On December 17, the Small Business Administration issued a final rule that makes significant changes to the agency’s small business 8(a) and HUBZone programs. These generally extend the changes the SBA initially proposed in August 2024, which we previously summarized in detail (see links below). The final rule takes effect on January 16, 2025.

The primary modifications affect the HUBZone Program, and include:

• • Instead of having to certify their eligibility every year, HUBZone firms must only certify their company is eligible for a HUBZone contract at the time the firm submits its initial offer, including price, for the contract.
  • HUBZone firms that have won a HUBZone contract will have to bring their residency up to 35% within twelve months after the award. This twelve-month grace period will be a rolling one, which means a new twelve-month grace period starts upon the award of any HUBZone contract.
  • HUBZone employees must work at least 10 hours per week during the four-week period before an entity’s HUBZone eligibility is determined in order to qualify as a HUBZone employee.
  • The length of time an employee must reside in a HUBZone was reduced from 180 days to 90 days.

For a more detailed discussion of the proposed rule, largely implemented as proposed, see our prior analysis at:

SBA’s Proposed Rule: Impact on HUBZone and 8(a) Programs

Annual Certification and Residency Requirements

Recertification of HUBZone Businesses

All Small Mentor-Protégé Program ‎

Affiliation and Negative Control

We will provide a more detailed analysis of the final rule changes in the coming weeks. In this update, we highlight the areas where the SBA made significant changes from, or provided additional context for, its proposed rule.

Joint Venture and Ostensible Subcontractor Rule

The SBA initially proposed to amend 13 CFR 121.103(h)(3) to provide that a joint venture is ineligible as a small business concern, an 8(a) small business concern, a certified HUBZone small business concern, a WOSB/EDWOSB concern, or a VO/SDVO small business concern if (1) SBA determines the managing venturer (i.e., the small business) will not perform 40% of the work to be performed by the joint venture, (2) a joint venture partner that is not similarly situated to the managing venturer performs the primary and vital requirements of a contract, or (3) the managing venturer is unusually reliant on such a joint venture. This suggested that a mentor could be deemed an ostensible subcontractor of the protégé.

In response to comments, the agency agreed to remove the provision that would permit the SBA to make a joint venture ineligible for small business contracts if the non-small business partner performs the primary and vital requirements of the contract, or the small business is unusually reliant on the joint venture to perform the contract.

Instead, the SBA will only find the joint venture ineligible for a small business contract if the agency determines the managing member (i.e., the small business) will not perform 40% of the work to be performed by the joint venture:

A joint venture offeror is ineligible as a small business concern, an 8(a) small business concern, a certified HUBZone small business concern, a WOSB/EDWOSB concern, or a VO/SDVO small business concern where SBA determines that the managing joint venture partner will not perform 40% of the work to be performed by the joint venture.

The SBA explained that it changed the proposed rule because small businesses may rely on their joint venture partner to perform contracts, and leveraging the experience or resources of a joint venture partner is often the entire purpose of having formed the venture:

Two commenters opposed the language in proposed § 121.103(h)(3)(v) that would find a joint venture to be ineligible where a joint venture partner that is not similarly situated to the managing venturer performs primary and vital requirements of a contract, or where the managing venturer is unusually reliant on such a joint venture partner. These commenters noted that a primary reason why companies joint venture is because the managing member is not able to perform the contract by itself and may not be able to perform a significant amount of the primary and vital work to be done under the contract. They believed that finding a joint venture to be ineligible merely because a non-similarly situated partner was performing primary and vital work is contrary to the entire purpose of a joint venture. SBA agrees and has amended the regulatory text in this final rule to eliminate the language finding a joint venture to be ineligible where a joint venture partner that is not similarly situated to the managing venturer performs primary and vital requirements of a contract, or of an order, or where the managing venturer is unusually reliant on such a joint venture partner. A joint venture is not only permissible but encouraged where a concern lacks the necessary capacity to perform a contract on its own. It would be contradictory to say that a joint venture is permissible where the managing member cannot perform the contract by itself but then say it is ineligible if a non-managing member partner was performing primary and vital work.

