The annual Interagency Suspension and Debarment Committee (ISDC) recently issued its annual report to Congress. The report, found here, contains details describing improvements to the federal suspension and debarment process and a summary of each agency’s suspension and debarment activities in Fiscal Year 2019. Throughout FY2019, the ISDC pursued a strengthened understanding and awareness of suspension and debarment activities across the federal acquisition and financial assistance communities, and continued to focus on modernizing/streamlining lead agency coordination. Otherwise, while the total numbers of referrals and suspensions increased in FY2019 compared to FY2018, proposed debarments and debarments continued to decline. In addition, the ISDC notes that from FY2018 to FY2019 agencies better utilized pre-notice letters to notify individuals or entities that the Suspension and Debarment Official (SDO) was considering SDO action, allowing the recipient an opportunity to respond before formal SDO action.
Like many other aspects of the legal landscape, 2020 was defined by COVID-19 and emerging areas of exposure and enforcement to come related to pandemic relief funding. But 2020 also saw many other important FCA developments, from case law developments on materiality, causation, pleading requirements, bars to qui tam actions, and the government’s authority to dismiss qui tams, among others. These highlights are among the important developments discussed by C&M attorneys in a “Feature Comment” published in The Government Contractor.
Contractors barely had time to digest the prior administration’s changes designed to tighten the Buy American Act restrictions when, on January 25, 2021, President Biden issued Executive Order 14005 on “Ensuring Future of America is Made in America by all of America’s Workers” directing further tightening and perhaps even a new approach to determining what will constitute a “domestic end product” under the implementing regulations (previously discussed here).
Buy American Act Final Rule
On January 19, 2021, the FAR Council belatedly finalized a rule to implement President Trump’s EO 13881, “Maximizing Use of American-Made Goods, Products, and Materials” (July 15, 2019) (discussed here). The most significant changes adopted in the final rule include:
- Increasing the amount of domestic component cost generally needed (to 55%) for a non-COTS end product to qualify as “domestic;”
- Establishing, for the first time outside of federal grant programs, special and complex rules for end products consisting “wholly or predominately of iron or steel or a combination of both”; and
- Increasing the price evaluation penalty assessed on non-domestic end products in civilian agency procurements to 20% generally and 30% for domestic end product offers from small business.
Biden Made in America EO
EO 14005 is largely prescriptive, laying out the general policy of maximizing the use of goods, products, and materials produced in, and services offered in, the U.S. In addition to requiring agencies to review and report on implementation of and compliance with the various domestic preference regimes, the EO includes the following key provisions:
- Centralized process for waiver review and publication. The EO creates a new Made in America Office within the Office of Management and Budget (OMB) to be headed by a Made in America Director, who will have authority to review proposed agency waivers of any domestic preferences, with ultimate resolution by the President for any disagreements that cannot be resolved between OMB and the agency with respect to the appropriateness of the waiver. The EO also requires the General Services Administration (GSA) to develop a website where it will publish proposed and granted waivers along with the justification.
- Potential (additional) changes to the BAA. The EO also directs the FAR Council, within 180 days of the order, to consider proposing several amendments to the BAA, including (a) potentially a further increase in the domestic component requirements and applicable price evaluation preferences; and (b) replacement of the long-standing “component test” with a test “under which domestic content is measured by the value that is added to the product through US-based production or job-supporting economic activity.”
The EO also directs the FAR Council specially to review to the current special rules for commercial item IT, as well as more generally to report within 180 days recommendations on how to further effectuate the policy announced in the EO.
On January 24, 2021, the Office of Management and Budget (OMB) issued a memo which provides guidance to federal agencies on maintaining a safe federal workplace during the COVID-19 pandemic. This memo instructs federal agencies to require face masks and social distancing in all Federal buildings, as directed by President Biden’s Executive Order (EO) on Protecting the Federal Workforce and Requiring Mask-Wearing issued on January 20, 2021, which Crowell has discussed in a previous client alert. It also provides model safety principles which the 24 Chief Financial Officer Act agencies are required to review and use to build tailored workplace safety plans by January 29, 2021. These plans should also address how the safety principles will apply to on-site contractor employees, and agencies must ensure such contractor employees are aware of the requirements to comply with the CDC guidelines, including mask wearing and social distancing.
