United States: Leveraging SBA’s HUBZone Program To Enter The Government Contracts Marketplace

• Size = Small
• U.S. Citizens Only
• Location, Location, Location
• Staffing

• Procurement Advantage
• Subcontracting
• Approval Process
• Maintaining HUBZone Status
• Non-Manufacturers
• Manufacturers

• Scope out the Competition
• Corporate Structure
• Locate HQ
• Employees
• Marketing & Sales.

In December 1997, Congress created the Historically Underutilized Business Zone ("HUBZone") Empowerment Contracting Program to be administered by the Small Business Administration ("SBA"). The Program provides federal contracting opportunities for qualified small business concerns located in economically distressed urban and rural communities. The program focuses on job creation and private investment in those communities, and according to a former SBA Administrator, "[t]his program can help open the doors of opportunity for small businesses in many locations throughout the country."

Small businesses that either are currently located in a designated HUBZone or plan to relocate to a designated HUBZone will be able to take advantage of this enormous business opportunity. The government-wide goal for awarding government contracts to certified HUBZone companies started in 1999 as 1% of the total value of all procurement contracts awarded by the Federal Government. By 2003, the total percentage of federal procurement dollars awarded to HUBZone companies should rise to 3%, with an ultimate goal of between 4% and 5% of the total budget. Three percent of the current federal procurement budget is approximately six billion dollars.

Qualified HUBZone companies can obtain sole-source contracts and a preference in competitive awards. Contracts for the purchase of Federal Government goods and services under the HUBZone program operate in the following three ways:

1. A contract award to a qualified HUBZone small business concern can be made by a procuring agency if a contracting opportunity exists and it determines that two or more qualified HUBZone small business concerns will submit offers for the contract and the award can be made at a fair market price;
2. Consistent with other criteria, a contracting officer can award a sole source contract to a qualified HUBZone small business concern if it submits a reasonable and responsive offer and is determined by the contracting officer to be a responsible contractor. Sole-source contracts cannot exceed $5 million for manufacturing contracts and $3 million for all other contract opportunities; or
3. A 10 percent Price Evaluation Preference in full and open competition can be made on behalf of a qualified HUBZone small business concern if its offer is not more than 10 percent higher than the other offeror, so long as the other offeror is not a small business concern.
4. A HUBZone company is also eligible for subcontracts from large businesses that have negotiated subcontracting plans with the Government. These plans contain goals for the award of subcontracts to small businesses and HUBZone companies.

To qualify for the Program, (1) a concern must be small; (2) must be 100% owned and controlled by United States citizen(s); (3) must have its principal office in a HUBZone; and (4) at least 35% of its employees must reside in a HUBZone. Further, after the initial certification process, a small business in the HUBZone program is required to "self-certify annually to SBA that it remains a HUBZone company." While these requirements and certifications may appear straight-forward, their actual application involves a number of legal issues.

Only a small business can participate in the HUBZone program. The size standard used to determine whether a business is small is based on the company’s primary industry classification under the NAICS code. This is based on the self-certification by the company in its application. If the SBA has any questions concerning the size status of the applicant, it may refer the application for a formal size determination by the local SBA office. Then, after it qualifies under its primary industry classification for the HUBZone program, the company must also qualify under the NAICS code assigned to any contract on which it is bidding.

The SBA considers anyone with a legal or equitable interest in a company to be an owner, and all owners are subject to the citizenship requirement. Thus, all stockholders, partners, and members of corporations, partnerships, and limited liability companies must be U.S. citizens. A stockholder, with either voting or non-voting shares, is considered an owner and options to purchase stock are considered exercised for this requirement. In partnerships, both limited and general partners that own equitable interests are considered owners.

However, it is not enough that a small business is wholly owned by U.S. citizens; it must also be controlled by U.S. citizens. Control includes both the day-to-day management and the long-term decision-making authority for the small business. Therefore, employees in positions of control, even if they do not have any ownership interest, must be U.S. citizens.

