Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH
DATE: November 22, 2002
SUBJECT: Small Business Administration; Small Business Size Standards and Proceedings of the Office of Hearings and Appeals
SOURCE: Federal Register, November 22, 2002, Vol. 67, No. 226, page 70339
AGENCIES: Small Business Administration (SBA)
ACTION: Proposed Rule
SYNOPSIS: SBA is proposing to amend its small business size regulations and the regulations applying to appeals of size determinations. The proposed rule would amend the definitions of affiliation, annual receipts, and employees, and it would make procedural and technical changes to cover new programs such as the Historically Underutilized Business Zone (HUBZone) program and the governmentwide Small Disadvantaged Business (SDB) program. Also, the proposed rule would codify several longstanding precedents of SBA's Office of Hearings and Appeals (OHA) and would clarify the jurisdiction of that office.
EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations (CFR), Chapter 1, Small Business Administration. The SBA small business size regulations are in Part 121, Small Business Size Regulations, and its OHA regulations are in Part 134, Rules of Procedure Governing Cases Before the Office of Hearings and Appeals.
DATES: Comments must be received no later than January 21, 2003.
ADDRESSES: Comments should be sent to John W. Klein, Associate General Counsel for Procurement Law, Small Business Administration, 409 3rd Street, SW, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: Laura M. Eyester, Office of General Counsel, 202-619-1801.
SUPPLEMENTAL INFORMATION: With a few exceptions, SBA size standards in 13 CFR Part 121 are based on either average annual receipts or number of employees, depending on the industry. When measuring a concern's size, the receipts or employees of affiliated concerns are included. The proposed rule would modify the definitions of affiliation, annual receipts, and number of employees. In addition, SBA would revise 13 CFR Part 134 to clarify the jurisdiction of SBA's OHA and make technical amendments.
The primary changes being proposed are as follows:
- Affiliation: Section 121.103, Exclusion from Affiliation Coverage, would be retitled "Exceptions to Affiliation Coverage" for clarity. In addition, paragraph (b)(2) would be revised to specify that the exception to affiliation for Indian tribes (including Alaska Native Corporations), Community Development Corporations (CDCs) or Native Hawaiian Organizations (NHOs) applies whether the tribe, CDC or NHO owns the concern whose size is at issue directly, or through another entity, which is wholly-owned by the tribe, CDC or NHO. Also, paragraphs (b)(2) and (b)(6) would be revised to clarify that SBA may find affiliation other than through common ownership or common management, and with respect to approved mentor/protege relationships, other than on the basis of the mentor/protege agreement. Paragraph (e), which covers control through common management, would be amended to clarify that affiliation arises when an officer, director, managing member, or partner controls two concerns. Finally, paragraph (g) would be added to provide that affiliation may arise where former officers, directors, stockholders, managing members, or key employees of one concern organize a new concern in the same or related industry and serve as its officers, directors, stockholders, managing members or key employees, and the first concern will provide contractual, financial, or other assistance to the new concern.
- Joint Ventures: Paragraph (f) of Section 121.103, What is affiliation?, would be redesignated as paragraph (h), and definitions for "joint venture" and "teaming arrangement" would be added. The following would be the definition for "joint venture": "A joint venture is an association of individuals and/or concerns with interests in any degree or proportion by way of contract, express or implied, consorting to engage in and carry out a single specific business venture for joint profit, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally. A joint venture is viewed as a business entity in determining power to control its management." The following would be the definition for "teaming arragement": "A teaming arrangement for affiliation purposes is one in which two or more companies form a partnership or joint venture to act as a potential prime contractor. Affiliation may also be found between a potential prime contractor and its intended subcontractor?" The definition for "joint venture" is practically the same as that in paragraph (7) of Federal Acquisition Regulation (FAR) 19.101, Explanation of Terms, and the definition for "teaming arrangement" is practically the same as that in paragraph (1) of FAR 9.601, Definitions. This was done to make the SBA regulations consistent with those for federal contracting.
In addition, paragraph (h)(5) would include language clarifying that, "For size purposes, a concern must include in its receipts its proportionate share of joint venture receipts, and in its total number of employees its proportionate share of joint venture employees."
Also, SBA is considering another change to the joint ventures regulation. Current paragraph (f)(3) allows joint ventures to be considered small for larger procurements when certain requirements are met. Generally, SBA regards joint ventures as short term relationships, which enable two or more concerns to enter into a business relationship to perform a specific contract. SBA is considering allowing two or more small businesses to form a joint venture relationship that would go beyond a specific contract and still afford them the exclusion from affilation. In other words, the joint venture could be an ongoing relationship that would allow the concerns to seek several different larger contract opportunities and still be excluded from affiliation without requiring the entities to form a separate joint venture for each contract opportunity. SBA is specifically requesting comments on this proposal.
