It’s always been an existential question. Can small businesses continue with contracts if they become no longer small. Companies do grow, after all, whether organically or with mergers or acquisitions. The Small Business Administration has rules for that but a proposed fix to a flawed rule could make things worse. The Federal Drive with Tom Temin gets analysis now from Haynes Boone procurement attorney Zach Prince.

Interview transcript:

Tom Temin And just maybe review for us what the rules are now. If I’m a small business and I’m on a small business, set aside multiple award contract and somebody buys me, and I’m a big business now, what does that mean?

Zach Prince So the rules are complicated, and it doesn’t help that the SBA wrote rules that are needlessly obtuse, to be nice. The complexity here does keep us lawyers in business, which I guess I should be grateful for. But business likes to have certainty, I like to have certainty when I’m advising businesses. So the current rules, the general rule is that your size is measured. Your qualification for procurement is measured at the time you submit your proposal. And that makes sense, because things change between the time you submit a proposal and award. It could be months, sometimes years later, and you qualified initially, you spent a heck of a lot of money with some of these proposals, putting together a solid offer that’s going to get accepted and you shouldn’t be bumped out of the competition because you’ve had some change in the intro. The rules are a little bit different with multiple award contracts, your big IDIQs. But generally, at least if you’ve got a set aside Mac, there’s the Mac itself, the IDIQ is set aside or you’re part of a pool of small businesses. So things like NASA SEWP. You’ve got your small business pools, you’ve got your large business pools. If you’ve got a big contract that was set aside in some sense, then you qualify for the task orders or other agreements that are issued under that without having to independently certify every time, unless the agency asks you to do it. They’ve always had that right. If there’s been a merger or an acquisition that caused you to become other than small, you have to notify the government within a specified period of time that either you still qualify or you don’t qualify. If you have been, you’ve grown now because of the acquisition, because you’ve got affiliates or whatever it might be, the agency can still award to you if it is a set aside Mac. The original contract is awarded on the basis of size. You qualify then agency can still awards you. That’s fine, unless they ask, they specifically say we’re not going to. They have that option. But they aren’t precluded from awarding to you.

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Tom Temin All right. So SBA had a clarifying rule that they want to undo now.

Zach Prince Yeah. So the SBA has been annoyed, apparently with the decisions from GAO and SBA’s own Office of Hearing Appeals, which have allowed businesses to continue receiving small business set asides first under GSA federal supply schedule contracts. The rule has always been different for that. The SBA rules made it different for that. So it’s always been the case that when the task order competition’s your size status is measured from the initial GSA schedule contract award. So you qualified when you submitted it. The GSA schedules are not set aside themselves. It’s the orders under it that are set aside. So even if you change that status in the interim, it doesn’t matter, including through merger and acquisition. SBA in this proposed rule says, no, no, that’s wrong. I mean, it’s not wrong. The rules said that. But apparently SBA didn’t want it to say that.

Tom Temin They see it as kind of a moral offense if a company suddenly gets big or mid-sized, no longer small, why should they still get contracts? It’s kind of a spirit versus a letter type of argument.

Zach Prince Yeah, that’s right. At least that’s the SBA’s idea here. And the same thing the SBA is saying about the recertification requirement for mergers and acquisitions that they’re saying now, we don’t think you should even get set aside, should even get task orders under set aside, Macs, even if you did qualify originally and the agency doesn’t care and they’re not asking you again. We think that’s not fair. To me, it begs a couple of questions, but I think the SBA is just, your point to the moral offense is probably right. They think there’s some fundamental difference between an acquisition that makes you big and organic growth. I don’t really see that. I think that we’ve got a shrinking defense base and industrial base. We want greater participation in government contracts and small business is a great way for industry to innovate and to try new exciting things and see what works. But companies get to a point where they need operational guidance and they need the capital to keep growing. And that capital is out there. It wants to invest, and it will do that. There are still contractual value to these businesses, but if the SBA says no, no, now, all their big contract vehicles are worthless to you. I don’t know that there’s going to be that same level of investment.

Tom Temin We’re speaking with procurement attorney Zach Prince. He’s a partner at Haynes Boone. So the new rulemaking that they have out now since August would clarify the SBA’s notion then that once you get big by an acquisition, too bad you’re out of the running for these contracts and task orders.

Zach Prince Yeah, that’s basically right. And it would get rid of another previous, what SBA would look at is a loophole, which doesn’t make any sense because the SBA wrote it. That would say that if you had submitted an offer and more than 180 days have passed before the acquisition, that you still could be awarded that even if it was a set aside, which again, I think makes a lot of sense. 180 days is a long time. You spent a lot of money before you even thought about going through an acquisition process. Why should that have any impact on your ability to receive award? SBA again, seems to be offended by this idea that they wrote in their own regulations.

Tom Temin All right. So the reregulation or the new rule is what’s the comment period? What’s the status of that reruling at this point or this reregulation?

Zach Prince I think it’s going to be a while, if it ever happens. Remember, SBA is not quick with the rule changes. It took them quite a long time for pretty much any change for the Small Business Act to implement any regulatory changes. NDAAs often have changes, the SBA provisions that take them forever to do anything with. Comments were due in October. I don’t think we’re going to see anything this year. I would be surprised if we see anything early next year, and the administration change could also throw this for a loop. So who knows? But I do think that businesses that are looking to get into this space, larger businesses or private equity, need to be thoughtful about whether this could impact the valuation of a business that they’re looking at getting involved in.

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Tom Temin So you don’t think this will, it doesn’t look like this is going to take effect in any meaningful way before Jan. 20 anyhow. And then all bets are off, really.

Zach Prince Yeah. I try not to do much guessing because I tend to be wrong in this confusing, chaotic world we’re in. But I’m telling clients and I do a lot of work in the acquisition space to be thoughtful about this. I don’t think it’s a foregone conclusion, but it suggests that at least SBA would like this to be implemented in some way or other.

Tom Temin Well, I think that point about the defense industrial base, which the Defense Department has been admiring now for years, going on decades in some sense. And yet the procurement rules, their approaches, all they have been able to do in the last several years is nibble around the edges. There’s been several commissions that have come up with thousands of pages of recommendations for reforming procurement. Nothing’s happened, essentially. And so you would think that they would want as much flexibility as possible in dealing with small and startup companies and companies new to federal contracting.

Zach Prince Yeah, you would think that. But I think that one of the fundamental problems in government is that government often doesn’t understand industry. They don’t understand what motivates industry, and they don’t understand industrial norms. And so when you’ve got, I’m switching gears a little bit, but you’ve got a DoD publishing report suggesting that any profit margin over 15% is extortionist, when the industry in no way shape or form functions that way. And their calculations of what your profit margins are have no relation to what you’re reporting to the SEC because they’re taking huge swaths of your actual costs out is unallowable. It’s just ridiculous. That’s why industry doesn’t like doing business with the government with any regularity, because it requires shifting your mindset entirely.

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