assistance to the
prot[eacute]g[eacute], SBA could initiate proceedings to debar the
mentor from Federal contracting. Similarly, if SBA believes that a
prot[eacute]g[eacute] firm entered a mentor/prot[eacute]g[eacute]
agreement in order to be awarded joint venture contracts with its
mentor knowing that it would bring little or no value to the joint
venture, SBA could initiate proceedings to terminate the firm from 8(a)
participation or debar the firm from Federal contracting.
Reporting Requirement and Submission of Financial Statements
The proposed rule would also amend Sec. 124.601, which addresses a
statutorily required reporting requirement for 8(a) Participants. Small
business concerns participating in the 8(a) BD program are required by
statute to semiannually submit a written report to their assigned BDS
that includes a listing of any agents, representatives, attorneys,
accountants, consultants and other parties (other than employees)
receiving fees, commissions, or compensation of any kind to assist such
participant in obtaining a Federal contract. The listing must indicate
the amount of compensation paid and a description of the activities
performed for such compensation. The current regulation incorrectly
required this report to be submitted annually. This change is needed in
order to bring the regulation into compliance with the statutory
requirement.
The proposed rule would also amend Sec. 124.602 regarding the
submission of audited and reviewed financial statements. As the cost
for audited and reviewed financial statements increases, those costs
are becoming more of a burden on developing disadvantaged small
businesses. As such, SBA believes that audited financial statements
should be required only for larger firms. SBA proposes to raise the
level above which audited financial statements are required from
Participants with gross annual receipts of more than $5,000,000 to
Participants with gross annual receipts of more than $10,000,000.
Reviewed financial statements would be required of all Participants
with gross annual receipts between $2,000,000 and $10,000,000, instead
of between $1,000,000 and $5,000,000. SBA requests comments as to
whether these levels are appropriate. Specifically, SBA considered
changing the level above which audited financial statements are
required to Participants with gross annual receipts in excess of
$6,000,000 or $7,500,000, and requests comments on those alternatives
vis a vis the $10,000,000 level contained in the proposed rule.
Requirements Relating to SDBs
Finally, SBA is proposing to amend Sec. 124.1002, which defines
what is an SDB. SBA first proposes to add a provision to Sec.
124.1002(d) to make it clear that the ``other eligibility
requirements'' set forth in Sec. 124.108 for 8(a) BD program
participation do not apply to SDBs. As part of an SDB protest, SBA
would merely be determining whether a concern is owned and controlled
by one or more individuals who qualify as socially and economically
disadvantaged. SBA would not consider whether the concern is a
responsible business for the particular contract. As such, issues such
as good character and failure to pay Federal financial obligations
should not be part of SBA's determination as to whether a firm
qualifies as an SDB. If a firm does not have good character, for
example, a procuring agency should take that into account as an issue
of responsibility prior to contract award.
SBA is also proposing to add a new paragraph to Sec. 124.1002 to
define full time management as it applies to the SDB program. Since the
SDB program is a contracts program and not a business development
program, and since there is no good policy reason to exclude part-time
companies from the SDB program, SBA proposes to permit SDB owners to
devote fewer than 40 hours per week to their SDB firms provided that
the disadvantaged manager works for the firm during all the hours that
the firm operates. For example, if a firm is only in operation 20 hours
per week, the disadvantaged manager of the firm would be considered to
devote full time to the firm if the individual was available and
working for the firm during the 20 hours the firm was operating. This
definition is not being extended to 8(a) firms as those firms are
expected to operate 40 or more hours per week. SBA is interested in the
public's comments on this proposed change.
Compliance with Executive Orders 12866, 12988, 13175, and 13132,
the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork
Reduction Act (44 U.S.C., Ch. 35).
Executive Order 12866
The Office of Management and Budget (OMB) has determined that based
on the revision to Sec. 124.506(b)(4), this rule constitutes a
significant regulatory action for purposes of Executive Order 12866,
and as a result a regulatory impact analysis is required.
Regulatory Impact Analysis
Is there a need for the regulation action?
As stated above, the revision to Sec. 124.506 would limit the
amount of work that a non-8(a) business, particularly a non-8(a) large
business in the context of a mentor/prot[eacute]g[eacute] relationship,
could perform on an 8(a) sole source contract above the competitive
threshold amounts. Specifically, a joint venture between a tribally or
ANC-owned concern and a non-8(a) business concern could be awarded a
sole source contract above the applicable competitive threshold amount
only where the non-8(a) joint venture partner does not receive any work
on the contract as a subcontract to the joint venture prime contractor.
SBA believes this rule is needed to prevent large businesses as
well as other non-8(a) firms from being able to reap the benefits of
sole source contracts intended for tribally-owned or ANC-owned 8(a)
Participants. When these large contracts are awarded on a sole source
basis to joint ventures, the contracts are not available for
competition among other 8(a) firms. Thus, large firms and other non-
8(a) firms joint venturing with tribally owned or ANC owned firms are
realizing the benefits of sole source 8(a) contracts to the detriment
of 8(a) firms who might otherwise compete for these
[[Page 55711]]
contracts. This is particularly true when the non-8(a) joint venture
partner is also a subcontractor on the same 8(a) contract. In such a
case, a non-8(a) concern could conceivably be performing 70-80% of the
entire contract. SBA believes that such an outcome should not be
possible under the 8(a) program.
Other proposed changes in this rule are needed to clarify SBA's
requirements and remove confusion. For example, the proposed change to
Sec. 121.103(h) to permit a specific joint venture to be formed for
three contract awards over a two-year period, instead of an entity that
can seek three contract opportunities over a two-year period, is
proposed because the current requirement has caused confusion and
resulted in some firms being ineligible for certain small business
awards due to that confusion. Similarly, the proposed change to Sec.
124.104(c)(2) to exempt income from an S corporation from the
calculation of both the individual owner's income and net worth to the
extent such income is reinvested in the firm or used to pay corporate
taxes is designed to treat an individual owner of an S corporation the
same as an individual owner of a C corporation. The current rule has
caused confusion as to whether such income should be included in an
individual's income or net worth for purposes of determining economic
disadvantage.
Finally, several changes in this rule are being proposed to
eliminate or ease restrictions that SBA believes are unnecessary. For
example, the proposed change to Sec. 124.105(g) would provide more
flexibility in determining whether to admit to the 8(a) program
companies owned by individuals where such individuals have immediate
family members who are owners of current or former 8(a) concerns. SBA
believes that the current rule, which broadly prohibits such ownership,
is too strict and needs to be revised to recognize separate business
ownership in more than one immediate family member. In addition, SBA
believes that the proposed change to Sec. 124.104(c)(2) to exempt
funds in Individual Retirement Accounts (IRAs) and other official
retirement accounts from the calculation of an individual's net worth
in determining his or her economic disadvantage is needed so that those
individuals who have wisely invested in retirement accounts should not
be penalized.
What are the potential benefits and costs of this regulatory action?
During the past five years, an estimated 62 joint ventures between
tribally owned or ANC-owned firms and firms which are not tribally
owned or ANC owned were awarded contracts above the competitive
threshold amounts based on the current application of the statutory
exception. The dollar amounts of these contracts ranged from $3 million
to $600 million and the total contract dollars awarded was
approximately $2.5 billion. It is estimated based on past experience
that each joint venture partner performs approximately one half of the
contract awarded the joint venture, with the 8(a) concern performing
slightly more based on regulatory requirements that more than half the
profits from the contract be distributed to the 8(a) firm. See 13 CFR
124.513(c)(3). Thus, under this assumption, in the past five years an
estimated $1.25 billion has been awarded to firms that are not
tribally-owned or ANC-owned as a result of the current regulatory
scheme and approximately $1.25 billion was awarded to tribally or ANC-
owned firms. (Contracts awarded to joint ventures between tribally
owned concerns and other tribally owned concerns were not counted as
these contracts would still be allowed under the proposed rule.) Under
the above assumptions and based on the data compiled approximately $500
million (approximately half of 25 contracts) went to large businesses
and $750 million (approximately half of 37 contracts) went to small
businesses not tribally or ANC-owned. We also believe that a
significant percentage of non-8(a) joint venture partners also acted as
subcontractors on the same 8(a) contracts for which they were joint
venturers. If non-8(a) joint venture partners can no longer act as
subcontractors, the only way for them to perform additional work on an
8(a) contract is to increase the percentage of work performed by the
joint venture. This will necessarily have the beneficial effect of
increasing the amount of work performed by tribally and ANC-owned 8(a)
firms. This change, in concert with the change to require the 8(a)
partner(s) to a joint venture on an 8(a) contract to perform at least
40% of the work performed by the joint venture, should enable 8(a)
joint venture partners to perform not only more work, but more
meaningful work on 8(a) joint venture contracts.
If this change dissuades large mentors from participating as joint
venture partners with tribally or ANC-owned firms on sole source 8(a)
contracts, many of these contracts may not be offered to the 8(a)
program at all. These contracts would then be either competed among all
small businesses, or competed among all firms on an unrestricted basis.
It is difficult to estimate the costs and benefits to the various
classes of firms as it is impossible to foresee which future contracts
above the competitive thresholds would be awarded based on the various
options (sole source to tribally-owned or ANC-owned firms, competition
among 8(a) firms, competition among small businesses, unrestricted
competition). It is likely that large firms and firms not in the 8(a)
program will get smaller proportionate shares of these contracts;
however, we note that Congress clearly intended the exception from the
competition requirements to be for the benefit of ANC-owned and
tribally-owned firms and not to large and non-8(a) firms. Therefore,
any impact on large or non-8(a) firms is of little consequence for
purposes of this rule. The benefits to large and non-8(a) firms are
incidental to the purpose of the rule and are arguably at the expense
of other 8(a) firms.
