Transcript
Good morning, everybody. It’s Sam Le from GovCon Intelligence. Welcome back. I’m here in Virginia Beach at the Virginia Beach Convention Center. I just spoke this morning at the SAME Mid-Atlantic Conference. Let me just show you what the conference looks like here. Let’s see a good number of people out on the convention floor, networking, making connections. If anybody’s here is actually online, want to come by and say hi, I’ve got another microphone if you want to stop by and say hi real fast.
Upcoming SBA Regulatory Changes
I felt the need to come online today because, as I discussed this morning at my talk, there’s a big SBA regulatory change right around the corner. Just yesterday, people started discovering that SBA had submitted a request to a White House office. It’s called the Office of Information and Regulatory Affairs, a request for review of a proposed rule that SBA will release once this review is over.
The proposed rule is called Fraud, Waste, and Abuse Reforms. It’s on the Office of Information and Regulatory Affairs website as Fraud, Waste, and Abuse Reforms, a proposed rule states that it’s economically significant as received by OIRA February 20th. And it’s got a RIN number, AI66.
So what does this mean? Fraud, Waste, and Abuse. SBA has been talking a lot about Fraud, Waste, and Abuse. particularly in the 8(a) program. And it’s thought that perhaps this could be related to the news releases and 8(a) data call, the audits that have been coming out with respect to 8(a). There may be other areas involved as well. It could be something they’re looking at for the loan programs or the grant programs.
Subcontracting and Reporting Requirements
I said this morning at SAME, I would expect to see something in here about the limitations on subcontracting. Limitations on subcontracting have been a big emphasis for SBA during the data call. There’s something brought up by Secretary Hegseth for the sledgehammer video.
So you might see SBA propose to require companies to submit reports on their limitations on subcontracting. There’s actually a requirement in the law for SBA to create a electronic system for companies to report their compliance with the limitations on subcontracting. So SBA may be using that statutory responsibility to now take action on the limitations on subcontracting.
8(a) Program and Economic Disadvantage Thresholds
There may be action in there on the 8(a) program. SBA has been sending out suspension and proposed termination letters to 8(a) companies based on the economic disadvantage thresholds. There are three economic disadvantage thresholds that all 8(a) companies must comply with. There’s a net worth threshold. That’s $850,000. There’s an income threshold, adjusted gross income over three years. That’s $400,000. And there’s a total assets threshold, $6.5 million.
I’ll just know that I’ve heard from some people at this conference that the total assets threshold, particularly for Companies that require bonding is especially difficult to comply with. Because once you start getting contracts, you start to bump up against that $6.5 million threshold. Because that’s not personal assets. That can include assets in the company. So if a company needs bonding, if it needs to grow, it needs to have that capital to grow. And then it starts to bump up against that $6.5 million total asset threshold. So SBA may be looking at those thresholds or continuing compliance audits of economic disadvantage. That’s the effort that the agency is going through now with the letters of intent to terminate and suspensions.
Joint Ventures and Mentor-Protege Arrangements
What else could be in this proposed rule? Fraud, waste, and abuse reforms. Over the past few years, SBA has started to closely study joint ventures and mentor-protege arrangements. I remember when I was at SBA, I prepared a good amount of data to show the growth of joint ventures and the growth of mentor-protege over the last few years. It has grown a lot. It’s not a huge part of government contracting, but it has grown immensely as compared to small business contracting in general.
So you may see something in these so-called fraud, waste, and abuse reforms about joint ventures, maybe more reporting on joint ventures. There are significant reporting requirements now that joint ventures may not be aware of, so there may be some efforts to formalize those requirements, at least have a designated mailbox at SBA for those or electronic system to obtain those reports from joint ventures. There was also a proposal over the past few years to cut down on the ability of mentor-protege joint ventures to win long-term contracts and multiple award contracts. So you might see that come back. in this fraud, waste, abuse reforms.
OIRA Review and Public Comment Period
That was submitted. This proposed rule from SBA on fraud, waste, and abuse reforms was submitted to the Office of Information and Regulatory Affairs on February 20th. Usually, things sit at OIRA for up to 90 days. SBA, in its last submission to OIRA, the one related to the data call, asked for expedited processing. I think they got it across in something like 24 hours that time around. So it could be that SBA looks at trying to get some sort of expedited processing with this OIRA submission for fraud, waste, and abuse reforms.
The good thing about this is it’s a proposed rule. So that means that SBA will be asking for comments from the public. Ordinarily, those comments would be a 60-day period. If SBA is trying to really push on fraud, waste, and abuse, maybe it would be something like 30 days. But that does give companies and trade associations, members of the public, the opportunity to submit comments to SBA on whatever these reforms look like. So if it’s something like economic disadvantage or joint ventures, maybe there’s something in there related to tribal, Alaska Native and Indian tribes, then organizations, individuals, and companies can submit comments to SBA. And the Supreme Court has said that agencies have to respond to significant comments received during that process.
Use of AI and Rulemaking Precedents
Now, I’m suspicious of whether SBA might be using AI and algorithms to go through this data call. I discussed that in my last video with Dean Jessica Tillipman.
