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How Will New SBA Regulations Affect 2021 Strategy for GovCons?

In October 2020, the U.S. Small Business Administration (SBA) published new regulations that have already impacted the 2021 strategy for government contractors. Among other things, these new regulations merge two existing mentor-protégé programs, revise affiliation laws, and clarify the SBA’s size requirements for government contractors. 

From small to large GovCons, these regulations are sure to direct strategy now and in the future. In this post, we break down the rulings and what they mean for small and large GovCons in 2021. Read the full post below or contact GovConPay to learn more.

The Goal of SBA Regulations for GovCons

I try to treat our organization much like you do as a sales organization. We made a priority that for us, my job was to make sure that when looking at government contracting as a whole, which is about $450 to $500 billion a year, my job was to make sure that 23% of that money was spent with small businesses.

The good thing about that is that we've increased the market. The bad thing about that is that some of the federal policies that are still there are favoring the well-prepared contractor. The purpose of the ADA program and SBA was to get new companies to be able to be entrepreneurs and to start their companies and develop their companies. And we found that because of something called category management, that was the biggest elephant in the room for us.

What Is Category Management

The U.S. General Services Administration describes category management as “a fundamental shift from managing purchases and price individually across thousands of procurement units to managing entire categories of purchases across government collaboratively.”

Category management was having an effect of while the contracts were getting bigger, it was driving small companies out of the marketplace. Only companies that are eligible for these contracts are those that are 10 times larger than small business GovCons who can complete 10 times the amount of work. 

Small GovCons found themselves saying, “I do this really, really well — better than anyone. But because of category management, now my piece of the pie has been taken away from me. And now it's being given to somebody who may or may not be as good as I am. And that makes the government more inefficient.”

Part I: Early-Stage Updates

So in short, what we did in the first step was to try to make all of our programs more useful and to try and make it easier for people to apply and get into these programs. So in general, that's why we made improvements to the 8(a) program. We made improvements to the HUBZone program, and we made improvements to WOSB and also to Service Disabled Veteran. 

HUBZone Updates

We wanted to protect small businesses affected by COVID, leading us to offer extensions to those in the 8(a) program. I think that was great. We did something also that with 8(a), if any part of the contract now was in the 8(a) program, now you have to seek SBA approval before you change it.

That's going to change one of the major strategies that a lot of large companies have been using that in my opinion, have hurt small businesses. The HUBZone program was a program that generally was penalizing people for being successful. We changed several things in the HUBZone program. We made it so that the HUBZones didn't change for five years, and we froze them for five-year periods to give companies like yours, more reliability. We wanted to ensure that if you took the chance and you established yourself in a HUBZone program, or in a HUBZone location, that HUBZone wouldn't change due to no fault of your own and now you're out of compliance.

The other issue we had was with employees. 35% of your employees have to come from HUBZone where they have to be from any HUBZone. And the challenge with that is that if people were moving during that time period, they could put the entire company out of business at a moment's notice. 

Contract Eligibility

One of the other things we had was the eligibility of contracts. We had a rule that says that you have to be eligible at the time that you bid a contract and that you also had to be eligible at the time of receiving the contract.

That was one of the things that I struggled with the most with my company and FedSolve with clients that we had because the biggest challenge we had with that rule was that even if we were eligible at the time of bid, we didn't bid just one contract, we bid four or five.

So, here's how that role used to work. If we went to the Department of Defense and they issued one contract for 10 people, as an example, that often put us out of compliance with the 35% rule. That meant that these other contracts, the second, third, fourth, and fifth contracts that we would have won are no longer there, they're illegal for us to receive those.

The government looked at that and identified that we went through the competition, we went through the exercise, we spent the money to get to the right contractor, and now we're not allowed to award that to them. So we fixed that as well. 

Now, if you have an employee that was in the HUBZone for at least six months, you can hire them. And then if they maintain employment for another six months, then they can leave and move to anywhere else that they want to move to. As long as they maintain employment with your company, they still count towards the 35%. 

