On April 27^th, the U.S. Small Business Administration (“SBA”) published a final rule making changes to the regulations governing the 8(a) program. This final rule is SBA’s implementation of the proposed rules issued by the SBA on September 9, 2022 and we summarized the changes adopted by the final rule here.

While many of the SBA’s regulatory changes are intended to document existing SBA policies and practices, the SBA did implement a number of substantive changes. Accordingly, over the next several weeks, we will be going through various parts of the final rule and conducting an in-depth discussion and analysis of the changes. We anticipate addressing the following areas in this series:

• Bona Fide Place Of Business Requirements; (published May 5, 2023)
• Joint Ventures;
• Size Determinations In Connection With Multiple Award Contracts;
• Ostensible Subcontractor Rule; (published May 30, 2023)
• Limitations On Subcontracting;
• 8(a) Business Activity Targets;
• Follow-On Contracts;
• Size Protests; and
• All Small Mentor-Protégé Program.

8(a) Business Activity Targets (§ 124.509)

In this update, we are addressing the changes to the rules governing 8(a) business activity targets.

The goal of the 8(a) program is to “assist eligible small disadvantaged business concerns compete in the American economy through business development.” The federal government, however, does not want 8(a) entities to be too reliant on 8(a) awards throughout their nine-year term within the 8(a) program. Accordingly, 15 U.S.C. § 636(j)(10)(I) requires 8(a) entities to start receiving non-8(a) revenue starting in their fifth year, or be ineligible to receive additional 8(a) contracts. Implementing this statutory directive, the SBA requires 8(a) entities to achieve progressively higher levels of non-8(a) revenue each program year, starting with the fifth program year.

These required ratios are “business activity targets,” and each transitional year (years five through 9 of an entity’s participation in the 8(a) program), the 8(a) entity must meet the following amounts of non-8(a) revenue as a percentage of their annual total revenue:

The consequences for not meeting the applicable business activity targets can be severe, ranging from heightened reporting, a remedial action plan, or up to a complete prohibition on receipt of 8(a) awards (whether competitive or sole source), if the 8(a) entity is found to have not made good faith efforts to meet their business activity target.

The revisions to the business activity target rule adopted in October 2020 changed the standard for seeking outside sources of revenue from a standard that required “maximum efforts” and “substantial and sustained efforts” to a new standard requiring “good faith efforts” to meet business activity targets. This change was rolled out with limited details as to what constituted “good faith efforts,” and 8(a) participants have sought further guidance on how to meet the new standard, including what would be required in terms of providing the required proof and documentation.

The SBA responded to the 8(a) community’s requests for additional clarity by adopting language in its April 27, 2023 final rule specifying what constitutes good faith efforts to meet business activity targets. The final rule adopted revisions to 13 C.F.R. § 124.509 clarifying that good faith efforts include:

• Demonstrating that the 8(a) entity submitted offers for one or more non-8(a) procurements which, if awarded during its just completed program year, would have given the 8(a) entity sufficient revenues received during that year to achieve the applicable non-8(a) business activity target for its just completed program year, and/or
• Identifying extenuating circumstances that adversely impacted the 8(a) entity’s efforts to obtain non-8(a) revenues, such as (but not limited to) a reduction in government funding, continuing resolutions and budget uncertainties, increased competition driving prices down, or having one or more prime contractors award less work to the 8(a) entity than originally contemplated.

In adopting these changes, the SBA rejected a request that SBA consider, when determining if there were good faith efforts to meet business activity targets, “proposals submitted during the applicable program year (irrespective of award or when contract revenues would be realized).” The SBA explained that:

Whether a Participant has made good faith efforts to meet its applicable non-8(a) business activity target, SBA believes it should only consider non-8(a) receipts which would have been realized during the relevant program year. In addition, it is unclear how SBA should treat contract revenues that would not be derived in the pertinent program year. In SBA’s view, a Participant must demonstrate to SBA that it submitted offers for one or more non-8(a) procurements which, if awarded during its just completed program year, would have given the Participant sufficient revenues to achieve the applicable non-8(a) business activity target during that same program year.