It’s not unlikely that SBA might be using AI and algorithms to go through the comments that are received as well. You know, SBA typically receives hundreds of comments on its proposed rule. So they may be getting a lot of those comments and running it through some sort of algorithm.
But even then... SBA is still required by the Supreme Court precedent under the Administrative Procedure Act to respond to significant comments during the rulemaking. So it is worth it for companies to look at this proposed rule when it does come out. It may not come out for 90 days. It may come out in a couple of weeks, depending on whether it goes through expedited processing.
Guidance for Submitting Comments
But when the proposed rule does come out, it’s worth it to companies to review it closely and submit comments through regulations.gov. It’s very easy to use website. Just go in. There’s a text box. If you have a PDF document, you can upload that to the website. And then those comments have to be considered by SBA if they’re significant.
One tip on the comment is if you can, submit data. It’s really important for an agency while it’s going through a rulemaking process to consider hard facts. And for the most part, that’s data. So if you have data that’s specific to your industry or specific to your company, your trade association, if you have data that’s specific to your members, that’s particularly relevant information.
Regulatory Flexibility Act and Economic Impact
There’s also an opportunity through the comment process to emphasize the economic impact of the rule on small entities. That’s a requirement under the Regulatory Flexibility Act, or IRFA. They call it the Initial Regulatory Flexibility Act analysis. This rule, this fraud, waste, and abuse reforms proposed rule is designated on the OIRA website as economically significant. It says it is economically significant.
So if this rule comes out, we don’t know what’s in it yet, but if it comes out and it has an impact on small entities, including small businesses, it’s worth it to bring that up. And then that triggers an analysis under the Regulatory Flexibility Act. There’s actually another office at SBA, the Office of Advocacy, that has oversight on the Regulatory Flexibility Act. So you could see separate offices of SBA involved in this proposed rule, depending on what the impact is on the Regulatory Flexibility Act.
Scrutiny of the 40% Rule for Joint Ventures
Some other things that I brought up at this conference, people had questions about mentor-protege and joint ventures. I am hearing that even though SBA hasn’t done much on the data call with joint ventures, individual contracting agencies are starting to closely scrutinize joint ventures. People in joint ventures are aware of the 40% rule. That’s the rule that the managing venturer has to perform at least 40% of the work of the joint venture. So in a mentor-protege relationship, that’s going to be the protege that’s performing 40% of the work of the joint venture.
I’ve seen cases where agencies are starting to reach out to joint ventures and ask about their compliance with the 40% rule. So pay attention to that. I did have somebody come out and ask me, where does that apply? Is that at the contract level, if you have a multiple award, IDIQ contract, or is that task order level? The answer to that is the old lawyer's answer: It depends. You have to really look at your contract to see whether a particular box is checked under the limitations of subcontracting. Maybe it’s under the contract. That’s the default rule. But if that box is checked, it could be on the task order level. And it’s important to look at your contract closely to see whether your contract’s 40% rule, as well as the limitations of subcontracting, is at the contract level or at the order level.
Impacts of the FAR Overhaul and Contracting Personnel
I’ve had a number of people. Again, I’m at the SAME Mid-Atlantic Conference in Virginia Beach. People talk about the impact of DRP and the fork of contracting officers leaving the federal government. There’s a host of impacts on the small business side as well as on the contracting side. It happens at the same time as agencies are starting to implement the FAR overhaul. So the Department of Defense, Department of War just put into place 37 parts of the FAR overhaul on February 1st. That’s a huge regulatory action. And you have a smaller cadre of 1102s and contracting officers that are handling these regulatory changes.
Additionally, the FAR overhaul has additional discretion for contracting officers. So I’m hearing that now you have younger and less experienced contracting officers that suddenly have a host of new discretionary authorities under the FAR overhaul. How is that working out? So I wouldn’t be surprised if you’re on the outside and you’re watching solicitations come through, that you’re seeing things that you haven’t seen before or new procurement authorities that you haven’t seen before, because the FAR overhaul opens it up, but also you have fewer experienced contracting officers that are running through that.
It’s a lot of work for these contracting officers to get up to speed on these regulations. That’s part of my purpose here is to give education to federal agencies as well as contractors on what some of the new initiatives are.
The 8(a) Suspension List and Technical Barriers
Another question I got by email, and I also got it here at the conference, is where can I find the 8(a) suspended list? Now, you might have seen from some of my posts on Substack, I track the companies that have been suspended.
I just posted the other day that the number of suspended companies went back down to the 800s. It was up to 1,000 for a bit, and it’s dipped down back to 800s. I try to track that on a daily basis. So keep track on govconintelligence.com and the notes section. I’ll post every few days about how many companies are suspended and whether it seems to be going up or down.
So I have knowledge of how to find the list. I am reluctant to put the list out there. My view on this whole suspension and termination wave is that most of these companies have done nothing wrong. On the suspension side, the initial wave was companies that did not reply by the January 19th deadline to the data call. January 19th was a holiday. It was difficult for a lot of those companies to get the tech support they needed. This system, anybody who actually replied to the call knows the system is not infallible. They’ve seen a lot of like twirling circles on the system. So there were companies that were not able to submit by that January 19th deadline. If they didn’t submit by the January 19th deadline, They were immediately suspended. Didn’t matter if they submitted the next day. I don’t think they did something wrong by being suspended. They may just have had technical issues that really could have been a system issue rather than something on the company’s side. So that’s the first wave.
