© Birch Horton Bittner & Cherot, P.C. 2017

© Birch Horton Bittner & Cherot, P.C. 2017
8(a) to (z) Presented by Jon M. DeVore David A. Rose © Birch Horton Bittner & Cherot, P.C. 2017

Presenters Jon M. DeVore David Rose David Fishman © Birch Horton Bittner & Cherot, P.C. 2017

Outline: Examining SBA Programs
SBA 8(a) Program History Mentor-Protégé Joint Ventures Subcontracting © Birch Horton Bittner & Cherot, P.C. 2017

The SBA 8(a) Program Overview
© Birch Horton Bittner & Cherot, P.C. 2017

SBA Small Business Programs
The Small Business Administration (SBA) was created as an independent Federal agency to aid, counsel, assist, and protect the interests of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of our nation. SBA administers several small business programs, including: 8(a) Business Development Program HUBZone Program Service-Disabled Veteran-Owned Businesses Small Disadvantaged Businesses Woman-Owned Small Businesses SBA 8(a) Program Overview © Birch Horton Bittner & Cherot, P.C. 2017

Purpose of the 8(a) Program
Section 8(a) of the Small Business Act, 15 U.S.C. § 637, provides for assistance and business development opportunities for socially and economically disadvantaged small businesses. Particularly, the 8(a) Business Development (BD) Program helps these businesses compete in the marketplace and access federal and private procurement markets that would likely be unavailable to them otherwise. Federal acquisition policies encourage Federal agencies to award a certain percentage of their contracts to 8(a) firms and other small businesses. SBA, which is responsible for administering the program, defines a small business as one that is independently owned and operated, organized for profit, and not dominant in its field. SBA 8(a) Program Overview See Federal Acquisitions Regulation (FAR) § and 502; 48 CFR § and 502. See 15 USC § 637(a)(1)(d). © Birch Horton Bittner & Cherot, P.C. 2017

Benefits of Utilizing the 8(a) Program in Government Contracting
Ability to make sole-source awards to 8(a) companies More efficient, can negotiate price and profit, protests less likely ANC and Tribal Exemption from sole-source dollar thresholds; can contract with the Federal government without a cap on the amount of the sole-source award. Ability to utilize experience and manpower of larger, more experienced businesses through: Awards to 8(a) Mentor-Protégé joint ventures Subcontracting portions of the contract to large businesses Awards to entity-owned firms, which often have reach-back to corporate family resources, support, and stability of larger and more experienced businesses Aid to socially and economically disadvantaged peoples Individually-owned 8(a) firms provide benefits to one or a few disadvantaged owners. Native 8(a) firms provide benefits to entire communities, which could be hundreds or thousands of disadvantaged people. SBA 8(a) Program Overview © Birch Horton Bittner & Cherot, P.C. 2017

Qualifications and Eligibility for the 8(a) Program

Qualifications for 8(a) Certification
Basic eligibility requirements for 8(a) certification are that the firm must: be a small business, that is unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and U.S. citizens, and demonstrate a potential for success. Qualifications and Eligibility © Birch Horton Bittner & Cherot, P.C. 2017

Other Key Aspects of 8(a) Eligibility
Application & Approval: A small business must apply for and be granted 8(a) certification. 8(a)s are also SDBs: Once a company obtains its 8(a) certification, it is automatically eligible to participate in the 8(a) Program. Nine-Year Term: Participation in the 8(a) Program is subject to a nine-year term throughout which the company must maintain its eligibility. Business Plan: Once admitted to the program, 8(a) companies must prepare and submit to the SBA for approval a detailed business plan, and this plan must be reviewed and updated annually. Business Development Focus: A key part of the mandatory business plan is a strategy for meeting the non-8(a) business activity targets. Balance of 8(a)/Non-8(a) Work: SBA requires that program participants actively work to obtain minimum levels of non-8(a) business and sets non-8(a) business targets that increase significantly during a firm’s final years in the 8(a) Program. Qualifications and Eligibility See 13 CFR §§ & 204. 13 CFR §§124.2 & 13 CFR §§ & 403. 13 CFR § (2002). 13 CFR (b). © Birch Horton Bittner & Cherot, P.C. 2017

Qualifications and Eligibility
Size NAICS Code: SBA determines a firm’s size based on the company’s North American Industry Classification System (NAICS) code for its primary business area. The Federal government uses NAICS codes to identify and classify specific categories of business activities that represent the primary line of business of a firm. As a firm gains experience and expertise, it can qualify for additional NAICS codes. Government agencies also rely upon the NAICS codes for procurement solicitations. Employees/Revenues: Depending on the industry, the applicable size standard eligibility is based on the average number of employees for the preceding twelve months or on sales volume averaged over a three-year period. E.g., the small size standard for NAICS code , Telecommunications Resellers, is employees, whereas for NAICS code , Satellite Telecommunications, it is $ million. Affiliates: In determining the size of an 8(a) firm, SBA has specific provisions and limitations regarding how an applicant’s affiliation with other companies will impact its eligibility. For example, if another firm exercises ownership or control over an applicant, the receipts or employees of both will be counted when determining the applicant’s size. There are several exceptions to the general affiliation rules for entity-owned firms, qualified joint ventures, mentor-protégé relationships, etc. Qualifications and Eligibility © Birch Horton Bittner & Cherot, P.C. 2017