The model safety principles include:
- Establishing a COVID-19 Coordination Team by January 26, 2021 that is responsible for conducting assessments and reviewing compliance with the workplace safety plans;
- Continuing to encourage the use of telework;
- Requiring the use of face masks by all federal employees and on-site contractors (face shields must not be permitted as substitutes) and providing exceptions consistent with CDC guidance for those unable to wear masks or during specific activities (such as eating and drinking or when alone in an enclosed space);
- Limiting official domestic and international travel for Federal employees;
- Working with local public health officials on contact tracing;
- Conducting symptom monitoring for all federal employees and on-site contractors on a daily basis or upon entry to the workplace, which the agency will use to assess the individual’s risk level and to determine whether they should be allowed entry to the workplace;
- Limiting capacity in all Federal workplaces to 25%, unless it is physically impossible or poses a threat to national security; and
- Requiring social distancing of at least 6 feet from others.
The principles also address environmental cleaning, hygiene, and ventilation and air filtration, as well as the use of elevators and shared spaces. Additionally, the Centers for Disease Control and Prevention is developing a testing plan for the federal workforce.
Crowell & Moring will continue to monitor developments in the implementation of the memo.
In this episode, hosts Kate Growley and Evan Wolff talk about the concepts of confidentiality, integrity, and availability in the cybersecurity context. Crowell & Moring’s “Byte-Sized Q&A” podcast takes the complex world of government contracts cybersecurity and breaks it down into byte-sized pieces.
The National Institute of Standards & Technology (NIST) has published three draft addenda to its manufacturer IoT guidance NISTIR 8259, as well as draft guidance for federal agencies, NIST SP 800-213, on integrating IoT devices into their networks. Notably, NIST published the addenda—8259B, 8259C, and 8259D—and 800-213 just days after the enactment of the Internet of Things Cybersecurity Improvement Act of 2020, in which Congress directed NIST to draft and finalize security guidelines for IoT devices procured by the federal government. While neither the 8259 addenda nor 800-213 fall within the Act’s purview, they are likely to inform NIST’s development of its IoT cybersecurity guidance under the Act. This is particularly true with regard to both 800-213 and addendum 8259D, the latter of which offers a “worked example” of implementing the core 8259 requirements within the specifications of the FISMA process and the NIST SP 800-53 security controls.
This week’s episode covers a False Claims Act update from DOJ, DOD COVID-19 vaccination plan of interest to contractors, final rule on LPTA, a Commerce final rule on information and communications technology or services, and range of executive orders issued by President Biden, and is hosted by partner Peter Eyre and associate Rina Gashaw. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.
In a previous blog post, we covered the Small Business Administration’s (SBA) consolidation of the 8(a) Business Development (BD) Mentor-Protégé Program and the All Small Mentor-Protégé Program. Beyond consolidating the programs, SBA also made a host of additional changes to the 8(a) Program, almost all of which took effect on November 16, 2020. As with consolidation, most of the changes—including those discussed below—are intended to reduce burden on small businesses and streamline the 8(a) Program.
At a practical level, the most impactful changes for current and future 8(a) Program participants concern the revised reapplication period; follow-on contracts and sole-source awards; the immediate family member rule; and changes in ownership. Each of these changes appears in the Final Rule covering Consolidation of Mentor-Protégé Programs and Other Government Contracting Amendments (85 FR 66146-01, 2020-19428.pdf (govinfo.gov)), and the Federal Regulations (13 C.F.R. Part 124).
