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Runway extended: SBA issues final rule implementing five-year period of measurement for receipts-based size standards

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After a year of uncertainty, the U.S. Small Business Administration (SBA) has issued its long-awaited final rule implementing the Small Business Runway Extension Act of 2018.  The final rule, which becomes effective on January 6, 2020, amends SBA’s receipts-based size standard for its procurement programs to adopt a five-year averaging period for calculating annual revenues of firms and their affiliates in all industries that are subject to SBA’s receipts-based size standards.  In addition, to help firms with declining revenues who might be adversely impacted by five-year period of measurement, SBA’s final rule includes a transition period until January 6, 2022, allowing firms to choose either a three-year averaging period or a five-year averaging period for calculating average annual receipts for size standards purposes.  For our discussion of the proposed rule issued in July 2019, please read the article here.

As SBA explained, a five-year averaging period should “allow more small firms to benefit from SBA’s small business assistance programs by extending their small business status for a longer period.”  It also may result in more large business contracts being set aside for small businesses under the “Rule of Two” because “[w]ith an expanded pool of small businesses, the Federal Government will have more qualified small businesses to choose from.”

Continue reading at:  Holland & Knight

Impacts of SBA’s proposed rule changing size status calculation

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The U.S. Small Business Administration (SBA) recently issued a Proposed Rule implementing the Small Business Runway Extension Act (the Act).  The proposal changes the calculation of a firm’s average annual receipts for purposes of determining eligibility for contracts set aside for small businesses.  Under the current rule, the SBA averages a company’s annual receipts for the preceding three years in order judge whether the company qualifies as a small business or has exceeded the applicable size standard.  If implemented, the Proposed Rule will expand the look-back period to five years.  Companies wishing to comment on the Proposal have until August 23, 2019.

This article examines the effect of the Rule on transactional work involving government contractors.

Summary of the Proposed Rule’s Impacts

The SBA’s size standards establish eligibility for a variety of federal small business assistance programs such as the SBA’s 8(a) Business Development (BD) program, the Historically Underutilized Business Zones (HUBZone) program, the Service Disabled Veteran-Owned Small Business (SDVOSB) program, the Woman-Owned Small Business (WOSB) program and the Economically Disadvantaged Woman-Owned Small Business (EDWOSB) program.  The size standards use annual receipts to determine eligibility for some industries, and use number of employees for others.  The Proposed Rule does not change the calculation method for employee-based standards.

By changing the calculation period from average annual receipts from three to five years, the SBA seeks to allow mid-sized businesses who have just exceeded size standards to regain their small business status, and for advanced small businesses close to exceeding the size standard to retain their small business status for a longer period.  

Continue reading at:  Holland & Knight

SBA OHA: for calculating receipts, look to tax returns

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To calculate a company’s size under a receipts-based NAICS code, the SBA will add the company’s total income to its costs of goods sold, as those amounts are reported on its tax returns.  In fact, the SBA’s regulations are clear that it must use these reported amounts to determine a company’s size status.

What happens, then, when a company’s taxes show “income” that might not really reflect money in the company’s accounts?  The SBA’s Office of Hearings and Appeals recently considered this question, and affirmed a company’s ineligibility based on the income reported in its tax returns.

Continue reading at:  SmallGovCon Blog

 

SBA issues proposed rule implementing Small Business Runway Extension Act

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The U.S. Small Business Administration (SBA) just issued its long-anticipated Proposed Rule implementing the Small Business Runway Extension Act (the Act).  In a previous Holland & Knight blog post, they discussed the SBA’s position that the Act would not be effective until the rulemaking process was completed.  If implemented, the Proposed Rule will modify the SBA’s method for calculating annual average receipts used to prescribe size standards for small businesses.  Specifically, the SBA proposes to change its regulations so that a five-year averaging period (instead of three years) is used when calculating the annual average receipts for all SBA receipts-based size standards and other agencies’ proposed size standards for service-industry firms.

Notably, however, the SBA is proposing to restrict the benefit of this change.

First, SBA takes the position in the commentary to the Proposed Rule (consistent with its previous positions and described more fully below) that the change does not go into effect until its rulemaking is completed. Second, the SBA states that the change will not be applied retroactively when it considers size appeals so that SBA will review a size challenge in accordance with the size standard in effect at the time of the challenged company’s certification. Third, the SBA is not changing non-SBA size standards and leaves such changes to the individual agencies. Further, the SBA has not abandoned its position that the Act does not mandate this change. The SBA states that it is only proposing these rules in the interests of economy and because the new rules do not conflict with the SBA’s existing statutory authority and is consistent with Congress’ intent.

The SBA also points out that while this change will benefit growing small businesses, it could detrimentally impact large businesses that are losing revenue. For those businesses, the longer look-back period may cause them to take longer to regain small business size status.

Finally, SBA’s commentary reiterates its position that receipts of a former division count when determining size status while the receipts from a concern’s former subsidiary do not. There was no additional language in the proposed rule to reflect this sentiment, but contractors and practitioners should take notice.

Continue reading at:  Holland & Knight

5 questions answered about size protests

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Wouldn’t you like to know five things about size protests and appeals?

Matthew Schoonover, partner at Koprince Law LLC, recently wrote an interesting article about size protests, specifically answering five questions you need to know about.  These are the questions he posed:

  1. What is a size protest?
  2. Who can challenge a company’s size?
  3. How are size protests decided?
  4. Can I appeal an adverse size determination?
  5. What else should I know about size protests and appeals?