Although ANC-owned and tribally-owned 8(a) firms may receive fewer
contract dollars if mentors are dissuaded from participating as joint
venture partners under the proposed rule, we note that those firms will
nevertheless be permitted to bid on all the contracts that are no
longer available to them on a sole source basis as joint venture
partners. We also note that these firms may still be awarded these
contracts as prime contractors bidding alone or as joint venture
partners with other tribally or ANC-owned firms, and that such firms
will still be able to subcontract substantial portions of the contracts
to other non-8(a) firms. We also reference the recent report issued by
the GAO entitled ``CONTRACT MANAGEMENT Increased Use of Alaska Native
Corporations' Special 8(a) Provisions Calls for Tailored Oversight'',
GAO-06-399, April 2006 (``GAO Report''). That report noted that 8(a)
obligations to firms owned by ANCs increased from $265 million in FY
2000 to $1.1 billion in 2004 and that in FY 2004, obligations to ANC
firms represented 13 percent of total 8(a) dollars (GAO Report, p. 6).
This sharp increase in 8(a) dollars awarded to ANC firms from 2000 to
2004 draws into question the need for such firms to utilize joint
venture vehicles to take advantage of 8(a) sole source opportunities
above the competitive threshold amounts.
Finally, SBA notes that the rule requiring the 8(a) member of a
joint venture to receive the majority of the joint venture's profits is
easily
[[Page 55712]]
manipulated and difficult to monitor. Thus, it would not be difficult
for a joint venture to manipulate its numbers so that less than 51
percent of the actual profits from a contract in fact go to the
tribally-owned or ANC-owned 8(a) concern. On the other hand,
performance of work is more easily measured and thus easier to monitor.
If a contract is awarded to an ANC-owned or tribally-owned firm and
more than the allowed percentage is subcontracted, this fact is more
difficult to hide and easier to track. Therefore, it is expected that
instances of abuse and the use of fronts will decrease as a result of
the proposed change.
For all of the reasons listed above, SBA believes that the benefits
of the proposed rule far exceed its costs and far exceed the benefits
of continuing the status quo.
Regarding other proposed changes set forth in this rule, SBA
believes that increased clarity and easing of restrictions is overall
beneficial to 8(a) applicants and Participants.
Alternatives to the Regulatory Action
SBA has considered a number of alternatives to the proposed rule
and is interested in hearing from the public concerning these
alternatives. One alternative SBA has considered is to continue to
allow joint ventures on contracts above the competitive thresholds
between ANC or tribally-owned concerns and other concerns with the
condition that the ANC or tribally owned concern be required to meet
the performance of work requirements set forth in 13 CFR 124.510 with
its own workforce. Also see 13 125.6. Section 13 CFR 124.510 requires a
prime contractor on an 8(a) contract to perform certain percentages of
work with its own workforce (50 percent for service and manufacturing
contracts, 15 percent for general construction and 25 percent for
special trades). Another alternative being considered is to permit
joint ventures above the threshold amounts with other 8(a) concerns or
with other small businesses, but not with large businesses. Finally,
SBA also considered disallowing any joint ventures on 8(a) sole source
contracts above the competitive threshold amounts. Under this approach,
ANC and tribally-owned Participants could still receive 8(a) sole
source contracts above the competitive threshold amounts, they just
could not perform those contracts through a joint venture. This would
force ANC and tribally-owned Participants to be the prime contractor
and meet the performance of work (i.e., 50%) requirement with their own
workforce. The first alternative is not being proposed because of the
difficulty of enforcing the performance of work requirements. It is not
clear whether a firm is meeting the required percentages of work
requirements until the firm (or joint venture) is well along in the
performance of the contract. It is difficult to enforce these
provisions at this point and often the only recourse if the
requirements are not met is to terminate the contract, a solution that
creates numerous problems for the procuring activity. The second
alternative is not being proposed at this time because it would still
result in granting a significant portion of an 8(a) contract to a non-
8(a) concern. Finally, the elimination of all joint ventures above the
competitive thresholds approach is not being proposed because SBA was
persuaded by tribal and ANC representatives that joint ventures serve
an important function in the overall business development of ANC and
tribally-owned Participants.
SBA is very interested in comments from the public on these issues.
Executive Order 12988
This action meets applicable standards set forth in Sec. 3(a) and
3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or preemptive effect.
Executive Order 13132
This rule does not have federalism implications as defined in
Executive Order 13132, Federalism. It will not have substantial direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government, as specified
in the Executive Order. As such it does not warrant the preparation of
a Federalism Assessment.
Executive Order 13175, Tribal Summary Impact Statement
For the purposes of Executive Order 13175, Consultation and
Coordination with Indian Tribal Governments, the SBA's General Counsel
has determined that the requirements of this order have been met in a
meaningful and timely manner. This rule complies with the standards set
forth in the Executive Order and SBA has provided the tribal officials
with an opportunity to provide meaningful and timely input on
regulatory policies that have tribal implications.
In drafting this proposed rule, SBA consulted with representatives
of Alaska Native Corporations (ANCs) and Indian tribes, both informally
and formally, pursuant to Executive Order 13175, primarily to discuss
potential changes to the mentor/prot[eacute]g[eacute] requirements. SBA
met informally with tribal and ANC representatives in Washington, DC on
July 19, 2007, and more formally in Fairbanks, Alaska on October 24,
2007, 72 FR 57889, and in Denver, Colorado on November 11, 2007, 72 FR
60702. A vast majority of the comments received from these discussions
were concerned that SBA would overreact to negative publicity regarding
one or two 8(a) Participants and would change the mentor/
prot[eacute]g[eacute] program in a way that would take away an
important business development tool to tribal and ANC-owned firms.
Tribal representative after tribal representative talked about the
importance of the 8(a) BD program to the tribal and ANC communities.
They stressed that the 8(a) BD program works, providing the government
with a contracting option that is efficient and cost effective while
permitting the government to achieve its policy of supporting
disadvantaged small businesses and providing benefits to some of the
most underemployed people in America. They explained that they have
been trying to dispel program misperceptions caused by unsubstantiated
allegations of misconduct and abuse, when they would rather be devoting
their efforts to business and community development. Several tribal
representatives felt that relatively few tribes have realized the
benefits of the mentor/prot[eacute]g[eacute] component of the 8(a)
program, and were concerned that SBA would be closing this business
development option just as they are getting to the point where they
would use it. Representatives also were concerned that SBA would
propose changes that would restrict the participation of mentors in the
program. That is not SBA's intent. SBA too believes that the 8(a) BD
program is a much-needed and beneficial program, and that the tribal
and ANC component of the program serves a valuable economic and
community development purpose in addition to its business development
purpose. It is not SBA's intent to shut down any component of the 8(a)
program that truly assists the development of any small disadvantaged
businesses. Specifically, SBA is not proposing to close this business
development option to tribes and ANCs as some tribal representatives
were concerned. SBA does not seek to make it more difficult for
tribally-owned and ANC-owned firms to participate in
[[Page 55713]]
the 8(a) BD program, and merely looks for ways to help ensure that the
benefits of the program flow to those who are truly eligible to
participate. SBA has carefully reviewed both the testimony given at the
tribal consultation meetings and the formal comments submitted in
response thereto. SBA welcomes the opportunity to discuss its proposals
with the tribal and ANC communities in more detail during the public
comment period.
Initial Regulatory Flexibility Analysis
This rule, if finalized, may have a significant impact on a
substantial number of small entities within the meaning of the
Regulatory Flexibility Act, 5 U.S.C. 601-612. As such, SBA sets forth
an initial regulatory flexibility analysis (IRFA) of this proposed rule
addressing the following questions: (1) What is the need for and
objective of the rule, (2) what is SBA's description and estimate of
the number of small entities to which the rule will apply, (3) what is
the projected reporting, record keeping, and other compliance
requirements of the rule, (4) what are the relevant Federal rules which
may duplicate, overlap or conflict with the rule, and (5) what
alternatives will allow the Agency to accomplish its regulatory
objectives while minimizing the impact on small entities? SBA will
specifically address six provisions of the proposed rule which may have
a significant impact on a substantial number of small businesses. They
are: (1) The provisions relating to joint ventures between
prot[eacute]g[eacute] firms and their SBA-approved mentors; (2) the
requirement that the disadvantaged manager of an 8(a) applicant or
Participant must reside in the United States and spend part of every
month physically present at the primary offices of the applicant or
Participant; (3) the provision excluding qualified individual
retirement accounts from an individual's net worth in determining
economic disadvantage; (4) the provisions establishing objective
criteria for determining economic disadvantage in terms of income and
total assets; (5) the provision requiring SBA to early graduate a firm
from the 8(a) program if the firm becomes large for the size standard
corresponding to its primary NAICS code; and (6) the provisions
relating to what size 8(a) Participants must annually submit either
audited or reviewed financial statements to SBA.
1. What is the need for and objective of the rule? The need for and
objective of the provisions relating to joint ventures between
prot[eacute]g[eacute] firms and their SBA-approved mentors is set forth
in detail in the Regulatory Impact Analysis above.
SBA believes that the proposed requirement that the disadvantaged
manager of an 8(a) applicant or Participant must reside in the United
States and spend part of every month physically present at the primary
offices of the applicant or Participant is needed to reduce the
potential abuse of ``front'' companies in which a non-disadvantaged
individual actually runs the day-to-day operations of the business.
SBA believes that a change is needed to exclude qualified
individual retirement accounts from the calculation of an individual's
net worth when considering economic disadvantage. As noted in the
supplementary information above, SBA has found that the inclusion of
individual retirement accounts in the calculation of an individual's
net worth does not serve to disqualify wealthy individuals from
participation in the program, but has worked to make middle and lower
income individuals ineligible to the extent they have invested
prudently in accounts to ensure income at a time in their lives that
they are no longer working. SBA believes that it should not penalize an
individual who has invested in a qualified retirement account.
SBA believes that it is necessary to put into the regulations
provisions establishing objective criteria for income and total assets
in determining economic disadvantage to publicize SBA's current
policies in this area. While the proposed rule establishing $200,000 in
income and $3,000,000 in total assets as the levels above which an
individual is deemed not to be economically disadvantaged for purposes
of initial 8(a) eligibility is not a change in SBA policy, these
standards are currently contained only in decisions rendered by SBA's
OHA. Including these standards in the regulatory text will aid all
applications in more fully understanding SBA's eligibility
requirements.