Reapplication Period (13 C.F.R. § 124.207)
One of the most significant changes to the 8(a) Program involves reducing the waiting period for applicants reapplying to the Program. Previously, unsuccessful applicants had to wait 12 months from the date of a final agency decision to reapply for admission into the Program. Now, that timeframe has been cut to 90 days. SBA explained that the “change will reduce the number of appeals to [OHA] and greatly reduce the costs associated with appeals borne by disappointed applicants.” The reduction does come with a tradeoff, however. Unsuccessful applicants must now forego the previously-available reconsideration process, which involved appealing the determination to the SBA’s Office of Hearings and Appeals (OHA). Given the time and expense of an OHA appeal, applicants will likely view the 90-day reconsideration period as a welcome change.
Follow-On Contracts (13 C.F.R. § 124.3)
SBA also clarified what counts as a follow-on contract for purposes of the 8(a) Program. Under 13 C.F.R. § 124.504(d)(1), “where a procurement is awarded as an 8(a) contract, its follow-on or renewable acquisition must remain in the 8(a) BD program unless SBA agrees to release it for non-8(a) competition.” Despite this language, there was confusion as to what exactly qualified as a follow-on contract.
In order to address the uncertainty, SBA added a multi-part definition to the regulations explaining follow-on requirements or contracts:
The determination of whether a particular requirement or contract is a follow-on includes consideration of whether the scope has changed significantly, requiring meaningful different types of work or different capabilities; whether the magnitude or value of the requirement has changed by at least 25 percent for equivalent periods of performance; and whether the end user of the requirement has changed. As a general guide, if the procurement satisfies at least one of these three conditions, it may be considered a new requirement. However, meeting any one of these conditions is not dispositive that a requirement is new. In particular, the 25 percent rule cannot be applied rigidly in all cases. Conversely, if the requirement satisfies none of these conditions, it is considered a follow-on procurement.
13 C.F.R. § 124.3.
In addition to the definition, the regulation amended 13 C.F.R. § 124.504 to make clear that contracting officers must receive SBA’s approval prior to releasing any follow-on procurement from the 8(a) BD Program.
Sole-Source Awards (13 C.F.R. § 124.501(g))
SBA clarified eligibility requirements for sole-source awards under the 8(a) Program. In the Final Rule, SBA explained that a Participant’s eligibility for 8(a) sole-source awards is determined at the time SBA accepts a requirement for the 8(a) Program. And, in instances where a Participant graduates from the Program prior to the actual sole-source award, the award cannot be made to that Participant.
SBA also revised regulations regarding the value of sole-source awards Participants are eligible to receive. While the previous version of 13 C.F.R. § 124.519 was NAICS dependent, the new version eliminates this point of confusion and states that a “Participant may not receive sole source 8(a) contract awards where it has received a combined total of competitive and sole source 8(a) contracts in excess of $100,000,000 during its participation in the 8(a) BD program, regardless of its primary NAICS code.”
As with the previous changes, these are aimed at reducing confusion for 8(a) Participants and encouraging greater participation in the Program.
The Immediate Family Rule (13 C.F.R. § 124.105(g))
Finally, SBA amended 13 C.F.R. § 124.105(g) to provide greater clarity in situations where an applicant has an immediate family member that has used his or her disadvantaged status to qualify another current or former Participant in the Program. The purpose of the regulation is to ensure that individuals do not unduly benefit from the 8(a) BD Program by taking advantage of the 8(a) certification of a family member. Under the previous version of the regulation, the applicant firm was required to demonstrate that “no connection exist[ed]” between the applicant and the other current or former family-member Participant. SBA determined that this rule was “too harsh,” and that a firm should not be penalized for having an immediate family member participate in the 8(a) Program.
To address the issue, SBA replaced the former “no connection exists” standard with a new test for determining whether entities are truly separate.” Under the new, more relaxed standard, family entities cannot:
- Be connected by any common ownership or management, regardless of the amount or position;
- Have a contractual relationship that is not conducted at arm’s length;
- Share common facilities; or
- Operate in the same primary NAICS code and the individual seeking to qualify the applicant concern does not have management or technical experience in that primary NAICS code.