Property Purchase

The last update we made to HUBZone focused on property purchase and long-term lease. If you make an investment by coming into the community or taking a long-term lease in a HUBZone while it is eligible, we will give you up to 10 years to be able to rely on your HUBZone eligibility, even if the HUBZones change.

Women-Owned Small Business Program

Over the years, the women-owned small business program (WOSB) had basically been abused. The integrity had been attacked. In general, it was a self-certification program. This was actually an old responsibility of SBA from dating before I got there in 2015. 

But I told our staff that at the end of the day, we're required to set up a formal certification program. And we're going to do that even though that's not our responsibility for our administration, it's the responsibility of the agency. I'm proud to say that in July 2020, SBA started taking formal applications for the women-owned small business program.

The certifications have more integrity, and now it goes through the same rigorous process that we do for all of our certifications. And that program incidentally will be probably SBA's largest program by volume. So hopefully with the Biden administration, I think they'll make women-owned businesses a priority, so that's certainly an important certification to have. 

Service-Disabled Veteran-Owned Business Program

The last thing that we had was the service-disabled veteran-owned certification. I worked for two years to try to get the VA to give the program that they have for service-disabled veteran-owned over to SBA. And I'm happy to say that even though I wasn't there, we finally got the CVE programs coming over to SBA. It came over in the last iteration of the NDAA.

Now the SBA has two years to implement that. What that means is that the SBA will now formally certify people for the veterans-owned program and the veterans-owned program will now be a certification that is used government-wide. As you know, 8(a) is certainly the grandfather of all the sole source vehicles, but it is by no means the only vehicle that people use. If you go to different industries, you go to different agencies, everyone has their favorites. So 8(a), HUBZones, women-owned, service-disabled veterans are certainly important. I'm glad that we're able to bring those changes and make those improvements for small businesses.

The Runaway Extension Act

Remember that you can always get multiple certifications. One other thing that I think was important that we did in part one of our changes was Congress came up with the Runway Extension Act. What we realized when they first came in with the Runway Extension Act that it was improperly drafted. We understood Congress’s intent and worked with them diligently, and we were able to expedite rules and implement them at SBA. 

We're able to implement their intent with the Runway Extension Act within a year. And so now for the Runway Extension Act in determining if you're still small, we increase the time period from three-year average annual receipt to five years.

What that means simply is that a majority of companies now have a five-year timeframe to calculate their average of annual receipts. And think that that helps most people, okay. Those things were so important simply because if we don't improve the programs, if we don't get more participation, if we don't get government buying that these programs are working and that they will help the government to solve their mission, then part two was going to be less effective. 

Part II: New SBA Regulations

Today is really talking about what we did with part two. And in general, now that we have four certifications that are more powerful and easier to use and better to use and serve a better purpose, then we had to really look at the industry and try to protect the government share or protect the contract share that small businesses have.

That's why some of these changes will change the landscape of government contracting. In general, part two was focused on how to increase opportunities for small businesses and protect small businesses. And honestly, the best way to do that was teaming, because of category management causing starter contracts to shrink. 

The small businesses had to be more robust in order to be able to participate. And that's why we thought it was like, if we can improve the ability of our small businesses to team with other businesses, that would, and have government be required to accept that combination. We thought that would be one of the best ways to be able to protect small business contracts that are small now so that they weren't removed from the small business community.

It would also empower small businesses that had the capability of participating as individuals, but not at the expanded level by doing something just called teaming. It allowed effectively mighty mouse in the small business in superman as a large business to team their superpowers together and continue to go after contracts together.

The simple thing to me was that what it did was combined the best of all worlds. It combined the capacity of a robust company with the ability of certification for a smaller business that may have some capability, but not all of it, to be able to team together, to act as one. And in general, it gave a better selection and a better opportunity for the government to have better solutions at their disposal to achieve their mission.

