Damien Specht, a partner at the Morrison Foerster law firm, joined me yesterday on GovCon Intelligence, just a few days after the Senate passed a bill to reauthorize the SBIR program. We got into the details of the reauthorization bill. Then we talked about his specialty—mergers and acquisitions of government contractors. After working on hundreds of M&A deals, Damien shared his tips for companies in dealing with the recent small-business M&A cliff, plus what small businesses need to take care of before selling.
And, with SBA’s most recent announcement on an additional 620 proposed terminations, we discussed the 8(a) audits. How do SBA’s actions affect firms on OASIS+ and the GSA Schedule?
Links
Damien Specht bio at Morrison Foerster
Venture Capital Investment and Small Business Affiliation Rules: Why a Limited Exception is Crucial to Economic Recovery Efforts by Jessica Tillipman and Damien Specht
S. 3971, Small Business Innovation and Economic Security Act.
The Building People, B-423896, Nov. 20, 2025.
A transcript follows.
Introduction
Sam: Welcome to GovCon Intelligence. My guest today is Damien Specht. Thanks so much for being on the show. Damien.
Damien: Glad to be here. This is awesome. You’ve had a number of really great people on this thing, and I am a regular consumer of the content, so thanks, so glad to help you make some.
Sam: That’s very nice. Damian Specht is a partner at the Morrison and Foerster law firm. He’s in the firm’s government contracts and public procurement practice, and he does a little bit of everything. Regulatory counseling, subcontracting arrangement negotiations, contract disputes, size protests, M&A, a lot of M&A. According to your bio, you’ve done over 200 transactions, probably more than that now.
Damien: More than that now.
Sam: At the, at that point. And then a long list of GAO decisions. Court of Federal Claims decisions. I want to start with some breaking news this week in the small business world, which is the Small Business Innovation Research program, or SBIR program. It has been lapsed for quite some time, but it seems to be looking on the way up because the Senate has passed reauthorization. For SBIR, I know you and I last saw each other in person at a hearing with the American Bar Association about SBIR, and there was some question about whether it was going to happen this year. It looks like it’s right around the corner. So what are your thoughts about what’s happened with SBIR and how this reauthorization looks?
SBIR Reauthorization and Program Evolution
Damien: I’ve been working on SBIR-related things for almost 20 years now, which is pretty incredible to think about. And it’s a great program. And I, we had never lapsed before. We had always had these sort of short extensions. This is the first lapse. But I’ve been an evangelist for the program, and that has made the last few months really hard because you’re out there in the market talking about how great this program is, how it’s a great opportunity, et cetera, and everybody says, but isn’t it dead? And it’s very hard to get people moving again when you’re moving forward and making more awards and all that sort of thing.
I think in terms of the debate that was ongoing: There’s a fight between the folks that want to cap the Phase I and Phase II awards. And my view of the world is that if businesses are doing good research and they’re accomplishing the goals in Phase I and Phase II, and it’s useful to the government, then we should let them do that. But I think there’s a counter view. Which is essentially that the idea is to commercialize, to finish out those technologies. And if you’re not taking it from one and two to phase three, that’s a failure in the program. Fine. This is a compromise. And there, there, there may well be agency caps on phase one and phase two awards, and there’s this new portion of the program that will allow for larger awards.
Sam: Oh, okay.
Damien: My question on the larger awards is that going to, as you may know. The SBIR program is funded through a particular allocation of research and development dollars from all of these agencies. And one of my concerns is if we’re going to make larger and larger awards, is that going to mean fewer awards overall, or is that just going to mean that there’s maybe going to be more money in the program to pay for it? And I don’t know, I don’t know how that is going to develop. But the other point on SBIR is that you have a focus right now in our industry on technology, on IP, and whether that’s hardware or software or AI-enabled, this and the rest. If the focus is going to be on technology, the early-stage program that makes the most sense is SBIR.
And we need to be out educating people on the program, driving more proposals. The way that you’re going to disrupt the folks that win all the phase ones and twos is to have somebody else win phase ones and twos, right? And getting more new entrances, more new entrants, more competition, more technology. And it’s just been a, I’m very glad to hear that it’s probably on the glide path to being re-upped and being re-upped for a number of years.
Sam: Where do you see this program evolving with this opposition to multiple award winners and then this new emphasis now on larger awards and on commercialization? Where do you see it two, three years from now?
Damien: It’s interesting because the SBIR program is sleepy right up until it has to be renewed. That’s how it goes. Is that there is a, it gets renewed. There are some tweaks; last time there were ones about foreign investment and those sorts of things that were the, where the changes last time. The real question I think going forward now is, okay, is our focus on. Early-stage research and development. Are we buying lottery tickets here, or are we really ends-based and we’re going to be focused on the end outcome? And these larger awards are an indication of an ends-based mindset that we really want to get to the end. And that’s a policy choice that is way above my pay grade.