13 C.F.R. § 124.105(g).
While this new “truly separate” test is still somewhat harsh, it is less so than the previous “no connection exists” standard. It also encapsulates SBA’s thinking that “an individual should not be required to avoid all contact with the business of an immediate family member.” Instead, he or she should merely have to demonstrate that the two businesses are truly separate and distinct entities.
As with the previously-discussed regulations, these changes are emblematic of SBA’s efforts to clarify and simply the 8(a) Program in an effort to boost participation.
As we’ve stressed about the mentor-protégé program, the Small Business Administration’s (SBA) primary concern is that the program benefits the small business protégés.
Past performance is a particularly delicate topic for small businesses, presenting something of a what-came-first-the-chicken-or-the-egg question. Past performance is not strictly required in order to win prime federal contracts, and its weighting and restrictions can vary greatly by procurement. For example, FAR 15.305 prohibits an offeror without a record of relevant past performance from being evaluated favorably or unfavorably under past performance. Nonetheless many small businesses find it exceedingly difficult to break into the federal market without a record of past performance.
Of concern when SBA initially established the All-Small Mentor-Protégé Program was how past performance would be treated for small business joint ventures authorized under 13 C.F.R. § 125.9. SBA initially required procuring agencies to consider not only the past performance and experience of the joint venture but also of the joint venture members. In the recent rulemaking, SBA broadened the regulation to provide for contracting agencies to consider not only past performance and experience, but also the capabilities, of the joint venture members.
The Small Business Act
The Small Business Act requires that agencies in certain circumstances evaluate the individual partners of a joint venture and to attribute those evaluations to the joint venture itself if the joint venture does not demonstrate sufficient capabilities or past performance itself:
When evaluating an offer of a joint venture of small business concerns for any multiple award contract above the substantial bundling threshold of the Federal agency, if the joint venture does not demonstrate sufficient capabilities or past performance to be considered for award of a contract opportunity, the head of the agency shall consider the capabilities and past performance of each member of the joint venture as the capabilities and past performance of the joint venture.
15 U.S.C. § 644(q)(1)(C).
The Prior Joint Venture Evaluation Provision
In establishing the All-Small Mentor-Protégé Program, SBA provided for contracting agencies to consider not only the past performance and experience of the joint venture, but also those of its members:
When evaluating the past performance and experience of an entity submitting an offer for a contract set aside or reserved for small business as a joint venture established pursuant to this section, a procuring activity must consider work done individually by each partner to the joint venture as well as any work done by the joint venture itself previously.
13 C.F.R. § 125.8(e). The joint venture regulations for other statuses contained similar language regarding past performance and experience for 8(a) joint ventures (§ 124.513(f)), SDVOSB joint ventures (§ 125.18(b)(5)), for WOSB joint ventures (§ 127.506(f)), or HUBZone joint ventures (§ 126.616(f)).
The Revised Joint Venture Evaluation Provision
As part of its rulemaking, SBA expanded the provision on the evaluation of “past performance and experience” to also cover “capabilities … business systems and certifications” and added a prohibition on agencies requiring a protégé to individually meet the same criteria as other offerors. These changes drive home that procuring agencies must consider joint ventures in the aggregate.
In full, the amended regulation reads:
When evaluating the capabilities, past performance, experience, business systems and certifications of an entity submitting an offer for a contract set aside or reserved for small business as a joint venture established pursuant to this section, a procuring activity must consider work done and qualifications held individually by each partner to the joint venture as well as any work done by the joint venture itself previously. A procuring activity may not require the protégé firm to individually meet the same evaluation or responsibility criteria as that required of other offerors generally. The partners to the joint venture in the aggregate must demonstrate the past performance, experience, business systems and certifications necessary to perform the contract.
13 C.F.R. § 125.8(e). (SBA did not initially propose revising the past performance and experience provisions regarding 8(a) joint ventures (§ 124.513(f)), SDVOSB joint ventures (§ 125.18(b)(5)), for WOSB joint ventures (§ 127.506(f)), or HUBZone joint ventures (§ 126.616(f)). But, SBA issued a correcting amendment effective January 14, 2021 to conform the regulations. Now, each of these provisions are analogous.)