The company's principal place of business must be located in a designated HUBZone. This requirement encourages businesses to relocate to a HUBZone or expand their existing business operations within a HUBZone, rather than merely establishing a headquarters there, which would employ fewer people.

A HUBZone is defined as "a historically underutilized business zone, which is an area located within one or more qualified census tracts, qualified non-metropolitan counties, or lands within the external boundaries of an Indian reservation." Bureau of Census data on median household income and Bureau of Labor Statistics data on unemployment rates determine which census tracts or non-metropolitan counties are "underutilized." Generally, for a tract to qualify as a HUBZone, median household income must be less than 80% of the state median household income or the unemployment rate must not be less than 140% of the state average unemployment rate.

Finally, a company seeking to participate in the HUBZone program must satisfy the HUBZone employee percentage requirement. This means 35% of the company’s employees must live in a HUBZone (not necessarily the same HUBZone as the principal place of business). For many small businesses, this can be a significant hurdle. For example, many small businesses have part-time employees, and the method of determining how those employees count in the 35% calculation can be complex.

The issue of where an employee resides is addressed in the SBA's final rule. The SBA concluded that an employee's place of residence can be determined in either of two ways: (1) by the employee living in a HUBZone for at least 180 days; or (2) by the employee being a registered voter in a precinct designated as being within a HUBZone. The use of either method of residency determination requires the employee's intent to remain there indefinitely. Small businesses may reasonably rely on employees' representations of their intent to remain in the HUBZone.

Businesses must keep good and updated information regarding an employee's residence as long as they are in the HUBZone program. They will have to certify that they meet this 35% goal when they initially apply for the program, annually thereafter, and every time they are awarded a contract under the program. They may be required to demonstrate the accuracy of these certifications at any time.

In return for a company’s willingness to locate its principal place of business in a HUBZone and employ HUBZone residents, the Government gives the HUBZone company advantages over non-HUBZone companies by reducing the company’s competition for federal contracts. Contracts may be awarded to HUBZone companies through three separate mechanisms. First, an award may be given to a HUBZone company through full and open competition after a price evaluation preference in favor of qualified HUBZone companies. Second, a HUBZone company may participate in set-aside awards based on competition restricted to HUBZone companies. Finally, a sole-source award may be given to a HUBZone company.

Agency contracting officers are responsible for determining when to set aside contracts for the HUBZone program. Prior to setting aside a contract for the HUBZone program through either a restricted competition or a sole-source award, a contracting officer must determine whether the contract is statutorily excluded from the HUBZone program.

If the contracting officer determines that there are two or more qualified HUBZone companies, he then may decide to set the contract aside for a competition restricted to such companies. This obviously benefits the potential HUBZone bidders by greatly restricting the competition for the contract. A HUBZone company also can benefit if the contract is awarded under full and open competition. This is because a HUBZone company is given a 10% price preference over a non-HUBZone company. A HUBZone company that is also a Small Disadvantaged Business is given an additional 10% price differential. A potential 20% pricing advantage!

HUBZone companies are permitted to award subcontracts subject to several requirements. Because the SBA wants to ensure that HUBZone contracts benefit the residents of HUBZones, the SBA has set percentage requirements that must be met by the HUBZone company. For example, on a services contract, 50% of the cost of the contract’s labor costs must be spent on either the labor of the qualified HUBZone company or on the employees of another HUBZone company with whom it has subcontracted. In other words, a company is not precluded from subcontracting to non-HUBZone companies, but 50% of the labor value of the contract must go to the employees of a HUBZone company. For construction and supply contracts this percentage is lower, but it still must be maintained throughout the contract term.

The SBA reviews applications for certification and supporting materials to determine whether the applicant qualifies as a HUBZone company. It may grant certification based on the application materials alone, or it may request additional information from the applicant or independently verify the accuracy of the information submitted. In particular, SBA has been conducting audits of companies that apply to verify small business size status, so the company's self-certification in the application is not always the end of the matter.

If SBA determines that the concern is a qualified HUBZone company, it will issue a certification to that effect. SBA will make its determination within 30 calendar days after receipt of a complete application package whenever practicable.