SBA believes that it makes sense to early graduate a firm from the
8(a) BD program where it no longer qualifies as small for its primary
NAICS code for two consecutive years because it is reasonable to
conclude that at that point the firm has substantially achieved the
targets, objectives and goals contained in its business plan, and thus,
has met the standard set forth in Sec. 7(j)(10)(H) of the Small
Business Act, 15 U.S.C. 636(j)(10(H), for graduation.
SBA also believes it makes sense to raise the revenue levels above
which audited financial statements and reviewed financial statements
should be required for continued 8(a) BD participation. As the cost for
audited and reviewed financial statements increases, those costs are
becoming more of a burden on developing disadvantaged small businesses.
In addition, SBA notes that while size standards have increased due to
inflation over time, the levels of revenue above which audited and
reviewed financial statements are required for the 8(a) program have
not. As such, SBA believes that it makes sense to increase these levels
and alleviate the burden on smaller firms.
2. What is SBA's description and estimate of the number of small
entities to which the rule will apply? In FY 2007, SBA approved 60
mentor/prot[eacute]g[eacute] agreements. In FY 2006, SBA approved 173
mentor/prot[eacute]g[eacute] agreements. There are currently more than
300 approved mentor/prot[eacute]g[eacute] agreements. The proposed
changes to the mentor/prot[eacute]g[eacute] program would not affect
all small firms that are currently SBA-approved prot[eacute]g[eacute]s.
The significant proposed restriction on the program would prohibit a
joint venture between a prot[eacute]g[eacute] firm and its SBA-approved
mentor to subcontract additional work on the contract to the mentor.
Thus, it would affect only those mentor/prot[eacute]g[eacute]
relationships in which the mentor and prot[eacute]g[eacute] firms joint
venture for one or more government contracts and the mentor wants to
also act as a subcontractor on the contract. While the number of these
situations is not great, the potential for abuse without the proposed
change is.
The average number of applications for the 8(a) BD program for the
past five fiscal years (FYs 2003 to 2007) is 3,682. There are
approximately 6-10 declines based solely on control issues per 100
declines. For this time period, there were 1,583 total declines for the
8(a) program. Based on the estimated number of declines due to control
issues, this would translate as between 95 and 158 declines for control
for the past five fiscal years, or an average of 19 to 30 per year. The
number of firms declined for control reasons because the individual
claiming disadvantaged status lived outside the United States is
miniscule. We know of only two cases during the five year period where
SBA declined a firm on that basis.
For the last five fiscal years, there are approximately 3-5
declines per 100 declines based solely on issues relating to economic
disadvantage. This would translate into between 48 and 80 declines
based on economic disadvantage during the last five fiscal years, or an
average of 9 to 16 per year. SBA believes that the number of firms
[[Page 55714]]
declined due solely to significant assets in an IRA or other qualifying
retirement account is very small. SBA anticipates that 1 or 2 firms per
year which would have been found not to be economically disadvantaged,
and thus ineligible for the 8(a) BD program, will be eligible because
of the proposed change. Of the 9 to 16 declines per year due to
economic disadvantage, less than half were due to excessive income or
total assets. As such, the provisions establishing objective criteria
for income and total assets would affect no more than 8 8(a) applicants
each year.
During the last three fiscal years (FYs 2005 to 2007), a total of
591 firms were terminated from the 8(a) BD program (143 in FY 2007, 318
in FY 2006, and 130 in FY 2005), 342 firms voluntarily withdrew from
the program (149 in FY 2007, 95 in FY 2006, and 98 in FY 2005), and 42
firms left the program due to early graduation (12 in FY 2007, 12 in FY
2006, and 18 in FY 2005).
As reported in the Dynamic Small Business Search, there are
currently 9,609 Participants in the 8(a) BD program. Of those firms,
5,876 firms have less than $10 million in annual revenue, and 5,365
firms have less than $5 million in annual revenue. Thus, the proposed
change to raise the revenue level under which Participants must submit
audited or reviewed financial statements to SBA would ease the
regulatory burden on these firms.
3. What are the projected reporting, recordkeeping, and other
compliance requirements of the rule and an estimate of the classes of
small entities which will be subject to the requirements? There would
be no additional reporting or recordkeeping requirements imposed by the
rule. The rule would ease the regulatory burden on smaller 8(a) firms.
Specifically, SBA proposes to raise the level above which audited
financial statements are required from Participants with gross annual
receipts of more than $5,000,000 to Participants with gross annual
receipts of more than $10,000,000. Reviewed financial statements would
be required of all Participants with gross annual receipts between
$2,000,000 and $10,000,000, instead of between $1,000,000 and
$5,000,000.
4. What are the relevant Federal rules which may duplicate, overlap
or conflict with the rule? The Federal Acquisition Regulation (FAR)
defers to and incorporates the substance of the provisions set forth in
SBA's regulations for issues pertaining to the 8(a) program. To the
extent the FAR is inconsistent with 8(a) rules implemented by SBA, the
FAR would need to be changed to be consistent.
Paperwork Reduction Act
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
has determined that this proposed rule, if adopted in final form, would
contain no new reporting or recordkeeping requirements.
List of Subjects
13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business, Individuals with
disabilities, Loan programs--business, Reporting and recordkeeping
requirements, Small businesses.
13 CFR Part 124
Administrative practice and procedures, Government procurement,
Hawaiian natives, Indians--business and finance, Minority businesses,
Reporting and recordkeeping requirements, Tribally-owned concerns,
Technical assistance.
For the reasons set forth above, the Small Business Administration
proposes to amend parts 121 and 124 of title 13 of the Code of Federal
Regulations as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
Subpart A--Size Eligibility Provisions and Standards
1. The authority citation for part 121 continues to read as
follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644 and
662(5); and, Pub. L. 105-135, sec. 401 et seq., 111 Stat. 2592.
2. Amend Sec. 121.103 by revising paragraph (b)(6), by revising
the second and third sentences of paragraph (h) introductory text, and
by revising paragraph (h)(3)(iii) to read as follows:
Sec. 121.103 How does SBA determine affiliation?
* * * * *
(b) * * *
(6) An 8(a) BD Participant that has an SBA-approved mentor/
prot[eacute]g[eacute] agreement is not affiliated with a mentor firm
solely because the prot[eacute]g[eacute] firm receives assistance from
the mentor under the agreement. Similarly, a prot[eacute]g[eacute] firm
is not affiliated with its mentor solely because the
prot[eacute]g[eacute] firm receives assistance from the mentor under a
Federal Mentor-Prot[eacute]g[eacute] program where an exception to
affiliation is specifically authorized by statute or by SBA under the
procedures set forth in Sec. 121.903. Affiliation may be found in
either case for other reasons.
* * * * *
(h) * * * This means that a specific joint venture entity generally
may not be awarded more than three contracts over a two year period,
starting from the date of the award of the first contract, without the
partners to the joint venture being deemed affiliated for all purposes.
Because SBA determines size and affiliation as of the date an offeror
submits its initial offer including price to a procuring agency, SBA
will also determine compliance with this three awards in two years rule
as of the date of initial offer including price. As such, an individual
joint venture may be awarded more than three contracts without SBA
finding general affiliation between the joint venture partners where
the joint venture had received two or fewer contracts as of the date it
submitted one or more additional offers which thereafter result in one
or more additional contract awards. The same two (or more) entities may
create additional joint ventures, and each new joint venture entity may
be awarded up to three contracts in accordance with this section. At
some point, however, such a longstanding inter-relationship or
contractual dependence between the same joint venture partners will
lead to a finding of general affiliation between and among them. For
purposes of this provision and in order to facilitate tracking of the
number of contract awards made to a joint venture, a joint venture must
be in writing and must do business under its own name, and it may (but
need not) be in the form of a separate legal entity, and it may (but
need not) be populated. * * *
* * * * *
(3) * * *
(iii) Two firms approved by SBA to be a mentor and
prot[eacute]g[eacute] under 13 CFR 124.520 may joint venture as a small
business for any Federal government prime contract or subcontract,
provided the prot[eacute]g[eacute] qualifies as small for the size
standard corresponding to the NAICS code assigned to the procurement
and, for purposes of 8(a) sole source requirements, has not reached the
dollar limit set forth in 13 CFR 124.519. If the procurement is to be
awarded through the 8(a) BD program, SBA must approve the joint venture
pursuant to Sec. 124.513. If the procurement is to be awarded other
than through the 8(a) BD program (e.g., small business set aside,
HUBZone set aside), SBA need not approve the joint venture prior to
award, but if the size status of the joint venture is protested, the
provisions of Sec. Sec. 124.513(c) and (d) will apply. This
[[Page 55715]]
means that the joint venture must meet the requirements of Sec. Sec.
124.513(c) and (d) in order to receive the exception to affiliation
authorized by this paragraph.
* * * * *
3. Amend Sec. 121.402(b) by revising the last sentence and adding
a new sentence at the end thereof to read as follows:
Sec. 121.402 What size standards are applicable to Federal Government
contracting programs?
* * * * *
(b) * * * Acquisitions for supplies must be classified under the
appropriate manufacturing NAICS code, not under a wholesale trade or
retail trade NAICS code. A concern that submits an offer or quote for a
contract or subcontract where the NAICS code assigned to the contract
or subcontract is one for supplies, and furnishes a product it did not
itself manufacture or produce, is categorized as a nonmanufacturer and
deemed small if it meets the requirements set forth in Sec.
121.406(b).
* * * * *
4. Amend Sec. 121.406 by revising paragraph (a) introductory text,
(a)(1) (b)(1) introductory text, revising paragraphs (b)(1)(ii) and
(b)(1)(iii), by redesignating paragraphs (b)(3), (b)(4) and (b)(5) as
paragraphs (b)(5), (b)(6), and (b)(7), respectively, by adding new
paragraphs (b)(3) and (b)(4), and by revising newly redesignated
paragraph (b)(6) to read as follows:
Sec. 121.406 How does a small business concern qualify to provide
manufactured products or other supply items under small business set-
aside or 8(a) contracts?
