This week on NVTC’s blog, member company Venable shares Calculation of Annual Receipts, Recertification Requirements, and Service-Disabled Veteran-Owned and HUBZone Small Business Regulations,” part three of their five part series on the SBA’s Proposed Rules to Implement the 2013 NDAA. This post focuses on Calculation of Annual Receipts, Recertification Requirements, and changes to the Service-Disabled Veteran-Owned (SDVO) and HUBZone Small Business regulations.


A Change to the Calculation of Annual Receipts
The proposed rule seeks to amend 13 CFR § 121.104, which sets forth the requirements for calculating annual receipts when determining the size of a business. The revision to the rule is to clarify a perceived misinterpretation that the current definition did not require the inclusion of passive income. The SBA explicitly provides that this had never been the intent of the SBA. Indeed, the SBA explains in the preamble to the proposed rule that “the only exclusions from income are the ones specifically listed in paragraph (a) [of Section 121.104]. It was always SBA’s intent to include all income, [including passive income].”Contractors should be aware that the SBA is not merely proposing a clarification to its size status regulations, but also signaling an interest in how contractors are calculating their annual receipts. Contractors should be prepared to detail their calculation of annual receipts in anticipation of potential increased SBA scrutiny.
A New and Notable Recertification Requirement
Currently the small business rules require small business concerns to recertify their size within 30 days following a merger or acquisition, per 13 CFR § 121.404(g). However, the SBA seeks to amend this provision by adding language that requires small business concerns subject to a merger or acquisition that occurs after an offer has been submitted but before award, to recertify their size with the contracting officer prior to award.This change is notable and could have a significant impact on small business concerns. As many government contactors know, awards can be delayed for any number of months, for varying reasons that have nothing to do with the offering entities. However, under this new rule, if a small business concern – or its affiliate – is subject to a merger or acquisition, the concern could disqualify itself from the award, which may have been scheduled for award many months before, perhaps well before the transaction was even contemplated. Such a rule would seem to have an unfair impact on growing small business concerns.

SDVO and HUBZone Changes
The SBA also proposes a few changes to the SDVO and HUBZone programs. For example, in order to comply with the changes to the limitations on subcontracting requirements (as addressed in Part 1 of this series), both the SDVO (13 CFR § 125) and the HUBZone (13 CFR § 126) programs include proposed changes to their respective regulations that will require SDVO and HUBZone concerns to represent that they will comply with the limitation on subcontracting requirements.

The proposed changes to the SDVO program also clarify that:
A joint venture of at least one SDVO SBC and one or more other business concerns may submit an offer as a small business for a competitive SDVO SBC procurement, or be awarded a sole source SDVO contract, so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement.Thus, an SDVO small business can form a joint venture with another non-SDVO small business to submit an offer as a joint venture, and the joint venture still will qualify as an SDVO small business, provided that all members of the joint venture meet the size standard for the procurement.Submitting Comments: Contractors wishing to submit comments on these proposed rules can do so through regulations.gov by searching for RIN: 3245-AG58. Comments are due by February 27, 2015.


Continue following Venable’s Small Business Series for additional analysis and take-aways from the SBA’s proposed rule implementing the 2013 NDAA. If you have any questions about how these proposed rules could affect your business, please contact any of our authors: Keir Bancroft, Paul Debolt, Dismas Locaria, Rob Burton, Rebecca Pearson, James Boland, Nathaniel Canfield, or Anna Pulliam

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This week on NVTC’s blog, member company Venable shares “The Limitation on Subcontracting and Small Business Subcontracting Plans,”part 1 of their five part series on the SBA’s Proposed Rules to Implement the 2013 NDAA. 


The current limitation on subcontracting rule, or the “50 percent rule,” requires small business prime contractors on set-aside services contracts to incur no less than 50 percent of the cost of performance for labor. A similar methodology applies to materials and construction contracting. To implement requirements of the 2013 NDAA, the SBA proposes to alter the rule as follows:
No more than 50 percent of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated, and in addition

  • Any work that a similarly situated entity subcontractor further subcontracts to an entity that is not similarly situated will count toward the 50 percent subcontract amount.
  • A similar 50 percent limitation applies to the amount paid by the government for supply contracts; a 15 percent limitation is applied to the amount paid by the government for construction contracts.

