On Feb 11, 2011, the SBA made sweeping changes to the 8(a) Business Development “federal contracting” program – its biggest overhaul since 1998, effective March 14, 2011. The purpose of the 8(a) program is to help eligible small “disadvantaged” businesses compete for billions of dollars worth of federal contracts each year.
This program – and some of the changes – create new opportunities for small biz owners who can obtain 8(a) certification, as well as others who team up with a qualifying firm to pursue federal contracts. Here some tips, and a summary of key changes to the program below:
- See if you qualify: 8(a) certification is for small firms that are socially and economically disadvantaged. To qualify, a firm can’t exceed a certain size limit, which varies by industry; has to be able to meet certain economic criteria; and show that it is socially disadvantaged, meaning minority-owned or disadvantaged.
- Get your financial house is in order: The SBA requires documentation on all aspects of the business and its owners, so make sure your business is being run cleanly.
- Inquire about other SBA certifications: Even if you don’t qualify for this program, there are other small business certifications including Small Disadvantaged Business, Women-Owned Business, Service-disabled Veteran-Owned Business and HUBZone Business.
- Partner with qualified biz owners: If you are new to government contracting, teaming up with another business can help you gain the experience and credibility. With various set-aside contracting programs for small businesses, partnering with an 8(a) or women-owned firm can help increase your chances of winning contracts.
FAQ on 8(a) changes:
Q. What Are the Some of the Changes to the Rules on Economic Disadvantage?
For the first time, this rule adds objective criteria to determine economic disadvantage based on personal income and total assets. With the rule change applicants to the program must demonstrate economic disadvantage based on the following criteria:
- Adjusted Net Worth must not exceed $250,000 for initial eligibility or $750,000 for continuing eligibility.
- Personal Income must not exceed $250,000 (averaged over three years) for initial eligibility or $350,000 for continuing eligibility.
- Total Assets must not exceed $4 million for initial eligibility and $6 million for continued eligibility (allows for growth during the 9-year term).
IRA Accounts – excluded from net worth and total asset determinations
The rule clarifies SBA’s treatment of Subchapter S Corporations when determining economic disadvantage. SBA’s intent is to make the treatment of S Corporations consistent with that for C Corporations, and not penalize a firm because of the different tax structures. If the business can demonstrate that funds reported on the individual tax return were used to pay taxes or reinvested into the firm SBA will not count those funds as personal income. The Final Rule adds the same treatment for LLCs and Partnerships.
Q. What Are the Some of the Changes to the Rules on Joint Ventures?
The rule tightens the requirements for joint ventures (JV) to ensure that non-disadvantaged firms do not unduly benefit from the 8(a) BD program.
- The JV agreement may be informal or formal (separate business structure) BUT must be in writing. Also, the JV may, but need not be populated (i.e., have its own separate employees).
- The JV may not be awarded more than three contracts over 2-year period without a finding of general affiliation. The same two entities may form additional JVs and each may be awarded three contracts over two years.
- Specific to the 8(a) BD program the 8(a) partner to the JV must perform at least 40% of the work performed by the JV. This change replaces the “significant portion” language of the previous regulations. The rule differentiates between populated and unpopulated joint ventures and applies different requirements.
- Project Manager: For the unpopulated JV (or JV populated only with administrative personnel) an employee of 8(a) managing venturer must be project manager. For the JV Populated with individuals intended to perform contracts, the JV must demonstrate how performance of the contract is controlled by the 8(a) managing venture.
- Performance of work: For the unpopulated JV (or JV populated only with administrative personnel) the amount of work done by all the partners will be aggregated and 8(a) partner must perform at least 40% of all work done by JV (includes all work done by non-8(a) partner and any of its affiliates at any subcontracting tier). For the JV Populated with individuals intended to perform contracts, the non-8(a) JV partner, or any of its affiliates, may not act subcontractor to JV or any subcontractor of the JV.
Q. Are There Reporting Requirements for Joint Ventures?
Yes, the rule introduces Performance of Work Reports. As part of the annual review the Participant must demonstrate how it is meeting the performance of work requirements for each 8(a) contract that is performing as a JV. At the completion of every 8(a) contract awarded to a JV, the Participant must explain how Performance of Work Requirements were met.