Admission to the 8(a) Program

The SBA’s final rule clarifies that an entity must be eligible for the 8(a) Program as of the date the SBA issues a decision on whether to admit the applicant, rather than on the date of application.

The SBA did note that although eligibility will be determined based on the date of the agency’s decision, “implicitly a small business must believe that it is eligible at the time it applies for certification for any program. For purposes of applying for HUBZone certification, an applicant must submit payroll records for the four-week period immediately prior to its application date. It would be impossible to require payroll records for some unknown future date. After submitting an application for any program, a concern must immediately notify SBA of any changes that could affect its eligibility and provide information and documents to verify the changes.”

Business Activity Targets

The SBA adopted its proposed rule regarding calculating business targets, including the language that permits federal officials to discount offers submitted by an 8(a) Participant on opportunities for which the entity did not have a reasonable prospect of success.

Though the SBA did not materially change this provision in the final rule, the agency explicitly rejected a request by some commentators to be able to use affiliate past performance when determining whether an 8(a) entity had a reasonable prospect of success with regard to a specific opportunity:

According to the commenters, the value of a Participant’s prior contracts is one of several relevant factors SBA should consider in determining whether a Participant had reasonable prospects of winning a contract. SBA agrees and notes that the business development assistance provided through the 8(a) BD program is intended to improve a Participant’s capabilities and ability to pursue larger, more complex contracts. In proposing this amendment to the BAT regulations, SBA sought to discourage Participants from disingenuously submitting offers, particularly for large dollar-value procurements, for the clear purpose of circumventing the BAT policies; it certainly was not intended to suggest that SBA would consider only projected revenues from lost contract opportunities at or below its current capacity in determining whether a Participant made good faith efforts to obtain work outside the 8(a) BD program. Several commenters recommended that for an entity owned Participant, SBA should consider the past performance and experience of sister subsidiary companies. SBA disagrees. SBA would consider the past performance and experience of affiliated companies, but, under applicable statute and regulations, individual business concerns owned by a Tribe, ANC, NHO or CDC are not affiliated with each other. As SBA has stated previously, SBA believes that the past performance of a sister company can be considered only where that sister company is involved in the procurement under consideration (i.e., as a subcontractor or joint venture partner). In response to the comments, the final rule restructures § 124.509(d)(1)(ii) and adds language clarifying that SBA will consider all relevant factors, to include contract magnitude, and past performance and experience of a joint venture partner and/or subcontractor.

The SBA also rejected requests to consider more than the base value of a contract for which the 8(a) entity’s offer was unsuccessful:

In the agency’s best judgment, limiting consideration to the value of the base year of performance and only for the period of compliance in which the offer was submitted strikes the right balance between this goal and continued business development through sole source contract support.

Substitution of a new 8(a) Entity Into an Existing 8(a) Joint Venture

The SBA’s final rule included proposed changes to 13 CFR 124.518 that would permit a joint venture to swap out its existing small business member with a new 8(a) member.

In adopting this as the final rule, the SBA, however, provided explicit commentary on the STARS III MAC:

SBA never intended for this substitution authority to allow Participants to sell or otherwise transfer prime 8(a) contracts when doing so would frustrate the program’s interests or potentially violate other applicable Federal procurement rules. To this end, SBA has already received several substitution requests from contract holders on 8(a) multiple award contracts, such as the 8(a) Streamlined Technology Acquisition Resource for Services (STARS) III multiple award contract. The contract holders requesting a substitution have typically graduated from the 8(a) BD program or have exceeded the applicable size standard and are therefore no longer eligible to receive sole source orders under the 8(a) STARS III vehicle. Such firms have stated that a substitution would serve their business development needs by raising capital from the sale of STARS III contracting assets, and by eliminating the cost and burden of administering the contract. SBA does not believe a transfer under these and similar circumstances serves the programmatic business development needs of the contract holder requesting a substitution. Participation in the competitive 8(a) procurement process has been and remains one of the most valuable forms of business development assistance available through the 8(a) BD program. Establishing and implementing a capture strategy, critically evaluating a Request for Proposals, and technical proposal writing are just some of the necessary skills for submitting a successful offer in the Federal marketplace. In SBA’s view, losing the opportunity to acquire or hone these skills in the competitive 8(a) context would be antithetical to a firm’s business development even where the transfer might provide other legitimate benefits.