But I do think that. The purpose of the SBIR program is not to be just another procurement program; it’s to do basic research and development that nobody else is going to bet on, but the federal government. If you are in a place where co, where venture capital will come and bet on your company, it’s great to be in the SBIR program, but you’re not the target audience, at least from my perspective. And I also just, if the goal is to cap awards to particular companies, I don’t know how effective that is to implement because they can just start another company, and I don’t know if you’re going to then track those people, and all of a sudden this starts to get very complicated, very fast. Sure. Whereas I think if you. If you do more to advertise the program internally and externally, I think there are more people on the private side that know what the SBIR program is than in the whole of the government. So if you do more to advertise the program, you get more people involved on both sides and run through Silicon Valley, and you run through all the technology corridors that we have in this country, that’s the solution rather than some arbitrary cap.
Sam: And that’s a good entry point to whatever it is, government contracting or grants. These are companies that have done no work with the federal government at all. And now they’re able to get their systems in place and get introductions to people. They can potentially be part of the industrial base.
Damien: That’s right. And the thing that we’re assuming knowledge of, but let me actually emphasize it, is that SBIR phase ones are not necessarily winner takes all. The topic can come out, and the government can make any number of awards on those. And so if you’re an emerging small business, one path is to go beat Lockheed Martin, and the other one is to be one of three awardees on a hundred thousand dollars SBIR. There’s one of those that is a far easier entrance point to the market.
The Congressional Experience and Policy Evolution
Sam: Certainly. So look forward to getting that passed and then getting the funding out for this fiscal year. Want to take a step back in your bio? I didn’t mention that you actually started as a congressional staffer on the Small Business Committee. How has the experience of a congressional staffer changed? Or maybe more broadly, if you can’t answer that. How has the process for getting small business legislation through Congress changed? Since you were there.
Damien: You know the answer to this from your seat. So I was up on the Hill for a heartbeat while I was in law school. I was in the Senate Small Business Committee. Had the great pleasure to work for Kevin Wheeler, who is just one of those SBIR experts, and to work collaboratively with Max Kidalov, who is still working on SBIR stuff today. He was there as well. And one of the things that we were frustrated with then—again, even in the short time I was there—was that we couldn’t get things done. It wasn’t a priority to get small business legislation pushed through, seen as a collaborative, but not a particularly high-priority committee. And we were mostly looking for other pieces of legislation to hang things on in order to get them. Through.
And when I came out, I intended to go back after law school. I was going to go back and work on the hill. And I didn’t, and I will tell you that because of folks at SBA, like you, who, and John and the others who were willing to talk to industry, I think that those of us on the outside can get more done than even the Hill staffers can. Because the regulations that are coming out on small business affiliation or recertification or whatever, if the agencies are willing to talk to industry and folks who care, we have the ability to actually get things done without worrying about what bill we’re tying it to, or whether we need to have a hearing.
I think, I’ve also seen, there was, even then there was an increase in partisanship, and I’ve thought of that as a non-partisan committee. Everybody wants small businesses to succeed. We can disagree on the 8(a) program or on any particular program, but everybody wants. I bustling Main Street, a successful small business program. Everybody wants the government to buy the best new technologies from the most interesting, innovative firms. Everybody wants that. But when we get tied up in fights about particular programs, things just hit the rocks. And in my seat now outside is outside counsel. I’ve testified before the committee a couple times on the House side. I’ve been able to work on rules with smart SBA lawyers. And I’ve also been able to get exposure to way more businesses than I would have had. I just stayed on the Hill. Hundreds of small businesses a year. I talk to the private equity guys, the venture capital folks. All those perspectives are really valuable and have helped frame how I see the small business rules as well.
Sam: That’s certainly one of the, maybe the last place, of true bipartisanship, the small business committees. At least in their hearings. Maybe not so much in their legislation that’s coming out, but at least they are cordial to each other in their hearings.
Damien: It was always collaborative, but a little too slow for me.
Affiliation, Recertification, and the “January 16th Cliff”
Sam: Speaking of your background and your work now with private equity firms and investment firms. I mentioned in the last recording of this that you had worked on a paper. It’s probably more than 10 years ago now, with Jessica Tillipman on investment potential in small business contractors. If you were to go back and look at that paper, how do you think it’s aged? Do you think those ideas have become more mainstream since you wrote the paper in terms of allowing more investment into small business contractors?
Damien: It’s interesting, I think Jessica may have said—I was a law student at the time, so now we’re talking about years ago, right? One part of that analysis was here’s how affiliation works. And affiliation is incredibly hard. The regulations are thousands of words. And that’s not even the good stuff. The good stuff is in the case law. And that’s where you get more of it.
