Numerous 8(a) changes in final rule

Changes affect eligibility, NHOs, management

Tucked into the Small Business Administration’s recent final rule on creating a mentor-protégé program were provisions that make significant changes to the 8(a) Small Business Development Program.

The final rule was published on July 25 and the provisions go into effect Aug. 24.

The changes affect how social disadvantage is determined, as well as eligibility, the application process, tribal entities, sole source awards and Native Hawaiian owned small businesses, among other factors.

Social Disadvantage

The SBA offers more guidance on how to determine social disadvantage for eligibility for the 8(a) program for people who are not in the designated groups.

The final rule states that each person claiming social disadvantage “must present facts and evidence that by themselves establish that the individual has suffered social disadvantage that has negatively impacted his or her entry into or advancement in the business world.”

Furthermore, it states that each instance of alleged discriminatory conduct “must be accompanied by a negative impact on the individual’s entry into or advancement in the business world in order for it to constitute an instance of social disadvantage.”  

If there are alternative reasons for the negative impacts, there is further guidance. The final rule says the SBA may disregard a claim of social disadvantage “where a legitimate alternative ground for an adverse employment action or other perceived adverse action exists and the individual has not presented evidence that would render his/her claim any more likely than the alternative ground.”

The SBA provides two helpful examples of how the analysis works.

Experience Factor

The new regulations make it slightly easier for applicants to show adequate management experience. In the past, applicants needed to show management experience in the industry in which they were applying. Under the new rule, the management experience need not be related to the industry of the applicant’s firm.

However, the SBA adds that the specific industry experience of employees may be considered in certain circumstances. It gives an example where SBA might question whether an owner without experience in the industry would be in control when there is a non-disadvantaged owner or former owner with experience in the industry actively involved in management of the firm.

Application Processing

The new rule lifts some of the previous requirements in the application to make it easier for applicants:
- No more automatic inclusion of IRS Form 4506T (Request for Transcript of Tax Return).
- All applications must be filed electronically.
- No more “wet” signature required on applications.
- No more automatic referrals of applicants with criminal records to the Office of Inspector General…. SBA may exercise reasonable discretion.
- No more narrative statements of economic disadvantage required.

Substantial unfair competitive advantage

The new rule provides guidance on how SBA will determine whether a tribally-owned firm (including ANCs and NHOs) has obtained a “substantial unfair competitive advantage within an industry category.”

“SBA will consider a firm’s percentage share of the national market and other relevant factors to determine whether a firm is dominant in a specific six-digit NAICS code with a particular size standard,” the rule states. SBA also will review Federal Procurement Data System (FPDS) data to compare the firm’s share of the industry as compared to overall small business paricipation in that industry to determine whether there is an unfair competitive advantage.

Tribally-Owned 8(a) Participants

The rule states that the individuals responsible for the management and daily operations of a tribally-owned concern cannot manage more than two Program Participants at the same time.

Native Hawaiian Organizations

In a significant change, the rule revision outlines how the SBA will determine whether an NHO is economically disadvantaged. It treats the NHOs similarly to Indian tribes, by requiring an NHO to present information relating to the economic disadvantaged status of Native Hawaiians, including the unemployment rate of Native Hawaiians and the per capita income of Native Hawaiians.

“The difference between tribes and NHOs, however, is that one tribe serves and intends to benefit one distinct group of people (i.e., its specific tribal members), and multiple NHOs may be established to serve and benefit the same group of people (i.e., the entire Native Hawaiian community,” the SBA’s rule adds.

In addition, the revised rule clarifies that “the members or directors of an NHO need not have the technical expertise or possess a required license to be found to control an applicant or Participant owned by the NHO. Rather, the NHO, through its members and directors, must merely have managerial experience of the extent and complexity needed to run the concern.”

Individual NHO members may have to show more specific industry-related experience to prove that the NHO controls the day-to-day operations of the firm.

Sole Source Awards

Changes made by Congress in 2011 requiring agencies to make justifications for sole-source awards over $20 million (currently $22 million) were incorporated into the Federal Acquisition Regulation, but not into SBA’s rules. The new rule closes that gap.

The final rule notes: “There is a misconception by some that there can be no 8(a) sole source awards that exceed $22 million. That is not true. Nothing in either section 811 or the FAR prohibits 8(a) sole source awards to Program Participants owned by Indian tribes and ANCs above $22 million.”

A recent GAO study noted that 48 such contracts were awarded to Tribal 8(a) firms in fiscal 2015, averaging $98.2 million each. The number of such contracts has trended upward, from 26 to 48, over the past five years.

Change in Primary Industry

Under the final rule, the SBA may change an 8(a) company’s primary industry classification if “the greatest portion” of the company’s total revenues during the last three completed fiscal years “has evolved from one NAICS code to another.” 8(a) participants will be notified if the SBA intends to change their NAICS code, and will have an opportunity to oppose the action.

“As long as the Participant provides a reasonable explanation as to why the identified primary NAICS code continues to be its primary NAICS code, SBA will not change the Participant’s primary NAICS code,” the final rule states.

More Information:
Fed Register rule: https://goo.gl/wQOqPU
GAO Report June 2016 GAO-16-557: http://www.gao.gov/assets/680/677750.pdf

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