Community Benefit Reports

In response to comment, the SBA revised 13 CFR 124.604 to formalize its current practice of permitting entity-owned 8(a) firms to submit consolidated community benefit report. The SBA stated:

§124.602 allows a Tribe/ANC/NHO/CDC to submit consolidated financial statements prepared by the parent entity with schedules for each 8(a) Participant instead of separate audited financial statements for each individual 8(a) Participant. According to this commenter, it would make sense to provide a similar consolidated reporting option for community benefits under § 124.604. While SBA did not specifically propose any changes to § 124.604, we note SBA has long permitted Tribes/ANCs/NHOs/CDCs to annually report consolidated community benefits. Because this commenter’s suggested revision merely recognizes current program policy and the entity’s discretion to consolidate benefits reporting but does not require such consolidation, the final rule adds language to § 124.604 to clarify that Tribes/ANCs/NHOs/CDCs may elect to submit a consolidated report showing how the applicable Native or underserved community has benefitted through the Tribe’s/ANC’s/NHO’s/CDC’s participation in the 8(a) BD program. Of course, as noted above, consolidated community benefits reporting is optional; Tribes, ANCs, NHOs, and CDCs may continue to submit separate annual community benefits reports through each 8(a) Participant.

Joint Venture Past Performance

The SBA’s current regulations provide that—while a contracting agency may not require the protégé in a mentor-protégé joint venture to meet the same evaluation or responsibility criteria individually as that required of other offerors generally—contracting agencies can require some past performance from the protégé. The SBA’s proposed rule purported to provide “guidance” as to the types of past performance that contracting agencies can require of the protégé in a mentor-protégé joint venture.

The SBA rejected claims by commentators that this was a change to current practice, but did provide some helpful commentary and clarifications:

Several commenters recommended that SBA should highlight that the change is intended to limit the type of past performance agencies can require of proteges rather than authorizing the imposition of greater or more complex past performance requirements. SBA agrees that the guidance provided is intended to ensure that procuring activities do not require the same full level of past performance and experience of protégé joint venture members as they do of other offerors generally. This logically means that if a procuring activity requires past performance of a protégé joint venture partner, it must be at a reduced level…. In response to the comments, the final rule clarifies that a procuring activity contracting officer may rely solely on the past performance and experience of the mentor joint venture partner in its discretion. The final rule also adds a provision to the regulatory text providing that if a procuring activity requires a protégé joint venture partner to demonstrate some successful performance and/or experience on fewer previous contracts of lower values than that required of other offerors generally, successful performance by the protégé firm on the contracts it identifies shall be rated equivalently to successful performance by the mentor partner to the joint venture or any other individual offeror on the higher valued contracts they identify. Although this was clearly set forth in the example to paragraph (e), SBA believes that it should be specified in a separate regulatory provision as well.

Size Recertifications

While it generally adopted as final the proposed restructuring of regulations that govern size recertifications, the SBA did make some additions in response to comments:

• • The final rule adds a new § 125.9(g) that would delay the effective date of ineligibility for orders and options on underlying small business multiple award contracts due to disqualifying recertifications for one year after the effective date of this final rule. As such, a firm that has a disqualifying size or status recertification due to a merger, acquisition or sale that occurs prior to one year after the effective date of this final rule will remain eligible for orders issued under an underlying small business multiple award contract.
  • A firm that has a disqualifying size or status recertification prior to the end of the fifth year of a long-term contract will remain eligible for any options to be exercised prior to one year after the effective date of this final rule.
  • The final rule makes ineligible only those contract holders that have disqualifying recertifications involving a merger, acquisition, or sale with a large business. Where two business concerns individually qualify as small before a merger, acquisition or sale but do not in the aggregate after such occurrence, the final rule allows the contract holder to remain eligible for orders issued under an underlying small business multiple award contract. Although the surviving entity may be eligible for orders after the merger, sale or acquisition, a procuring activity could no longer count orders issued to the entity as awards to a small business.