Rule Change: SBA May Now Unilaterally Change 8(a) Firms’ Primary NAICS Codes Proposed change codifies current SBA practice of changing a firm’s NAICS code when SBA determines that a firm’s primary industry has evolved. MAJOR change to the current regulations, which allow only the Participant itself to change its primary NAICS code. Prompted by fear the current system allows a firm to select a primary NAICS code different from any other Participant owned by that same entity and then perform majority of its work in the same primary NAICS code as the other participant. Previously, no requirement for Participant to actually perform work in the NAICS code under which its program entry was certified. New Rule: “SBA may change the primary industry classification contained in a Participant’s business plan where the greatest portion of the Participant’s total revenues during the Participant’s last three completed fiscal years has evolved from one NAICS code to another.” Process: SBA will review primary NAICS codes as part of the firm’s annual review process. When SBA determines that such change is appropriate, SBA notifies Participant of intent to make a change and give firm opportunity to respond. Participant may challenge by demonstrating why it believes its chosen primary NAICS continues to be appropriate. i.e. new contracts received since end of the last fiscal year, if the firm made good faith efforts to obtain contracts in its primary NAICS code, etc. No additional appeals process! SBA declined to make automatic changes NAICS code changes based on federal database reports. Qualifications and Eligibility 13 CFR § (e)(2). What criteria must a business meet to remain eligible to participate in the 8(a) BD program? © Birch Horton Bittner & Cherot, P.C. 2017

Rule Change: SBA May Now Unilaterally Change 8(a) Firms’ Primary NAICS Codes (con’t) New rule also includes specific guidance on dissuading SBA to make a unilateral change: (e)(2)(ii)A Participant may challenge SBA’s intent to change its primary industry classification by demonstrating why it believes the primary industry classification contained in its business plan continues to be appropriate, despite an increase in revenues in a secondary NAICS code beyond those received in its designated primary industry classification. The Participant should identify: All non-federal work that it has performed in its primary NAICS code; any efforts it has made and any plans it has to make to receive contracts to obtain contracts in its primary NAICS code; all contracts that it was awarded that it believes could have been classified under its primary NAICS code, but which a contracting officer assigned another reasonable NAICS code; and any other information that it believes has a bearing on why its primary NAICS code should not be changed despite performing more work in another NAICS code. (iii) 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. Impact on Sister Companies following NAICS Change: Where an SBA change in the primary NAICS code of an entity-owned firm results in the entity having two Participants with the same primary NAICS code, the second, newer Participant will not be able to receive any 8(a) contracts in the six-digit NAICS code that is the primary NAICS code of the first, older participant for a period of time equal to two years after the first Participant leaves the 8(a) BD program. Qualifications and Eligibility 13 CFR § (e)(2). © Birch Horton Bittner & Cherot, P.C. 2017

Issue Spotlight: Two-Year Rule & NAICS Subcategories
The Two-Year Rule: Prohibits sister companies from having the same primary NAICS code In addition to the one-time eligibility rule (which applies generally to 8(a) applicants), 8(a) applicants owned by ANCs and tribes must also comply with the two-year rule in (c)(3)(ii): A Tribe [or ANC] 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. NAICS Subcategories: “…the same primary NAICS code means the six digit NAICS code having the same corresponding size standard.” NOTE: Recent SBA Policy Change – SBA can change an 8(a) firm’s NAICS code without the firm’s consent. This was a recent SBA internal policy shift, and now is codified in SBA rules. Trend: SBA is applying increased scrutiny to prevent sister companies in the same industry. Issues could arise during new 8(a) applications or during annual reviews (where primary NAICS code is not reflected in revenues). Practice Tip: Spot and prevent NAICS code issues before SBA interferes. Entities must create systems for tracking revenues for all 8(a) entities by NAICS code and regularly monitor for deviations from goals. Business development teams should set strategic goals using NAICS codes and monitor related progress and industry opportunities. Qualifications and Eligibility © Birch Horton Bittner & Cherot, P.C. 2017

What is Affiliation? Why is Affiliation an Important Issue? Size: SBA determines whether an entity qualifies as a small business concern by counting its receipts, employees, or other measure including those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. 13 C.F.R. § (a)(6). Affiliated companies will have their sizes combined, and the combined size must be lower than the small business threshold for the NAICS code in question (employees/$) in order for one of the businesses to be considered small. What are the General Principles of Affiliation? Generally, affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. SBA’s regulations on affiliation are contained in 13 C.F.R. § (available at Major Types of Affiliation Common Management Common Ownership Contractual Relationships/Economic Dependency Identity of Interests “Totality of the Circumstances” (catch-all) Qualifications and Eligibility © Birch Horton Bittner & Cherot, P.C. 2017

Common Administrative Services Affiliation Exemption: Examples of Qualifying Activities SAFE Bookkeeping Payroll Recruiting Human resource support Cleaning services Duties unrelated to contract performance/ management that do not interfere with the control of the subject firm POSSIBLY SAFE Services that are “administrative in nature” Record retention not related to specific contract Database maintenance for awarded contracts Regulatory compliance monitoring Template development Assisting with invoice preparation Identifying procurement opportunities IF subsidiary is involved in business development and prepares the offer, controls the technical and contract-specific portions of offer preparation, controls employee assignments, and controls contract performance logistics. NOT PERMISSIBLE “Actual and direct day-to-day oversight and control” of contract performance Negotiating directly with government Project scheduling Hiring and firing of employees Employee assignments on contracted work Logistics of contract performance Qualifications and Eligibility Proposed Change No. 2, to be codified at 13 CFR (b)(2)(ii) © Birch Horton Bittner & Cherot, P.C. 2017

New “Contractual Relations” Affiliation Exception for ANCs, Tribes, NHOs, and CDCs New Affiliation Exception: “A business concern owned and controlled by an Indian Tribe, ANC, NHO, CDC, or by a wholly-owned entity of an Indian Tribe, ANC, NHO, or CDC, is not considered to be affiliated with another concern owned by that entity based solely on the contractual relations between the two concerns.” 13 CFR (f)(2)(ii). Purpose of new Exception: SBA commented: “The Small Business Act and SBA’s rules clearly recognize that ANC, NHO, CDC, and Tribally-owned concerns will provide assistance to sister entities, and it does not make sense to find affiliation based on economic dependence among such concerns.” Context: This new exception was included as part of the revisions to the regulations regarding affiliation based on Identity of Interests and Economic Dependence. Qualifications and Eligibility 81 Fed. Reg © Birch Horton Bittner & Cherot, P.C. 2017