- Annual Receipts: SBA proposes several changes to Section 121.104, How does SBA calculate annual receipts? Currently, SBA bases its calculation of a concern's average annual receipts on information contained in the concern's Federal income tax returns over its last three completed fiscal years. SBA believes the public would benefit from additional regulatory guidance, so SBA is proposing to modify its definition of "receipts" in paragraph (a)(1) to identify the items on a federal tax return that are to be used to calculate receipts. Also, the terms "total income," "gross income," and "cost of goods sold" would be removed and replaced with the terms "gross receipts, "gross sales," and "other income" because the currently used terms, as used by the Internal Revenue Service (IRS), exclude certain types of income when determining receipts. The change in terminology merely lists the items on a federal tax return that the SBA considers as comprising all or part of total or gross income.
In addition, SBA would further revise its definition of "receipts" to include interest, dividends, rents and royalties received by partnerships, S corporations, and sole proprietorships.
Finally, SBA proposes to expand its exclusion of receipts received by an agent for another ("pass-through" expenses). The existing regulation allows this exclusion only for agents specifically identified in the regulation: "travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker." The proposed regulation would continue to list these agency-type business entities, but would append "such as" to the list, thus permitting SBA to find similar agent-type situation to be excluded when a specific type of business or industry demonstrates that such practices are common in the industry and avoiding the need for SBA to amend its regulations.
- Tax Returns for Size Determinations: Section 121.104(a)(1) would be revised to state, "The federal income tax return and any amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern. SBA will not use tax returns or amendments filed with the IRS after the initiation of a size determination." This would preclude a concern that is the subject of a size protest from providing revised federal tax returns to SBA while a size determination or appeal is pending. Such a practice would require SBA to continually reevaluate cases that had already been completed, causing delays in the size determination process and, in the case of pending procurements, delays in contract award.
Paragraph (a)(2) would cover situations where a concern has not filed a federal income tax return for one or more of its most recently completed three fiscal years. Paragraph (a)(2) would state, "SBA will calculate the concern's annual receipts for that year using any other available information, such as the concern's regular books of account, audited financial statements, or information contained in an affidavit by a person with personal knowledge of the facts."
- Employees: Paragraph (a) of Section 121.106, How does SBA calculate number of employees?, would be revised to clarify that SBA may utilize the same criteria used by the IRS for federal income tax purposes in determining whether individuals are employees. Also, the revision would clarify that "employees obtained from a temporary employee agency, professional employee organization or leasing concern" are considered employees for size determination purposes.
In addition, paragraph (b)(4) would explicitly describe how employees of affiliates and former affiliates are treated, rather than referring to the manner in which annual receipts of affiliates and former affiliates are treated in Section 121.104.
- Size Standard Determination: The title of Section 121.402, What size standards are applicable to procurement assistance programs?, would be changed to "What size standards are applicable to federal government contracting programs?", and paragraph (a) would be revised to state that a contracting officer must use the size standard in effect at the time the solicitation is issued. If SBA amends a size standard and it becomes effective after the solicitation is issued, then the contracting officer would not be required to amend the solicitation and use the new size standard, but "may amend the solicitation and use the new size standard."
Section 121.404, When does SBA determine the size status of a business concern?, states that, as a general rule, the size status of a concern is determined as of the date the concern submits a written self-certification that it is small to the procuring agency as part of its initial offer including price. The three exceptions are (1) when an offeror applies for a Certificate of Competency, and (2) complying with the nonmanufacturer rule, and (3) for determinations of "ostensible subcontractors" (see Section 121.103(f)(4)). Paragraph (a)(1) would be revised to provide that a concern applying to be certified in SBA's 8(a) Business Development program, as a small disadvantaged business (SDB), or as a HUBZone small business must qualify as small "for its primary industry classification" as of the date of certification by SBA. Also, Section 121.404(a)(5) would be revised to state that "a concern must qualify as small as of the date that it certifies that it is small for the subcontract" because the date of offers for or the award of the prime contract are not relevant to whether a concern is small for a subcontract. In addition, the applicable size standard would be the size standard in effect at the time the concern self-certifies that it is small for the subcontract, not the size standard that may have been in effect when the prime contract was awarded. Proposed Section 121.404(b) would state, "A concern that qualified as a small business at the time it receives a contract is considered to be a small business throughout the life of that contract. 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 small business." This would codify SBA's long-standing position on the issue. However, SBA is considering a rule that would place a 5-year limit on the amount of time a concern would be deemed a small business. (EDITOR'S NOTE: For more on a similar action taken recently by the General Services Administration (GSA) regarding option exercises on its contracts, see the November 18, 2002, FEDERAL CONTRACTS DISPATCH "General Services Administration (GSA); Federal Acquisition Regulation (FAR) Deviation Requiring Small Business Certification for Option Exercise.")
Proposed Section 121.404(c) would state, "A follow-on or renewal contract is a new contracting action. As such, size is determined as of the date the concern submits a written self-certification that it is small to the procuring agency as part of its initial offer including price for the follow-on or renewal contract." SBA believes that the renewal of an existing contract is a term that is imprecisely used. Sometimes "renewal" is incorrectly used where a procuring agency exercises an option. In that case, there is no new contracting action. The authority for the option relates back to the original contract.
