On Dec. 29, the Small Business Administration (SBA) announced a proposed rule that could bring big changes to small businesses competing for set-aside contracts.

This rule would make amendments to provisions under the National Defense Authorization Act of 2013. It could affect the way affiliation is determined, how distribution of work is evaluated between a prime contractor and subcontractor, and the processes for assessing other compliance issues for small businesses.

Proposed Changes

Affiliation and Joint Venture Compliance

Affiliation can be a death sentence for small business prime vendors and subcontractors trying to compete for government set-aside contract. SBA’s proposed rule would eliminate the risk of affiliation in instances where all participants hold small business status.

This also extends to small business joint ventures. The size of participating vendors would no longer be combined to determine compliance. Instead, joint ventures would allow prime contractors to subcontract to as many similarly situated firms as desired.

This essentially means that small businesses would no longer need to worry about becoming noncompliant when exclusively partnering with other small businesses on government set-aside contracts.

How Compliance is Determined When Subcontracting

While the concept of designating 50% or more of the work on a contract to a prime contractor small business concern (SBC) remains the same, the way in which the government determines this requirement is being met would change under the new proposal.

Establishing division of work would move from a “cost-based” formula to a “percentage of total payments” methodology. So instead of ensuring the prime vendor incurs at least 50% of the total contract cost, the new approach would focus on total payments made by the government to prime vendors.

Prime vendors with small business status would also no longer be penalized for subcontracting out any amount of work to other “similarly situated subcontractors”.

Timelines, Penalties, and Exemptions

The proposed rule change also addresses how SBA plans to take greater care when determining compliance over a multi-year contract. A total and partial set-aside contract would be evaluated for compliance on a timeline built from its base term and each subsequent option period. On full and open contracts, SBA would use periods of performance for each order to determine compliance.

SBA also outlined how they would calculate whether a small business maintained its status from year to year. The agency emphasized that receipts for these purposes should include all income, with the only exclusions being ones specifically listed. Passive income, which is sometimes overlooked by small businesses applying for 8(a) status, would also be included in these evaluations.

The proposed changes presented new penalties for noncompliance on set-aside contracts. Companies that violate subcontracting limitations could be subject to a fine treated as the greater of $500,000 or the dollar amount spent in excess of the permitted levels on subcontracting.

Small business set-aside contracts that fall under $150,000 would be exempt from the limitations on subcontracting requirements.

With such big changes on the way, SBA is accepting comments and suggestions on the proposed rule until Feb. 27. You can share your opinions by visiting the Federal eRulemaking Portal and following the instructions for submitting comments.