Q. What Are the Some of the Changes to the Rules Governing the Mentor/Protégé Program?
The changes to the rule specifically allow for non-profit Mentors and a Mentor can have up to 3 protégés at one time. A Protégé can have second Mentor, corresponding to an unrelated, secondary NAICS code. However, a firm cannot be both a Protégé and a Mentor at the same time.
The assistance to be provided by the Mentor must be tied to the Protégé’s SBA-approved business plan and the Mentor/Protégé Agreement must be approved by SBA before the firms can submit a joint venture offer on a procurement as a small business. In order to receive the exclusion from affiliation on any non-8(a) contracts, the agreement must comply with the 8(a) JV requirements (other than SBA approval).
- The rule changes permit Mentor/Protégé joint ventures to be small for federal subcontracts (DOE).
- The rule now prohibits SBA from approving a new Mentor/Protégé relationship within six months of the end of an 8(a) Participant’s program term.
- The benefits derived from Mentor/Protégé relationship end once the protégé leaves the 8(a) BD program. In other words the exclusion from affiliation ends.
- For the first time, the rule allows for a specific reconsideration process when a Mentor/Protégé Agreement is declined.
Q. Are There Consequences if the Mentor Fails to Provide the Agreed-Upon Assistance to the Protégé?
Yes. The changes require that the Mentor is notified and provided an opportunity to respond. If the Mentor fails to provide the agreed-upon assistance SBA may terminate the Mentor/Protégé Agreement. The Mentor is ineligible to participate for two years. SBA may recommend a stop work order for each contract the Mentor and Protégé are performing as a JV and where they have received the exclusion from affiliation. If a stop work order is authorized where the protégé can independently complete performance, SBA may authorize substitution of the protégé firm for the JV. Finally, a Mentor’s failure to provide the agreed-upon assistance may constitute grounds for Government-wide suspension or debarment.
Q. How Does SBA Define Primary NAICS Code?
Primary NAICS code means the six digit code having the same size standard (e.g., 541330 Engineering Services, $4.5M, is different from Military & Aerospace Equipment and Military Weapons, $27M).
Q. Are there Changes to the Rules on Early Graduation and Size for the Primary NAICS Code?
SBA may graduate a Participant where the firm exceeds the size standard corresponding to its primary NAICS code, as adjusted, for three successive program years. If the firm can demonstrate that through its growth and development its primary NAICS code is changing to a secondary NAICS code in its adjusted business plan, SBA will not early graduate the firm.
Q. Do the Rules Address Participants Owned by Individuals Called to Active Military Status?
Yes. The changes to the rule allow the disadvantaged individual owners of the 8(a) firm called to active military status to elect to be suspended from program participation so as not to lose any of the 9-year term in the program. The length of suspension time is added to program term when individual returns to control the firm. If one or more other disadvantaged individuals can continue to control the firm in absence, the firm may elect to continue to operate as an 8(a) firm.
Q. Are There Changes to the Rules on Excessive Withdrawals?
- The final rule amends the definition of withdrawal and the amounts SBA will consider excessive, and thus a basis for possible termination or early graduation. SBA believes that the new definition of withdrawal better addresses the original legislative intent behind the prohibition against excessive withdrawals.
- The final rule also clarifies that withdrawals that exceed the threshold amounts indentified in the regulations in the aggregate will be considered excessive.
- The new definition for withdrawal excludes officers’ salaries; but SBA will count those salaries if it believes the firm is attempting to circumvent the regulations through the payment of salaries.
- The withdrawal amounts will be in the aggregate and are as follows:
- Firms with sales up to $1M, $250,000;
- Firms with sales between $1M and $2M, $300,000;
- Firms with sales exceeding $2M, $400,000.
These limits do not apply to tribes, ANCs, NHOs, CDCs where withdrawal is made for the benefit of the tribe/ANC/NHO/CDC or the native or shareholder community; however, it does apply to withdrawals that do not benefit the relevant entity or community. A large salary to a non-disadvantaged individual will be treated as an excessive withdrawal and SBA will look at the totality of circumstances in determining whether withdrawal is excessive.
Q. What Changes Were Made to the Rules That Apply to Applicant and Participant Representatives?
The compensation received by any packager, agent or representative of any 8(a) applicant or Participant for assisting in obtaining certification, 8(a) contracts or other assistance must be reasonable in light of services provided. The fee charged cannot be a percentage of gross contract value. For good cause, SBA may suspend a packager, agent or representative from assisting 8(a) applicants or Participants.
For further information contact: 8aBD2@sba.gov
About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.