The title of Section 121.406, How does a small business concern qualify to provide manufactured products under small business set-aside or MED [minority enterprise development] procurements?, would be changed to "How does a small business concern qualify to provide manufactured products under small business set-aside or 8(a) contracts?", and paragraph (b)(1)(ii) would be amended to delete the requirement that a nonmanufacturer must normally sell the items being supplied to the general public. This requirement was based on provisions of the Walsh-Healey Public Contracts Act, which required that the federal government acquire supplies only from manufacturers or "regular dealers," and one of the requirements for being a regular dealer was to sell items to the general public. These Walsh-Healey Act provisions were repealed by the Federal Acquisition and Streamlining Act of 1994 (Public Law 103-355). SBA believes that requiring a firm to sell to the general public is overly restrictive, that a firm may be a legitimate, viable business selling exclusively to government entities. SBA does not believe that a firm that sells only to the government should be excluded from being considered a small business just because it does not generally sell items to the general public. Therefore, so long as a firm normally sells the type of item either to public or private entities, it may qualify as a small business nonmanufacturer under SBA's size regulations. Also, the proposed rule would change the provision to require the concern to normally sell the same "type of item." The current regulation simply states that a concern must sell "the items" being supplied. Under the proposed rule, a firm would not need to have a track record of selling the exact item, but only items of the same type.
In addition, the following clarifying language would be added to paragraph (b)(2): "Firms that add substances, parts, or components to an existing end-item to modify its performance will not be considered the end-item manufacturer where those identical modifications can be performed by and are available from the manufacturer of the existing end item." Therefore, if a firm adds something to an item that the manufacturer of that existing item does not provide, the firm will be considered the manufacturer of the ultimate end item (that is, the item plus the addition). SBA provides the following example in the introductory material to the proposed rule: "If firm A manufactures a saw, the government wants to purchase a saw with a safety switch, and firm B adds a safety switch to the saw, firm B, and not firm A, will be considered the manufacturer of the end item (i.e., saw with safety switch) provided firm A does not itself make or provide a saw with safety switch. Similarly, a firm that merely installs a video card that the manufacturer of a computer could have installed will not be considered the manufacturer of computer."
Currently, Section 121.410, What are the size standards for SBA's Section 8(d) Subcontracting Program?, states that a business concern is considered to be small for a subcontract awarded by a federal prime contractor if: (a) for subcontracts of $10,000 or less, the concern bidding on the subcontract has 500 or fewer employees averaged over each pay period of the previous year, or, (b) for subcontracts of more than $10,000, the concern bidding on the subcontract is no larger than the size standard corresponding to the North American Industry Classification System (NAICS) code that best represents the scope of work of the subcontract. Section 121.410 would be revised to eliminate the 500 employee size standard for subcontracts of less than $10,000 and require that the size standard of the NAICS industry that best matches the purpose of the subcontract be used.
Paragraph (a) of Section 121.702, What size standards are applicable to the SBIR [Small Business Innovation Research] program?, would be revised to recognize that a joint venture is permitted where each entity to the venture is at least 51% owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States. The current requirement does not contain such an exception for joint ventures.
Paragraph (a)(1)(i) of Section 121.1001, Who may initiate a size protest or request a formal size determination?, would be revised to provide that "any offeror whom the contracting officer has not eliminated for reasons unrelated to size" may file a protest. Currently, paragraph (a)(1)(i) permits "any offeror" to file a size protest. in connection with a particular procurement or sale. An offeror that has been eliminated for reasons unrelated to size would not be able to compete for award if the protest were successful, so it should not be allowed to question another firm's size status.
To Section 121.1004, What time limits apply to size protests?, would be added a new paragraph a)(4) to cover instances where notification of contract award is posted on the Internet under simplified acquisition procedures (SAP) (see FAR Part 13, Simplified Acquisition Procedures). New paragraph (a)(4) would require that a size protest "must be received by the contracting officer before close of business on the fifth day, exclusive of Saturdays, Sundays, and legal holidays, after the electronic posting." Also, because there is no requirement for the contracting officer to provide either pre-award or award notification to unsuccessful offerors under simplified acquisition procedures, a new paragraph (a)(5) would state, "Where there is no requirement for written pre-award notice or notice of award, or where the contracting officer has failed to provide written notification of award, the 5-day protest period will commence upon oral notification by the contracting officer or authorized representative of the identity of the apparent successful offeror."
Section 121.1205, How is a list of previously granted class waivers obtained?, would be amended to add SBA's website at http://www.sba.gov/GC/approved.html as a source for the list of classes of products for which nonmanufacturer rule have been waived.
- OHA Procedures: Paragraph (k) of Section 134.102, Jurisdiction of OHA, would be amended to authorize appeals of determinations by the SBA Government Contracting Area Office as to whether two or more concerns are affiliated for purposes of SBA's financial assistance programs, or other programs for which an affiliation determination was requested.
Section 134.314, Standard of Review, would be retitled as "Standard of Review and Burden of Proof," and revised to add the sentence, "The appellant has the burden of proof, by a preponderance of the evidence, in both size and NAICS code appeals."
Finally, SBA proposes amending paragraph (a) of Section 134.316, The Decision, to add the sentence, "The Judge will not decide substantive issues raised for the first time on appeal, or which have been abandoned or become moot."
FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.
Copyright 2002 by Panoptic Enterprises. All Rights Reserved.
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