It is very important for the applicant to provide SBA with all required information and a properly completed application form. If SBA rejects the application, the applicant must wait at least a year to re-apply for admission to the HUBZone Program.

As stated above, one of the requirements of the program is that the HUBZone company maintain HUBZone employees at a 35% level. The regulation requires a HUBZone company to "immediately notify SBA of any material change which could affect its eligibility." For example, a change in ownership or an acquisition or affiliation by the company could trigger the immediate notification requirement. Failure to provide SBA with immediate notification could result in a company's decertification from the HUBZone Program.

The employee percentage requirement is certainly material to the program, but it is not clear whether a HUBZone company is required to notify the SBA every time it briefly dips below the 35% requirement. The regulations, however, require HUBZone companies to use "good faith efforts to ensure that a minimum percentage of 35 percent of its employees continue to reside in a HUBZone so long as SBA certifies it as qualified and during the performance of any contract awarded to it on the basis of its status as a qualified HUBZone company." In light of the good-faith standard imposed on a business to maintain its required employee percentage, it would seem an administrative nightmare for the SBA to require written notification every time a company briefly falls below the standard.

This "attempt to maintain" requirement is also imposed on all HUBZone companies during the performance of any contract awarded on the basis of HUBZone status. The SBA interprets "attempt to maintain" to mean "making substantive and documented efforts to maintain that percentage such as written offers of employment, published advertisements seeking employees, and attendance at job fairs." It is unclear whether the "attempt to maintain" and the "good faith" standard differ in any meaningful way. Because the "good faith effort" and "attempt to maintain" language in the final rule indicate that the 35% requirement is not absolute, it is doubtful that a HUBZone company would be immediately decertified from the program for failure to maintain the 35% employee requirement.

It remains unclear what is actually required of a company to fulfill its obligation to maintain the 35% employee requirement. A HUBZone company must only "attempt to maintain" the percentage while actually performing a contract, indicating that percentages less than the 35% requirement are temporarily permitted.

In addition, a HUBZone company must provide an annual certification to SBA that the company remains a qualified HUBZone small business company. This certification will require the company to determine whether it satisfies the legal tests imposed by SBA. SBA will de-certify a company that fails to certify its HUBZone status within thirty days of the annual anniversary of its initial SBA certification.

There are several specific restrictions on the sale of products by HUBZone companies. A qualified HUBZone company that is a non-manufacturer may submit an offer on a HUBZone contract for supplies only if it meets the requirements of the SBA’s nonmanufacturer rule. This rule, which has recently been changed by the SBA, now states that a HUBZone company may qualify for a Government requirement to provide manufactured products as a nonmanufacturer if it: (i) does not exceed 500 employees; and (ii) is primarily engaged in the wholesale or retail trade and normally sells the items being supplied to the general public. If the HUBZone company is selling products manufactured by another HUBZone company, there is no limit on the dollar value of the contract. However, if the HUBZone company is selling products manufactured by a large business or a non-HUBZone small business, the contract cannot exceed $25,000.

The SBA applies a relatively loose definition of "manufacturer." A manufacturer is the concern that performs the primary activities to transform substances into the end item being sold to the Government. These activities must involve mechanical, chemical, or human actions that impart to the end item characteristics that the original substances, parts, or components did not possess before they were assembled or transformed. Thus, when a concern assembles and configures the components, then installs the system at the procuring agency's site, calibrates it, conducts training, and provides technical support, the SBA has found the concern to be the end item's manufacturer.

By contrast, a firm that performs only "minimal operations" upon the end item does not qualify as a manufacturer. Such activities include merely unpacking, modifying, assembling, installing, and integrating components, nearly all of which are produced by a single manufacturer. In evaluating whether operations are minimal, the SBA will consider (1) the proportion of total value added by the efforts, excluding overhead, testing, quality control, and profit; and (2) the importance of the elements added by the concern to the function of the end item, regardless of relative value.

