In its June newsletter PilieroMazza, a law firm specializing in government contracting, noted “hard data and anecdotal evidence indicate that, to reach its full potential, the HUBZone Program needs to be simpler and more business friendly.”
Two bills are working their way through the legislative process to make a significant change to the HUBZone program to make the program easier for businesses to use.
Sen. David Vitter (R-La), chair of the Senate Small Business Committee, has introduced legislation that extends HUBZone redesignation status from three years to seven years. His legislation also enables state governors to petition for HUBZone status for specific areas.
On the House side, Rep. John Delaney (D-Md.) introduced “the Delaney HUBZone amendment” to H.R. 5485, the Financial Services and General Government Appropriations Act for Fiscal Year 2017, one of the key pieces of legislation to be enacted each year. It only covers redesignation extensions.
When geographic areas are removed from HUBZone designation, companies that are currently HUBZone-certified in that area remain eligible for the program for three years. This current short period discourages companies from participating in the program since it often takes a year or more to win the first contract. The proposed seven-year program length will, it is hoped, make it more worthwhile for businesses to participate.
Limitation on Subcontracting
The NDAA created a change in the way federal small business set-aside contracts are to be performed by contractors and subcontractors. Instead of requiring a set percentage of work to be done by the prime, the NDAA limited the amount of work that could be performed by the subcontractor to 50% or less of the value of the contract. The limitations apply to set-asides of $150,000 or more.
Under the final rule, the cost of materials is excluded on supply, construction and specialty-trade contracts, but not service contracts.
Also excluded is any work performed by a “similarly situated” subcontractor, which is a small business participating in the same program in which the set-aside was awarded. The similarly-situated subcontractor also must have the appropriate size standard for the NAICS code used for the subcontract.
For example, if a small business subcontracts with another small business to perform on a small business set-aside contract, and the sub has the appropriate NAICS code and size, then the subcontracted work is not subject to the 50% limitation. There is no limit on how much work the subcontractor may perform in such cases.
“The new rule effectively means that there is no limit on the amount of work that may be subcontracted at the first-tier level provided the work is subcontracted to other like firms,” according to an analysis by Venable LLP.
The same principles would apply to similarly-situated firms for set-aside contracts over $150,000, including set-asides for small businesses and set-asides for small vendors certified as 8(a), HUBZone, women-owned and service-disabled veteran-owned.
The exclusion only applies to the first tier similarly situated subcontractor. The second tier will not be excluded.
Separate NAICS code for subs
Another important point is that the similarly-situated entity must be small under the NAICS code for the subcontract, attorney Steven Koprince recently pointed out in an analysis.
Koprince said that provision in many cases is a benefit to small businesses, because the subcontractor need not be small under the NAICS code that applies to the prime contract. Also, the prime contractor determines the NAICS code that applies to the subcontractor.
“The final rule…implicitly emphasizes the importance of assigning NAICS codes and size standards to subcontracts–something many primes (large and small alike) are not doing,” Koprince wrote.
Financial Penalties
Contractors also should note that Congress required in the NDAA that businesses that violate the limitations on subcontracting rule are subject to a fine of $500,000, or the dollar amount spent in excess of permitted levels for subcontracting, whichever is greater.
“Mixed Contract”
The final rule has provisions for “mixed contracts” combining services and supplies. For a mixed contract, the contracting officer must select a single NAICS code that best describes the principal purpose of the contract. The subcontracting limitation then applies to the portion of the award amount that represents the principal purpose.
Non-Manufacturer Rule
Under the new rules, the SBA clarified that the nonmanufacturer rule does not apply to small business set-aside contracts valued between $3,500 and $150,000.
Affiliation
The final rule includes language that codifies decisions made by the SBA’s Office of Hearings and Appeals. The final rule states that affiliation is presumed to exist for firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, or siblings. SBA said the presumption would be rebuttable.
Joint Ventures
Under the new rules, a joint venture of two or more concerns may submit an offer as a small business as long as each business is small under the size standard corresponding to the NAICS code assigned to the contract.
Passive income
Passive income must be included when calculating annual receipts for size purposes.
Mergers and Acquisitions
If a small business submits an offer as a small business concern, but then is acquired or subject to a merger after the offer but before the award, it must recertify its size to the contracting officer prior to award.
Other provisions
Other provisions in the final rule cover the HUBZone program, subcontracting plans, the identity of interest affiliation rule, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, size protests and NAICS code appeals, application of the non-manufacturer rule to software procurements, “adverse impact” analyses on construction contracts and the Certificate of Competency (COC) program, according to a Holland & Knight LLP analysis.
More information: Federal Register notice https://goo.gl/3Vab9R
PilieroMazza PLLC analysis http://goo.gl/RFyd7Q
Steven Koprince analysis http://goo.gl/YvTSH3
Venable LLP analysis https://goo.gl/3QFVq5
Holland & Knight LLP analysis http://goo.gl/ak8KNn