The SBA also noted that, in regards to showing extenuating circumstances that “the regulatory text provides that the list of extenuating circumstances is not exhaustive. This is consistent with SBA’s intent to consider all relevant circumstances out of the Participant’s control which adversely impacted its efforts to obtain sufficient non-8(a) revenues.” As such, “reduction in government funding, continuing resolutions and budget uncertainties, increased competition driving prices down, or having one or more prime contractor’s award less work to the 8(a) entity than originally contemplated” are some of the factors that the SBA will consider in determining if extenuating circumstances exist, but not the only factors.

Additionally, the SBA determined that, instead of changing the regulations to require 8(a) entities to submit interim financial statements for purposes of evaluating the entity’s compliance with business activity targets when a program year did not match the entity’s fiscal year, the SBA will continue to allow 8(a) entities to estimate program year revenues for both 8(a) and non-8(a) activities. The SBA concluded that “it could be burdensome on some businesses to report sales estimates based on interim reporting periods spanning different fiscal years where they do not currently prepare interim quarterly statements.” However, 8(a) entities are now given the option to provide program year sales reporting based on entity’s interim financial statement figures, which may be prepared in-house.

Sole Source 8(a) Awards Under MACs and Business Activity Targets (§ 124.503(i)(1)(iv))

The SBA also adopted language providing that the SBA will examine whether an 8(a) entity is in compliance with its 8(a) business activity target requirements before the SBA will approve a sole source 8(a) order to that 8(a) entity under a multiple award contract (“MAC”). Similarly, where an agency seeks to issue an 8(a) sole source order to a joint venture, the SBA will review and determine whether the lead 8(a) partner to the joint venture is in compliance with any applicable competitive business mix target established or remedial measure.

For sole source awards under a MAC, the SBA explained that:

Because SBA is determining eligibility anew at the time of a new sole source order, it was always SBA’s intent to not only require a firm to still be a current and otherwise eligible 8(a) Participant at the time of offer/acceptance of a sole source order, but to also require the firm to be in compliance with any applicable competitive business mix target established or remedial measure imposed by § 124.509.

Therefore, 8(a) entities will have to be in compliance with their business activity targets to receive a sole source award under a MAC, at the time of award, and including when they are members of a joint venture.

Business Activity Compliance Is Measured Based On The 8(a) Entity’s Most Recently Completed Program Year

When 8(a) entities evaluate their compliance with business activity targets, they should keep in mind that compliance with business activity targets is backward looking, because the SBA measures compliance with business activity targets at the end of an 8(a) entity’s program year. SBA approaches business activity target compliance this way because it is not feasible to conclusively forecast an entity’s compliance with business activity targets within a given program year.  Moreover, the sanctions imposed by the SBA for not meeting business activity targets in a particular year are informed by the 8(a) entity’s good faith efforts to meet their business activity targets and, potentially, the amount by which it did not meet its business activity targets. Those are also two items that also cannot realistically be evaluated until the end of the program year.

Therefore, if an 8(a) entity meets its business activity targets for a particular program year, that entity should be eligible to receive 8(a) awards for the entire following program year, and should be able to make the certifications regarding compliance with business activity targets required by 13 CFR 124.509(b)(4) and FAR 52.219-18 during that year.

This also means that real-time monitoring progress towards meeting an 8(a) entity’s applicable business activity targets during a program year may be helpful in proactively avoiding the issues that arise when an 8(a) entity fails to meet its business activity targets. The consequences can include a remedial action plan imposed by the SBA and/or a prohibition against receiving sole source and/or competitive 8(a) awards.

There are tools available to 8(a) entities that can assist them in meeting their business activity targets. In particular, subcontract revenue, including subcontract revenue on 8(a) contracts, counts as non-8(a) revenue. This includes subcontract revenue from similarly situated entities (i.e. entities that have the same socio-economic status, such as two 8(a) entities), which has the added benefit of not being subject to the ostensible subcontractor rule or the SBA’s limitations on subcontracting.