Ownership and Control An applicant must be unconditionally owned and controlled by one or more disadvantaged individuals. Generally, disadvantaged individuals must hold at least 51% ownership, including entitlement to dividends and distributions, and such individuals must also exercise day-to-day control of the firm. 8(a) applicants owned and controlled by Indian Tribes and ANCs are subject to special 8(a) eligibility rules. Stock/voting: ANC must own at least 51% of the voting stock and at least 51% of the aggregate of all classes of stock in an 8(a) corporate applicant (for non-corporate entities, the tribe must own at least a 51% interest). Management: ANCs and Tribes are subject to different rules regarding management. The ANC must also control the management and daily business operations of an ANC-owned concern, but the ANC-owned concern may be controlled by the ANC through one or more individuals who possess sufficient management experience of an extent and complexity needed to run the concern, or through acceptable tribal management models (below). Qualifications and Eligibility © Birch Horton Bittner & Cherot, P.C. 2017

Ownership and Control (cont’d)
Management (cont’d) Tribal Management – Management may be provided by: Committees, teams, or Boards of Directors which are controlled by one or more members of an economically disadvantaged Tribe, or Non-Tribal members if the concern can demonstrate that the Tribe can hire and fire those individuals, that it will retain control of all management decisions common to boards of directors, including strategic planning, budget approval, and the employment and compensation of officers, and that a written management development plan exists which shows how Tribal members will develop managerial skills sufficient to manage the concern or similar Tribally-owned concerns in the future. Conflicts of Interests: Members of the management team, business committee members, officers, and directors are precluded from engaging in any outside employment or other business interests which conflict with the management of the concern or prevent the concern from achieving the objectives set forth in its business development plan. This is not intended to preclude participation in ANC/Tribal or other activities which do not interfere with such individual’s responsibilities in the operation of the applicant concern. Entities May Own Multiple 8(a) Firms: ANCs/Tribes may own more than one 8(a) entity, so long as they are not operating within the same primary NAICS code. Follow-on Contracts Limitation: A firm owned by a Tribe or ANC may not receive a sole- source 8(a) contract that is a follow-on contract to an 8(a) contract that was performed immediately previously by another 8(a) firm owned by the same Tribe or ANC. Qualifications and Eligibility © Birch Horton Bittner & Cherot, P.C. 2017

Good Character Regulations require that the participant and all its principals must have good character, so good character is an explicit condition of program eligibility. Failure to follow SBA regulations could impact SBA’s assessment of the participant’s (or its principals’) character. Violations of any SBA regulation may result in denial of participation in the 8(a) Program. SBA will consider the nature and severity of the violation in making an eligibility determination. Character screening factors include: Criminal or debarment actions - SBA Form 912 Civil judgments Other non-criminal matters relating to the business integrity of the participant or its principals. BENEFIT: Peace of Mind – Cos and agencies know they are doing businesses with pre-screened companies and owners/managers that meet standards for good character. Qualifications and Eligibility 13 CFR (a). 13 CFR (a)(2). 13 CFR (a)(4) © Birch Horton Bittner & Cherot, P.C. 2017

Potential for Success General Rule: Two-years minimum business experience. 8(a) applicants must possess reasonable prospects for success within its particular industry, which normally requires that the applicant has been in business in its primary NAICS area for at least the two years prior to its application to the 8(a) Program. ANC/Tribal Exception: An ANC/Tribally-owned firm can demonstrate a potential for success based on, among other things, the technical and managerial experience of the individuals responsible for day-to-day management and control and its financial capacity. In other words, a new, but well-financed company with experienced and qualified management will satisfy the requirement. Additionally, an ANC/Tribally-owned applicant may establish potential for success by demonstrating that the ANC or Tribe has made a firm written commitment to support the operations of the applicant concern and it has the financial ability to do so. Recognizes that ANC/Tribally-owned firms may have purposes other than profit, such as increasing Native employment, assisting community development, and serving other community needs. BENEFIT: While small businesses are often viewed as higher risk due to size and (potentially) inexperience, 8(a) firms have demonstrated one or more types of potential indicating their likely success. This screening helps improve the government’s chances of working with well-organized, reliable, and financially responsible small businesses. Qualifications and Eligibility 13 CFR § 13 CFR § (c)(6)(ii). © Birch Horton Bittner & Cherot, P.C. 2017

Sole-Source Awards to Native-Owned 8(a) Firms

Benefits of Sole-Source Contracting
Certified 8(a)s are able to obtain government contracts both through SBA and directly from procuring agencies. The decision to set aside a contract for exclusive performance by an 8(a) firm or small business is largely within the discretion of the contracting agency, except that: Acquisitions with an anticipatable value between the micropurchase threshold and the simplified acquisition threshold (SAT) ($ $150,000) are automatically set aside for small businesses, and Rule of Two: Acquisitions over $150,000 (SAT) must be set aside for small businesses (or other SBA small business program participants) if the agency has a reasonable expectation of receiving fair market offers from at least two qualified small businesses. Protests/challenges to set-aside decisions are extremely rare, and only another 8(a) could conceivably challenge a competitive award to another 8(a). Native-Owned 8(a) Firms Sole-Source Awards to See 15 U.S.C. §637(a)(1); 13 CFR § ; 48 C.F.R. Subpart 19.5; 13 CFR §125.2. © Birch Horton Bittner & Cherot, P.C. 2017

Benefits of Sole-Source Contracting with Native-Owned 8(a) Firms
The most significant benefit of the 8(a) Program relates to the size and scope of the contracts that Native-owned firms can obtain on a non-competitive basis. 8(a) Participants can receive sole-source (i.e. non-competitive) contracts up to a ceiling of $4 million for goods and services and $6.5 million for manufacturing. However, Tribally-owned and ANC-owned concerns are exempt from the dollar thresholds for sole-source contracts. One of the most powerful preferences for Tribes and ANCs within the 8(a) Program. Not available to other small businesses such as Native Hawaiian-owned businesses (NHOs) or Community Development Corporations (CDCs). Native-Owned 8(a) Firms Sole-Source Awards to © Birch Horton Bittner & Cherot, P.C. 2017

