L & R Alert November, 2014

Small Business Size Standards:  Proposed Changes in Employee-Based Standards
SBA recently issued two proposed rules seeking comments on revised employee-based size standards.  These proposals are part of an on-going comprehensive review by the SBA of all size standards to determine whether they are consistent with current data.
In the first proposed rule, issued on September 10, 2014, the SBA proposed increases in the size standard for 209 industries in NAICS Sector 31-33, Manufacturing.  79 Fed. Reg. 54,146.   SBA proposes one of five employee size standards for each industry:  500, 750, 1,000, 1,250 and 1,500 employees.  A full list of NAICS codes and proposed size standards may be found is set forth in the rule.
In the second proposed rule, also issued on September 10, the SBA proposed certain changes to employee standards for industries that are not part of the Manufacturing (NAICS Sectors 31-33), Wholesale Trade (NAICS Sector 42), or Retail Trade (Sector 44-45) sectors.  Specifically, the SBA proposes to increase the employee size standard for 30 industries and to reduce the employee size standard (from 500 to 250 employees) for three mining industries.  Of note, the SBA also proposes to eliminate the Information Technology Value Added Reseller sub-industry exception under NAICS 541519 (Other computer Related Services) and its 150 employee size standard. This proposed rule may be found at 79 Fed. Reg. 53,646. Corrections to the proposed rule were published on October 20, 2014.  79 Fed. Reg. 62,576.
Comments on both proposed rules were due by November 10, 2014.
For more information on this topic, contact Judith B. Kassel at Judith.Kassel@arentfox.com
Limitations on Subcontracting Rule: Status Check
It has been nearly two years since the National Defense Authorization Act for Fiscal Year 2013 (“NDAA FY 2013”) was enacted into law.  The NDAA FY 2013 made numerous changes to the small business contracting rules, including a major change to the “performance of work” requirements referenced in SBA’s regulations and set forth in FAR clause, 52.219-14, Limitations on Subcontracting.  The enacted changes, however, have yet to be implemented in SBA’s regulations or the FAR clause.   As a result, there has been some confusion as to which set of “performance of work” requirements apply.
The FAR clause 52.219-14, Limitations on Subcontracting, and SBA’s regulations currently require a small business prime contractor who holds a contract for services to perform “at least 50 percent of the cost of contract performance incurred for personnel” with its own employees (supply and construction contracts use different language). Compliance with this rule sometimes presents a challenge for small business prime contractors; many subcontractors, for example, are unwilling to provide a prime contractor the internal cost data necessary to ensure compliance.   
The NDAA FY 2013 modified the “performance of work” requirements to make compliance easier for small businesses by simplifying the math.  Instead of using “cost” as the measure of compliance, the NDAA FY 2013 modified the “performance of work” requirement to now state that a small business prime “may not expend on subcontractors more than 50 percent of the amount paid to the [prime] under the contract.”  Thus, the new rule uses the “amounts paid”, as opposed to “costs of personnel incurred” as the measure of compliance, which is an easier benchmark to identify for both small business prime contractors and the Government.   

In addition to this modification, the NDAA FY 2013 also provided that small business prime contractors can include the amounts paid “similarly situated” subcontractors in the small business prime contractor’s performance of work calculation.  Thus, a small business who subcontracts to a small business will be deemed to comply with the new “performance of work” rule if the amounts paid the two small businesses, combined, is at least 50% of the total amount paid the small business prime contractor.   
As noted above, the SBA has not yet implemented regulations addressing the changes enacted by the NDAA FY 2013.  The FAR Council, likewise, has not issued a new FAR clause replacing 52.219-14, Limitations on Subcontracting.  This fact notwithstanding, some agencies and some small businesses have argued that, because the new rules have been enacted by statute, they should apply now.  The Government Accountability Office appeared to support this view in a protest case published earlier this year, Sealift, Inc., B-409001 (January 6, 2014).  In a footnote to the case, the GAO cited the new “performance of work” requirements enacted by the NDAA FY 2013 and stated that the protester complied with the new rule, implying that the new rule was the applicable standard by which compliance with the “performance of work” requirement would be measured.  The GAO, however, was not explicit on this issue. 

Compliance with the Limitations on Subcontracting clause was the topic of a recent GAO report.  InSeptember of this year, GAO published a report titled, “Continued Noncompliance with Monitoring Requirements Signals Need for Regulatory Change.” The report concluded that, at least with respect to 8(a) program contractors, contracting officers were not paying adequate attention to compliance with the “performance of work” requirements in the Limitations on Subcontracting clause. With regard to the planned regulatory changes necessitated by the NDAA FY 2013, the report noted that SBA had finished drafting the proposed regulations implementing the new rules in June but also observed that it “will take more actions and could take years, however, to incorporate any changes into the FAR.”  The report confirmed the widespread observation that agencies are adhering to the old rules pending incorporation into the FAR of the new rules 
Members of SECAF’s Legislative & Regulatory Committee have heard from SBA that these rules are due out “very soon.”
For more information on this topic, please contact Stephen P. Ramaley at sramaley@milesstockbridge.com
HUBZone Program News
The 2014 National HUBZone Conference was held mid-September in Chantilly, Va. and with it came several announcements that may impact HUBZone companies nationwide.
SBA Administrator, Maria Contreras-Sweet, spoke at the conference and expressed strong support for the HUBZone program.  Secretary Contreras-Sweet acknowledged that HUBZone spending is well below the 3% government-wide goal and she announced that several initiatives are in the works to boost awareness for the HUBZone program, improve outreach to HUBZone firms, and ultimately increase HUBZone spending.  
According to Secretary Contreras-Sweet, one way the SBA may try to boost HUBZone participation is by changing how the HUBZone Program deals with redesignated HUBZone areas.  The HUBZone maps are not static – HUBZone areas evolve based on several data points, such as new Census data.  Currently, when an update to the HUBZone maps causes a location to lose its HUBZone status, the location goes into “redesignated” status.  The redesignated status allows the location to remain HUBZone eligible for three more years, giving HUBZone firms in that location time to move to a new HUBZone location.  Secretary Contreras-Sweet said that SBA is considering a change that would lengthen the amount of time a location can stay in redesignated status.  She did not say how much more time they might add, but any extension beyond the current three-year period would be welcome news for HUBZone firms because it would give more firms a chance to remain in the HUBZone program for a longer period of time.
For more information on this topic, please contact jwilliams@pilieromazza.com.
National Defense Authorization Act for FY 2015 - Status
In our June ALERT, we reported that the House had passed a draft of the NDAA for FY 2015 and that the Senate was expected to take up the bill this Fall.  The NDAA for FY 2015 as passed by the House includes a number of provisions beneficial to small businesses, including increasing the Government-side small business contracting goal and allowing sole-source contracts to Women-Owned Small Businesses.  It also includes a controversial provision which transfers responsibility for verification of Veteran-Owned Small Businesses from the Center for Verification and Evaluation at VA to SBA.
The Senate, however, will not likely consider the bill independently; instead the House and Senate are trying to work on a compromise bill.  The bill may be taken up by the lame-duck session, although the success of passing the bill during the session will likely depend on the ability to limit amendments to the bill.  In short, the future of the NDAA FY 2015 at this point is uncertain.
For more information on this topic, please contact Devon Hewitt, Chair of the Legislative & Regulatory Committee, at dhewitt@protoraelaw.com.