But the question was, okay, how do we maintain some level of purity where real small businesses are getting real awards? But we allow them to. To grow. We allow them to potentially take minority outside investment, or we allow them to have a pot of gold at the end of the rainbow, where they get to exit. Because if you don’t have that, you’re going to limit the people that come into the market. If the idea here is that I’m going to build a business that is going to be a permanent, small business, that’s going to attract one slice of people. If you say, okay, it’s going to be a small business, and then you can grow, and you can go compete with the bigs, that’s going to be another. Small but optimistic slice of people. But if they’re, but if you then have a situation where those people can build value, and they’re maybe regular entrepreneurs or they come from an entrepreneurial background. Many of my clients come from entrepreneurial families, right? They want to build something to eventually sell, to potentially do it again.
And so if you want the most people to come into the funnel. You have to attract all three of those. You can’t just attract the first two. And the purpose of the paper was to argue that there are places where we can allow more outside investment, where we can have different affiliation rules, where we can modify how we look at it without just throwing the doors open and saying, no more small businesses. Everyone gets to be large. I think it’s aged pretty well. But what that didn’t anticipate was the whole recertification regime that we now have on top of that. Did not see that one coming.
Sam: Let’s get into that because I did have a talk with a business owner—this morning even--asking, what is the point of this new recertification rule? So he is referring to the January 16th cliff. Now that the cliff has passed, the rule is that if you’re a small business that gets acquired by a large business, you can no longer qualify for small business set-aside orders or orders off of an IDIQ that was originally set aside. And so the
Damien: question, and you get off from the IDIQ.
Sam: Yes.
Damien: If it’s a set aside, IDIQ, right?
Sam: Or you could get shifted over to the large business pool if that’s an option. I wish the rule said that a little more clearly. You could talk more about that. That would be the, that would be the ideal state of the rule. So I argued in a Substack post a couple of weeks ago, when the cliff arrived, that part of this recertification regime is to have small businesses competing against other small businesses rather than having a small versus large situation. It’s a matter of fairness.
But even more to the point, it is a sticking point for the SBA Inspector General and for a particular whistleblower group for over 20 years. Now, since 2005, the SBA IG had been prodding SBA to make changes to recertification because the idea was that without this recertification regime, small business dollars were going to large. And by the way, I found some testimony from one Damian Specht saying this is a problem and that SBA needs to fix this problem of small business dollars going to large businesses. So, looking back on that, but more to looking at junior 16th, the arrival of the cliff, what do you think about this particular issue--this cliff issue of preventing acquired small businesses from going after small business orders?
Damien: So first off, I don’t know that you and I agree on the premise necessarily, right? So I agree that set aside dollars to generally go to small businesses, but I think that we can make a business judgment that says: The important thing here is that the government is hitting its small business goals and that those dollars are making it to small businesses. And if we have a recertification regime that runs to credit as opposed to eligibility. We’ve balanced the market between allowing for growth, allowing for acquisitions, and making sure that 20-some odd percent of federal dollars end up in small business hands. I think you and I probably disagree on that, but when we talk about small business dollars, there’s a difference for me between a contract that was awarded to a business that was a small business at the time that it certified, that it was, and counting that as for credit after they’ve been acquired. So I think I see a distinction between those things. That is a policy call, right? That is not the outside counsel call. And it’s not like it’s illegal to do it that way. It’s just a policy call. But the implication.
Sam: It’s also a technology call, though. Let me just mention that I don’t know that it’s actually technically possible to separate the credit from the eligibility. Please go ahead.
Damien: I’m sure we’ll solve that problem in good time. But, because what worries me and I’ll, I will get to, I promise I’ll get to the January 16th, but what worries me is a circumstance where you have the 180-day rule. Where a submitted proposal for a small business that is a single award, not a MAC. If you recertify within the first 180 days as large, you are ineligible for award. After 180 days, you’re eligible, and then if it’s a MAC, you’re ineligible no matter when it happens. What I worry about is a circumstance where I’m a contracting officer, and I’m trying to let a procurement, and I get X number of proposals. The procurement timeline is six months a year, 18 months. CIO-SP4: The rest of our lives. And all that time, people are drifting off. We are getting less competition because the folks that the government would’ve awarded to are falling off.
And once they win that award, then they have to recertify as large during the course of it. So now the awardees are trickling off. And what you’re doing at the end of the day is not only reducing competition, which is a goal of the system, but you’re also reducing the certainty for that contracting officer who’s trying to make that award, trying to decide, hey, is this going to be a small business contract at all? Do I want to take that risk of having people fall off? I just want to let it full and open. Okay. Soapbox over with the January 16th rule. There was an anticipation that there would be a lot of transactions running up to January 16th because people were trying to get grandfathered in, right?
