hubzone certification and requirementsBy Theodore P. Watson, Esq. and Cheryl E. Adams, Esq.

 The SBA HUBZone Certification Program

Having an SBA HUBZone certification opens many doors for you as a contractor.  It is important to understand the requirements that you must fulfill in proposal submission, as well as what the government is required to include in a request for proposal (“RFP”) or solicitation.

HUBZone stands for Historically Underutilized Business Zone.  When businesses (or firms, or concerns) are SBA certified, the certifications can help small companies in urban and rural communities gain preferential access to federal contracting opportunities. 

The purpose of the SBA HUBZone program is to encourage investment, economic development, and employment growth in underutilized and distressed areas. FAR 19.1301.

Three exclusive contract award tools exist for the government contracting officer to use to aid SBA HUBZone certified firms obtain federal contracts.

  1.             Sole source awards
  2.            Set asides for certified firms
  3.            Price evaluation preferences in full and open competitions

FAR includes a preference for competitions between two or more firms over HUBZone sole source procurements.  A process exists for SBA to appeal a contracting officer’s decision not to set aside an award to HUBZone small businesses.  FAR 19.305

SBA HUBZone Requirements

To be eligible for SBA HUBZone certification, a firm must meet four threshold requirements.  In general, the business must be:

  • Small by SBA standards
  • At least 51% owned and controlled by either:

            (a) US Citizens

            (b) a Community Development Corporation

            (c) an agricultural cooperative or

            (d) a Native American Indian Tribe

  •       The principal office must be located in a HUBZone (see a map)
  • At least 35% of the firm’s employees must live inside the HUBZone.

A Joint Venture may be considered a HUBZone small business if it meets the criteria in 13 C.F.R. 121.103(h) and also is a small business concern both at the time of initial offer, and at the time of contract award. FAR 19.1303

  • HUBZone firms are required to retain their records demonstrating their eligibility for six years. 

How to Comply With the 35% Employee Residence Requirement

The underlying intent of the HUBZone program is an investment and continued employment in distressed communities.  Compliance with the 35% rule may seem simple, but in practice, there can be some complexity in applying the rules.  Compliance can literally be a moving target.  In an attempt to make compliance somewhat simpler and easier, SBA issued some new rules addressing some of the more frustrating compliance issues.  The new rules are effective as of December 26, 2019.  Some of the issues addressed in the new rules include:

  1. The “continual compliance” rule was relaxed. Now, once certified, a firm is allowed to remain eligible for future government contracts for one entire year, without requiring it to demonstrate that it continues to meet all HUBZone eligibility requirements at the time it submits an offer for each additional contract opportunity.  HUBZone status is now determined as of the date of a concern’s certification, NOT as of the time it submits its offer.

This new rule was created for a number of reasons, including to reduce the administrative burden on HUBZone firms.  HUBZone maps change based on economic data.  The new SBA rules recognize that once a firm is certified, it is unrealistic to expect the firm or its employees to relocate in order maintain HUBZone certification status if the maps change.  It also creates more flexibility for HUBZone service contractors to win and perform contracts in locations other than the HUBZone.

  1. The “attempt to maintain” 35% requirement now includes a 20% floor. In the new rules, SBA adopted a 20% floor within the definition of “attempt to maintain.”  After a small business is certified, the business may later need to hire more new employees as it grows or wins more contracts.  These new employees might reside in areas located outside the HUBZone.  There is a requirement for the firm to make “substantive and documented efforts,” to hire HUBZone residents to try to maintain compliance with the 35% HUBZone residency requirement.  That is, the firm must “attempt to maintain” 35% residency.

Under the new rules, a firm that fails to actually maintain, at minimum, 20% of its workforce as HUBZone residents can lose its certification.  The 20% floor only applies to firms that are performing HUBZone contracts.  HUBZone firms have a duty to report to SBA if they fall below the 20% floor.

  1. An “Employee” must work a minimum of 40 hours per month.  The new rules clarify how SBA will determine whether an individual worked 40 hours per month, for purposes of HUBZone compliance.  SBA will review a firm’s payroll records for the most recently completed pay periods accounting for the four-week period immediately prior to either:
  2. Date of HUBZone application or
  3. Date of recertification.

The new rule addresses two situations, as not all businesses handle their payroll the same way.  SBA will review the most recently completed payroll records for:

  1. Weekly Payroll:    Last four pay periods.
  2. Bi-Weekly Payroll:  Last two pay periods.

 