(a) General. In order to qualify as a small business concern for a
small business set-aside or 8(a) contract to provide manufactured
products or other supply items, an offeror must either:
(1) Be the manufacturer or producer of the end item being procured
(and the end item must be manufactured or produced in the United
States); or
* * * * *
(b) Nonmanufacturers. (1) A concern may qualify as a small business
concern for a requirement to provide manufactured products or other
supply items as a nonmanufacturer if it:
* * * * *
(ii) Takes ownership or possession of the item(s) with its
personnel, equipment or facilities in a manner consistent with industry
practice; and
(iii) Will supply the end item of a small business manufacturer,
processor or producer made in the United States, or obtains a waiver of
such requirement pursuant to paragraph (b)(5) of this section.
* * * * *
(3) The nonmanufacturer rule applies only to procurements that have
been assigned a manufacturing NAICS code, Sectors 31-33. It does not
apply to supply contracts that do not primarily consist of
manufacturing.
(4) The nonmanufacturer rule applies only to the supply component
of a requirement classified as a manufacturing contract. If a
requirement is classified as a service contract, but also has a supply
component, the nonmanufacturer rule does not apply to the supply
component of the requirement.
Example 1 to paragraph (b)(4). A procuring agency seeks to
acquire computer integration and maintenance services. Included
within that requirement, the agency also seeks to acquire some
computer hardware. If the procuring agency determines that the
principal nature of the procurement is services and classifies the
procurement as a services procurement, the nonmanufacturer rule does
not apply to the computer hardware portion of the requirement. This
means that while a contractor must meet the applicable performance
of work requirement set forth in Sec. 125.6 for the services
portion of the contract, the contractor does not have to supply the
computer hardware of a small business manufacturer.
Example 2 to paragraph (b)(4). A procuring agency seeks to
acquire computer hardware, as well as computer integration and
maintenance services. If the procuring agency determines that the
principal nature of the procurement is for supplies and classifies
the procurement as a supply procurement, the nonmanufacturer rule
applies to the computer hardware portion of the requirement. A firm
seeking to qualify as a small business nonmanufacturer must supply
the computer hardware manufactured by a small business. Because the
requirement is classified as a supply contract, the contractor does
not have to meet the performance of work requirement set forth in
Sec. 125.6 for the services portion of the contract.
* * * * *
(6) The two waiver possibilities identified in paragraph (b)(5) of
this section are called ``individual'' and ``class'' waivers
respectively, and the procedures for requesting and granting them are
contained in Sec. 121.1204.
* * * * *
5. In Sec. 121.1001, add a new paragraph (b)(10) to read as
follows:
Sec. 121.1001 Who may initiate a size protest or request a formal
size determination?
* * * * *
(b) * * *
(10) The SBA Inspector General may request a formal size
determination with respect to any of the programs identified in
paragraph (b) of this section.
PART 124--8(a) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS
STATUS DETERMINATIONS
6. The authority citation for part 124 is revised to read as
follows:
Authority: 15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d) and Pub.
L. 99-661, Pub. L. 100-656, sec. 1207, Pub. L. 101-37, Pub. L. 101-
574, section 8021, Pub. L. 108-87, and 42 U.S.C. 9815.
7. Remove the term ``SIC'' and add, in its place, the term
``NAICS,'' in the following places:
a. Sec. 124.110(c);
b. Sec. 124.111(d);
c. Sec. 124.502(c)(3);
d. Sec. 124.503(b);
e. Sec. 124.503(b)(1);
f. Sec. 124.503(b)(2);
g. Sec. 124.503(c)(1)(iii);
h. Sec. 124.503(g)(3);
i. Sec. 124.505(a)(3);
j. Sec. 124.507(b)(2)(i);
k. Sec. 124.513(b)(1), (b)(1)(i), and (b)(1)(ii)(A);
l. Sec. 124.513(b)(2);
m. Sec. 124.513(b)(3);
n. Sec. 124.514(a)(1);
o. Sec. 124.515(d);
p. Sec. 124.517(d)(1);
q. Sec. 124.517(d)(2);
r. Sec. 124.519(a)(1);
s. Sec. 124.519(a)(2);
t. Sec. 124.1002(b)(1), (b)(1)(i), and (b)(1)(ii); and
u. Sec. 124.1002(f)(3).
8. Revise Sec. 124.2 to read as follows:
Sec. 124.2 For what length of time may a business participate in the
8(a) BD program?
A Participant receives a program term of nine years from the date
of SBA's approval letter certifying the concern's admission to the
program. The Participant must maintain its program eligibility during
its tenure in the program and must inform SBA of any changes that would
adversely affect its program eligibility. The nine year program term
may be shortened only by termination, early graduation or voluntary
withdrawal as provided for in this subpart.
9. In Sec. 124.3, add new definitions for ``NAICS code,'' and
``Regularly maintains an office'' in alphabetical order, and revise the
definitions of ``Primary industry classification'' and ``Same or
similar line of business,'' to read as follows:
Sec. 124.3 What definitions are important in the 8(a) BD program?
* * * * *
NAICS code means North American Industry Classification System
code.
* * * * *
[[Page 55716]]
Primary industry classification means the six digit North American
Industry Classification System (NAICS) code designation which best
describes the primary business activity of the 8(a) BD applicant or
Participant. The NAICS code designations are described in the North
American Industry Classification System book published by the U.S.
Office of Management and Budget. SBA utilizes Sec. 121.107 of this
chapter in determining a firm's primary industry classification. SBA
may permit a Participant to change its primary industry classification
if the Participant can demonstrate that the majority of its revenues
during a two-year period have evolved from one NAICS code to another.
* * * * *
Regularly maintains an office means conducting business activities
as an on-going business concern from a fixed location on a daily basis.
The best evidence of the regular maintenance of an office is
documentation that shows that third parties routinely transact business
with a Participant at a location within a particular geographical area.
Such evidence includes advertisements, bills, correspondence, lease
agreements, land records, and evidence that the Participant has
complied with all local requirements concerning registering, licensing,
or filing with the State or County where the place of business is
located.
Same or similar line of business means business activities within
the same four-digit ``Industry Group'' of the NAICS Manual as the
primary industry classification of the applicant or Participant. The
phrase ``same business area'' is synonymous with this definition.
* * * * *
10. Revise Sec. 124.101 to read as follows:
Sec. 124.101 What are the basic requirements a concern must meet for
the 8(a) BD program?
Generally, a concern meets the basic requirements for admission to
the 8(a) BD program if it is a small business which is unconditionally
owned and controlled by one or more socially and economically
disadvantaged individuals who are of good character and citizens of and
residing in the United States, and which demonstrates potential for
success.
11. Amend Sec. 124.102 by redesignating paragraph (a) as paragraph
(a)(1), and by adding a new paragraph (a)(2) to read as follows:
Sec. 124.102 What size business is eligible to participate in the
8(a) BD program?
(a)(1) * * *
(2) In order to remain eligible to participate in the 8(a) BD
program after certification, a firm must generally remain small for its
primary industry classification, as adjusted during the program. SBA
may graduate a participant prior to the expiration of its program term
where the firm exceeds the size standard corresponding to its primary
NAICS code for two successive program years.
* * * * *
12. Amend Sec. 124.104 by revising paragraph (b)(2); redesignating
paragraph (c)(2)(ii) as paragraph (c)(2)(iv), adding new paragraphs
(c)(2)(ii) and (c)(2)(iii), and by adding new paragraphs (c)(3) and
(c)(4) to read as follows:
Sec. 124.104 Who is economically disadvantaged?
* * * * *
(b) * * *
(2) When married, an individual claiming economic disadvantage must
submit separate financial information for his or her spouse, unless the
individual and the spouse are legally separated. SBA may consider a
spouse's financial situation in determining an individual's access to
credit and capital. SBA does not take into consideration community
property laws when determining economic disadvantage.
* * * * *
(c) * * *
(2) * * *
(ii) Funds invested in an Individual Retirement Account (IRA) or
other official retirement account that are unavailable to an individual
until retirement age without a significant penalty will not be
considered in determining an individual's net worth. In order to
properly assess whether funds invested in a retirement account may be
excluded from an individual's net worth, the individual must provide
information about the terms and restrictions of the account to SBA.
(iii) Income received from an S corporation will be excluded from
net worth where the applicant or Participant provides documentary
evidence demonstrating that the income was reinvested in the firm or
used to pay taxes arising in the normal course of operations of the
firm.
* * * * *
(3) Personal income for the past two years. If an individual's
adjusted gross income averaged over the two years preceding submission
of the 8(a) application exceeds $200,000, SBA will presume that such
individual is not economically disadvantaged. For continued 8(a) BD
eligibility, SBA will presume that an individual is not economically
disadvantaged if his or her adjusted gross income averaged over the two
preceding years exceeds $250,000. The presumption may be rebutted by a
showing that this income level was unusual and not likely to occur in
the future, that losses commensurate with and directly related to the
earnings were suffered, or by evidence that the income is not
indicative of lack of economic disadvantage. Income earned by S
corporations which is reinvested in or used to pay taxes arising in the
normal course of operations of the firm is exempted from income for
purposes of this section provided that documentary evidence is
submitted demonstrating this use. Likewise, S corporation losses may
not be subtracted from an individual's income to reduce that income.
(4) Fair market value of all assets. An individual will generally
not be considered economically disadvantaged if the fair market value
of all his or her assets (including his or her primary residence and
the value of the applicant/Participant firm) exceeds $3 million for an
applicant concern and $4 million for continued 8(a) BD eligibility. The
only assets excluded from this determination are funds excluded under
paragraph (c)(2)(ii) of this section as being invested in a qualified
IRA account.
13. Amend Sec. 124.105 by revising paragraphs (g) and (h)(2) to
read as follows:
Sec. 124.105 What does it mean to be unconditionally owned by one or
more disadvantaged individuals?
* * * * *
(g) Ownership of another Participant in the same or similar line of
business.