Some of that happened, I think there was less there for a couple reasons. Number one, totally unclear how any of this relates to the GSA schedule, right? I don’t understand how it fits under the rule. And the GSA schedule is just a huge driver of business. With that, there’s no certainty. I don’t know if January 16th, 2025, or January 16th, 2026, is the cutoff date for that. So I think that was part of the issue. The other part is that 2025 was not a great year for government contractors. There’s the direct impact of DOGE and the cuts that occurred there. But there’s this more subtle impact, which is that a lot of contracts last year got extended. So the incumbent got extended, but there was no recompete. And that may have been intentional; it may have been because of a lack of staff, who knows? But it is what happened.
And as a result, it’s very hard to sell a business where I say, oh, I’ve got this contract for another six months, as opposed to, I won the recompete, I have it for another six years. And so there were a number of transactions before that date, but I think the overall impact of those two things. Really stopped that from occurring. Now what’s going to happen going forward? We’re going to have to figure out how this rule works, right? So I did the math. This rule, 125.12, is 1,684 words.
Sam: Oh, okay. It’s just over 1,000.
Damien: 121.404. The other recertification rule, 1,274 words.
Sam: That’s a lot to go through. Good for lawyers.
Damien: So 3000 words. Where we used to have size is determined when you submit your bid, including price, right?
Sam: Yes. FAR Overhaul is maybe a sentence.
Damien: Exactly. Exactly. And frankly, you could make the argument that in 1,684 words, there are actually too few words in here because there are a number of issues that are unaddressed that we need to address going forward to figure out certainty. And there’s going to be litigation on. How does this apply to the point you made before? What if there is an IDIQ contract that has a large pool and a small pool? I think the text of the rule probably says that if you recertify in a reserve, which is what the small pool is, you’re ineligible for options. I cannot imagine that’s the outcome. That SBA wanted, right? There’s no policy reason to kick the company entirely as opposed to just moving them up to the full and open pool. So could we deal with some clarification there? Things like that need to be fixed here. And I understand that the timeline for the rule was, was a little rushed, et cetera. But at any event.
Sam: Just quickly, do you think it applies to novations?
Damien: I do not think that 125.12 applies to novations. I think it’s a gap. But the problem is the FAR does require recertification for an asset transfer innovation, right? So what controls your guess is as good as mine? We’re going to find out at some point. We’re going to find out. Your guess is as good as mine. But no, I don’t think it applies to novations.
Market Trends 2026: M&A and Private Equity
Sam: You mentioned the downturn in 2025 because of DOGE and extended contracts. How are things looking market-wise in 2026 so far?
Damien: Busy. There’s a lot going on in the M&A market, and I think it’s important to baseline what the M&A market looks like for government contractors. The overwhelming majority of transactions. Are somewhere between $50 million and $100 million. So we see all of these transactions that are a billion dollars or hundreds of millions of dollars. Those are an extraordinary minority. The actual majority of deals are those smaller ones. And so every single transaction has some level of small business involvement in it. Because those are the deals that are coming up as I’m doing $45 million in a five-year average revenue, I can compete as small. That $46 million can be a problem, right? Or 47 or 48, depending on where the numbers go with inflation. And so that is a huge part of the market and a huge part of all of these transactions.
So it’s been busy. There has been a lot of investment, and that investment comes, I think, in three major flavors. There’s private equity in our market. Those are control investments. They are recertifying as large, and they’re making a bet that that company plus other companies will be able to compete full and open and, and that those businesses will be more sophisticated with their work. There are private equity firms that do minority. We would refer to them as venture capital, but they’re not. So there are venture capital firms that take small amounts, but there are also investors that’ll take 30, 40% of a business in our space. Keep them small, give them some resources to grow, and then see if they can compete on a full and open basis. And then there are what are referred to as strategic transactions. So that’s either a large existing business, like a publicly traded business that buys a small business, or two small businesses combine. We see that a lot where somebody, my $45 million individual, he and another 45 million individual want to combine, be a $90 million enterprise, and think that’s a more competitive way to go forward.
Sam: And that’s preferenced under the new rule.
Damien: It is preferenced in the new rule, a small, acquiring a small. Though small for what isn’t totally clear, right? Small in their primary code; small, under a given contract. Not totally clear.
Sam: I promised the person this morning that I would ask. Now, post January 16th, what are the strategies that you would suggest to a company that did not make their transaction in time for the cliff?
Damien: You’re not going to be surprised, but number one, win more work, right? That’s easy. But primarily, we talk about the mentor-protege program as a way to transition, and I think that is beneficial to everyone. It’s beneficial to the business that is graduating. It’s beneficial to the business that is coming up as a protege. There is set aside work that needs to transition to someone. And you’ve got incumbent personnel who are performing it, and you’ve got a small business who wants to get into that market, wants to meet that customer, wants to do that work. And if you can marry the two of those, that’s the whole point of the mentor-protege program.