  1. The compensation rules for employees have changed.  The compensation rules differ depending on whether the employee is also the firm’s owner.  Also, specialized rules apply to other situations involving a HUBZone firm’s workforce.
  2. Uncompensated Owners:  An owner of a firm should be counted as an employee even if the owner receives no salary or is otherwise not compensated, (i) if that individual works at least 40 hours per month for the concern, and also (ii) if the sole owner worked less than 40 hours during the past 4 weeks, but has not hired another individual to direct the actions of the firm’s employees.
  3. Non-owner Compensation:  For non-owners, SBA will not count an individual as an employee toward the 35% resident requirement if that person either (i) receives no compensation or (ii) receives deferred compensation.  In these situations, the individual is a “volunteer,” not an employee. 
  4. In-kind Compensation: To be an “employee” for purposes of the program, an individual must receive a present (not future) economic benefit.  Therefore, SBA will count as employees individuals who receive in-kind compensation.  The in-kind compensation, at minimum, must be equivalent in value to 40 hours of work (again, during the last 4 weeks).  Compensation of a lesser value would result in the employee being counted as a volunteer.  Also, the compensation must be (i) of demonstrable financial value to the individual and (ii) compliant with law.
  1. Independent Contractors:  Independent contractors, e.g. those using IRS Form 1099, are generally do not count as employees for purposes of the HUBZone program.  See SBA Size Policy Statement No. 1.  for more details.  Generally, if an independent contractor is not an employee for size standard purposes, this individual also would not be an employee for HUBZone purposes.  The idea is for the size standard rules and the HUBZone rules to be consistent.
  2. HUBZone Contract Employees:  HUBZone firms sometimes obtain labor by contracting through third party businesses specializing in providing HUBZone resident employees, specifically for purposes of HUBZone certification compliance.  A single individual who works 40 hours, total, for different employers can qualify as an employee.  For example, one individual could work 10 hours per month for four separate businesses and still qualify as a HUBZone resident “employee” for each of those businesses.
  3.   Other Labor:  SBA continues to include in the definition of “employees” (i) temporary and leased employees, (ii) individuals obtained through a union agreement, and employees obtained through a Professional Employer Organization (“PEO”).  In general, subcontractors are not considered to be employees.  13 CFR 126.103(2)(iv)

           

  1. Principal place of business, and worker job-site requirements are clarified.  When determining whether a concern’s principal office is located in a HUBZone, SBA counts all employees of the concern, other than those employees who work at job-sites.  Additionally, SBA found that some firms would attempt to circumvent the principal place of business rules and rent office or other space located in a HUBZone, and without any business at that location.  Thus, there is now a new requirement for firms to demonstrate, and provide evidence, that they conduct business at the location designated as the firm’s principal office.
  2. SBA has changed the definition of “reside” for purposes of determining which employees are HUBZone residents.  Individual employees no longer need to demonstrate intent to live in the HUBZone indefinitely. 

Instead, the new rules require that an individual must live in a HUBZone for at least 180 days after the HUBZone is certified.  This requirement must be met for that individual to be counted as a resident beyond the firm’s first year of certification. 

Also, to count towards the firm’s 35% requirement, new resident employees must:

  1. Have lived in the HUBZone for at least 180 days prior to recertification; and
  2. Continue to live in the HUBZone at least 180 days after recertification.

Additional rules apply regarding employees who move out of the HUBZone after the required 180 days, but continue to work for the HUBZone firm.

  1. Specialized rules apply to overseas HUBZone employees.  Where an employee temporarily works overseas to perform the contract, but actually resides in a United States HUBZone, SBA will consider the U.S. residence to be the employee’s residence.  In addition to some other applicable rules, the employee must provide documentation showing he or she is paying rent or owns a home in the HUBZone, in order to count toward the 35% HUB Zone residency requirement.
  2. Affiliates’ employees are sometimes counted as if they were the HUBZone firm’s employees.  A small business concern may have affiliates.  Sometimes, SBA may count the affiliates’ employees as if they are employees of the HUBZone firm, for purposes of the firm’s compliance with the principal office and 35% employee residency requirements. 
    • The rules regarding affiliation are complex and detailed.  However, the basic idea is SBA will look at the totality of circumstances to determine whether it would be reasonable to treat the employees of one concern as employees of another for the program purposes only where SBA first determines that the two firms should be considered affiliates for size purposes. 
    • Where there is evidence that a firm and its affiliates are “intertwined and acting as one,” SBA will count the employees of one as employees of the other.  Accordingly, for a HUBZone firm to avoid having its affiliates’ employees included when SBA counts HUBZone residents, it would usually need to demonstrate a “clear line of fracture” between itself, and the affiliate.

See generally Federal Register, Vol. 48, Nov 26, 2019.

SBA Keeps a List of Qualified Small Business Concerns

If SBA determines that a concern is a HUBZone small business concern, it will issue a certification.  Importantly, SBA will also add the concern to the List of Qualified Small Business Concerns at http://dsbs.sba.gov/dsbs/search/dsp_searchhubzone.cfm. Only firms on this list are HUBZone small business concerns, eligible for HUBZone preferences.  Also, SBA certified HUBZone concerns may not opt out of being listed.

            TIP:  HUBZone businesses must be on SBA’s List of Qualified HUBZone Small Business Concerns to be eligible to win HUBZone set-aside contracts.

How to Reduce the Risk that SBA Will De-certify Your HUBZone Certification Status

Because of the many benefits that come with SBA HUBZone certification, there are many requirements that a firm must meet.   Failure to meet the requirements may cause your firm to face decertification.  Below are some important things to know in order to maintain your good standing as SBA certified small business:

  • SBA performs routine, unannounced site visits to make sure requirements are met.  The visits may be to any of the company’s offices.
  • Your firm must recertify annually.
  • Any material changes must be reported to SBA.
  • SBA can perform a program examination after certification has been issued to make sure all eligibility requirements are still met. 
  • SBA may rely on third-party referrals about compliance.
  • Your firm must remain small under the applicable NAICS code size standards.