(1) An individual may not use his or her disadvantaged status to
qualify a concern if that individual has an immediate family member who
is using or has used his or her disadvantaged status to qualify another
concern for the 8(a) BD program. The AA/BD may waive this prohibition
if the two concerns have no connections, either in the form of
ownership, control or contractual relationships, and provided the
individual seeking to qualify the second concern has management and
technical experience in the industry. Where the concern seeking a
waiver is in the same or similar line of business as the current or
former 8(a) concern, there is a presumption against granting the
waiver. The applicant must provide clear and compelling evidence that
no
[[Page 55717]]
connection exists between the two firms.
(2) If the AA/BD grants a waiver under paragraph (g)(1) of this
section, SBA will, as part of its annual review, assess whether the
firm continues to operate independently of the other current or former
8(a) concern of an immediate family member. SBA may initiate
proceedings to terminate a firm for which a waiver was granted from
further participation in the 8(a) BD program if it is apparent that
there are connections between the two firms that were not disclosed to
the AA/BD when the waiver was granted or that came into existence after
the waiver was granted. SBA may also initiate termination proceedings
if the firm begins to operate in the same or similar line of business
as the current or former 8(a) concern of the immediate family member
and the firm did not operate in the same or similar line of business at
the time the waiver was granted.
(h) * * *
(2) A non-Participant concern in the same or similar line of
business or a principal of such concern may not own more than a 10
percent interest in a Participant that is in the developmental stage or
more than a 20 percent interest in a Participant in a transitional
stage of the program, except that a former Participant or a principal
of a former Participant (except those that have been terminated from
8(a) BD program participation pursuant to Sec. Sec. 124.303 and
124.304) may have an equity ownership interest of up to 20 percent in a
current Participant in the developmental stage of the program or up to
30 percent in a transitional stage Participant, in the same or similar
line of business.
* * * * *
14. Amend Sec. 124.106 by revising paragraph (a)(2), and (e)
introductory text, and by adding a new paragraph (h) to read as
follows:
Sec. 124.106 When do disadvantaged individuals control an applicant
or Participant?
* * * * *
(a)(1) * * *
(2) A disadvantaged full-time manager must hold the highest officer
position (usually President or Chief Executive Officer) in the
applicant or Participant. Such manager must reside in the United
States, and must generally spend at least part of every month
physically present in the primary offices of the applicant or
Participant.
* * * * *
(e) Non-disadvantaged individuals may be involved in the management
of an applicant or Participant, and may be stockholders, partners,
limited liability members, officers, and/or directors of the applicant
or Participant. However, no non-disadvantaged individual or immediate
family member may: * * *
* * * * *
(h) Notwithstanding the provisions of this section requiring a
disadvantaged owner to control the daily business operations and long-
term strategic planning of an 8(a) BD Participant, where a
disadvantaged individual upon whom eligibility is based is a reserve
component member in the United States military who has been called to
active duty, the Participant may elect to designate one or more
individuals to control the Participant on behalf of the disadvantaged
individual during the active duty call-up period. If such an election
is made, the Participant will continue to be treated as an eligible
8(a) Participant and no additional time will be added to its program
term. Alternatively, the Participant may elect to suspend its 8(a) BD
participation during the active duty call-up period pursuant to
Sec. Sec. 124.305(h)(1)(ii) and 124.305(h)(4).
Sec. 124.108 [Amended]
15. Amend Sec. 124.108 by removing paragraph (f).
16. Amend Sec. 124.109 by revising paragraphs (c)(3)(ii),
(c)(4)(i) introductory text, and (c)(6) to read as follows:
Sec. 124.109 Do Indian tribes and Alaska Native Corporations have any
special rules for applying to the 8(a) BD program?
* * * * *
(c) * * *
(3) * * *
(ii) A tribe may not own 51% or more of another firm which, either
at the time of application or within the previous two years, has been
operating in the 8(a) program under the same primary NAICS code as the
applicant. A tribe may, however, own a Participant or other applicant
that conducts or will conduct secondary business in the 8(a) BD program
under the NAICS code which is the primary NAICS code of the applicant
concern. In addition, once an applicant is admitted to the 8(a) BD
program, it may not receive an 8(a) contract in a secondary NAICS code
that is the primary NAICS code of another Participant (or former
participant that has left the program within two years of the date of
application) owned by the tribe for a period of two years from the date
of admission to the program.
* * * * *
(4) * * *
(i) The management and daily business operations of a tribally-
owned concern must be controlled by the tribe, through one or more
individual members who possess sufficient management experience of an
extent and complexity needed to run the concern, or through management
as follows:
* * * * *
(6) Potential for success. A tribally-owned applicant concern must
possess reasonable prospects for success in competing in the private
sector if admitted to the 8(a) BD program. A tribally-owned applicant
may establish potential for success by demonstrating that:
(i) It has been in business for at least two years, as evidenced by
income tax returns for each of the two previous tax years showing
operating revenues in the primary industry in with the applicant is
seeking 8(a) BD certification; or
(ii) The individual(s) who will manage and control the daily
business operations of the firm have substantial technical and
management experience, the applicant has a record of successful
performance on contracts from governmental or nongovernmental sources
in its primary industry category, and the applicant has adequate
capital to sustain its operations and carry out its business plan as a
Participant; or
(iii) The tribe has made a firm written commitment to support the
operations of the applicant concern and it has the financial ability to
do so.
* * * * *
17. Amend Sec. 124.112 by removing the word ``and'' at the end of
paragraph (b)(7), by redesignating paragraph (b)(8) as paragraph
(b)(9), by adding a new paragraph (b)(8), by revising paragraphs (d)(1)
and (d)(3), and by adding new paragraphs (e) and (f) to read as
follows:
Sec. 124.112 What criteria must a business meet to remain eligible to
participate in the 8(a) BD program?
* * * * *
(b) * * *
(8) For each Participant owned by a tribe, ANC, NHO or CDC,
information showing how its 8(a) participation has benefited the tribal
or native members and/or the tribal, native or other community. This
data includes information relating to funding cultural programs,
employment assistance, jobs, scholarships, internships, subsistence
activities, and other services to the affected community; and
* * * * *
(d) Excessive withdrawals. (1) The term withdrawal includes, but is
not limited to, the following: cash dividends; distributions in excess
of amounts needed to pay S Corporation taxes; cash and property
withdrawals;
[[Page 55718]]
payments to immediate family members not employed by the Participant;
bonuses to officers; and investments on behalf of an owner. SBA will
look at the totality of the circumstances in determining whether to
include a specific amount as a withdrawal under this paragraph.
* * * * *
(3) Withdrawals are excessive if during any fiscal year of the
Participant they exceed:
(i) $200,000 for firms with sales up to $1,000,000;
(ii) $250,000 for firms with sales between $1,000,000 and
$2,000,000; and
(iii) $400,000 for firms with sales exceeding $2,000,000.
* * * * *
(e) Change in primary industry classification. A Participant may
request that the primary industry classification contained in its
business plan be changed by filing such a request with its servicing
SBA district office. SBA will grant such a request only where the
Participant can demonstrate that the majority of its revenues during a
two-year period have evolved from one NAICS code to another.
(f) Graduation determination. As part of the final annual review
performed by SBA prior to the expiration of a Participant's nine-year
program term, SBA will determine if the Participant has met the targets
and objectives set forth in its business plan and, thus, whether the
Participant will be considered to have graduated from the 8(a) BD
program at the expiration of its program term.
18. Revise Sec. 124.202 to read as follows:
Sec. 124.202 How must an application be filed?
An application for 8(a) BD program admission must generally be
filed in an electronic format. An electronic application can be found
by going to the 8(a) BD page of SBA's Web site (www.sba.gov). An
applicant concern that does not have access to the electronic format or
does not wish to file an electronic application may request in writing
a hard copy application from the AA/BD. The SBA district office will
provide an applicant concern with information regarding the 8(a) BD
program.
19. Revise Sec. 124.203 to read as follows:
Sec. 124.203 What must a concern submit to apply to the 8(a) BD
program?
Each 8(a) BD applicant concern must submit those forms and
attachments required by SBA when applying for admission to the 8(a) BD
program. These forms and attachments may include, but not be limited
to, financial statements, Federal personal and business tax returns,
and personal history statements. An applicant must also submit IRS Form
4506T, Request for Copy or Transcript of Tax Form, to SBA. In all
cases, the applicant must provide a wet signature from each individual
claiming social and economic disadvantage status.
20. Amend Sec. 124.204 by revising paragraph (a), redesignating
paragraphs (c), (d) (e) and (f) as paragraphs (d), (e), (f) and (g),
and adding new paragraph (c) to read as follows:
Sec. 124.204 How does SBA process applications for 8(a) BD program
admission?
(a) The AA/BD is authorized to approve or decline applications for
admission to the 8(a) BD program. The DPCE will receive, review and
evaluate all 8(a) BD applications. Applications submitted by firms
owned by ANCs will be initially reviewed by SBA's San Francisco DPCE
unit. SBA will advise each program applicant within 15 days after the
receipt of an application whether the application is complete and
suitable for evaluation and, if not, what additional information or
clarification is required to complete the application. SBA will process
an application for 8(a) BD program participation within 90 days of
receipt of a complete application package by the DPCE. Incomplete
packages will not be processed.
* * * * *
(c) The burden of proof to demonstrate eligibility is on the
applicant concern. If a concern does not provide requested information
within the allotted time provided by SBA, or if it submits incomplete
information, SBA may presume that disclosure of the missing information
would adversely affect the firm or would demonstrate lack of
eligibility in the area to which the information relates.
* * * * *
21. Revise Sec. 124.205 (a) and (b) to read as follows:
Sec. 124.205 Can an applicant ask SBA to reconsider SBA's initial
decision to decline its application?
(a) An applicant may request the AA/BD to reconsider his or her
initial decline decision by filing a request for reconsideration with
SBA. The applicant may submit a revised electronic application or
submit its request for reconsideration to the SBA field office that
originally processed its application by personal delivery, first class
mail, express mail, facsimile transmission followed by first class
mail, or commercial delivery service. The applicant must submit its
request for reconsideration within 45 days of its receipt of written
notice that its application was declined. If the date of actual receipt
of such written notice cannot be determined, SBA will presume receipt
to have occurred ten calendar days after the date the notice was sent
to the applicant. The applicant must provide any additional information
and documentation pertinent to overcoming the reason(s) for the initial
decline, including information and documentation regarding changed
circumstances.
