5335 Wisconsin Avenue, NW
Washington, DC 20015
It is the declared policy of Congress as stated in the Small Business Act, 15 U.S.C. 631 et. seq., to aid, counsel and protect the interests of small business concerns and place a fair proportion of total purchases with small businesses.
This is achieved through:
(1) small business set-asides;
(2) programs to facilitate awards to firms that are small and meet additional requirements such as the 8(a) program for socially and economically disadvantaged small businesses, the Small Business Innovation Research (“SBIR”) Program, Service Disabled Veteran Owned Small Business (“SDVOSB”) Program and Woman Owned Small Business (“WOSB”) Program; and
(3) SBA’s certificate of competency program.
Under the certificate of competency program a small business denied a contract because a contracting officer considers it to be not responsible (capable of performing and having business integrity) is entitled to a binding second opinion from the SBA.
What is a Small Business?
The threshold question generally is whether a firm is a small business. Applicable principles are summarized as follows in P. Seidman, “An Overview of Small and Disadvantaged Business Contracting”, 19 National Contract Management Journal 5 (1985)(citations omitted) at pp 5-6:
A “small business concern” is defined by the Small Business Act as “one which is independently owned and operated and which is not dominant in its field of operation.” Implementing regulations promulgated by the Small Business Administration (SBA) establish size standards for various industrial classification codes. . . .. Size standards are stated either by average annual receipts or number of employees. Since size standards are on a standard industrial classification code basis, a company may be a small business for one type of contract but not another.
Small business status cannot be achieved by merely spinning off parts of a large business organization. In determining size, a business is lumped together with its “affiliates.” Under applicable regulations, “concerns…are affiliates of each other when either directly or indirectly (1) once concern controls or has the power to control the other, or (2) a third party or parties controls or has the power to control both.” The regulations further state that “[i]n determining…whether or not affiliation exists, consideration shall be given to all appropriate factors, including common ownership, common management and contractual relationships.” Other factors indicating affiliation are family relationship of ownership, common facilities, and common attorneys and accountants.
Small Business Owners
Many small businesses are family owned. Often the sale or gift of part of a business to another family member will be proposed to remain within the applicable small business size standards. SBA regulations provide, however, that members of the same family have an identity of interest and are treated as one person. If read literally, this rule would result in the affiliation of all businesses owned or controlled by members of the same family. The SBA size appeal board has ruled, however, that family relationship alone does not establish affiliation. In Size Appeal of Maintenance Engineers, for example the board found two concerns unaffiliated where a father owned 100 percent of company A and his son, a former officer of company A, owned 83 percent of company B. The board emphasized that firms A and B had separate books and offices, were in different lines of business, had no contractual relations, and were financially independent.
Small business prime contractors should be aware of SBA’s “ostensible subcontractor” rule, which states that a small business may be deemed to be affiliated with a large business subcontractor for purposes of a procurement. A subcontracting relationship alone will not result in a finding of affiliation. The rule comes into play where the subcontract relationship is a sham and the ostensible subcontractor controls or has the power to control the small business “prime” contractor. (Citations omitted).
Interested parties may file a size protest challenging the small business status or protest challenging the eligibility of an offeror for SBA programs such as SDVOSB, HUBZone or WOSB with the contracting officer.
In order for a protest to be timely, it (or confirmation of a protest initiated orally) must be in writing and received by the contracting officer on the fifth business day after the bid opening date for sealed bids, or after the receipt from the contracting officer of notification of the identity of the prospective awardee in negotiated acquisitions. 13 C.F.R. §§ 121.1004, 124.1010, 125.25, 126.801, 127.603. A size protest must be sufficiently specific to provide reasonable notice as to the grounds upon which the protested concern’s size is questioned. 13 C.F.R. § 121.1007.
An SBA Regional Office decision on a size determination or eligibility for other SBA programs may be appealed to the SBA Office of Hearings and Appeals (“OHA”).
A firm should exercise care in claiming small business status and eligibility for SBA programs. There are severe civil and criminal penalties for improper certifications including suspension and debarment. An improper certification can also result in liability for treble damages and up to $21,563 per invoice under the Civil False Claims Act, 31 U.S.C. § 3729 et. seq.
Attorneys at Seidman & Associates, P.C. have extensive experience interpreting SBA rules and OHA decisions concerning affiliation and other eligibility requirements for SBA Programs. They can advise your firm on how to qualify for SBA programs and avoid civil and criminal penalties for false certifications.
As SBA Chief Counsel for Advocacy during the Clinton Administration., Jere Glover represented the interests of small business before executive agencies and the Congress. He has extensive experience with size protests and appeals and eligibility requirements for SBA programs. Mr. Glover has worked with the Small Business Innovation Research (“SBIR”) Program since its inception in 1982. For additional information on the SBIR Program click here.
Paul Seidman was Assistant Chief Counsel for Procurement in the Office of the Chief Counsel for Advocacy at SBA from 1979-1981. He is coauthor of the book Representing Small Business and articles concerning small business contracting.
For additional information see the following publications on our website:
– P. Seidman, “An Overview of Small and Disadvantaged Business Contracting”, 19 National Contract Management Journal 5 (1985).
– P. Seidman, “How to Save a Few Billion Dollars: Defense Bureaucrats Could Save that Much by Contracting With Smaller Firms”, Inc. Magazine, February 1982 at p. 12
– P. Seidman, “What’s Mine is Mine and What’s Yours is Mine – The Return of Overpriced DOD Spare Parts”, The Government Contractor, April 13, 1994.
The aforementioned statement of general principles applicable to Small Business Contracting as of 8/13/2015. SBA Rules are subject to change. The above is not intended as legal advice. In order to obtain legal advice applicable to specific facts a consultation is required.