            TIP:  Don’t miss the 3-year deadline to recertify your HUBZone business

A business may be SBA HUBZone certified for as long as it meets the qualification requirements.  SBA certification ends, however, either when the company voluntarily de-certifies or the SBA de-certifies the business.   If SBA decertifies the business, the business can apply for re-certification 90 days after the date of decertification.

An SBA De-certification Can Be Challenged

SBA is responsible for regulating and implementing the HUBZone program.  SBA may propose to decertify a firm if it fails to comply with the eligibility requirements at any time.  If SBA is considering decertifying a firm, SBA will normally send a notice in the form of a proposed decertification letter.  If your firm receives a proposed decertification letter, it normally has 30 days to respond.  13 CFR 126.404.  Otherwise, if a firm is decertified, after 90 days it may reapply for HUBZone recertification.  13 CFR 126.309

When Would the Government Contracting Officer (“CO”) include an SBA HUBZone Price Preference in a Solicitation?

The FAR’s procedures apply broadly to all federal agencies that employ one or more contracting officers.

Full and Open Competition:  contracting officers are required to include the clause at FAR 52.219-4, Notice of Price Evaluation Preference for HUBZone Small Business Concerns, in solicitations and contracts for acquisitions conducted using full and open competition. FAR 19.1309. 

FAR 52.219-4 provides that offers submitted by qualified HUBZone businesses will be evaluated by adding a factor of 10 percent to the price of all other offers.  Except… the contracting officer will not add the factor of 10 percent to offers from other (a) small businesses concerns or (b) other HUBZone small businesses that did not waive the evaluation preference).  

TIP:  Ask the contracting officer to include a HUBZone price preference in the solicitation.

If a solicitation does not include the price preference for HUBZone contractors, a prospective offeror can ask that the agency contracting officer amend the solicitation to include the preference.

  • To receive the ten percent price preference, the small business must agree to certain conditions

The contractor must spend, at minimum, the following percentages of their personnel costs on either employees of the prime contractor HUBZone company, or on other SBA HUBZone certified companies. 

            Cost

            Percentage     Type of Work                                                 

            50%                 Services (other than construction)

            50%                 Supplies or products (other than a “nonmanufacturer”)     

                                    General construction 

            15%                    Cost of contract performance incurred for personnel,

– on its own employees; or

            50%                    Cost of contract performance incurred for personnel,

– on its own employees and

– employees of HUBZone small business subcontractors                 

                                    Construction, general trade contractors

            25%                    Cost of contract performance incurred for personnel

                                                – on its own employees; or

            50%                    Cost of contract incurred for personnel

– on its own employees and

                                                – employees of HUBZone small business subcontractors.

 

See limitation on subcontracting rules, FAR 19.1308(d).

            TIP:  Construction prime contractors who subcontract with other small businesses may subcontract out more of the work, and still retain their HUBZone status

HUBZone Preference Procedures Do Not Always Apply to Some Contracts

The FAR excludes some types of acquisitions from FAR procedures.  According to FAR Part 19.1304, a contracting officer may decide not to include a HUBZone price preference under certain circumstances.  A price preference would usually not be found in procurements where the government’s requirements can be satisfied through award to Federal Prison Industries or Ability One non-profit agencies (blind or severely disabled).

Also, HUBZone procedures and preferences are not mandatory for orders under:

  •             – Indefinite delivery contracts; or
  •             – Federal Supply Schedules
  •             – SBA 8(a) set-asides
  •             – Requirements under the micropurchase threshold (see FAR 2.101)
  •             – Requirements for commissary or exchange resale items.

Learn more about 8(a) set asides versus HUBZone contracts.

Also, if a contracting officer issues a solicitation set aside for HUBZone firms, and in response receives no acceptable offers from HUBZone firms, the contracting officer withdraws the requirement.  If the government still needs the supplies and/or services, the contracting officer must then set it aside for small businesses.  FAR 19.1305

Although as a broad general rule contracting officers are required to include a price evaluation preference in solicitations for full and open competition, certain exceptions exist.  See FAR 19.1307.

Avoid Being Denied the Contract – Draft a Clear Proposal

In a recent bid protest, a company submitted its proposal, but was not awarded the contract even though it was certified by SBA.  The Government Accountability Office (“GAO”) noted that although the company was certified it had not also agreed to perform conditions required by the Federal Acquisition Regulations (“FAR”).  Wakan, LLC B-408535.2 (2014) Compliance with these conditions is material to the solicitation and the offeror must comply with them to receive the evaluation preference.

The agreement to comply must be made clear in the SBA HUBZone certified company’s proposal.  It is up to the business to submit a well-written proposal with adequately detailed information to show that they will comply with the solicitation including any HUBZone requirements.

Get Help With Your HUBZone Disputes

For help with your SBA HUBZone certification issues, please contact our SBA small business attorneys at 1-866-601-5518 for a FREE CONSULTATION.