(b) The AA/BD will issue a written decision within 45 days of SBA's
receipt of the applicant's request. The AA/BD may either approve the
application, deny it on the same grounds as the original decision, or
deny it on other grounds. If denied, the AA/BD will explain why the
applicant is not eligible for admission to the 8(a) BD program and give
specific reasons for the decline.
* * * * *
22. Revise Sec. 124.301 to read as follows:
Sec. 124.301 What are the ways a business may leave the 8(a) BD
program?
A concern participating in the 8(a) BD program may leave the
program by any of the following means:
(a) Expiration of the program term established pursuant to Sec.
124.2;
(b) Voluntary withdrawal;
(c) Graduation pursuant to Sec. 124.302;
(d) Early graduation pursuant to the provisions of Sec. Sec.
124.302 and 124.304; or
(e) Termination pursuant to the provisions of Sec. Sec. 124.303
and 124.304.
23. Amend Sec. 124.302 by revising the heading, by revising
paragraphs (a) introductory text and (a)(1), by removing paragraph (d),
by redesignating paragraph (c) as paragraph (d), and by adding a new
paragraph (c) to read as follows:
Sec. 124.302 What is graduation and what is early graduation?
(a) General. SBA may graduate a firm from the 8(a) BD program at
the expiration of its program term (graduation) or prior to the
expiration of its program term (early graduation) where SBA determines
that:
(1) The concern has successfully completed the 8(a) BD program by
substantially achieving the targets, objectives, and goals set forth in
its business plan, and has demonstrated the ability to compete in the
marketplace without assistance under the 8(a) BD program; or
* * * * *
[[Page 55719]]
(c) Exceeding the size standard corresponding to the primary NAICS
code. SBA may graduate a participant prior to the expiration of its
program term where the firm exceeds the size standard corresponding to
its primary NAICS code for two successive program years.
* * * * *
24. Amend Sec. 124.303 by revising paragraphs (a)(2), (a)(13) and
(a)(16) to read as follows:
Sec. 124.303 What is termination?
(a) * * *
(2) Failure by the concern to maintain its eligibility for program
participation, including failure by an individual owner or manager to
continue to meet the requirements for economic disadvantage set forth
in Sec. 124.104 where such status is needed for eligibility and the
Participant has not met the targets and objectives set forth in its
business plan.
* * * * *
(13) Excessive withdrawals, including transfers of funds or other
business assets, from the concern for the personal benefit of any of
its owners or any person or entity affiliated with the owners that
hinder the development of the concern (see Sec. 124.112(d)).
* * * * *
(16) Debarment, suspension, voluntary exclusion, or ineligibility
of the concern or its principals pursuant to 2 CFR parts 180 and 2700
or FAR subpart 9.4 (48 CFR part 9, subpart 9.4).
* * * * *
25. Revise Sec. 124.304(f) to read as follows:
Sec. 124.304 What are the procedures for early graduation and
termination?
* * * * *
(f) Effect or early graduation or termination. (1) After the
effective date of early graduation or termination, a Participant is no
longer eligible to receive any 8(a) BD program assistance. However,
such concern is obligated to complete previously awarded 8(a)
contracts, including any priced options which may be exercised.
(2) When SBA early graduates or terminates a firm from the 8(a) BD
program, the firm will generally not qualify as an SDB for future
procurement actions. If the firm believes that it does qualify as an
SDB and seeks to certify itself as an SDB, as part of its SDB
certification the firm must identify:
(i) That it has been early graduated or terminated; and
(ii) The circumstances that have changed since the early graduation
or termination or that do not prevent it from qualifying as an SDB.
(3) Where a concern certifies that it qualifies as an SDB pursuant
to paragraph (f)(2) of this section, the procuring activity contracting
officer shall protest the SDB status of the firm to SBA pursuant to
Sec. 124.1010.
26. Amend Sec. 124.305 by revising the first sentence of paragraph
(a), and by revising paragraph (h) to read as follows:
Sec. 124.305 What is suspension and how is a Participant suspended
from the 8(a) BD program?
(a) Except as set forth in paragraph (h) of this section, at any
time after SBA issues a Letter of Intent to Terminate an 8(a)
Participant pursuant to Sec. 124.304, the AA/BD may suspend 8(a)
contract support and all other forms of 8(a) BD program assistance to
that Participant until the issue of the Participant's termination from
the program is finally determined. * * *
* * * * *
(h)(1) SBA will suspend a Participant from receiving further 8(a)
BD program benefits when termination proceedings have not been
commenced pursuant to Sec. 124.304 where:
(i) A Participant requests a change of ownership and/or control and
SBA discovers that a change of ownership or control has in fact
occurred prior to SBA's approval; or
(ii) A disadvantaged individual who is involved in the ownership
and/or control of the Participant is called to active military duty by
the United States, his or her participation in the firm's management
and daily business operations is critical to the firm's continued
eligibility, and the Participant elects not to designate a non-
disadvantaged individual to control the concern during the call-up
period pursuant to proposed Sec. 124.106(h).
(2) A suspension initiated under paragraph (h) of this section will
be commenced by the issuance of a notice similar to that required for
termination-related suspensions under paragraph (b) of this section,
except that a suspension issued under paragraph (h) not appealable.
(3) Where a Participant is suspended pursuant to paragraph
(h)(1)(i) of this section and SBA approves the change of ownership and/
or control, the length of the suspension will be added to the firm's
program term only where the change in ownership or control results from
the death or incapacity of a disadvantaged individual or where the firm
requested prior approval and waited at least 60 days for SBA approval
before making the change.
(4) Where a Participant is suspended pursuant to paragraph
(h)(1)(ii) of this section, the Participant must notify SBA when the
disadvantaged individual returns to control the firm so that SBA can
immediately lift the suspension. When the suspension is lifted, the
length of the suspension will be added to the concern's program term.
* * * * *
Sec. 124.403 [Amended]
27. Amend Sec. 124.403 by removing paragraph (d).
28. Amend Sec. 124.501 by revising the first sentence of paragraph
(h) to read as follows:
Sec. 124.501 What general provisions apply to the award of 8(a)
contracts?
* * * * *
(h) A Participant must certify that it qualifies as a small
business under the size standard corresponding to the NAICS code
assigned to each 8(a) contract. * * *?
* * * * *
29. Amend Sec. 124.503 by revising paragraph (h) to read as
follows:
Sec. 124.503 How does SBA accept a procurement for award through the
8(a) BD program?
* * * * *
(h) Task or Delivery Order Contracts--(1) Contracts set aside for
exclusive competition among 8(a) Participants. (i) A task or delivery
order contract that is reserved exclusively for 8(a) Program
Participants must follow the normal 8(a) competitive procedures,
including an offering to and acceptance into the 8(a) program, SBA
eligibility verification of the apparent successful offerors prior to
contract award, and application of the performance of work requirements
set forth in Sec. 124.510, and the nonmanufacturer rule, if
applicable, (see Sec. 121.406(b).
(ii) Individual orders need not be offered to or accepted into the
8(a) BD program.
(iii) A concern awarded such a contract may generally continue to
receive new orders even if it has grown to be other than small or has
exited the 8(a) BD program, and agencies may continue to take credit
toward their prime contracting goals for orders awarded to 8(a)
Participants. However, a concern may not receive, and agencies may not
take 8(a), SDB or small business credit, for an order where the concern
has been asked by the procuring agency to re-certify its size status
and is unable to do so (see Sec. 121.404(g)), or where ownership or
control of the concern has changed and SBA has granted a waiver to
allow performance to continue (see Sec. 124.515).
[[Page 55720]]
(2) 8(a) credit for orders issued under multiple award contracts
that were not set aside for exclusive competition among eligible 8(a)
Participants. In order to receive 8(a) credit for orders placed under
multiple award contracts that were not initially set aside for
exclusive competition among 8(a) Participants:
(i) The order must be offered to and accepted into the 8(a) BD
program;
(ii) The order must be competed exclusively among 8(a) concerns;
(iii) The order must require the concern comply with applicable
limitations on subcontracting provisions (see Sec. 125.6 of this
chapter) and the nonmanufacturer rule, if applicable, (see Sec.
121.406(b) of this chapter) in the performance of the individual order;
and
(iv) SBA must verify that a concern is an eligible 8(a) concern
prior to award of the order in accordance with Sec. 124.507;
* * * * *
30-31. Amend Sec. 124.504 by revising the first sentence of
paragraph (a), by removing paragraph (d), by redesignating paragraph
(e) as paragraph (d), and by revising redesignated paragraph (d) to
read as follows:
Sec. 124.504 What circumstances limit SBA's ability to accept a
procurement for award as an 8(a) contract?
(a) Reservation as small business set-aside, or HUBZone or service
disabled veteran-owned small business award. The procuring activity
issued a solicitation for or otherwise expressed publicly a clear
intent to reserve the procurement as a small business set-aside or a
HUBZone or service disabled veteran-owned award prior to offering the
requirement to SBA for award as an 8(a) contract. * * *
* * * * *
(d) Release for non-8(a) competition. (1) Except as set forth in
paragraph (d)(4) of this section, where a procurement is awarded as an
8(a) contract, its follow-on or renewable acquisition must remain in
the 8(a) BD program unless SBA agrees to release it for non-8(a)
competition. If a procuring agency would like to fulfill a follow-on or
renewable acquisition outside of the 8(a) BD program, it must make a
written request to and receive the concurrence of the AA/BD to do so.
In determining whether to release a requirement from the 8(a) BD
program, SBA will consider:
(i) Whether the agency has achieved its SDB goal;
(ii) Where the agency is in achieving its HUBZone, SDVO, WOSB, or
small business goal, as appropriate; and
(iii) Whether the requirement is critical to the business
development of the 8(a) Participant that is currently performing it.
(2) SBA may decline to accept the offer of a follow-on or renewable
8(a) acquisition in order to give a concern previously awarded the
contract that is leaving or has left the 8(a) BD program the
opportunity to compete for the requirement outside of the 8(a) BD
program.