Accordingly, under the new rule a small business prime is barred from subcontracting more than 50 percent of the amount paid by the government under the prime contract, unless a subcontract is to a similarly situated entity, i.e., a subcontractor with the same small business program status as the prime contractor. Thus, a HUBZone small business prime contractor can subcontract to another HUBZone small business subcontractor without it counting toward the 50 percent limitation. That HUBZone small business prime contractor, however, will have to count a subcontract to a woman-owned small business toward the 50 percent limitation, because it is not a similarly situated entity.

The SBA has gone a step further from Congress. The 2013 NDAA focused only on prime contractor restrictions. This limitation, however, could allow a similarly situated subcontractor – to which the 50 percent limitation does not count – to further subcontract some or all of the value of its contract to a large business. Thus, on a $100,000 set-aside, a HUBZone small business prime contractor could subcontract $75,000 of the amount paid by the government to another HUBZone small business. That subcontractor, in turn, could subcontract some – or all – of its subcontract to a large business. The SBA proposes to block that loophole by imposing limitations to contractors at any tier, and specifies that subcontracts to entities that are not similarly situated will count toward the rule’s limitations. This would bar the HUBZone small business subcontractor in the example above from subcontracting too much work to a large business subcontractor.

The wording of the proposed new rules also would dramatically simplify the methodology for determining how the percentage of subcontracting is calculated. For both services and supplies, the percentage is calculated simply as a percentage of the amount paid by the government to the prime. This is a substantial change from the current calculation methodology, as services contractors who have spent time and effort determining the “cost of contract performance incurred for personnel” will attest.

The SBA has proposed significant penalties for small business prime contractors that misrepresent compliance with the rule. Those penalties include imprisonment for up to 10 years, and a fine that is the greater of $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.

The Bottom Line: What You Should Know

Under the SBA’s proposed rule, small business primes must be vigilant in tracking the amount of work subcontracted throughout their subcontracting chain, particularly the work subcontracted by similarly situated entities. Failure to keep track of subcontracting could result in the contracting team exceeding the 50 percent limitation on subcontracting without the prime contractor’s knowledge, and risk an accusation that the prime misrepresented compliance with the rule.

Small Business Subcontracting Plan Requirements

The SBA proposes to toughen up requirements pertaining to small business subcontracting plans, which could have significant consequences for large business prime contractors.

  • Reporting Fraudulent Activity or Bad Faith: The SBA proposes to allow small business concerns and commercial market representatives (CMRs) to report fraudulent activity or bad faith behavior by large business prime contractors with respect to their subcontracting plans. Reports would be made to the SBA’s Area Office where the firm is headquartered.
  • Strengthening Corrective Action Plans: Large business prime contractors failing to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for their subcontracting plans will be subject to material breach of contract, which will be considered in the contractor’s past performance evaluation.
  • Data Collection and Reporting: The SBA proposes to require agencies to collect, report, and review data on the extent to which each contractor meets its goals and objectives as set out in subcontracting plans.

This proposed rule, coupled with the recent rule allowing small business subcontractors to communicate directly with contracting officers about a lack of payment, will affect how large business prime contractors and their small business subcontractors interact. Failure by a large business prime contractor to reconsider a strained relationship with a small business subcontractor could lead to an allegation of fraudulent activity or bad faith with respect to small business subcontracting plan compliance. This proposal by the SBA leaves no recourse for the prime contractor to respond to allegations of fraudulent activity or bad faith, which could have significant adverse effects for contractors.

The Bottom Line: What You Should Know

Under the SBA’s proposed rule, large businesses must be aware of increasing scrutiny about small business subcontracting. The SBA’s proposed rule does not specify that any of the data collected on its subcontracting plan will be limited. Therefore, representations as to plan compliance under one contract must be consistent with plan compliance under another contract, or a large business prime runs the risk of allegations of making false statements to its agency customers.

Submitting Comments

Contractors wishing to submit comments on these proposed rules can do so through regulations.gov by searching for RIN: 3245-AG58. Comments are due by February 27, 2015.


Continue following Venable’s Small Business Series for additional analysis and take-aways from the SBA’s proposed rule implementing the 2013 NDAA. If you have any questions about how these proposed rules could affect your business, please contact any of Venable’s authors: Keir Bancroft, Paul Debolt, Dismas Locaria, Rob Burton, Rebecca Pearson, James Boland, Nathaniel Canfield, or Anna Pulliam.

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