In its commentary of the final rulemaking, SBA explained that this enhancement was at least partially the result of a commentator pointing out that some procuring activities have required that the protégé of a mentor-protégé joint venture be able to individually satisfy the requirements. SBA disagrees that this is reasonable. Nonetheless, SBA concluded in the commentary to its recent rulemaking that: “The joint venture should be a tool to enable it to win and perform a contract in an area that it has some experience but that it could not have won on its own.”
The amendments to the joint venture evaluation provision appear driven by three important concepts:
- That the protégé must already have some experience in the type of work to be performed under the contract. Nowhere has SBA specified that a joint venture is limited to bidding on set-aside contracts issued under the same NAICS code for which SBA approved the mentor-protégé agreement—indeed, SBA’s recent revision to 13 C.F.R. § 125.9(d)(1)(iii) makes clear that a joint venture can bid on work under more than the single NAICS code identified in the mentor-protégé agreement. Nonetheless, SBA seems to expect that the protégé have some experience in the NAICS code under which the joint venture bids.
- That the purpose of the joint venture is to allow the protégé to be able to perform requirements that it could not meet by itself.
- That the protégé must bring something to the table other than its size or socio-economic status—in other words, the protégé should have some experience or past performance. (Although with respect to this—there can often be a large gap between the experience of past performance that a small business has and what an agency has deemed to be relevant past performance for purposes of a particular procurement.)
How this amendment impacts existing GAO caselaw on the evaluation of joint ventures created pursuant to a mentor-protégé relationship?
Over the past few years, GAO has had the opportunity to assess challenges to solicitation criteria concerning the evaluation of joint ventures as well as the reasonableness of agency’s evaluation of the past performance and experience of joint ventures created pursuant to an SBA-approved mentor-protégé relationship.
In the pre-award context, GAO previously rejected a challenge that a solicitation improperly required all members of a small business mentor-protégé joint venture to have systems, certifications, and clearances in order to earn points under the evaluation scoring criteria. In ADVENTureOne LLC; Apogee Engineering, LLC, B-408685.23, Sept. 20, 2019, 2019 CPD ¶ 329, a small business argued that the scoring criteria of an RFP for award of new contracts in the OASIS small business pool contracts was unduly restrictive because it improperly limited a mentor-protégé joint venture’s ability to earn points. The RFP provided that “systems, certification and clearances ‘are not minimum or mandatory requirements,’” but that offerors may earn points under the scored evaluation for meeting such criteria. For joint ventures, the RFP provided that such offerors could only earn points for these criteria if either the joint venture or all members of the joint venture met the criteria. While the protester argued that 13 C.F.R. § 125.8(e) prohibited such an evaluation scheme, GAO concluded that neither statute (including the Small Business Act at 15 U.S.C. § 644(q)(1)(C)) nor regulation (including 13 C.F.R. § 125.8(e)) required GSA to treat the capabilities of any member of the joint venture as the capabilities of the joint venture.
Of note, GAO concluded that 15 U.S.C. § 644(q)(1)(C) did not apply because it was limited to circumstances where the joint venture itself “does not demonstrate sufficient capabilities or past performance to be considered for award of a contract opportunity.” Since the amended regulation is not so limited, it seems likely that had GAO been interpreting the agency’s requirements under the amended regulation, the decision would have come out differently.
In the post-award context, GAO has issued multiple decisions upholding the concept that an agency can consider the experience and/or past performance of a joint venture member where not otherwise prohibited by the solicitation:
- 22nd Century Techs., Inc.,B-417478.3, B-417478.4, Feb. 24, 2020, 2020 CPD ¶ 74: GAO concluded that the agency reasonably permitted a SBA-approved joint venture to rely on the experience and past performance of its individual joint venture partners. In particular, GAO ruled that, under the STARS II IDIQ contract, the agency reasonably interpreted the requirement that the “prime contractor” provide past performance contract profiles permits a vendor to submit and the agency to consider information submitted by the partners of an SBA-approved 8(a) joint venture.