No Dollar Thresholds for Sole-Source Awards to Native-Owned Firms
General Rule: Set-aside contracts may be competed amongst qualified 8(a) firms or be offered on a sole-source basis. However, a contract must be competed amongst 8(a) firms if the anticipated award price of the contract exceeds $6.5 million for manufacturing contracts and $4 million for other contracts. ANC/Tribal Exceptions: Exception to competitive sourcing general rule: ANC and Tribally-owned 8(a)s may receive sole-source contracts regardless of the dollar amount, so long as SBA did not previously accept it as a competitive procurement. 13 C.F.R. § (b). Exception to Contract Cap to Remain Eligible for 8(a) Sole-Source Awards: ANC/Tribal 8(a) firms are not subject to the dollar limits (generally $100 million) on the total value of 8(a) contracts that apply to other 8(a) companies. 13 C.F.R. § (a). NHO Exception at DOD: NHO-owned 8(a)s may be awarded a sole source Department of Defense (DoD) 8(a) contract above the competitive thresholds, if SBA has not previously accepted that contract requirement into the 8(a) Program as a competitive procurement. Native-Owned 8(a) Firms Sole-Source Awards to 13 CFR § (15 U.S.C. 637(a)(4) and (13)). Section 602 of Pub. L , as amended, (15 U.S.C. §637, note). See 13 CFR § (b). 13 CFR § (a). 15 U.S.C. §637(a)(1)(D); 13 CFR § (a). 13 CFR § © Birch Horton Bittner & Cherot, P.C. 2017

Native-Owned 8(a) Firms
No Dollar Thresholds for Sole-Source Awards to Native-Owned Firms (cont’d) No preference for competition over Native sole source awards: 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 DoD contracts, 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. JVs: Qualified Tribal, ANC, and NHO Joint Ventures can also receive sole source contracts above the competitive threshold. BENEFIT: Save time and negotiate customized contracts. Agencies can award sole source contracts up to $22 million dollars with no J&A required for SS awards to these entity-owned 8(a) firms. For sole source awards over $22 million, a streamlined J&A (five elements) is required, but may be faster than other sole source J&A requirements. Native-Owned 8(a) Firms Sole-Source Awards to © Birch Horton Bittner & Cherot, P.C. 2017

NDAA Section 811 and J&A of Sole-Source Contracts over $22 million
As discussed previously, ANCs, Tribes, and NHOs* may receive sole source contract of any size, regardless of the competitive thresholds. Sec. 811 requires Federal agencies to obtain proper Justification and Approval (J&A) before awarding 8(a) sole-source contracts valued at over $22 million (recently increased from $20 million). This is not a cap on sole-source awards, but the J&A requirement has had a drastic chilling effect on these types of procurements. The required J&A is limited to the five elements listed in Section 811(b): A description of the needs of the agency concerned for the matters covered by the contract; A specification of the statutory provision providing the exception from the requirements to use competitive procedures in entering into the contract; A determination that the use of a sole-source contract is in the best interest of the agency concerned; A determination that the anticipated cost of the contract will be fair and reasonable; and Such other matters as the head of the agency concerned shall specify. BENEFIT: J&A has only 5 elements (compared to traditional 12 elements in the FAR). Native-Owned 8(a) Firms Sole-Source Awards to © Birch Horton Bittner & Cherot, P.C. 2017

Two-Year Rule and Follow-On Contracts
The Two-Year Rule: Prohibits sister companies from having the same primary NAICS code In addition to the one-time eligibility rule (which applies generally to 8(a) applicants), 8(a) applicants owned by ANCs and tribes must also comply with the two-year rule in (c)(3)(ii): A Tribe [or ANC] 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. NOTE: Recent SBA Policy Change – SBA can change an 8(a) firm’s NAICS code without the firm’s consent. This was a recent SBA internal policy shift, and it is also in the proposed rule to be codified in SBA regulations (proposed Feb. 5, 2015). No Sole-Source Follow-On Contracts from Sister Companies Once an applicant is admitted to the 8(a) Program, it may not receive an 8(a) sole- source contract that is a follow-on contract to an 8(a) contract that was performed immediately previously by another Participant (or former Participant) owned by the same ANC or Tribe. Native-Owned 8(a) Firms Sole-Source Awards to © Birch Horton Bittner & Cherot, P.C. 2017

Mentor-Protégé Programs

SBA’s 8(a) Mentor-Protégé Program
SBA’s 8(a) Mentor-Protégé Program is a developmental tool designed to enhance the ability of 8(a) participants to compete for federal contracts. Mentors provide technical assistance, management assistance, and contract support, and they perform contracts through joint venture agreements with the 8(a) protégé as the prime. 8(a) Mentor-Protégé Program Benefits: A Mentor and its 8(a) protégé may pursue contracts as a joint venture. Significantly, J/Vs in an approved 8(a) mentor-protégé relationship will be considered small if the protégé qualifies as small. SBA will not find affiliation or undue control based on the Mentor-Protégé arrangement; however, a M-P Agreement is not carte blanche protection from affiliation either. 8(a) protégé may receive financial assistance via the mentor owning up to 40% of 8(a) concern. BENEFIT: Agencies, as customers of the protégé 8(a) firms, benefit from the protégé’s growth that is fostered and sped up via a successful mentor-protégé relationship. Through the mentoring and partner opportunities available through this program, protégés can increase their business’s scope of in-house expertise, improve administrative processes, improve contract management, and expand in-house work capacity. Mentor-Protégé Programs Small Gov Con re Size Appeal of Patriot Construction, Inc., SBA No. SIZ-5439 (2013) – remanded to area office. 13 C.F.R. § (b)(6), states that “[a]n 8(a) BD Participant” is not affiliated with its mentor “solely because the protege firm receives assistance from the mentor under the agreement.” However, “[a]ffiliation may be found for other reasons.” Under the regulation, SBA OHA wrote, “[t]he mentor/protege agreement thus protects the protege from a finding of affiliation for only assistance received under the agreement. The concerns may still be found affiliated for other reasons.” However, SBA OHA held that the SBA Area Office had erred by assuming that the mentor-protege agreement necessarily shielded KOO and TTCS from affiliation on a basis other than the family relationship. SBA OHA wrote, “the Area Office failed to consider whether the extensive sharing of employees between the two concerns, outside of the contracts the approved joint ventures performed, was beyond the scope of assistance provided under the mentor/protégé agreement, and thus constituted a basis for finding affiliation between the KOO and TTCS for other reasons.” SBA OHA also held that the SBA Area Office had failed to consider another important matter: “whether the regulations protect the mentor from a finding of affiliation, as well as the protege.” SBA OHA remanded the case to the SBA Area Office for further consideration. - See more at: © Birch Horton Bittner & Cherot, P.C. 2017

