SBA Announces Proposed Changes to 8(a) Contracting Program
Following on the heels of a lengthy rule-making process, the Small Business Administration (SBA) has announced a number of proposed changes to the federal 8(a) contracting program. The publication of the proposed changes triggers a 60-day period in which individuals and entities can respond with comments. The proposals come at a time when Alaska Native corporations and related Native organizations (“ANCs”) have repeatedly found themselves in the news, including hearings before Sen. Claire McCaskill’s (D-Mo.) U.S. Senate subcommittee regarding their participation in the 8(a) program.
Included among the proposed 8(a) changes are new restrictions on joint ventures, potential restrictions on mentor-protégé partnering, company size limits, and early graduation from the 8(a) program for successful entities. The changes also include new reporting requirements and allow the SBA’s Office of Inspector General to examine whether entities meet certain program qualifications. To view the full Notice click here.
If implemented, some of these changes could have a significant impact on ANC contracting, as well as on businesses that work with 8(a) entities. This advisory provides an outline of the major changes and some thoughts on what they mean for participants.
A. Proposed changes to the 8(a) program
The SBA’s 8(a) program, which was named for Section 8(a) of the Small Business Act, was designed as a business development program to help disadvantaged businesses compete in the marketplace. In April 2006, the U.S. Government Accountability Office released a report that recommended the SBA take action to improve oversight of ANC contracting. As a result, the SBA began a series of consultations with tribal leaders and elected members of Alaska Native villages.
The latest stage of this process was yesterday’s announcement from the SBA regarding its proposed changes to the 8(a) contracting program. Coming on the heels of the Senate subcommittee’s investigation, the changes enter the public comment period with potential momentum toward effecting permanent changes that could have serious impacts on ANC contracting.
The proposed changes are extensive and lengthy. While some proposals tinker at the margins of familiar features of the 8(a) program, such as mentor-protégé relationships, other proposals could change the length of time that some ANCs can remain in the program. Significant proposed rule-making includes the following changes that could directly affect ANCs:
- New restrictions on subsidiaries involved in similar lines of business. The SBA has proposed restricting new 8(a) companies from receiving contracts in the same business line as sister companies. The restrictions would apply for two years after the new company was admitted to the program.
- New restrictions on joint ventures. Proposals could limit enities from forming multiple joint ventures together and the number of contracts a joint venture may receive over two years. Significantly, the 8(a) entity would have to perform at least 40 percent of the joint venture work and report back to the SBA that it met this qualification. Similarly, the SBA is considering limiting a mentor from receiving subcontracts from the joint venture.
- New size restrictions. The proposals include early graduation of 8(a) entities that have exceeded certain size limits for two consecutive years.
- Proposed changes would allow the SBA’s Office of Inspector General to determine whether 8(a) entities meet size restrictions.
- The SBA is looking to redefine “economically disadvantaged” as that term applies to tribes and individual tribe members (the Alaska Native Claims Settlement Act includes a provision categorizing ANCs as disadvantaged automatically). According to the Notice, some have argued for “bright line” asset or net worth tests. The SBA is not convinced that these tests or other formulations would capture the disadvantaged status of a tribe and is requesting comments.
- New reporting requirements. Proposed changes would require ANCs to annually submit information regarding various benefits they provide shareholders, such as employment, scholarships and cultural programs.
- Allowing waiver of the two-year operational requirement when an ANC makes a written commitment to support an 8(a) applicant.
- Allowance of affiliation exceptions for protégés in other federal mentor-protégé programs will be recognized only where specifically authorized by statute or where the SBA has authorized an exception under its discretion—discretion that will be exercised in limited circumstances.
B. The McCaskill Subcommittee report
The proposed 8(a) changes come at a critical time both with respect to the broader American economy and to potential congressional reforms. In 2009 the Senate Subcommittee on Contracting Oversight, under the leadership of Sen. McCaskill, began an investigation into federal government ANC contracting. To date, the Subcommittee’s investigation has included numerous requests for information, live hearings and congressional testimony, and two reports.
