SBA proposes joint venture, subcontracting changes

S mall businesses are getting some long-waited good news from the Small Business Administration.

SBA issued a proposed rule Dec. 29, nearly a year after Congress passed the fiscal 2013 Defense Authorization bill changing certain provisions in the Small Business Act.

Among the most important updates is the provision letting joint ventures between two or more small firms bid as a small business.

“SBA proposes to remove the restriction on the type of contract for which small businesses may joint venture without being affiliated for size determination purposes. SBA is proposing this change for several reasons. First, this proposed change would encourage more small business joint venturing, in furtherance of the governmentwide goals for small business participation in federal contracting,” the proposal stated. “Second, this change would respond to results from the Small Business Teaming Pilot Program indicating more small business opportunities and greater success on small contracts than on large contracts. Third, this change would better align with the new provisions of the NDAA governing the limitations on subcontracting, which allow a small business prime contractor to subcontract to as many similarly situated subcontractors as desired.”

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SBA also clarifies how it will calculate whether a small firm remains small year over year.

“SBA proposes to clarify that receipts include all income, and the only exclusions from income are the ones specifically listed” in Section 121.104 of the Small Business Act, such as net capital gains or losses, taxes collected for and remitted to a taxing authority if included in gross or total income and amounts collected by services such as travel or real estate agents.

SBA stated, “It was always SBA’s intent to include all income, except for the listed exclusions; however, SBA has found that some business concerns misinterpreted the current definition of receipts to exclude passive income. SBA’s proposed change clarifies the intent to include all income, including passive income, in the calculation of receipts.”

A huge chunk of the rule focuses on small business subcontracting changes.

Among the biggest change is a shift in how agencies are to calculate the percentage of work required to be performed by a prime contractor.

SBA says it wants to change to the “concept of limiting a percentage of the award amount to be spent on subcontractors. The goal is the same: to ensure that a certain amount of work is performed by a prime contractor small business concern (SBC) that qualified for a small business program set-aside procurement due to its socioeconomic program status.”

SBA also proposes to limit the percentage of the award that could be performed by a large business.

“SBA has concerns about the practical application of a regulation that would require only a certain percentage of contract awards to be either retained by the prime contractor, or spent on a similarly situated entity. SBA’s concern is that an approach that limits its review solely to the first tier of the contracting process (agreements between the prime contractor and its direct subcontractors) could be fraught with abuse,” the notice stated. “For example, if small business A is awarded a $500,000 small business set-aside service contract and subcontracts $450,000 of the work to small business B, if the limitation of subcontracting requirements apply only to the first tier, then the government’s review would be complete. Small businesses A and B clearly meet the 50 percent rule. However, if small business B could further subcontract all of its $450,000 to a large business with impunity, then SBA believes that the intent of the subcontracting limitation requirements would be circumvented and small businesses would not be properly protected. In such a case, a large business would have performed $450,000 of a $500,000 contract (or 90 percent) of a contract that was set-aside exclusively for small business. In SBA’s view, a large business that ultimately performs 90 percent of a small business set-aside contract unduly benefits from a contract intended to be performed by small business. SBA believes that the intent of the changes in the NDAA were to ensure that contracts awarded, and the benefits of those contracts, flow to the proper beneficiaries.”

Comments on the proposed rule are due by Feb. 27.

This post is part of Jason Miller’s Inside the Reporter’s Notebook feature. Read more from this edition of Jason’s Notebook.

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