Requirements for Participating in SBA’s 8(a) Mentor-Protégé Program
Mentor firms must: have favorable financial health; have good character; not be suspended or debarred; and be able to impart value to the protégé through practical experience with the 8(a) Program or general knowledge of business operations and government contracting. An 8(a) protégé firm must: be in development stage; or have never received an 8(a) contract; or have ½ size of its primary NAICS code NOTE: SBA recently proposed to change its regulations governing which 8(a) firms may be protégés by proposing that an 8(a) firm need only be small to be a protégé. Protégé may generally have only one mentor at a time, but exceptions can be made where the second relationship will not conflict with the first and it pertains to a secondary NAICS code or the protégé seeks to acquire specific expertise that the first mentor does not have. Mentor can have more than one protégé (if second does not compete with first), but under no circumstances will a mentor be permitted to have more than three protégés at one time. Mentor-Protégé Programs © Birch Horton Bittner & Cherot, P.C. 2017

New Small Business Mentor-Protégé Program
SBA was statutorily required to create a mentor-protégé program available to all small businesses. In 2016, SBA finalized regulations to implement one new Mentor-Protégé Program for all of the newly covered small businesses. This is a significant change that will greatly expand mentor-protégés’ participation in small business contracting. Rather than creating four new programs, SBA implemented one Mentor- Protégé Program for the following SBCs: Service-Disabled Veteran-Owned Small Business Concerns (SDVO SBCs) HUBZone SBCs Women-Owned Small Business (WOSB) concerns all other small businesses This is in addition to the current mentor-protégé program for 8(a) participants. The 8(a) Mentor-Protégé Program will remain intact separately from the general small business Mentor-Protégé Program. Mentor-Protégé Programs © Birch Horton Bittner & Cherot, P.C. 2017

Joint Ventures © Birch Horton Bittner & Cherot, P.C. 2017

Small Business Joint Ventures
Joint Venture = an association of individuals and/or concerns with interests in any degree or proportion consorting to engage in and carry out no more than three specific contracts or limited-purposed business ventures for joint profit over a two-year period. J/V may seek more than 3 awards but once 3 awarded, must stop hunting. For this purpose, joint venture participants combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally. Size of J/Vs: A joint venture of two or more business concerns may submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract. 13 CFR (h)(3)(i) Joint Ventures © Birch Horton Bittner & Cherot, P.C. 2017

Types of Joint Ventures
Small Businesses: A joint venture is when two or more small business concerns submit an offer as a small business for a federal procurement. The procurement may be bundled or non-bundled. 8(a) Procurement: An 8(a) concern partners with one or more other small business concerns as a joint venture on an 8(a) procurement. See 13 C.F.R. § (b). Mentor/Protégé: Two firms are in an SBA-approved Mentor-Protégé agreement (Type IV). Joint Ventures © Birch Horton Bittner & Cherot, P.C. 2017

8(a) Joint Ventures A joint venture of at least one 8(a) participant and one or more other business concerns may submit an offer for a competitive 8(a) procurement without regard to affiliation, if it meets the following requirements: Small: each concern is small under the size standard corresponding to the NAICS code assigned to the contract. 8(a) Size: A joint venture of at least one 8(a) Participant and one or more other business concerns may submit an offer as a small business for a competitive 8(a) procurement, or be awarded a sole source 8(a) procurement, so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement. BENEFIT: Agencies get teams of small businesses with complementary capabilities instead of one small business. This allows agencies to push more work with greater value and greater demands, to small businesses, which in turn makes it easier for agencies to achieve its general and specific small business contracting goals for each year. In addition, agencies benefit specifically on that contract from getting the increased stability, greater expertise, more extensive past performance, and greater capacity of having two or more small businesses working as a team to meet the government’s contract requirements. Joint Ventures © Birch Horton Bittner & Cherot, P.C. 2017

8(a) Mentor-Protégé Joint Ventures
An 8(a) protégé may enter into a J/V with its SBA-approved mentor and have the J/V qualify as a small business for any federal government contract or subcontract for which the protégé firm is qualified to perform, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement. BENEFIT: Agencies gain significant benefit from contracting with 8(a) Mentor-Protégé Joint Ventures. The government can utilize the expertise and experience of the mentor while receiving small business credit. This may result in more efficient, cost-effective, and reliable delivery of services/products to the government, since the small business can leverage the experience and resources of its large business mentor. Joint Ventures © Birch Horton Bittner & Cherot, P.C. 2017

Limitations on Subcontracting
Applicable to ALL Small Businesses performing on qualified Small Business Contracts © Birch Horton Bittner & Cherot, P.C. 2017