Mentor-Protégé Merger

The SBAs vehicle for teaming was the small mentor protégé that had been around. And then we also had the mentor protégé. So we merged them, we call it All Small Mentor-Protégé now. Mentor-protégé originally was only for 8(a) companies who chose to mentor with other companies. Now it's for any SBA small business. All certified small businesses can now team with any business. They don't have to be large. They don't have to be emerging small, which means medium. But they can also team with small businesses.

Joint Ventures

The big thing also is that we worked hard to make sure that if they formed the teams and the teaming mechanism is going to be called a joint venture, that the joint ventures had to be accepted for participation by the government. Does it always mean that they're going to be the best? No. Couldn't get that possible. But at the end of the day, if you have, as an example, you have someone who's certified only with a company that has all the capability that merger with the joint venture, if they bid on a contract, must be accepted by the contracting officer.

However, there are times where if they had a combined capacity of, let's say, 10 million in past performance, it is possible that if a smaller business, with some past performance in the subject area and another small business with some participation in the subject area team together, their joint venture might be more palatable or more acceptable to the government. 

Nevertheless, with our SBA joint ventures, we made sure that if you're participating by joining superpowers, you will be considered. Even though we have these joint ventures, we want to make sure that we're protecting the small business and with the small business. For example, we have something that says that the small business, the All Small Mentor-Protégé agreement can be canceled within 18 months at the election of the small business. What that means is that typically if you wanted to cancel a mentor-protégé agreement, you have to ask SBA and SBA has the right to say no.

However, I thought that at the end of the day those small businesses ought to know their business better than anyone else. So if you are in a mentor-protégé, and you're not getting the support that you thought you were going to get — you're not getting contracts support, operation support, marketing support, staffing support, etc. — you have the right to go back to SBA and ask them to cancel that mentor-protégé. Then they will give you another one because you only get two of those in your life. 

More on Teaming

In terms of teaming, you have a small business that's teamed with another business. And the danger we have is that in order for the small business to be able to get work, to count towards the 23% goal and allow small businesses to get portions of work that they can execute, we necessarily had to let the fox into the henhouse. 

And then, don't be surprised when the fox starts getting at the hens, right? While that may be funny, that's kind of sad when it comes to the agency trying to protect small businesses. So what we put into the joint venture for anything that's there in general, the SBA-certified business will be the managing partner. So the managing partner here, as an example, has to be protected by requiring the performance by the small business. 

Performance Management

Failure to meet that workshare agreement for the small business may lead to a contracting officer being able to use that as justification not to award options or to penalize you on a re-compete. In other words, the math that you have to do for the small businesses, the small business in our small and large example, the small business must do 40% of the work that any of the JV partners is doing.

Specifically, when you calculate the portion of work that you have, add up the work that the small business and the large business are doing, and then 40% of that has to be done by the small business. Not only is this a requirement to protect the small business, but it is also what we call non-delegable. What that means is that they cannot use similarly situated businesses to execute that work. The 40% must be done by the managing partner.

If the small business is not hitting its 40% at the task order level, that means that the mentor has to become a mentor. They've got to work together to make sure that the 40% is done by the small business. Does that affect the majority of the mentor-protégé agreements? No. 

But it affects enough that the industry liked what we were doing and so we changed that rule to protect the small businesses to help get them more contract share. And also it's still allowed and it's allowed better solutions to be offered to the government. 

2021 and Beyond

We made some big changes. It changes the strategies that people used to use, and hopefully, it empowers the small businesses to be able to go to their partners now and use them in a much more effective and efficient way. 

I think for the small businesses and the mentors that are intending to be mentors and for small businesses that are intending to be quality contractors, it's a good marriage to happen in the face of category management. It empowers small businesses to get more of their market share, to protect their market share. And more importantly, it gives better solutions to our government and it helps the small businesses to be the best option for the government to achieve its mission.

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