HUBZone Eligibility Certifications

The SBA proposed to revise §§ 126.500, 126.601, and 126.602 to eliminate the one-year certification rule. Instead, firms would be eligible on the date of offer for HUBZone contracts and only have to recertify once every three years.

The agency adopted its proposal to require HUBZone entities to be eligible at the time they submit their initial offer, including price, for a contract. It rejected commentators’ concerns over the compliance burdens this would impose:

SBA is not swayed by the comments stating that firms do not know when a HUBZone opportunity will arise and, correspondingly, when an offer for a HUBZone opportunity must be submitted. These comments presume that maintaining at least 35% HUBZone resident employees is not important, and that as long as the firm did so at one point in time (i.e., the date of certification or recertification), it is free to ignore that requirement for the rest of the year. SBA does not believe that is in line with the intent of the program. One of the purposes of the program is to promote serious, meaningful employment of individuals residing in areas of high unemployment or low income (i.e., in HUBZones). That purpose should be paramount throughout the year, not merely at the time of recertification. If a firm knows that it must comply with the 35% residency requirement at the time it submits an offer for a HUBZone contract, maintaining that 35% will be something the firm tries to do throughout the year. SBA believes that is what the program intended. SBA also continues to believe that requiring HUBZone firms to be eligible at the time of offer is essential for increasing uniformity among the agency’s contracting programs. As such, the final rule requires a firm to be eligible at the time it submits its initial offer, including price, for a HUBZone contract.

The SBA also adopted the triennial recertification requirement, which will bring the HUBZone program in line with the agency’s other certification programs.

The SBA’s final rule also implemented the proposed language that would require HUBZone firms which did not receive a contract during the year preceding their recertification date to represent that, at the time of recertification, at least 35% of the applicant’s employees reside in HUBZones and the concern’s principal office is located in one as well.

The SBA also decided to adopt its “12-month grace period proposal.” This means that HUBZone firms awarded a contract will have to bring their residency up to 35% within the twelve months following award of the contract. If a firm’s recertification falls within this grace period, then the recertification would require the firm to represent that it is “attempting to maintain” compliance with the 35% HUBZone residency requirement. After the grace period, the firm would have to reattain 35% HUBZone residency at the time of any recertification. This one-year grace period is a rolling grace period based on the award of a HUBZone contract. The SBA explained:

The final rule provides that where a certified HUBZone small business concern was awarded a HUBZone contract during the “12-month period preceding its recertification” it can represent that it is attempting to maintain compliance with the 35% HUBZone residency. That language is not limited to the first HUBZone contract received by a certified HUBZone small business concern. As long as the concern received any HUBZone contract during the 12-month period preceding its recertification, it can represent that it is attempting to maintain compliance with the 35% HUBZone residency. In effect, that language allows each additional HUBZone award to trigger a new 12-month grace period from the date of award of the additional HUBZone contract.

The SBA’s final rule also permits HUBZone firms to recertify their HUBZone eligibility up to 90 days before their triennial anniversary of HUBZone certification date. The SBA revised its proposed rule to clarify that:

when a HUBZone firm recertifies its HUBZone status during the 90 days prior to its certification anniversary date, it will be recertifying its eligibility as of the date it makes that recertification. This is a change from the current rules, which require firms to recertify their status as of their anniversary date. Since this final rule eliminates the one-year certification rule, there is no longer a need for firms to recertify their status as of their exact anniversary date. By giving firms a 90-day window in which to complete this recertification, SBA believes firms will have sufficient time to gather and review their payroll records to ensure that they indeed meet the HUBZone requirements before recertifying.

