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In this part of our ongoing series (see Part I, Part II and Part III) on the Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments implementing the National Defense Authorization Act of 2013 (FY2013 NDAA) Amendments, we address the new recertification requirement that is triggered following the merger, sale, or acquisition of a firm that has submitted an offer as a small business concern (SBC).

A concern that represents itself as a small business and qualifies as small at the time of proposal submission is considered to be a small business throughout the life of that contract.  This even applies for Multiple Award Contracts—the SBC is considered small for each order issued against the contract with the same NAICS code and size standard (unless a contracting officer chooses to request a new size certification in connection with a particular order).  In other words, even where a concern grows to be other than small, the procuring agency may exercise options and still count the award as an award to a SBC, unless a recertification requirement has been triggered.

Given the great boon that comes to a firm upon award of a contract where it has qualified as a SBC, the SBA has long sought to set the right balance for what should happen when a small business is involved in a merger, sale, or acquisition. The concern is that if a SBC could submit a proposal with pricing, certify that it is small, and actually qualify on that date of proposal submission as small, should that small business be able to sell itself following proposal submission or contract award to a large business and allow the large business to benefit for up to five years of contract performance as a “small business”?  The SBA’s answer to that is no.  The SBA’s regulations as currently drafted require recertification in certain circumstances following a merger, sale, or acquisition but only once award has already been made.  In the final rule, SBA imposes new recertification requirements aimed at changes that occur within the window between proposal submission and contract award.

Current Recertification Requirements

The SBA determines the size status of a firm, including its affiliates, as of the date the firm submits an offer to the procuring agency that includes price. See 13 C.F.R. § 121.404(a).

Under the current SBA regulations, the SBA requires SBCs to recertify size status in two circumstances. First, SBCs must recertify to the procuring agency within 30 days of an approved contract novation.  13 C.F.R. § 121.404(g)(1).  If it cannot recertify as small, the offeror must inform the procuring agency that it is other than small.  If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals.

Second, where contract novation is not required, SBCs must recertify within 30 days of a transaction becoming final, or inform the procuring agency that it is other than small. 13 C.F.R. § 121.404(g)(2(i). If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals. Recertification is required in these circumstances:

(A) When a concern acquires or is acquired by another concern;

(B) From both the acquired concern and the acquiring concern if each has been awarded a contract as a small business; and

(C) From a joint venture when an acquired concern, acquiring concern, or merged concern is a participant in a joint venture that has been awarded a contract or order as a small business.

13 C.F.R. § 121.404(g)(2)(ii).

As drafted, these regulations do not expressly require recertification in situations where a proposal has been submitted but before award is made. Nor do these regulations require that an agency exclude an offeror from a procurement when a small business concern became “large” after the date required for self-certification.

The Final Rule Imposes a New Recertification Requirement on Small Businesses

In the final rule, the SBA adds a recertification requirement as 13 C.F.R. § 121.404(g)(2)(ii)(D). Now, if the merger, sale or acquisition occurs after offer but prior to award, SBCs will have to recertify its size to the contracting officer prior to award.

In commentary to the rule, the SBA explains that part of the purpose of this addition is that an agency’s receipt of small business credit should not depend on whether an acquisition or merger occurs the day before award of a contract.

The final rule also broadens the scope of required recertifications in cases where contract novation is not required. Currently it is limited to cases of merger or acquisition.  The final rule expands it to be in cases of merger, sale, or acquisition, where contract novation is not required.

These changes become effective June 30, 2016.

Potential Impact

As a result of this rule, firms considering a merger, sale, or acquisition before award must assess the impact a change in size status may have in on-going procurements. And, the timeline of an acquisition cycle is often difficult to forecast. These new requirements are a significant departure from size status determinations that were previously made based on the initial proposal, and for those firms engaging in M&A, this rule will now require recertification while proposals are pending on small business set-asides. Additionally, the total impact of these changes to the recertification requirement is unclear, for example, on contracting officers’ decisions to award contracts to companies for which they will not be entitled to receive small business credit.