Small Businesses Face Convoluted Eligibility Rules

By Scott Freling and Carl Wiersum

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The Federal Acquisition Regulation Council recently published a proposed rule that would update the Federal Acquisition Regulation, or FAR, to implement the Small Business Administration’s 2020 changes to rules on when small businesses must recertify their status in connection with orders under multiple-award contracts.

These changes impact defense contractors that hold multiple-award contracts under which they bid on set-aside orders, as well as larger defense contractors that may look to acquire such businesses.

The SBA size and socioeconomic recertification rules are convoluted — especially in situations where a small business becomes a large business by virtue of a mergers-and-acquisitions transaction and may have ongoing small business set-aside contracts, pending set-aside bids or active set-aside indefinite delivery, indefinite quantity, or IDIQ, contracts.

In addition to the change of size or socioeconomic status notice requirements of relevant FAR and SBA regulations and the obligation for the contractor to update its size and socioeconomic representations in the System for Award Management (, a plethora of situation-specific requirements make it easy for the contractor community to be inadvertently tripped up.

For example, size status is typically determined for purposes of a contract on the date the business submits its initial offer or response that includes price, so a contractor that undergoes a change of size status after submitting its offer but before receiving an award can generally remain eligible for an award — except if the change of size status is due to a merger, sale or acquisition, in which case the contractor only remains eligible if the contractor submitted the offer at least 180 days before the relevant transaction.

And SBA’s rules treat Small Business Innovation Research contracts differently than other small business set-asides, requiring the contractor to meet size and other requirements at the time of award instead of the offer date.

IDIQ contracts add another layer of complexity given the time — and the contractor’s potential status change — that may pass between receiving the parent award and child orders. Generally, a contractor who changes size status — including as a result of an M&A transaction — after receiving a set-aside IDIQ contract remains eligible to receive additional orders under the parent contract at the agency’s discretion, both for standalone IDIQs and multiple-award contracts.

However, as the FAR Council recognized in its recently proposed changes, there are some situation-specific recertification requirements that may knock the contractor out of the competition for set-aside orders under a multiple-award contract if the contractor is not able to independently certify its size or socioeconomic status in connection with a specific order.

Overall, the council’s proposed changes provide greater clarity in the FAR on situations in which small businesses must recertify their size status in connection with orders under multiple-award contracts and take a much-needed step toward aligning the FAR small business requirements and clauses with SBA’s regulations.

Like SBA’s regulations, the FAR recertification updates are scoped to certain orders issued under multiple-award contracts. So, their reach is comparatively limited — for example, the updates would not be relevant to standalone contracts, or even to single-award IDIQ contracts. The proposed FAR updates also carry forward SBA’s carve-out for federal supply schedule, or FSS, contracts, which could otherwise be considered multiple-award contracts.

Historically, for orders issued under multiple-award contracts, if a contractor represented as a small business or a specific socioeconomic status prior to award of the contract, the contractor only needed to re-represent its size or socioeconomic status in connection with an order if a contracting officer required it.

The updated FAR text would preserve a contracting officer’s ability to require order-level recertification at their discretion — including for FSS contracts. But the updates also reflect three situations in which recertification would be mandatory when submitting an offer for orders issued under multiple-award contracts. These categories generally address situations where there may be a misalignment between the underlying multiple-award contract and the particular order.

First, where the order is issued under an unrestricted multiple-award contract but is issued as a set-aside.

Second, where the order is issued under a set-aside multiple-award contract and is further set aside for a specific socioeconomic category that differs from the underlying multiple-award contract.

Third, where the order is issued under the set-aside part of a multiple-award contract and is further set aside for a specific socioeconomic category that differs from the underlying set-aside part of the multiple-award contract.

The consequence of the proposed FAR updates is that if a small business is required to provide a recertification based on any of the above situations when submitting an offer for an order and cannot do so — whether due to a subsequent M&A transaction or size change or because the order is associated with a socioeconomic status the business cannot represent as — the business would not be eligible to bid on or receive the order.

More generally — and as also underscored by recent False Claims Act settlements with respect to incorrect small business representations — the updates emphasize that the small business eligibility rules can be complex and situation-specific and serve as a reminder to government contractors that it is necessary to pay close attention to any certifications employees may be making or set-aside orders employees may be accepting on the contractor’s behalf. ND

Scott Freling is a partner and Carl Wiersum is an associate in the Washington, D.C., office of Covington & Burling LLP.

Topics: Defense Contracting

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