- Gunnison Consulting Group, Inc., B-418876, B-418876.3, B-418876.4, Oct. 5, 2020, 2020 CPD ⁋ 344: In this CIO-SP3 task order procurement, the solicitation provided that while an offeror can rely on the experience of a major subcontractor, it nonetheless had to propose at least one experience reference from the prime vendor that holds the CIO-SP3 SB contract. The protester argued that the joint venture failed to submit a relevant experience example for itself because it relied on two relevant experience examples from the mentor joint venture partner and one from its proposed subcontractor. GAO concluded that the distinction between offeror and major subcontractor did not create a requirement that a joint venture offeror submit an experience example of its own and, relying on 22nd Century Techs., Inc., supra, GAO ruled that the agency reasonably credited the joint venture with the mentor’s performance in line with 13 C.F.R. § 125.8.
These types of challenges are likely to be decided in a similar fashion for past performance and experience and beyond to “capabilities … business systems and certifications.”
There is another line of caselaw regarding the evaluation of joint ventures at GAO concerning the consideration or weighting an agency is required to give to a particular type of past performance or experience.
For example, in a procurement for award of new OASIS contracts, GAO denied a challenge to a solicitation term that limited the number of experience projects that may be submitted in a mentor-protégé joint venture’s proposal for a large business mentor firm. The agency argued in Ekagra Partners, LLC, B-408685.18, Feb. 15, 2019, 2019 CPD ¶ 83 that the solicitation was consistent with the Small Business Act (15 U.S.C. § 644(q)(1)(C)) and SBA’s regulation (13 C.F.R. § 125.8(e)) as these only required consideration be given to the experience of the mentor and protégé joint venture members—not that equal consideration be given. GAO ultimately denied the protest, as neither procurement laws nor regulations prohibited the solicitation term and the agency provided a reasonable basis for its inclusion (e.g., allowing a mentor-protégé joint venture rely primarily upon the mentor’s experience provides a “‘fundamentally unfair competitive advantage’ as compared to small businesses that are not part of such joint ventures” and in order to ensure that the small business protégé is capable of performing the work).
Of significance here is that in response to GAO’s invitation to opine on the arguments in Ekagra, SBA agreed that “neither SBA regulations nor the Small Business Act specifically address the relative consideration that an agency must give to the past performance of a large business mentor in a mentor-protégé joint venture, as compared to a small business protégé.” GAO reported that:
SBA further states that, although it may address this matter in future regulations, “presently SBA’s regulations are limited to stating that the agency ‘must consider work done individually by each partner to the joint venture,”’ including a large business mentor.
As it currently stands, the amended regulation contains language similar to what GAO interpreted here—that “a procuring activity must consider work done and qualifications held individually by each partner to the joint venture as well as any work done by the joint venture itself previously.” (While the amended regulation also states that “[t]he partners to the joint venture in the aggregate must demonstrate the past performance, experience, business systems and certifications necessary to perform the contract,” this does not seem to expressly speak to weighting.)
Relatedly, GAO has denied a challenge to the rating of substantial confidence for the past performance for a SDVOSB joint venture where the protester where the protester argued that the agency had to give the same weight to a proposed subcontractor’s past performance as it would to the past performance of a non-managing joint venture member. In K2 Solutions, Inc, B-417689, Sept. 24, 2019, 2019 CPD ¶ 330, the record revealed that agency gave slightly more weight to the past performance of the joint venture managing partner as opposed to the non-managing partner and then gave significantly more weight to the combined past performance of the managing and non-managing partners than to the past performance of subcontractors. An unsuccessful offeror argued that since the agency used the term non-managing partner and subcontractor interchangeably in the solicitation, the past performance of both should be given equal weight. GAO disagreed, as no statute, regulation, or prior precedent required the agency to treat a subcontractor and non-managing partner the same—noting that the RFP’s evaluation scheme was consistent with the SBA’s regulations.