The latter of these two reports, which was issued on July 15, 2009, made numerous findings regarding ANC contracting. Despite finding that the 8(a) program has been a boon to Native shareholders and the broader Alaska economy, it went on to criticize ANCs in numerous respects. Key critical findings in the analysis include:
- ANCs are now among the largest federal contractors, with four among the top 100 recipients of federal contracts. Eleven of the 19 ANCs exceed the annual revenue limits imposed by the SBA’s 8(a) program, and numerous ANCs exceed the corporate size limits.
- Between 2000 and 2008, ANCs received $6.6 billion in 8(a) sole-source contracts, i.e., no-bid contracts, valued at more than $3.5 million each.
- ANCs may be passing work through to subcontractors. By using their exemptions to various 8(a) limits, ANCs may be able to pass contracting benefits and revenues to subcontractors that do not otherwise qualify for the 8(a) exemptions.
- ANCs employ a relatively small percentage of shareholders. Of the 19 surveyed ANCs, only about 5.2 percent of their employees were Native shareholders (or relatives of shareholders). ANCs also rely heavily on highly paid, non-Native executives.
In light of these findings, Sen. McCaskill’s office released a statement expressing her disappointment that yesterday’s proposed rules do not “go far enough.” Additional congressional action is still very possible.
C. What do these changes mean for Alaska businesses?
Despite making up only 1.3 percent of the total contracts awarded under the 8(a) program, the effects of the ANC contracts have a disproportionately beneficial effect on the Alaska economy. For example, according to Alaska Business Monthly (ABM), as of 2009, Native organizations ranked first in the number of Alaskan employees, with more than 13,000 (they have nearly 55,000 total employees worldwide). Their total combined revenues were over $9.9 billion. Even more critical, Native organizations account for 71 percent of all the revenue from the industries listed on ABM’s Top 49er list. Native organizations also employ more than 58 percent of all Alaska employees and provide 83 percent of the jobs from all companies on the list.
The potential effects on Alaska Native villages of reduced 8(a) ANC contracts could be even more devastating. According to testimony given to the Senate Subcommittee, based on data from only 11 ANCs, from 2000 to 2008 these ANCs provided almost $550 million to their shareholders. These benefits included $340 million in shareholder dividends, $20 million in scholarships and almost $5 million in elder support.
Restricting ANC participation in the 8(a) program could have serious consequences on these economic benefits provided to the state or to Native shareholders.
D. What should you do?
First, it is important to understand that yesterday’s Notice is but one part of the SBA’s rule-making process. In an encouraging sign, the Notice remarks on the significant feedback that it has already received from ANCs during the process and states that it does not intend to shut down “any component of the 8(a) program” that provides benefits to disadvantaged businesses. And the Notice goes so far as to defend 8(a) as a “much-needed and beneficial program,” specifically pointing to the valuable economic and community benefits that ANCs provide.
The process has now entered the 60-day public comment stage. Individuals and entities can provide comments on the proposed rules and suggest amendments to the SBA’s proposals. Once the comment period is closed, the SBA can modify or even abandon its proposed changes as it works to issue final rules. The summary of the SBA’s proposals indicates that the SBA has already abandoned or modified a number of proposals based on input it has received as part of the rule-making process. It is hard to know when the rule-making process will result in final, enforceable changes to the 8(a) program, since the SBA can take years to issue final rules.
Second, contact your congressional delegation. Significant rule changes will often involve congressional comments and debate. These comments may be direct or part of the formal 60-day notice-and-comment period.
Third, it is important to become familiar with the proposed changes. Whatever changes result, those ANCs and related entities that can adjust to the new regulations the quickest will have a competitive advantage over those that struggle to adapt to the new regulatory landscape. Early investment of time and money to understand the proposals and become involved in their development could yield significant benefits in the long run.
For more information about the proposed changes or the notice-and-comment period, please contact a Davis Wright Tremaine attorney.