AI Algorithms and Economic Disadvantage Reviews
And the second wave now are companies being identified for issues with economic disadvantage. That’s probably another 230 companies that have been suspended and proposed for termination for economic disadvantage. Companies go through an economic disadvantage review every year. 8(a) companies are required to submit financial documents to their district office to go through a review of whether they’re economically disadvantaged. So these companies, if they’re in the program now, they’ve already been cleared by a human being.
Now SBA is using likely an algorithm, AI, to go through those same documents again. And that AI is finding issues with maybe a few hundred companies. I’m not certain that those are legitimate issues. And some of the cases I’ve seen, those are not issues that comply with SBA practice and regulations. I’ve talked about this before. There are exclusions to the economic disadvantage threshold. This AI, this algorithm is not, in all cases, applying those exclusions.
So I think a lot of these 200 or so companies that have been identified in the second round, first of all, they’ve already been cleared by a human. That’s why they’re in the program. And second of all, this computer is making mistakes as it goes through. Jessica Tillipman and I talked about the fact that SBA is just really jumping to suspension and termination, rather than having another human in the loop to review these suspensions and terminations. So that’s all to say, I’m not on board with saying that these companies are somehow engaged in some wrongdoing. And for that reason, I’m not putting a list out there. You can find which companies are suspended. You can go to the SBA website. It’s search.certification.sba.gov and start searching up companies and see whether they’re suspended or not. It’s not that hard to start to go through the whole list. I just not willing to put a list out there for it.
Conflicts Between 13 CFR and FAR Part 19
A few more questions that I got today in the Virginia Beach SAME conference. I got questions about CFR versus FAR overhaul. There are a lot of changes in the FAR overhaul, particularly with the 8(a)A program. And what controls when there’s currently this conflict between the SBA rules, which is 13 CFR, and the FAR overhaul rules? Those are out there in Part 19.
Some of the areas of conflict include the once 8(a), always 8(a) rule. Is there an automatic release for contracts that are being moved from the 8(a) program to service-disable VET or HUBZone or women-owned? Another area is on recertification. I wrote about that in my last article on whether agencies need to require a company to be eligible at the time of order where SBA rules say they must be eligible at the time of order. The answer is we haven’t seen it happen yet. So we don’t really know.
On the 8(a) side, SBA would tell you SBA is in charge of the 8(a) program. They have a partnership agreement with every agency on how that agency is expected to conduct its contracts under the 8(a) program. So, for example, on the once 8(a), always 8(a) rule. SBA issues releases. If an agency doesn’t get a release you’re not supposed to take something out of the 8(a) program. FAR overhaul doesn’t say that. FAR overhaul says there’s an automatic release.
But SBA hasn’t changed its rules. The SBA will still require that there be a release from the SBA headquarters in order for that agency to take that out of the program. So if sSBA a is in charge of the 8(a) program and it hasn’t released yet, the current rule would say, since SBA is in charge of it, that contract has not been released.
And I’ve heard instances where SBA has been asked for a release. And just because of the last thing that I mentioned, people taking the DRP, taking the fork, they’re not getting around to those releases fast. It can be months, potentially, for an agency to actually get a response on a release. And if it hasn’t gotten that release, that means that requirement, based on the CFR, should stay in the program. That’s also what the 8(a) partnership agreement says.
Future Outlook and Closing Remarks
We’ll see when this comes up. It’s certainly a big issue that could come up in litigation before GAO, both that 8(a) issue as well as the recertification issue. We’re in this interim period right now where SBA rules say one thing, the FAR overhaul says something else. It’s been said, Larry Allen said in an interview with a law firm that SBA rules eventually will change. That hasn’t happened yet. It might happen in this new Fraud, Waste and Abuse Reform rule that comes out where SBA might consider some of the changes that happen in the FAR overhaul. But that doesn’t seem to be, you know, if you call something Fraud, Waste and Abuse Reforms, it doesn’t indicate that it’s going to be changes to reflect the FAR overhaul.
I think that wraps all the questions that I have. I just want to call everybody’s attention again to the proposed rule that will be coming out from SBA on Fraud, Waste and Abuse Reforms. You might see that in 90 days. You might see that in 30 days. Depends on whether SBA requested expedited processing from OIRA. When it does come out, there’ll be an opportunity to comment. It’s designated as economically significant, and certainly I’ll come back online and talk about it when it’s available to the public for review. Thanks, everybody, for joining me. I had fun talking to SAME Mid-Atlantic here in Virginia Beach, and I’ll see you next time. Thanks, everybody.
With 20 years of Federal legal experience, Sam Le counsels small businesses through government contracting matters, including bid protests, contract compliance, small business certifications, and procurement disputes. Sam obtained his law degree from the University of Virginia and formerly served as SBA’s director of procurement policy. His website is www.samlelaw.com.
This video is for informational purposes only and does not constitute legal advice.