GAO’s caselaw on weighting means that it remains important for offerors to understand exactly what the evaluation criteria provides for before submitting a proposal for a set-aside either as a joint venture or in which another joint venture may be bidding. Until GAO has opportunity to consider the amended regulation’s inclusion of “capabilities … business systems and certifications” int 13 C.F.R. § 125.8(e), offerors should be aware that agencies may try to read similar restrictions into the evaluation of a joint venture’s “capabilities … business systems and certifications.”
The National Defense Authorization Act for Fiscal Year 2021 on the Evaluation of Small Businesses’ Past Performance as Part of a Joint Venture
To date, SBA’s regulations have concerned the evaluation of the joint venture when the joint venture is competing in a procurement. But, Congress has legislatively addressed how agencies are to evaluate a small business’ past performance as part of a joint venture. As we have discussed elsewhere, Section 868 of National Defense Authorization Act for Fiscal Year 2021 amends 15 U.S.C. § 644 to allow a small business concern, if it has no relevant past performance of its own, to rely on the performance of a joint venture in which it took part. The small business is required to describe its duties and responsibilities as part of the joint venture within its proposal. SBA must issue rules implementing these changes within 120 days of enactment of the NDAA. (Note, Section 868 also amends 15 U.S.C. § 637 to require prime contractors to provide small business concerns with a record of the entity’s past performance as a subcontractor so that the small businesses may use that record in future proposals.)
In the Small Business Administration’s (SBA) October 2019 Final Rule covering Consolidation of Mentor-Protégé Programs and Other Government Contracting Amendments, SBA also included modification to two of the affiliation tests under 13 C.F.R. § 121.103.
(Note, SBA made a number of other changes to 13 C.F.R. § 121.103 focused on the joint venture affiliation test.)
Identity of Interest
With respect to the “identity of interest” test in § 121.103(f)(2), the SBA has added one additional method by which an entity can rebut the presumption of economic dependence. Under the current iteration of the rule, SBA can presume an identity of interest based upon economic dependence if one concern derives 70 percent or more of its receipts from another concern over the previous three fiscal years. The concern can only rebut that presumption by showing that it has only been in business a short while and has not had the opportunity to secure contracts separately.
Now, the presumption is also rebuttable by a showing that the contractual relation does not restrict the concern in question from selling the same type of products or services to another purchaser. SBA added an example of the application of this new basis to rebut the presumption: if over a five-year period, 195 of Firm A’s 200 contracts are with Firm B and represent greater than 70% of Firm A’s revenue over the past 3 years, SBA will likely find the two affiliated unless Firm A “can show that its contractual relations with Firm B do not restrict it from selling the same type of products or services to another purchaser.”
Newly Organized Concern Rule
With respect to the “newly organized concern” test in § 121.103(g), SBA is adjusting the test to reflect that affiliation may arise where both former and current officers, directors, principal stockholders, managing members, or key employees of one concern organize another concern that meets that satisfies all the prongs of this test. Currently, the rule only provides for affiliation based on former key individuals, but now the test will ensure that affiliation may arise where the key individuals are still associated with the first company.
And, although SBA indicated that entities and entity-owned firms are already excepted from affiliation under the newly organized concern rule by § 121.103(b)(2), SBA put in clarifying language to ensure that the newly organized concern rule cannot be read to contradict the 8(a) rule that permits a manager of a tribally-owned concern to manage two Program Participants at the same time (at 13 C.F.R. § 124.109(c)(4)(iii)
While SBA notes that § 121.103(b)(2) already excepts tribes, ANCs and NHOs and entity-owned firms, SBA added clarifying language in order to ensure that the “newly organized concern” rule is not misapplied to such entities. Now, this test will not apply where an individual currently manages two 8(a) program participants at the same time pursuant to § 124.109(c)(4)(iii).