How does that relate to the M&A? I no longer have a recertification obligation if I’m the mentor. So instead of saying, oh, will you keep this small business work or this 8(a) work, or this SDVOSB work, or whatever it is. Will you keep that work in a transaction? It’s a fait accompli. I don’t have to recertify because the size of the mentor protege joint venture is based on the small, and so that’s one strategy. I think that is a particularly good strategy for the IDIQs. I’m going to get off-ramped from an IDIQ. Maybe it makes sense to take that IDIQ and move it to a mentor-protege JV, where it can benefit an upcoming protege and there’s not an off-ramp issue that comes up.
Sam: Okay.
Damien: Does that make sense?
Sam: And the mentor in that case isn’t necessarily a large business; it’s just trying to plan for the future certification.
Damien: You’re planning for the future, and you’re planning for either your growth or an exit or your own acquisition with it. You want to go buy somebody. The other piece that is going to get more popular here is going to be the minority investment, right? I don’t have to recertify. And as an entrepreneur, I’ve got all my eggs in one basket. A minority investment helps me get paid for some of that so that I don’t have all of my personal wealth in one place. It gets me connections to the minority investors’ connections, and their, if it’s a venture capital person, it gets me involved in all of the different businesses that they invest in, all of those technologies. Or it gets me connections to folks who have done this before, who have ridden the ride before, been entrepreneurs before, and it can get me access to professionalized staff, a new CFO, a new chief growth officer, or something like that. There are a ton of benefits that come from that, and that is going to be a more attractive option going forward for folks who didn’t transition.
Minority Investment and Compliance Traps
Sam: That’s interesting that those are the collateral benefits of getting minority investment. When I was at SBA, there was a policy effort to open up all of the programs to additional minority investment, and we changed what’s called the extraordinary circumstances rule. Essentially, allowing for more supermajority requirements. Has that shifted the market at all? Have people taken advantage of that? Does it matter?
Damien: Big change, right? So it used to be that all of the programs had slightly different rules, and it was hard to know if you were going to make a minority investment, how that would work. And yes, I know you were involved in driving that forward and making it more uniform across the programs. That is a humongous change, right? That is a humongous change. Super beneficial. And it has certainly cost me billable hours, in that I don’t have to interpret all these various programs. It’s one rule across them all.
Sam: If only they could do that for joint ventures.
Damien: Exactly. But it’s interesting. So I separated out minority private equity from minority venture, and I did that on purpose. The minority private equity folks that play in this space know these rules, et cetera. But there’s a whole other group of businesses, we think of them as Silicon Valley, but they’re all over the country. And they are the ones who are coming up with cool technologies and are primarily commercial-facing, and they take venture capital based on standardized venture capital terms. These things are fairly rote, right?
And interestingly enough, the way that the SBA rules work, even as revised, is still not consistent with that. And so I certainly, I have a real concern. That, we’re on the one hand, we’re saying, Hey, we want better technology. We want more businesses that are doing cool stuff, which is what the venture capital folks are trying to invest in, but our small business rules aren’t actually keeping up with that. And so I think that’s the next major challenge on the minority side, anyway, is figuring out how it is that we marry the way that market has developed and our desire for it. With the affiliation rules, and maybe it’s a, maybe it’s a carve out for a certain percentage of ownership or something like that. Somebody below 10% doesn’t have to worry about negative controls; there’s a number of ways to get there, but I do think that there’s an and a disconnect, and that’s more than a frustration disconnect. It’s a compliance trap because those folks are going to enter this market. They’re going to win an SBIR, they’re going to win a small business contract. Somebody’s going to file a size protest, and they’re going to lose.
Sam: Interesting. What about the catch-all at the end of the extraordinary circumstances? Does that not cover it?
Damien: Maybe. That’ll be up to Holleman, right?
Sam: That’ll be the question once they get through their 1000 cases that they’re working on right now.
8(a) Program Audits, AI, and Subcontracting Limits
Sam: Actually, let’s talk about that. There have been at least two, maybe now three waves of suspensions in the 8(a) program. The first was 1100 companies did not reply to the data call on the holiday that it was due. The second wave was DC area firms that SBA suspected of not being economically disadvantaged. And it looks like there’s now an effort to look outside of the DC area. What are you seeing on 8(a) audits and suspensions generally? Do you think SBA has gotten it right? And what would you say to a company that’s caught up in the middle of this?
Damien: And can I add onto that, too? All the limitations on subcontracting action that’s going on as well.
Sam: That’s Treasury and War. That’s all running in parallel as well.
