United States: New SBA Rules Expand Collaboration Opportunities For Small Businesses

The Small Business Administration's various new rules, issued on May 31, 2016 and taking effect June 30, 2016, implement changes from the FY2013 National Defense Authorization Act (NDAA). The cumulative effect of the new rules is to provide tools for small businesses to collaborate with other small businesses while not losing one of their primary competitive advantages—their entity status for procurement programs.

Following the Money Not the Work

A primary goal of set-aside programs is to ensure that small businesses actually get and do business rather than serving merely as a pass through for other non-small entities. Section 1651 of the NDAA maintains this goal, but simplifies the mechanism by shifting from tracing "work" that must be performed by the small prime to limiting the amount of the award that may be spent on subcontractors.

Type of Contract

Amount That May be Paid to Subcontractors




50% (Excluding Cost of Materials)

General Construction

85% (Excluding Cost of Materials)

Specialty Trade Construction

75% (Excluding Cost of Materials)

When is a Subcontractor Not a Subcontractor? When it is a First-Tier Similarly Situated Subcontractor.

In making this shift to "amount paid" rather than amount worked, the SBA also added the new concept of a "similarly situated entity", 13 CFR 15.1, "a subcontractor that has the same small business program status as the prime contractor" and is "small for the NAICS code that the prime contractor assigned to the subcontract the subcontractor will perform." When calculating the amount paid to subcontractors as against the limits described above, amounts paid to a similarly situated first tier subcontractor are not considered subcontracted—that money is treated the same as if the small prime had kept that money itself. 13 CFR 15.6(c). In an effort to prevent abuse of the system this exception for similarly situated entities, only applies to first-tier subcontractors. Any work subcontracted further down—even if subcontracted to another similarly situated entity—is counted against subcontract payment restriction.

Affiliation Clarified

The SBA has made two significant revisions to its Affiliation rules found in 13 CFR 121.103(f) which defines affiliation based on an identity of interest. First, the existing rules were rather vague with respect to what constituted an "identity of interest" based on familial relationship. The SBA's new language clarifies that a presumption of affiliation exists for firms that conduct business with each other and are owned or controlled by persons who are married couples, parties to a civil union, parents and children and siblings. This clarification is reflective of size protest decisions by the SBA Office of Hearings and Appeals (OHA) interpreting the existing regulations. Second, the new rules state that if a firm derives 70% or more of its revenue from another firm over the previous three years, there will be a rebuttable presumption that those two firms are affiliated by economic dependence. Previously there has been no specific guidance on the economic dependence affiliation rules, so these new regulations will certainly assist businesses evaluating their affiliation strategy.

Joint Ventures Keep Small Status

The SBA has also amended the joint venture affiliation restrictions in 13 CFR 121.103(h). The new rules allow for two or more small businesses to joint venture for any procurement without being deemed affiliated with respect to the performance of that procurement. Under the old rules, the exception was only for Mentor/Protégé JVs or certain bundled or large procurements. The SBA believes this rule change will encourage more small business participation in federal contracting and align with the mandates of the NDAA which allows a small business prime to subcontract with as many similarly situated subcontractors as it desires.

Clarification of Size Protest Standing and Expanded Jurisdiction for SDVO SBC and WOSB/EDWOSB Programs

The SBA also made two important amendments regarding size protests. First, it clarified 13 CFR 121.1001(a) by providing guidance that only an Offeror in line or under consideration for award may file a size protest, not an Offeror found to be non-responsive, technically unacceptable or outside the competitive range. The SBA is also adding a new 121.1001(b)(11) that allows the SBA to initiate a formal size determination for Service Disabled Veteran Small Business Concerns (SDVO SBC) and Women Owned and Economically Disadvantaged Women Owned Small Business (WOSB/EDWOSB) programs. Now contractors can bring information to the SBA to challenge the eligibility of awardees for contracts set aside under these programs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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