Click here to read the answers to these questions: http://smallgovcon.com/five-things/size-protests-and-appeals/

Familial relationship affiliation: SBA treats spouses as ‘one party’

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The author of this article, Steve Koprince, is also author of the book entitled “The Small-Business Guide to Government Contracts.”

One common way that contractors attempt to avoid affiliation is by limiting a particular individual to a minority ownership interest (often 49%).

But as a recent SBA Office of Hearings and Appeals case demonstrates, when a company’s owners are spouses (or other close family members), the SBA may disregard the legal ownership split, and treat the family members as one person for purposes of the affiliation rules.

OHA’s decision in Size Appeal of Gregory Landscape Services, Inc., SBA No. SIZ-5817 (2017) involved an Army solicitation seeking grounds maintenance at Fort Rucker, Alabama.  The solicitation was issued as a WOSB set-aside under NAICS code 561730 (Landscaping Services), with a corresponding $7.5 million size standard.

After opening bids, the Air Force announced that Gregory Landscaping Services, Inc. was the apparent awardee.  An unsuccessful competitor then filed a size protest.  Although the size protest was untimely, the SBA saw potential merit to the protester’s allegations.  The SBA adopted the size protest and initiated a size determination.

Keep reading this article at: http://smallgovcon.com/sbaohadecisions/familial-relationship-affiliation-sba-treats-spouses-as-one-party/

Ostensible subcontractor rule: SBA OHA confirms ‘four key factors’ to avoid

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In determining whether a prime contractor and subcontractor are affiliated under the ostensible subcontractor rule, the SBA is supposed to consider the totality of the relationship between the parties.  But when it comes to determining whether the ostensible subcontractor rule has been violated, not all components of the prime/subcontractor relationship are created equal.

In a recent decision, the SBA Office of Hearings and Appeals confirmed that there are “four key factors” that are strongly suggestive of ostensible subcontractor affiliation–especially if the subcontractor will perform a large percentage of the overall contract work.

OHA’s decision in Size Appeal of Charitar Realty, SBA No. SIZ-5806 (2017) involved a GSA solicitation for custodial, landscaping and grounds maintenance at two federal courthouses.  The solicitation was issued as an 8(a) set-aside under NAICS code 561720 (Janitorial Services), with a corresponding $18 million size standard.  The solicitation required, among other things, that offerors provide at least three past performance references, completed over the last three years, for similar work.

Keep reading this article at: http://smallgovcon.com/sbaohadecisions/ostensible-subcontractor-rule-oha-confirms-four-key-factors-to-avoid/

SBA’s appeals office reaffirms 70% threshold for economic dependence affiliation

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SBA logo smallUnder the Small Business Administration’s affiliation rules, one of the many ways a small business can be deemed affiliated with another is through the economic dependence rule: where a small business derives 70% or more of its revenues from another entity, the SBA ordinarily considers it to be economically dependent upon — and thus subject to the control of — that other entity.

So it was in a recent decision from the SBA’s Office of Hearings and Appeals (“OHA”), which confirmed the so-called “70% rule” for economic dependence.

In Size Appeal of Core Recoveries, LLC, SBA No. SIZ-5723 (Mar. 21, 2016), the SBA Area Office, “acting on an anonymous complaint,” challenged Core Recoveries’ size under NAICS code 561440 (Collection Agencies), which carries a $15 million size standard. The Area Office alleged that Core Recoveries was affiliated with a large business, West Asset Management.

Core denied the Area Office’s allegations, and explained that, as of the date of the SBA’s November 19, 2015 inquiry, “West maintained only 1,616 accounts with [Core Recoveries], which represented only 1.1% of [Core’s] total account volume on that date.” Additionally, Core said that it no longer had an active contract with West.

Nonetheless, the Area Office found Core to be affiliated with West through economic dependence. Under OHA precedent, a small business is automatically deemed affiliated with another entity where the small business derives more than 70% of its revenue from that other entity. (There is a limited exception for new businesses, which didn’t apply here).

Keep reading this article at: http://smallgovcon.com/sbaohadecisions/sba-oha-reaffirms-70-threshold-for-economic-dependence-affiliation/

Expired 8(a) mentor-protégé agreement sinks joint venture’s eligibility

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An 8(a) mentor-protégé agreement, which expired one year after its approval by the SBA, did not protect the 8(a) protégé and its mentor from affiliation–and meant that their 8(a) mentor-protégé joint venture was an ineligible large business.

A recent size appeal decision of the SBA Office of Hearings and Appeals is a cautionary tale for 8(a) protégé and their mentors, and highlights the importance of securing timely SBA reauthorization of 8(a) mentor-protégé agreements.

OHA’s decision in Size Appeal of North Star Magnus Pacific Joint Venture, SBA No. SIZ-5715 (2016) involved a joint venture between North Star Construction and Engineering, an 8(a) program participant, and North Star’s mentor, Magnus Pacific Corp.

On July 5, 2014, the SBA approved a mentor-protégé agreement between North Star and Magnus Pacific.  The mentor-protégé agreement stated that the initial period of the agreement was one year.  North Star, the protégé, was required to request continuance of the mentor-protégé agreement within 60 days prior to its expiration.  The SBA’s letter approving the mentor-protégé agreement similarly stated, “[t]his agreement shall expire after one year, unless SBA approves an extension.”  The letter reiterated that North Star was to request an extension within 60 days prior to expiration.

Keep reading this article at: http://smallgovcon.com/sbaohadecisions/expired-8a-mentor-protege-agreement-sinks-jvs-eligibility/

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