HUBZone Employees

The SBA generally adopted as final its proposed changes to the definition of employees for purposes of the HUBZone program, but there were adjustments. The final rule provides that:

• • To qualify as a HUBZone employee, an individual must work at least 10 hours per week during the 4-week period before eligibility is determined. The SBA did not adopt its proposed change that would have required individuals to work 80 hours a month in order to be an employee for HUBZone purposes.
  • Reservists and National Guard members will be treated as employees for HUBZone purposes during their period of active duty, even if they do not receive compensation from the HUBZone company.
  • Individuals who are on sick or maternity leave and continue to be paid by the business concern are considered employees.
  • The length of time an employee must reside in a HUBZone was reduced from 180 days to 90 days.
  • A HUBZone small business concern may have up to four Legacy HUBZone Employees at a given time, but must have at least one other HUBZone employee in order for anyone to count as a Legacy HUBZone resident employee. An individual who initially qualified as a HUBZone Resident Employee by residing in a Redesignated Area or a Qualified Disaster Area will not qualify as a Legacy HUBZone Employee. Likewise, individuals who work fewer than 30 hours per week at any time during their employment (not counting PTO or sick leave) cannot qualify as Legacy HUBZone Employees.
    • • A Legacy HUBZone Employee is an individual who: (a) resided in a HUBZone (other than a Redesignated Area) for at least 90 days preceding, and 180 days following, the concern’s HUBZone certification date or most recent recertification date; and (b) remains an employee at the time of the concern’s current recertification date.

HUBZone “Attempt to Maintain” Requirement

The SBA adopted its proposed changes to the “attempt to maintain” HUBZone residency requirement, but added a clarification. A firm that cannot demonstrate it is making the “substantive and documented efforts” described in the definition of “attempt to maintain” will have failed its attempt to maintain the HUBZone residency requirement.

The SBA’s proposed rule also would have required HUBZone entities that execute a contract and fail to “attempt to maintain” the minimum employee residency requirement to notify the agency via email to hubzone@sba.gov within 30 calendar days of such failure. In response to comments, the SBA removed this provision:

SBA received three comments on proposed § 126.501(b), all of which opposed the provision. One commenter disagreed with the requirement, arguing that it poses a significant compliance burden. Another commenter noted that the provision was overly harsh because a firm could temporarily appear to not comply with the attempt to maintain requirements but could correct that through its marketing efforts before it submits an offer for another HUBZone contract. The firm believed that decertifying a firm before it had the full opportunity to come back into compliance was wrong. SBA agrees. The firm will not be eligible for any HUBZone contract if it does not comply with the “attempt to maintain” requirements at time of offer and will be decertified if it does not comply with those requirements at the time of recertification. SBA believes that is sufficient and deletes the language set forth in proposed § 126.501(b) in this final rule.

HUBZone Principal Office

The SBA generally adopted as final its proposed changes to the definition of “principal office” for purposes of the HUBZone program—with one significant difference.

In response to comments, the SBA decided not to implement the proposed provision which mandated that if 100% of a firm’s employees telework, then 51% must reside in HUBZones in order to meet the principal office requirement. The SBA explained:

SBA believes that allowing 35% of a firm’s employees to qualify the firm as HUBZone eligible where the firm does not have a “principal office” would be inconsistent with the statutory requirements. The principal office requirement is statutorily required in addition to the 35% residency requirement. The proposed rule attempted to recognize the increase in teleworking, but sought to make up for the lack of a principal office being located in a HUBZone by requiring a greater percentage of HUBZone resident employees. The final rule does not adopt the proposed language. As such, the current policy will continue to apply, meaning that HUBZone firms must always have an office located in a HUBZone where more employees work compared to any other location (unless all employees work in HUBZones and have at least 35% HUBZone resident employees). SBA will continue to evaluate the impact of the prevalence of telework on the HUBZone portfolio.

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