Sample Software Corporation ("Sample Software"), a fictitious small software development/consulting company located in the Washington, D.C. area, might review the following issues in considering how best to leverage the HUBZone program to obtain government business.

Sample Software checks out the competition and seeks ways to differentiate itself. According to a list compiled and maintained by the SBA on HUBZone companies, six companies offering software development, for example, have qualified under the HUBZone Program and are located in Washington, D.C. (See http://pro-net.sba.gov/pro-net/search.html).

Sample Software determines whether to move the company’s principal office to a HUBZone location or set up a new, affiliated HUBZone company. The HUBZone company must be owned and controlled by U.S. citizens. Simple Software must determine the combined size of the two companies (HUBZone and non-HUBZone). Sample Software consults with legal counsel as ownership, affiliation and control rules are tricky. The North American Industry Classification System or NAICS code for software development companies is $18 million in annual revenues. Once a HUBZone company exceeds that mark on a three-year rolling average basis it will no longer be considered small. If the owners of Sample Software decide to start a new HUBZone Company, the SBA will likely deem the two companies affiliated for small business size purposes. This means that the combined revenue of the HUBZone company and Sample Software (and any affiliated company) cannot exceed $18 million. Moreover the affiliates of any HUBZone company may only be other HUBZone, 8(a) or woman owned businesses.

Sample Software determines that rent in some HUBZones in Washington is approximately $25 a square foot. Space of about 1000 square feet would run about $2,100 a month. The SBA has published online maps which detail HUBZone locations all around the country and some are in unexpected locations. In the Washington, D.C. metro area, HUBZones include the following:

• The area whose boundaries are Pennsylvania Avenue, 19^th Street, Virginia Avenue and 23^rd Street (the George Washington University area).
• The area whose boundaries are Pennsylvania Avenue, 15^th Street, New York Avenue and North Capital Street.
• The area whose boundaries are H Street, 16^th Street, Massachusetts Avenue and Vermont Avenue.
• The area between 5^th Street SW and the Navy Yard, where the new Federal office buildings are to be constructed.
• In Maryland, much of downtown Silver Spring in the Colesville Road, Georgia Avenue and East West Highway area is a HUBZone. There is another HUBZone along the Rockville Pike north of Montrose Road.
• Northern Virginia has few HUBZones. Essentially, there are only two, one in the Route 1 corridor near Mount Vernon and another small one located in Arlington near the Pentagon and just south of Columbia Pike. Beyond those, the nearest HUBZones are in the Fredericksburg, Culpepper and Front Royal areas.

Sample Software decides to hire at least two HUBZone residents as full-time employees to start. Sample Software determines to staff the office with an administrative assistant and receptionist both of whom live in a HUBZone for a combined annual salary of between $50,000 - $60,000. This allows up to three non-HUBZone residents and allows Sample Software to meet the 35% HUBZone-based employee requirement. If Sample Software receives contracts that require more than three additional programmers, Sample Software will subcontract out up to 50% of the cost of the work to another company and/or hire additional HUBZone residents (and create jobs for them) to maintain the 35% requirement.

Sample Software will contact the small business contracting specialist at target agencies, use the web to take advantage of electronic commerce initiatives, and hire a government marketing consultant. Consider a GSA Schedule or partner with a company that has one. Cohen Mohr provides assistance in locating HUBZone contracting opportunities both as a prime and as a subcontractor. In addition, the firm can provide you with marketing data identifying agencies that traditionally have contracted for software development and specific upcoming opportunities.

Federal agencies have all received mandates from Congress and the White House to get the program running and to award a large number of HUBZone contracts. The agencies, however, are having great difficulty identifying qualified HUBZone companies to award contracts to, except for small construction and consulting contracts. Therefore, the SBA and the agencies themselves are extremely willing to provide assistance in locating and obtaining contracts for qualified companies.

The HUBZone program is perfectly set for any business willing to make the investment necessary for it to qualify as a HUBZone company. With the right marketing and sales efforts, a HUBZone company can be very successful. Agencies and prime contractors are scrambling now to find quality HUBZone companies to fulfill Congressional mandates.