Damien: So, number one, it is clear to me that they’re using some sort of AI to make a lot of this analysis. I think it’s great to use AI to detect fraud, right? We have forever been at this point where we say, okay, what is the return on investment for detecting fraud? How much do we spend versus how much can we catch? And using AI to do that, I think you get a better return on investment. None of us wants fraud in the programs. That’s great. The problem is that at the volumes, I think it’s going out right now. I have not seen the quality control that I would have expected.
And so what I’ve seen in terms of the letters that have gone out are errors, and I know you’ve pointed them out on some of your prior discussions, but also misunderstandings of how the regulations work. And I’m a Luddite. I don’t, I’m not great at AI, et cetera. I don’t know how you teach it to do stuff, but it seems to me that. Future letters would benefit from an extra level of review before they go out. Particularly because those 8(a) letters are coming with an instant suspension from the program. They’re not going out as a Show Cause, which is probably how they should have gone out is a Show Cause. Prove it to me, and then if you don’t prove it to me, we’ll suspend you, or we’ll terminate you from the 8(a) program. They went out as if we assume the AI is correct, which has not been my experience.
And there have been follow-on contracting actions. OASIS+ has said, okay, if you are suspended from the 8(a) program, you are not eligible for 8(a) awards on my contract. We’re going to put you in essentially dormant status.
Sam: How does OASIS+ have the ability to do that? Wasn’t the idea that you get on it and then even after you graduate, you stay on OASIS+ in the 8(a)? So what’s the difference between being suspended and being graduated?
Damien: Oh, and that’s how the contract works. The contract says that if you recertify as other than, then you go dormant. So if you’re acquired or you hit one of the recertification points—five years—then you can go dormant. That’s fine, because that’s the way that contract was set up, and that’s what everybody was told the rules were. A suspension letter from SBA, and you’ll correct me if you think I’m wrong, but a suspension letter from SBA is not a recertification. And so I don’t know how they can do that. It’s not how the contract works, and it seems to me to be a due process problem. Right is that you’re just assuming guilty until proven innocent. And I think what we’ve seen with the late submissions, and I think what we will see with these waves, is quite the opposite, is that a lot of these folks are guilty of what?
Sam: Guilty of SBA, moving from one platform to another, and potentially losing your documentation, guilty of, as you said, SBA, not applying the clear rules on how to calculate income. Maybe there are a smattering of cases where firms are legitimately ineligible, but as you mentioned, I haven’t seen a whole lot of those.
Damien: No, those are actually the ones that were the most fascinating are the letters. They’re like, you never gave me your tax returns, and then you can get a screenshot of where the tax returns were submitted. And in fact, the letter includes information that could only have been calculated using those tax returns. So it’s a little bit of a loop.
Sam: That may be for the LLMs and the training data that you have to come up with a tax return sentence.
Damien: But I’m supportive of using every anti-fraud tool we have. And I’ll say the same thing on the limitation of subcontracting. Limitation of subcontracting has been in the rules forever, and it hasn’t been closely monitored in any way that I’m aware of. There’s reporting on it. But has it been closely monitored? Not really. Great. But to your point, there are exceptions, right? There are exceptions for ODCs; there are exceptions if you’re looking at a services contract versus a production contract, right? There are all of these exceptions, and it’s not clear that those are being applied consistently with the right level of human interaction.
Sam: Yes. And they never mentioned the non-manufacturer rule, which is a big exception to the limitation on subcontracting. I’ll reiterate this. I seem to say this on every single podcast. SBA has a statutory responsibility to set up a system for tracking limitations on subcontracting. It has not done that. So as a result, the Treasury Department and War have to send out these notices to 8(a) companies to send in monthly reports or whatnot. Save everybody a lot of time. If SBA or GSA just set up this system, that’s been talked about for over a decade now.
Damien: I’ll say on the limitation of subcontracting, those rules are also incredibly complicated, right? I did not do a word count for how many words there are, but I can tell you they’re incredibly complicated. What is the measurement period? What counts, what doesn’t? What diligence do I have to do for a similarly situated subcontractor that might count? Those rules are incredibly complicated, and I do think that there is space for reshaping the SBA rules to make them a little simpler. A little bit clearer for people. Because I think what happens is that over time they start simple, and then over time you address different problems. And every once in a while, it’s probably worthwhile to give some thought to how we might clarify and simplify.
Regulatory Conflict: SBA Rules vs. the FAR Overhaul
Sam: One effort to simplify was the FAR Overhaul, which cut at least 20% from the FAR, maybe even more from part 19. But now there are conflicts between the complexity of SBA’s rules and the simplification in the FAR Overhaul. So there’s a couple of areas that we could talk about. One is the 8(a) program with the once, 8(a) Always 8(a) rule. And sole source versus competition. Another is recertification where SBA, as you said, has 1600 words or so on recertification, and the FAR Overhaul has a sentence. Where do you see this going? How is this going to play out? Is it just going to be court case after court case, OHA case after case?