Subcontracting Limitations/Performance of Work Requirements
Crucial aspect of the 8(a) program. Mandatory requirements for the amount of work that must be performed directly by the 8(a) company, but flexible enough to allow 8(a) firms to work closely with other more experienced companies in order to ensure performance. In general, depending upon the type of contract involved, the 8(a) performance requirements range from: 50 percent of the costs incurred for most service and manufacturing contracts to 25 percent for special trade construction to 15 percent for general construction contracts. For Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, requirements are applied on the basis of task orders. NOTE: Rulemaking in Progress. SBA has proposed significant changes to subcontracting limitations, methods of calculation, compliance reporting, and penalties for non-compliance. Some of these changes have already been codified in Federal statutes, but agencies have generally continued to use the existing SBA regulations until the regulatory changes are finalized (discussed further below). Subcontracting 13 CFR §§ & For IDIQ contracts the requirements are applied on the basis of task orders. 13 CFR §§ (c). © Birch Horton Bittner & Cherot, P.C. 2017

Subcontracting Limitations Overview
What are they? Limits on the percentage of work that a Prime small business contractor can subcontract out to other businesses. When do they apply to a contract? Subcontracting limitations apply to all small business contracts, including 8(a) contracts, that are imposed by statutes. The specific percentage limit on subcontracting varies with the type of contract. Subcontracting © Birch Horton Bittner & Cherot, P.C. 2017

Shift in Focus and Standard
Shift away from prime self-performance minimums. Instead, regulations are phrased as the maximum that the Prime may subcontract. New standard (based on contract amount paid, not labor). Goal is the same – “To ensure that a certain amount of work is performed by a small business concern that qualified for a small business program set-aside or sole source procurement due to its socioeconomic status.” 81 Fed. Reg. at 34,244. Percentages Same, but Expressed differently. SBA proposes to keep the same percentages, but they are expressed in terms of the maximum allowed to be subcontracted, instead of the previous approach of the minimum amount that must be self-performed. For services and supplies: 50% of the award amount received by the prime contractor. 15% for general construction. 25% for specialty trade construction. New exclusion for Similarly Situated Entities (SSEs) New compliance and enforcement of Subcontracting Plans provision New penalties for non-compliance Subcontracting © Birch Horton Bittner & Cherot, P.C. 2017

SBA’s New Rule 13 CFR 125.6(a) The Regulation states: “…[A] small business concern must agree that: (1) In the case of a contract for services (except construction), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. (2)(i) In the case of a contract for supplies or products (other than from a nonmanufacturer of such supplies), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted… (3) In the case of a contract for general construction, it will not pay more than 85% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 85% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted. (4) In the case of a contract for special trade contractors, no more than 75% of the amount paid by the government to the prime may be paid to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 75% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted. Subcontracting © Birch Horton Bittner & Cherot, P.C. 2017

Cost of Materials Exclusion
Cost of Material Exclusion - Applies only to supplies, construction, and specialty trade construction. Services – While cost of materials exclusion is not applicable to service contracts, it is not needed, because those costs are excluded in a different way. The 50% subcontracting limitation for service contracts only applies to the services portion of the contract. “any costs associated with supply items are excluded from that analysis.” “[A]ll costs associated with providing the services, including any overhead or indirect costs associated with those services, must be included in determining compliance.” Subcontracting 81 Fed. Reg © Birch Horton Bittner & Cherot, P.C. 2017

Calculating Subcontracting Limitations
Similarly Situated Entity A subcontractor that has the same small business program status as the Prime and is small for the NAICS code that the Prime assigned to the SSE’s subcontract. Similarly Situated Entities are excluded from subcontracting limitations “[T]he NDAA deems any work done by a similarly situated entity not to constitute “subcontracting” for purposes of determining compliance with the applicable limitation on subcontracting.” However, any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Subcontracting Construction Contract w/ SSE Exemption Services Contract w/ SSE Exemption Max 85% Min 15% Max 50% Min 50% Subcontractors SSEs Prime Cost of Material s Subcontracto rs SSEs Prime Non-services (Including Cost of Materials) No Hard Limit No Hard Limit Excluded from Calculation Excluded from Calculation © Birch Horton Bittner & Cherot, P.C. 2017

Mixed Procurements Mixed Procurements e.g. procurement for services and supplies Guidance: First, CO must determine which category (services or supplies) has the greatest percentage of contract value and then assign the appropriate NAICS code. See 13 CFR 125.6(b). NAICS code selected dictates applicable subcontracting limitations, which would only apply to “principal purpose of the prime contract.” Thus, on a services contract, “a prime contractor can subcontract all of the supply components to any size business.” Subcontracting 81 Fed. Reg. at © Birch Horton Bittner & Cherot, P.C. 2017

Mixed Procurements (SBA Examples)
Supplies Contract with Services Component. A procuring agency is acquiring both services and supplies through a small business set-aside. The total value of the requirement is $3,000,000, with the supply portion comprising $2,500,000, and the services portion comprising $500,000. The contracting officer appropriately assigns a manufacturing NAICS code to the requirement. The cost of material is $500, Thus, because the services portion of the contract and the cost of materials are excluded from consideration, the relevant amount for purposes of calculating the performance of work requirement is $2,000,000 and the prime and/or similarly situated entities must perform at least $1,000,000 and the prime contractor may not subcontract more than $1,000,000 to non-similarly situated entities. Services Contract with Supplies Component. A procuring agency is acquiring both services and supplies through a small business set-aside. The total value of the requirement is $3,000,000, with the services portion comprising $2,500,000, and the supply portion comprising $500,000. The contracting officer appropriately assigns a services NAICS code to the requirement. Thus, because the supply portion of the contract is excluded from consideration, the relevant amount for purposes of calculating the performance of work requirement is $2,500,000 and the prime and/or similarly situated entities must perform at least $1,250,000 and the prime contractor may not subcontract more than $1,250,000 to non-similarly situated entities. Subcontracting 13 CFR 125.6(b) © Birch Horton Bittner & Cherot, P.C. 2017

