Included in a Direct Final Rule issued by the U.S. Small Business Administration (SBA) that became final on May 25, 2018 and innocuously entitled “Conforming Statutory Amendments and Technical Corrections to Small Business Government Contracting Regulations,” was a change to SBA’s eligibility rules following a change in status of a contractor. Many small business government contractors, as well as the government agencies they serve, will be impacted by this change.

Previously, the generally accepted interpretation of the SBA rules pertaining to a change in status of a contractor based on size or socio-economic status (e.g., small, HUBZone, SDVOSB and WOSB concerns) was that such small business contractors would remain eligible for new task order awards and contract extensions via option exercises under set-aside contracts awarded to them prior to their change in status. This interpretation applied even after a small business contractor could no longer certify that it retained the required status; provided, that the procuring agency had not specifically requested a recertification of size or status at the time a new task order or option was to be issued. The lost status only meant that the contracting agency could no longer claim the associated small business or socio-economic status credit for work performed under any such new task order or contract extension.

This interpretation was specifically confirmed by the SBA’s Office of Hearings and Appeals (OHA) recent decision in Analytic Strategies, involving an SDVOSB that had been awarded a GSA’s OASIS Small Business contract vehicle under which it was eligible to compete for OASIS task orders set aside for SDVOSB concerns. The case involved a status protest lodged by disappointed bidder on such a task order competition who argued that Analytic Strategies should not have been eligible for the task order award at issue given that the awardee had been acquired by a non-veteran owned business prior to the submission of its proposal. OHA ultimately ruled that since Analytic Strategies qualified as a SDVOSB at the time of the submission of its proposal for GSA’s OASIS SB Pool 1 contract, and because DHS did not require recertification of status in connection with the task order competition, Analytic Strategies was eligible to receive the task order award. OHA also noted that DHS had acknowledged that it was not permitted to take the SDVOSB credit for the award to Analytic Strategies. Under OHA’s interpretation of the SBA rules, the SBA has deferred to the procuring agencies regarding how best to address subsequently-unqualified concerns performing an ongoing contract.

SBA had sided with with the protestor in Analytic Strategies case, and claimed that the proper interpretation of its regulations should have resulted in the awardee being ineligible for any further SDVOSB set aside awards after its acquisition by a non-veteran owned company caused the company to lose its SDVOSB status. Accordingly, it is apparent that the rule changes newly implemented by SBA are designed to overturn well-established interpretation of its regulations and the new precedent established by the Analytic Strategies decision.

The rules that went into effect on May 25, 2018 specifically impact the following categories of small business entities by virtue of the modifications to the regulations listed below:

• Small business concerns – 13 C.F.R.§ 121.404(g)
• SDVOSB concerns – 13 C.F.R.§ 125.18(e)(1)
• HUBZone concerns – 13 C.F.R.§ 126.601(h)(1)
• WOSB/EDWOSB concerns – 13 C.F.R.§ 127.503(h)(1)

We note that 8(a) concerns are not impacted as they are already governed by much stricter regulations that require all 8(a) contracts to be terminated upon a change of status unless a special waiver is obtained – 13 C.F.R. § 124.515

In each case, contractors that hold such set-aside contracts that have since lost their status or eligibility may no longer be able to receive any further work under such contracts. There are numerous implications of this significant change. This will clearly have an impact on the valuations of such entities for M&A purposes. Affected contractors should evaluate their contract portfolios and appropriately revise plans for upcoming contract and task order competitions. And the government agencies that have awarded such set-aside contracts will need to reassess their pools of awardees to determine which have undergone a change of status or eligibility.

The wild card in this situation is whether SBA’s new rule changes can withstand a legal challenge. Some legal commenters have suggested that since Direct Final Rules are intended for only administrative and non-controversial changes, this fundamental change to SBA’s eligibility rules should have required the full notice and comment process for substantive rule changes, and therefore, could be ripe for a legal challenge as a violation of the Administrative Procedure Act (5 U.S.C. § 553).

For more information, contact MWL Partner Peter A. Fish.