Damien: There’s one thing that is unknowable, which is, or at least from where I sit, which is, is there a rewrite of 13 CFR coming to conform it in some way to the Revolutionary FAR Overhaul? And I don’t know the answer to that. I don’t know if that’s the way this is going to go. Color me skeptical, that’s the way that’s going to go. I’m sure there will be revisions to 13 CFR, and there’s a discussion of the potential rules coming out soon.
But I think those things are in conflict at the moment, and you’re right in important ways. Somebody’s going to try to move a contract out of the 8(a) program and move it to a service-disabled veteran or HUBZone, or woman-owned small business, one of the other small business programs. And, will SBA take a stand on that and say that’s inconsistent with 13 CFR, and what wins in that instance? Show me the release. Where did SBA release then? And we cannot wish into being the world that we want. And I think that’s part of what the Revolutionary FAR Overhaul was doing and saying, here’s what we want the rule to be, and that’s great, but you need to figure out how those two rules work together.
But the FAR and 13 CFR have been inconsistent for years. It was pre-Revolutionary FAR Overhaul, but in the other direction, which is to say that 13 CFR was coming out ahead, was making new rules, and the FAR Council was not getting around to implementing those rules. And so that’s been inconsistent for years, and at least the default has been to apply the more specific SBA rules. But I don’t know that’s been litigated.
Sam: On the recertification question, if a client comes to you and says I got acquired. I need to figure out which rule to follow. What are you telling them?
Damien: I’m a lawyer. I’m conservative. 13 CFR, right? We go to those recertification rules and tell them, look, your risk profile. If you want to rely on the FAR, that’s fine, but SBA is the agency that does this, and they have more detailed rules. And so, at least for the moment, we follow those rules, and those are the rules that we cite to.
Sam: And there’s no Office of Hearings and Appeals for the FAR Overhaul and all that.
Damien: Now, again, how that gets litigated over time and where that gets litigated, right? If you recertify and you get ramped off of a contract, I guess you file a claim for it, and you fight it out.
Sam: Interesting,
Damien: As to whether or not the FAR or 13 CFR controls, I am not a smart enough lawyer to know how that ends.
The Building People Case and HUBZone Challenges
Sam: Speaking of off-ramps and you being a lawyer, I was interested in this decision. This is The Building People decision from GAO in November of 2025 because I worked on this issue when I was at SBA. There’s something called the 8(a) pool on the GSA. And similar to what we were talking about with OASIS+, the idea was you get on the 8(a) pool, you stay on the 8(a) pool for competitive, even if you graduate from the program. Or you become other than small. You do have to be in the 8(a) program for sole source, but for competitive, you can stay in there. That question came up before the Department of Energy, and you represented a company called the Building People, which was on the 8(a) pool. And they were excluded anyway because of, not really clear, maybe a question of their size or their eligibility, but essentially the agency said it says you can stay on, but you don’t really have to stay on.
Damien: It is worse than that. It is worse than that. The RFP actually said, we’re not requesting recertification.
And in Q&A, the agency said you just have to be in the 8(a) pool. And to your point, I don’t think there’s any argument that The Building People were in the 8(a) pool. So, how do you get to a result where they get excluded? And procedurally, the answer to that is the agency refers the matter to SBA for an 8(a) determination. Okay. But that’s not what you said you were going to do when you set up the competition. And bids are not free. There is not only the cost of preparing the bid, but there’s the opportunity cost of, if you had told me this was the rule, maybe I would’ve bid as a subcontractor. And so when an agency does that, when they do something that is contra to what they’ve announced for the rules of the competition, that seems like a protest to me, like an issue, a problem. And the GAO’s conclusion was just that it says that they have to get an SBA opinion under these circumstances, but it doesn’t say they can’t just do it every Tuesday because they choose to.
Sam: And it doesn’t give any company certainty. And it seems like SBA was very active in this; for whatever reason, it seemed like it really caught their attention.
Damien: Yeah. Yeah.
Sam: And it raises questions about this OASIS+ scenario, too. Can they get around the strict language of the contract, as you mentioned, just by pointing to this case?
Damien: Not only the contract, the task order, right? The task order said no recertification.
Sam: On the Q&A. Let’s talk about proposed rules. SBA is coming out with the proposed rule sometime soon. They’ve already presented it to the White House Office of Information Regulatory Affairs. What do you want to see in that?
Damien: Probably not what’s going to be in it is probably the short answer. I made the point a couple of times here that I think clarity, simplicity, uniformity, all the things that put me out of a job, are the things that I’m looking for in the regulations. And that takes time, and I think it takes interaction with industry to figure out, hey, where are the pain points? And that was something that SBA in prior years was great at. Hey, industry, what sucks? What is not working for you? Where are the problem areas? And so if it were me, I think I would see more work on recertification and minority controls, and some cleanup of things that are outdated that we can address in other areas. That, that’s probably not what we’re going to see. I think we’re going to see a very likely focus on the 8(a) program that has been a consistent focus here.