General Provisions Responsibility: Compliance will be considered an element of responsibility and not a component of size eligibility. Independent Contractors: Work performed by an independent contractor shall be considered a subcontract, and may count toward meeting the applicable limitation on subcontracting where the independent contractor qualifies as a similarly situated entity. Period of Compliance: General Contract: The period of time used to determine compliance for a total or partial set- aside contract will be the base term and then each subsequent option period. Order: For an order set aside under a full and open contractor a full and open contract with reserve, the agency will use the period of performance for each order to determine compliance unless the order is competed among small and other-than-small businesses (in which case the subcontracting limitations will not apply). The contracting officer, in his or her discretion, may require the concern to comply with the applicable limitations on subcontracting and the nonmanufacturer rule for each order awarded under a total or partial set-aside contract. Subcontracting © Birch Horton Bittner & Cherot, P.C. 2017

Applicability Subcontracting Limitation rules apply to: Small Business set-aside contracts valued at $150,000 or more, as a general rule. All Program-Specific set-asides, regardless of dollar value. E.g. 8(a), WOSB/EDWOSB, HUBZone, SDVO SBTAs: Subcontracting limitations apply to the combined effort of members of a Small Business Teaming Agreement, not to members individually. Limitations on Subcontracting DO NOT apply to: Small business set-aside contracts valued at 3,500 – 149,999.99 Subcontracts (except where a prime is relying on a similarly situated entity to meet the applicable limitations on subcontracting). Subcontracting See re-designated 13 CFR 125.6(f). © Birch Horton Bittner & Cherot, P.C. 2017

Similarly Situated Entity (SSE) Exclusion
SSE work is not “subcontracting” for purposes of determining compliance with the applicable limitation on subcontracting. Purpose of exclusion: Subcontracts between a small business prime contract and a SSE subcontractor are excluded from the limitations on subcontracting calculation because it does not further the goals of SBA’s government contracting and business development programs to penalize small business prime contract recipients that benefit the same small business program participants through subcontract awards. Exclusion is applicable only to first-tier subcontractors. Work that is not performed by the employees of the prime contractor or employees of first tier SSE subcontractors will count as subcontracts performed by non-SSEs. Subcontracting 81 Fed. Reg © Birch Horton Bittner & Cherot, P.C. 2017

Similarly Situated Entity (SSE) Exclusion
What qualifies as a Similarly Situated Entity? “Similarly situated entity is a subcontractor that has the same small business program status as the prime contractor.” For a small business set-aside, partial set-aside, or reserve a subcontractor that is a small business concern… For an 8(a) requirement, a subcontractor that is an 8(a) certified Program Participant Size of SSE: In addition to sharing the same small business program status as the prime contractor, a similarly situated entity must also be small for the NAICS code that the prime contractor assigned to the subcontract that the subcontractor will perform. 13 CFR SSE exclusion from Affiliation under Ostensible Subcontractor Rule – final rule adopts proposed rule language. The final rule excludes subcontractors that are similarly situated from affiliation under the ostensible subcontractor rule. Subcontracting 81 Fed. Reg. at citing revised definition in 13 CFR 81 Fed. Reg. at 81 Fed. Reg SSE exclusion from affiliation under ostensible subcontractor rule - 81 Fed. Reg. at 34250, citing SBA’s revisions to 13 CFR (h)(4). © Birch Horton Bittner & Cherot, P.C. 2017

Reporting Requirements
FAR : SBA will rely on this existing FAR clause, which already requires prime contractors to report on subcontracting activities. Certification: SBA will rely on existing requirements for prime contractors to agree to comply with limitations on subcontracting generally in connection with the offer in order to be awarded a set-aside contract as a small business. Streamlined for Now: In the final rule, SBA declined to include several provisions considered in the proposed rule regarding compliance reporting, written agreements for SSEs, and separate certification. Future Comment Opportunity: SBA intends to issue a proposed rule to request public comment on the issue of whether ALL small businesses (not only those that are using SSEs to perform a contract as in previous proposed rule) should be required to report on compliance with limitations on subcontracting set-aside. Subcontracting 81 Fed. Reg © Birch Horton Bittner & Cherot, P.C. 2017

Penalties for Non-Compliance
Failure to Comply with Limitations on Subcontracting Generally SBA’s Final Rule provided for controversial penalties regarding non-compliance with limitations on subcontracting and SSE subcontracts. Revised § 125.6(h) provides: Penalties. Whoever violates the requirements set forth in paragraph (a) of this section shall be subject to the penalties prescribed in 15 U.S.C. 645(d), except that the fine shall be treated as the greater of $500,000 or the dollar amount spent, in excess of permitted levels, by the entity on subcontractors. A party’s failure to comply with the spirit and intent of a subcontract with a similarly situated entity may be considered a basis for debarment on the grounds, including but not limited to, that the parties have violated the terms of a Government contract or subcontract pursuant to FAR 9.406– 2(b)(1)(i) (48 CFR 9.406–2(b)(1)(i)). SBA on Non-Discretionary Monetary Penalties Penalties are defined in statute. So while many consider them harsh ($1 over subcontracting limitations will result in $500,000 fine), SBA has no discretion/authority to make them more moderate. SBA: “[C]oncerns that violate the limitations on subcontracting are subject to the penalties listed in 15 U.S.C. 645(d) except that the fine associated with these penalties will be the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.” PRACTICE TIP: Due to the lag of updating the FAR in light of the new SBA regulations, SBA has publically noted that it recommends that contractors ask contracting officers which subcontracting limitations (old in FAR or new in SBA regulations) will be applicable to the RFP. If the RFP is unclear, ask for the RFP to be clarified and craft a proposal based on CO’s election. BHBC recommends complying with regulations (also in the statute). Subcontracting Many commenters expressed concerns that the penalties were too harsh. SBA’s rule summary stated that many commenters “were concerned that by violating the limitations on subcontracting by even $1, possibly due to a miscalculation or a change in the Service Contract Act wage rates, a prime contractor could be exposed to a minimum fine of $500,000.” In response to the commenters, SBA noted that the proposed rule’s penalties mirrored the statute, so SBA had no authority to change or soften these penalties. The penalty provision is statutory and the use of the $500,000 fine as the minimum amount to be applied is also statutory. Thus, the Final Rule is the same as the proposed. SBA noted that this strong enforcement mechanism is meant to deter non-compliance. “SBA believes that the penalty provision will deter contractors from agreeing to comply with the limitations on subcontracting without a practical plan for compliance because it provides a strong enforcement mechanism. It is critical that firms that obtain set-aside and preferential contracts comply with applicable subcontracting limitations. The government’s policy of promoting contracting opportunities for small and socioeconomically disadvantaged businesses is seriously undermined when firms pass on work in excess of applicable limitations to firms that are other than small or that are not disadvantaged.” 81 Fed. Reg. at 81 Fed. Reg. at See 16 USC 645 (Section 1652 of NDAA) and newly proposed final rule 125.6(k); 81 Fed. Reg. at Moved to re-designated 125.6(h). © Birch Horton Bittner & Cherot, P.C. 2017

