SBA Rules - Important New Small Business Affiliation RulesBy virtue of congressional mandates and FAR regulations for small business firms, and under the National Defense Authorization Act (NDAA), the Small Business Administration regulations (SBA) has made recent changes to various SBA affiliation rules that regulate government contracts for small businesses including those set aside for designated SBA programs and the limitation on subcontracting.

What qualifies as a small business for government contracts? The highlights include mention of similarly situated small businesses and how previous SBA affiliation rules impact the amount of work subcontracted to teaming partners, mentor protégé agreement and joint venture arrangements.

Small businesses should be aware that although the new rules tend to relax the availability of size protests, the Small Business Administration regulations can still find affiliation if the statutory requirements are not followed.

What is Small Business Affiliation?

Small business concerns are considered affiliated when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. Affiliation becomes a major issue when either the contracting officer, SBA or your competition challenges you small business size status. When looking at affiliation, there does not have to be actual control. There just needs to be showing that the other person or entity has the power to control.

SBA Affiliation Rules in General

The new SBA rules address government contracts for small businesses and federal procurements for bundled contracts and suggest that a small business can engage in teaming agreements with other small businesses if each team member or subcontractor qualifies as small under the respective size standards.  This is based on the small business size standard that the contracting officer assigns to the prime contract and that is assigned to the subcontractor by the prime. Before, the new rules, it was easier to be deemed affiliated. However, with the new similarly situated entity rules, you have more avenues to escape liability under SBA affiliation rules.

  • The SBA’s inquiry into your business relationships is all about another person’s or company’s power to control your company.
  • Even if there is the ability to control your company by someone else, you may run the risk of losing the contract and your small business status.
  • Learn how to properly apply the SBA’s similarly situated small business rules to avoid potential liability.

SBA Affiliation and Joint Ventures

The newly published SBA rules also have incorporated changes to apply to joint ventures. Before, small businesses entering a joint venture agreement were presumed affiliated and subject to the ostensible subcontractor rule if they were unusually reliant on the subcontractor. They would only escape affiliate if they met the statutory exemption for SBA affiliation rules.  Under the 13 CFR 125.1, joint ventures would not be affiliated if they pass on work to similarly situated subcontractors. See more about SBA HUBZone Employee Requirements 13 CFR 126.

Government Contracts for Small Businesses & Limitations on Subcontracting

To avoid confusion with the old limitations on subcontracting rules that applied to 8(a) participants, the SBA now includes 13 CFR 125.6. Service-disabled veteran-owned small business SDVOSB. The new SBA small business affiliation rules for SDVOSB government contracts for small businesses state that when a small business represents itself as an SDVOSB it must also represent that it will comply with the limitation on subcontracting in accordance with 13 CFR 125.6 as part of the initial offer.

What about small companies owned by married couples?

Government contracts small business requirements under the new SBA rules regarding FAR regulations for small businesses suggest that small business companies owned and controlled by married couples are presumed to be affiliated. This is in addition to parties to a civil union, parents, children, and siblings. The SBA states that such a presumption can be rebutted by showing of a clear line of fracture between the small business concerns. Of note, other types of familial relationships (cousins etc.) are not grounds for presuming affiliation on family relationships.

Authority for PCRs to Act

 Procurement Center reps are often located at federal government agencies and on military bases. Under the SBA affiliation rules, the PCR must now review all acquisitions that are designated as a total small business set aside.

The reason for this oversight is for the PCR to decide whether a set-aside or sole source award to a small business is appropriate and to identify alternative strategies to maximize the participation of small businesses in the procurement. This level of oversight was also part of the small business specialist requirements. However, over the years, the agency small business specialist may not have had much teeth in the procurement decision process.

Also under the new rules, the PCR role as an advocate has been amplified especially for against bundling of government contract procurement requirements,The new SBA small business affiliation rules introduce the idea that PCRs can accept unsolicited proposals from small businesses. This allows for some level of meaningful dialogue with the PCR and contracting personnel.

What are prime contractor responsibilities when choosing small business subcontractors

Under the new SBA regulations, if you are a prime contractor and during the bidding stage you identify a named small business as a subcontractor, you now have to notify those subcontractors, in writing.

  • This amendment to the rules adds pressure to those prime subcontractors that really do not intend to use subcontractors named in their bid submission.

Is there any recourse for a company named as a subcontractor but now is expelled?

There is no clear answer to this question. However, the regulations seem to want to carve out a remedy for a company where the contractor named your company as a subcontractor for an upcoming government contract. Then after the government relies on your information and then makes the award, then wants to back out.  You may want to speak with an attorney that can reasonably assess the facts. Read about Avoiding the Pathway on Government Contract Fraud and Federal Procurement Fraud – Do You Have the Right Defense Lawyer?

SBA Affiliation Rules Penalties for Violations

For companies that violate this notification rule, they can now be subject to false claims and procurement fraud liability. They can now be referred to the SBA’s Office of Inspector General (SBA IG). See more about Signs of Being Under Investigation (Federal).

All other small business concerns as to whether a prime contractor or subcontractor has complied with SBA rules or otherwise acted in bad faith may be reported to the Government Contracting Area Office where the firm is headquartered.

Contractors who are deemed to act in bad faith can be found in material breach of contract and subject to liquidated damages under their contract.

At the end of the day, you want to make sure that you are in compliance with the FAR regulations and SBA small business regulations. 

Other FAR Regulations for Small Business Contractors

On August 11, 2021 the Federal Acquisition Regulatory (FAR) Council published three final rules that essentially amended the FAR and implement changes to various National Defense Authorization Acts (NDAAs) and to adopt the FAR with SBA small business regulations. r

The new rules discuss good faith effort to comply with a small business subcontracting plan; revamps the limitations on subcontracting under FAR 19.505, Limitations on Subcontracting and Nonmanufacturer Rule and also gives authority to the SBA Procurement Center Representatives. (PCR) to review any proposed acquisition so that they may make recommendations for improving competition from small business concerns.

Small Business Subcontracting Plans and “Good Faith” Efforts

For negotiated procurements with an expected contract value in excess of $750,000 ($1.5 million for construction), a large prime offeror (i.e., an other than small business offeror) must submit an acceptable small business subcontracting plan to the contracting officer in order to be eligible for award. FAR 19.704, Small Business Subcontracting Plan Requirements, and FAR 52.219-9, Small Business Subcontracting Plan, list the required contents of small business subcontracting plans, which must include an offeror’s percentage goals for subcontracting work to small business concerns and a description of the efforts the offeror will make to ensure small business concerns “have an equitable opportunity to compete for subcontracts.”

Speak to an Attorney & Get a Free Initial Consultation

If you are a small federal government contractor and need additional information about government contracts for small businesses or legal advice about important aspects of new SBA affiliation rules and small business guidelines, call the government small business contract lawyers at Watson & Associates LLC at 1-866-601-5518 for a free initial consultation.