Comparison of Prior Rule to New Rule

• 124.503 How does SBA accept a procurement for award through the 8(a) BD program?

. . .

(i) Task or Delivery Order Contracts, including Multiple Award Contracts—

(1) Contracts set-aside for exclusive competition among 8(a) Participants.

 . . .

(iv) An agency may issue a sole source award against a Multiple Award Contract that has been set– aside exclusively for 8(a) Program Participants, partially set-aside for 8(a) BD Program Participants or reserved solely for 8(a) Program Participants if the required dollar thresholds for sole source awards are met. Where an agency seeks to award an order on a sole source basis (i.e., to one particular 8(a) contract holder without competition among all 8(a) contract holders), the agency must offer , and SBA must accept , the order into the 8(a) program on behalf of the identified 8(a) contract holder.

(A) To be eligible for the award of a sole source order, a concern must be a current Participant in the 8(a) BD program at the time of award of the order, qualify as small for the size standard corresponding to the NAICS code assigned to the order on the date the order is offered to the 8(a) BD program, and be in compliance with any applicable competitive business mix target established or remedial measure imposed by § 124.509. Where the intended sole source recipient is a joint venture, the 8(a) managing partner to the joint venture is the concern whose eligibility is considered.

(B) Where an agency seeks to issue a sole source order to a joint venture, the two-year restriction for joint venture awards set forth in § 121.103(h) does not apply and SBA will not review and approve the joint venture agreement as set forth in § 124.513(e)(1).

• 124.509 What are non–8(a) business activity targets?

. . .

(c) Reporting and verification of business activity.

(1) Once As part of its annual review after being admitted to the 8(a) BD program, a Participant must provide to SBA as part within 30 days from the end of its annual review program year:

(i) Annual financial statements with a breakdown of 8(a) and non–8(a) revenue in accord with § 124.602; and

(ii) An annual report within 30 days from the end of the program year of all non–8(a) contracts, options, and modifications affecting price executed during the program year.

(ii) An estimate of 8(a) and non–8(a) revenue derived during the program year, which may be obtained from monthly, quarterly or semi-annual interim financial statements or otherwise.

(2) At the end of each year of participation in the transitional stage, the BOS assigned to work with the Participant will review the Participant’s total revenues to determine whether the non–8(a) revenues have met the applicable target. In determining compliance, SBA will compare all 8(a) revenues received during the year, including those from options and modifications, to all non–8(a) revenues received during the year.

(d) Consequences of not meeting competitive business mix targets.

(1) Beginning at the end of the first year in the transitional stage (the fifth year of participation in the 8(a) BD program), any firm that does not meet its applicable competitive business mix target for the just completed program year must demonstrate to SBA the specific efforts it made during that year to obtain non–8(a) revenue.

(i) SBA will determine whether the Participant made good faith efforts to attain the targeted non–8(a) revenues during the just completed program year. A Participant may establish that it made good faith efforts by demonstrating to SBA that:

(A) It submitted offers for one or more non–8(a) procurements which, if awarded to the Participant during its just completed program year, would have given the Participant sufficient revenues to achieve the applicable non–8(a) business activity target during that same program year. In such a case, the Participant must provide copies of offers submitted in response to solicitations and documentary evidence of its projected revenues under these missed contract opportunities; or

(B) Individual extenuating circumstances adversely impacted its efforts to obtain non–8(a) revenues, including but not limited to a reduction in government funding, continuing resolutions and budget uncertainties, increased competition driving prices down, or having one or more prime contractors award less work to the Participant than originally contemplated.

Where available, supporting information and documentation must be included to show how such extenuating circumstances specifically prevented the Participant from attaining its targeted non–8(a) revenues during the just completed program year.

(ii) The Participant bears the burden of establishing that it made good faith efforts to meet its non–8(a) business activity target. SBA’s determination as to whether a Participant made good faith efforts is final and no appeal may be taken with respect to that decision.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.