(i) SBA will consider release under this paragraph (d)(2) only
where:
(A) The procurement awarded through the 8(a) BD program is being or
was performed by either a Participant whose program term will expire
prior to contract completion, or by a former Participant whose program
term expired within one year of the date of the offering letter;
(B) The concern requests in writing that SBA decline to accept the
offer prior to SBA's acceptance of the requirement for award as an 8(a)
contract; and
(C) The concern qualifies as a small business for the requirement
now offered to the 8(a) BD program.
(ii) In considering release under this paragraph (d)(2), SBA will
balance the importance of the requirement to the concern's business
development needs against the business development needs of other
Participants that are qualified to perform the requirement. This
determination will include consideration of whether rejection of the
requirement would seriously reduce the pool of similar types of
contracts available for award as 8(a) contracts. SBA will seek the
views of the procuring agency.
(3) SBA will release a requirement under this paragraph only where
the procuring activity agrees to procure the requirement as a small
business, HUBZone, service disabled veteran-owned small business, or
women-owned small business set-aside.
(4) The requirement that a follow-on procurement need must be
released from the 8(a) BD program in order for it to be fulfilled
outside the 8(a) BD program does not apply to orders offered to and
accepted for the 8(a) BD program pursuant to Sec. 124.503(h).
32. Amend Sec. 124.506 by revising paragraph (a)(2)(ii), the
example in paragraph (a) (3), and paragraph (b) to read as follows:
Sec. 124.506 At what dollar threshold must an 8(a) procurement be
competed among eligible Participants?
* * * * *
(a) * * *
(2) * * *
(ii) The anticipated award price of the contract, including
options, will exceed $5,500,000 for contracts assigned manufacturing
NAICS codes and $3,500,000 for all other contracts; and * * *
* * * * *
(3) * * *
Example to paragraph (a)(3). If the anticipated award price for
a professional services requirement is determined to be $3.2 million
and it is accepted as a sole source 8(a) requirement on that basis,
a sole source award will be valid even if the contract price arrived
at after negotiation is $3.6 million.
* * * * *
(b) Exemption from competitive thresholds for Participants owned by
Indian tribes, ANCs and NHOs. (1) SBA may award a sole source 8(a)
contract to a Participant concern owned and controlled by an Indian
tribe or an ANC where the anticipated value of the procurement exceeds
the applicable competitive threshold if SBA has not accepted the
requirement into the 8(a) BD program as a competitive procurement.
(2) SBA may award a sole source 8(a) contract to a Participant
concern owned and controlled by an NHO on behalf of DoD where the
anticipated value of the procurement exceeds the applicable competitive
threshold if SBA has not accepted the requirement into the 8(a) BD
program as a competitive procurement.
(3) There is no requirement that a procurement must be competed
whenever possible before it can be accepted on a sole source basis for
a tribally-owned or ANC-owned concern, or a concern owned by an NHO for
contracts accepted on behalf of DoD, but a procurement may not be
removed from competition to award it to a tribally-owned, ANC-owned or
NHO-owned concern on a sole source basis.
(4) A joint venture between one or more eligible tribally-owned,
ANC-owned or NHO-owned Participants and one or more non-8(a) business
concerns may be awarded sole source 8(a) contracts above the
competitive threshold amount, provided that no non-8(a) joint venture
partner also acts as a subcontractor to the joint venture awardee.
* * * * *
33. Amend Sec. 124.507 by adding paragraphs (c)(2)(i), (c)(2)(ii)
and (c)(2)(iii) to read as follows:
Sec. 124.507 What procedures apply to competitive procurements?
* * * * *
(c) * * *
(2) * * *
[[Page 55721]]
(i) A Participant may have bona fide places of business in more
than one location.
(ii) In order for a Participant to establish a bona fide place of
business in a particular geographic location, the SBA district office
serving the geographic area of that location must determine if that
location in fact qualifies as a bona fide place of business under SBA's
requirements.
(A) A Participant must submit a request for a bona fide business
determination to the SBA district office servicing it.
(B) The servicing district office will forward the request to the
SBA district office serving the geographic area of the particular
location for processing.
(iii) In order for a Participant to be eligible to submit an offer
for a 8(a) procurement limited to a specific geographic area, it must
receive from SBA a determination that it has a bona fide place of
business within that area prior to submitting its offer for the
procurement.
* * * * *
34. Amend Sec. 124.509(a)(1) by adding a new sentence at the end
thereof to read as follows:
Sec. 124.509 What are non-8(a) business activity targets?
(a) General. (1) * * * Work performed by an 8(a) Participant for
any Federal department or agency other than through an 8(a) contract,
including work performed on orders under the General Services
Administration Multiple Award Schedule program, and work performed as a
subcontractor, including work performed as a subcontractor to another
8(a) Participant on an 8(a) contract, qualifies as work performed
outside the 8(a) BD program.
* * * * *
35. Amend Sec. 124.512 by adding a new sentence at the end of
paragraph (a), by revising paragraph (b), and by adding a new paragraph
(c) to read as follows:
Sec. 124.512 Delegation of contract administration to procuring
agencies.
(a) * * * Tracking compliance with the performance of work
requirements set forth in Sec. 124.510 is included within the
functions performed by the procuring activity as part of contract
administration.
(b) This delegation of contract administration authorizes a
contracting officer to execute any priced option or in scope
modification without SBA's concurrence. The contracting officer must,
however, submit copies to SBA of all modifications and options
exercised within 10 business days of their occurrence.
(c) SBA may conduct periodic compliance on-site agency reviews of
the files of all contracts awarded pursuant to Section 8(a) authority.
36. Amend Sec. 124.513 by revising paragraphs (c)(3), (c)(6), (d),
and (e), and adding a new paragraph (i) to read as follows:
Sec. 124.513 Under what circumstances can a joint venture be awarded
an 8(a) contract?
* * * * *
(c) * * *
(3) Stating that the 8(a) Participant(s) must receive profits from
the joint venture commensurate with the work performed by the 8(a)
Participant(s);
* * * * *
(6) Specifying the responsibilities of the parties with regard to
negotiation of the contract, source of labor, and contract performance,
including ways that the parties to the joint venture will ensure that
the joint venture and the 8(a) partner(s) to the joint venture will
meet the performance of work requirements set forth in paragraph (d) of
this section.
* * * * *
(d) Performance of work. For any 8(a) contract, including those
between mentors and prot[eacute]g[eacute]s authorized by Sec. 124.520,
the joint venture must perform the applicable percentage of work
required by Sec. 124.510, and the 8(a) partner(s) to the joint venture
must perform at least 40% of the work performed by the joint venture.
The work performed by 8(a) partners to a joint venture must be more
than administrative or ministerial functions so that they gain
substantive experience.
(e) Prior approval by SBA. (1) SBA must approve a joint venture
agreement prior to the award of an 8(a) contract on behalf of the joint
venture.
(2) Where a joint venture has been established and approved by SBA
for one 8(a) contract, a second or third 8(a) contract may be awarded
to that joint venture provided an addendum to the joint venture
agreement, setting forth the performance requirements on that second or
third contract, is provided to and approved by SBA prior to contract
award.
* * * * *
(i) Performance of work report. At the completion of every 8(a)
contract awarded to a joint venture, the 8(a) Participant(s) to the
joint venture must submit a report to the local SBA district office
explaining how the performance of work requirements were met for the
contract.
37. Amend Sec. 124.519 by revising paragraphs (a) and (f) to read
as follows:
Sec. 124.519 Are there any dollar limits on the amount of 8(a)
contracts that a Participant may receive?
(a) A Participant (other than one owned by an Indian tribe, ANC or
NHO) may not receive sole source 8(a) contract awards where it has
received a combined total of competitive and sole source 8(a) contracts
in excess of the dollar amount set forth in this section during its
participation in the 8(a) BD program.
* * * * *
(f) The AA/BD may waive the requirement prohibiting a Participant
from receiving sole source 8(a) contracts in excess of the dollar
amount set forth in this section where the head of a procuring activity
represents that award of a sole source 8(a) contract to the Participant
is needed to achieve significant interests of the Government.
38. Amend Sec. 124.520 by:
A. Revising the heading,
B. Revising the first and last sentences of paragraph (a),
C. Revising paragraphs (b)(1)(i) and (iv), (b)(2), and (b)(3),
D. Revising paragraph (c)(1),
E. Adding a new sentence to the end of paragraph (c)(2),
F. Revising paragraph (c)(3),
G. Adding new paragraphs (c)(4) and (5),
H. Revising paragraph (d)(1),
I. Revising paragraph (e)(1), and the second sentence of (e)(2),
J. Redesignating paragraph (f) as paragraph (g),
K. Adding a new paragraph (f),
L. Redesignating newly designated paragraphs (g)(2) and (g)(3) as
paragraphs (g)(3) and (g)(4),
M. Adding a new paragraph (g)(2), and
N. Adding a new paragraph (h)
The additions and revisions read as follows:
Sec. 124.520 What are the rules governing SBA's Mentor/
Prot[eacute]g[eacute] program?
(a) General. The mentor/prot[eacute]g[eacute] program is designed
to encourage approved mentors to provide various forms of business
development assistance to prot[eacute]g[eacute] firms. * * * The
purpose of the mentor/prot[eacute]g[eacute] relationship is to enhance
the capabilities of the prot[eacute]g[eacute], assist the
prot[eacute]g[eacute] with meeting the goals established in its SBA-
approved business plan, and to improve its ability to successfully
compete for contracts.
* * * * *
(b) * * *
(1) * * *
(i) Possesses favorable financial health;
* * * * *
[[Page 55722]]
(iv) Can impart value to a prot[eacute]g[eacute] firm due to
lessons learned and practical experience gained because of the 8(a) BD
program, or through its knowledge of general business operations and
government contracting.