Penalties for Non-Compliance – SSE Contracts
Failure to Comply with Spirit and Intent of SSE Subcontract - Penalty Discretionary. SBA kept debarment as possible penalty, but noted that violation of the spirit and intent of the subcontract with a similarly situated entity is something SBA may consider as basis for debarment, but is not required to consider for debarment. SBA notes that SBA would NOT consider suspension or debarment for violation when the prime made good faith representation but unforeseen circumstances led to violation. Opportunity to Respond: If SBA considers a violation of this SSE provision as basis for debarment, entity will have opportunity to respond. Subcontracting © Birch Horton Bittner & Cherot, P.C. 2017

Subcontracting Plans Section 1653(a)(2) of the NDAA states that the head of the contracting agency shall ensure that the agency collects, reports, and reviews data on the extent to which the agency’s contractors meet the goals and objectives set out in their subcontracting plans. Enforcement: Material breach of contract and potential impact on past performance evaluation for failure to provide written corrective action plan as specified or for failure to make good faith effort to comply with subcontracting plan. Notification to Potential Subcontractors: Primes must notify SBCs that are identified as potential subcontractors in a proposal, bid, offer or subcontracting plan connected with a Federal contract. SBA will establish a reporting mechanism for fraudulent activity or bad faith. Subcontracting 81 Fed. Reg. at 34251: “Section 1653 of the NDAA, as codified at 15 U.S.C. 637(d) (Section 8(d) of the Small Business Act), addresses amendments to the requirements for subcontracting plans.” SBA proposed to add a new § 125.3(f)(8) to incorporate these provisions. © Birch Horton Bittner & Cherot, P.C. 2017

Performance of Work Requirements for JVs
Two levels of performance of work requirements: Protégé’s Performance of Work: Minimum amount of the JV’s work that the Protégé must perform. Limitations on Subcontracting: Minimum amount of work that the JV must perform of the total contract’s work (generally applicable) Subcontracting 13 CFR (d). In a populated joint venture A non-8(a) JV partner, or any of its affiliates, may not act as a subcontractor to the JV awardee, or to any other JV subcontractor, unless the AA/BD determines that other potential subcontractors are not available, or the JV is populated only with administrative personnel. If a non-8(a) JV partner seeks to do more work, the additional work must generally be done through the JV, which would require the 8(a) partner(s) to the JV to also do additional work to meet the 40% requirement If a JV is populated only with administrative personnel, the JV may subcontract performance to a non-8(a) JV partner provided it also subcontracts work to the 8(a) partner(s) in an amount sufficient to meet the 40% requirement. The amount of work done by the partners will be aggregated and the work done by the 8(a) partner(s) must be at least 40% of the total done by all partners. In determining the amount of work done by a non-8(a) partner, all work done by the non-8(a) partner and any of its affiliates at any subcontracting tier will be counted. © Birch Horton Bittner & Cherot, P.C. 2017

JV Protégé Performance of Work Requirements & Subcontracting Limitations for JVs Protégé’s Performance of Work - Current Performance of Work Requirements for 8(a) Mentor- Protégé Joint Ventures For any 8(a) contract, the JV must perform the applicable percentage of work required by 13 CFR § In an unpopulated joint venture both the 8(a) and non-8(a) partners are technically subcontractors. 8(a) JV partner(s) must perform at least 40% of the work performed by the joint venture. Work performed by 8(a) JV partners must be more than administrative or ministerial functions so that they gain substantive experience. Work done by the partners will be aggregated and the work done by the 8(a) partner(s) must be at least 40% of the total done by all partners. In determining the amount of work done by a non-8(a) partner, all work done by the non-8(a) partner and any of its affiliates at any subcontracting tier will be counted. Subcontracting Limitations JV = Prime Contractor. For purposes of compliance with subcontracting limitations, the JV is considered the Prime, so the work done by both/all JV partners will determine how much work is performed by the “prime” compared to subcontractors. Example: On a Services contract, the JV must perform at least 50% of the contract’s award amount received by the JV contractor, and the protégé must perform at least 40% of the work done by the JV (thus protégé performs at least 20% of the award). Subcontracting 13 CFR (d). In a populated joint venture A non-8(a) JV partner, or any of its affiliates, may not act as a subcontractor to the JV awardee, or to any other JV subcontractor, unless the AA/BD determines that other potential subcontractors are not available, or the JV is populated only with administrative personnel. If a non-8(a) JV partner seeks to do more work, the additional work must generally be done through the JV, which would require the 8(a) partner(s) to the JV to also do additional work to meet the 40% requirement If a JV is populated only with administrative personnel, the JV may subcontract performance to a non-8(a) JV partner provided it also subcontracts work to the 8(a) partner(s) in an amount sufficient to meet the 40% requirement. The amount of work done by the partners will be aggregated and the work done by the 8(a) partner(s) must be at least 40% of the total done by all partners. In determining the amount of work done by a non-8(a) partner, all work done by the non-8(a) partner and any of its affiliates at any subcontracting tier will be counted. © Birch Horton Bittner & Cherot, P.C. 2017

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