(2) Generally a mentor will have no more than one
prot[eacute]g[eacute] at a time. However, the AA/BD may authorize a
concern to mentor more than one prot[eacute]g[eacute] at a time where
the concern can demonstrate that the additional mentor/
prot[eacute]g[eacute] relationship will not adversely affect the
development of either prot[eacute]g[eacute] firm (e.g., the second firm
may not be a competitor of the first firm). Under no circumstances will
a mentor be permitted to have more than three prot[eacute]g[eacute]s at
one time.
(3) In order to demonstrate its favorable financial health, a firm
seeking to be a mentor must submit to SBA for review copies of the
Federal tax returns it submitted to the IRS, or audited financial
statements, including any notes, or in the case of publicly traded
concerns the filings required by the Securities and Exchange Commission
for the past three years.
* * * * *
(c) Prot[eacute]g[eacute]s. (1) In order to initially qualify as a
prot[eacute]g[eacute] firm, a Participant must:
(i) Be in the developmental stage of program participation; or
(ii) Have never received an 8(a) contract; or
(iii) Have a size that is less than half the size standard
corresponding to its primary NAICS code.
(2) * * * Once a firm graduates from or otherwise leaves the 8(a)
BD program, it will not be eligible for any further benefits from its
mentor/prot[eacute]g[eacute] relationship (i.e., the receipts and/or
employees of the prot[eacute]g[eacute] and mentor will generally be
aggregated in determining size for any joint venture between the mentor
and prot[eacute]g[eacute] after the prot[eacute]g[eacute] leaves the
8(a) BD program).
(3) A prot[eacute]g[eacute] firm may generally have only one mentor
at a time. The AA/BD may approve a second mentor for a particular
prot[eacute]g[eacute] firm where (i) the second relationship pertains
to an unrelated, secondary NAICS code; (ii) the prot[eacute]g[eacute]
firm is seeking to acquire a specific expertise that the first mentor
does not possess; and (iii) the second relationship will not compete or
otherwise conflict with the business development assistance set forth
in the first mentor/prot[eacute]g[eacute] relationship.
(4) A prot[eacute]g[eacute] may not become a mentor and retain its
prot[eacute]g[eacute] status. The prot[eacute]g[eacute] must terminate
its mentor/prot[eacute]g[eacute] agreement with its mentor before it
will be approved as a mentor to another 8(a) Participant.
(5) SBA will not approve a mentor/prot[eacute]g[eacute]
relationship for an 8(a) Participant with less than one year remaining
in its program term.
(d) Benefits. (1) A mentor and prot[eacute]g[eacute] may joint
venture as a small business for any government prime contract or
subcontract, including procurements with a dollar value less than half
the size standard corresponding to the assigned NAICS code and 8(a)
sole source contracts, provided the prot[eacute]g[eacute] qualifies as
small for the procurement and, for purposes of 8(a) sole source
requirements, the prot[eacute]g[eacute] has not reached the dollar
limit set forth in Sec. 124.519.
(i) SBA must approve the mentor/prot[eacute]g[eacute] agreement
before the two firms may submit an offer as a joint venture on a
particular government prime contract or subcontract and receive the
exclusion from affiliation.
(ii) In order to receive the exclusion from affiliation for both
8(a) and non-8(a) procurements, the joint venture must meet the
requirements set forth in Sec. 124.513(c).
(e) Written agreement. (1) The mentor and prot[eacute]g[eacute]
firms must enter a written agreement setting forth an assessment of the
prot[eacute]g[eacute]'s needs and providing a detailed description and
timeline for the delivery of the assistance the mentor commits to
provide to address those needs (e.g., management and/or technical
assistance, loans and/or equity investments, cooperation on joint
venture projects, or subcontracts under prime contracts being performed
by the mentor). The mentor/prot[eacute]g[eacute] agreement must:
(i) Address how the assistance to be provided through the agreement
will help the prot[eacute]g[eacute] firm meet the goals established in
its SBA-approved business plan;
(ii) Establish a single point of contact in the mentor concern who
is responsible for managing and implementing the mentor/
prot[eacute]g[eacute] agreement; and
(iii) Provide that the mentor will provide such assistance to the
prot[eacute]g[eacute] firm for at least one year.
(2) * * * The agreement will not be approved if SBA determines that
the assistance to be provided is not sufficient to promote any real
developmental gains to the prot[eacute]g[eacute], or if SBA determines
that the agreement is merely a vehicle to enable the mentor to receive
8(a) contracts.
* * * * *
(f) Decision to decline mentor/prot[eacute]g[eacute] relationship.
(1) Where SBA declines to approve a specific mentor/
prot[eacute]g[eacute] agreement, the prot[eacute]g[eacute] may request
the AA/BD to reconsider the Agency's initial decline decision by filing
a request for reconsideration with its servicing SBA district office
within 45 calendar days of receiving notice that its mentor/
prot[eacute]g[eacute] agreement was declined. The prot[eacute]g[eacute]
may revise the proposed mentor/prot[eacute]g[eacute] agreement and
provide any additional information and documentation pertinent to
overcoming the reason(s) for the initial decline to its servicing
district office.
(2) The AA/BD will issue a written decision within 45 calendar days
of receipt of the prot[eacute]g[eacute]'s request. The AA/BD may either
approve the mentor/prot[eacute]g[eacute] agreement, deny it on the same
grounds as the original decision, or deny it on other grounds. If
denied, the AA/BD will explain why the mentor/prot[eacute]g[eacute]
agreement does not meet the requirements of Sec. 124.520 and give
specific reasons for the decline.
(3) If the AA/BD declines the mentor/prot[eacute]g[eacute]
agreement solely on issues not raised in the initial decline, the
prot[eacute]g[eacute] can ask for reconsideration as if it were an
initial decline.
(4) If SBA's final decision (either by allowing 45 calendar days to
pass from receiving the initial decision or the decision by the AA/BD
on reconsideration) is to decline a specific mentor/
prot[eacute]g[eacute] agreement, the 8(a) firm seeking to be a
prot[eacute]g[eacute] cannot attempt to enter another mentor/
prot[eacute]g[eacute] relationship with the same mentor for a period of
one year from the date of the final decision. The 8(a) firm may,
however, submit another proposed mentor/prot[eacute]g[eacute] agreement
with a different proposed mentor at any time after the SBA's final
decline decision.
(g) * * *
(2) The prot[eacute]g[eacute] must report the mentoring services it
receives by category and hours.
* * * * *
(h) Consequences of not providing assistance set forth in the
mentor/prot[eacute]g[eacute] agreement. (1) Where SBA determines that a
mentor has not provided to the prot[eacute]g[eacute] firm the business
development assistance set forth in its mentor/prot[eacute]g[eacute]
agreement, SBA will notify the mentor of such determination and afford
the mentor an opportunity to respond. The mentor must respond within 30
days of the notification, explaining why it has not provided the agreed
upon assistance and setting forth a definitive plan as to when it will
provide such assistance. If the mentor fails to respond, does not
supply adequate reasons for its failure to provide the agreed upon
assistance, or does not set forth a definite plan to provide the
assistance:
[[Page 55723]]
(i) SBA will recommend to the relevant procuring agency to issue a
stop work order for each Federal contract for which the mentor and
prot[eacute]g[eacute] are performing as a small business joint venture
pursuant to paragraph (d)(1) of this section;
(ii) SBA will terminate its mentor/prot[eacute]g[eacute] agreement;
and
(iii) The firm will be ineligible to again act as a mentor for a
period of two years from the date SBA terminates the mentor/
prot[eacute]g[eacute] agreement.
(2) SBA may consider a mentor's failure to comply with the terms
and conditions of an SBA-approved mentor/prot[eacute]g[eacute]
agreement as a basis for debarment on the grounds, including but not
limited to, that the mentor has not complied with the terms of a public
agreement under 2 CFR 180.800(b).
39. Amend Sec. 124.601 by revising paragraph (a) to read as
follows:
Sec. 124.601 What reports does SBA require concerning parties who
assist Participants in obtaining Federal contracts?
(a) Each Participant must submit semi-annually a written report to
its assigned BOS that includes a listing of any agents,
representatives, attorneys, accountants, consultants and other parties
(other than employees) receiving fees, commissions, or compensation of
any kind to assist such participant in obtaining a Federal contract.
The listing must indicate the amount of compensation paid and a
description of the activities performed for such compensation.
* * * * *
40. Amend Sec. 124.602 by revising paragraphs (a) introductory
text, (b), and (c) to read as follows:
Sec. 124.602 What kind of annual financial statement must a
Participant submit to SBA?
(a) Participants with gross annual receipts of more than
$10,000,000 must submit to SBA audited annual financial statements
prepared by a licensed independent public accountant within 120 days
after the close of the concern's fiscal year.
* * * * *
(b) Participants with gross annual receipts between $2,000,000 and
$10,000,000 must submit to SBA reviewed annual financial statements
prepared by a licensed independent public accountant within 90 days
after the close of the concern's fiscal year
(c) Participants with gross annual receipts of less than $2,000,000
must submit to SBA an annual statement prepared in-house or a
compilation statement prepared by a licensed independent public
accountant, verified as to accuracy by an authorized officer, partner,
limited liability member, or sole proprietor of the Participant,
including signature and date, within 90 days after the close of the
concern's fiscal year.
41. Amend Sec. 124.1002 by revising paragraph (d) and adding a new
paragraph (h) to read as follows:
Sec. 124.1002 What is a Small Disadvantaged Business (SDB)?
* * * * *
(d) Additional eligibility criteria. (1) Except for tribes, ANCs,
CDCs, and NHOs, each individual claiming disadvantaged status must be a
citizen of the United States.
(2) The other eligibility requirements set forth in Sec. 124.108
for 8(a) BD program participation do not apply to SDB eligibility.
* * * * *
(h) Full-time requirement for SDB purposes. An SDB is considered to
be managed on a full-time basis by a disadvantaged individual if such
individual works for the concern during all of the hours the concern
operates. For example, if a concern operates 20 hours per week and the
disadvantaged manager works for the firm during those twenty hours,
that individual will be considered as working full time for the firm.
Karen G. Mills,
Administrator.
[FR Doc. E9-25416 Filed 10-27-09; 8:45 am]
BILLING CODE 8025-01-P