And in truth, the 8(a) program has not been reformed in a while. I would like to see is reform on the HUBZone program, because that has been tried over and over again, and every year the government doesn’t hit its HUBZone goals. In part because, and I hear this from clients, it is basically impossible to comply 35%.
Sam: Is that the problem? 35% compliance?
Damien: It’s because the problem is you win a big contract, and how do you ramp and you’re recruiting for folks who aren’t steeped in the HUBZone rule. Your employees, 35% of your employees, have to come from a historically underutilized business area. These are census tracts, many of which are populated by students. Because they have lower incomes during college, et cetera. These are not necessarily—people think about urban blight, but it’s not. It’s some urban areas, some rural areas, and then college towns are where you’re hiring from. And if you win a contract where you now have to deploy a hundred people, and you have to deploy them in 30 days, it’s a real challenge.
Sam: It’s not meant for modern-day contracts. Most of these contracts are service contracts now. It doesn’t really make sense to have that same,
Damien: Maybe the answer is an investment in those HUBZones, right? If you’re not going to meet that goal, maybe there’s a way you can upgrade your office space; you can do whatever. Maybe there’s a financial component to rebuilding those places. That, that allows for more flexibility. Because until then, you’re going to have a situation where there are very few, and very few end in HUBZones.
Sam: And that creates fewer opportunities because you have to satisfy the rule of two. To put the HUBZone requirement out there.
Valuation and M&A Pitfalls
Sam: I do want to run this one question by you. Speaking of the M&A situation, even as 2026 seems to be better for M&A. Somehow I get more responses on my M&A articles than anything else. One of the responses I got was: My company was valued more when we were at half the size standard, or three quarters of the size standard than we are now, as we’re getting close to the size standard. So, where else can you see a company that’s growing and valuation actually goes down? Because it’s very close to not being eligible for set-aside work.
Damien: It’s not only what you do about that. It’s not only that, it’s that they’re eating their backlog of their small business wins. If I’m an outside investor and I’m looking at your single award, small business contract, if I’ve got five years left on it, it’s got a value. If you’ve got 18 months on it, it’s got a different value, right? And so as you get closer to that line, the, can you win this on recompete question becomes much, much harder. And you don’t have that tail to transition you through.
But the answer is, and all the smart people in this industry say, run a business, don’t participate in a program. And so the way out of that is to diversify your base, right? To use the mentor-protege program, use subcontracts where you are the sub to comply with the limitation of subcontracting, but you’re the sub to a small right? Make your revenue less small business dependent, right? One. Number two, while you are still small, and I’ll tie this to the beginning of our conversation, participate in the SBIR program. Develop intellectual property and the SBIR program allows you to go out and win sole-source work without the 8(a) program. If the 8(a) program went away tomorrow, you could still get sole-source SBIR Phase III awards. Go do that and go build a plan where a buyer can only see some backlog, but sees a plan, and then has the IP to dream on that you can win in less competitive operations. Does that make sense?
Sam: So, as you’re looking at these transactions that may be coming up and working with buyers, one of the things you engage in is diligence. Trying to make sure that the valuation is right or the transaction is proper; folks are compliant. What are you seeing in that? What are the biggest pitfalls companies should be looking out for in this?
Damien: If you’re a small business, I often say that we see more non-compliance than the inspector generals do. Because we are out there looking at dozens and dozens of businesses, and I don’t have to send them a CID or a subpoena. They open a data room, and I get to look at everything. And so we can see trend lines, and we can see all the errors, and we can see what’s going on.
So, for your small business audience, and for your large business audience that wants to acquire a small business, a couple points. The number one mistake we see is affiliates. People look around the four walls around them, and they say, that’s the size of my business, but they forget that they own another business over there, and their brother owns another business over there, or maybe they’ve got a parent corporation, right? We see that all the time with subsidiaries of larger corporations. They just say, oh SAM asked me, not Sam you, System for Award Management asked me, how many employees I have? I know how many employees I have. At the subsidiary, I’ve got 50 people on the payroll. So they put in 50 and that auto-populates the small business representations. What SAM wants them to do is to go look up and go all the way up the chain to be able to calculate that, but that’s not intuitive. And it’s not the obvious answer. For you and me it is because this is what we do for a living. For somebody who’s out there trying to actually run a business, it’s not. So we see that a lot.
And the same thing ties back to the venture piece, which is if you have taken even small minority money, but with the wrong negative controls, you can run into the same affiliation problem. So I would probably clean that up. This is going to make you bang your head on the table, but another one of the issues that comes up a lot is the belief that I don’t have to update my size status until I file my taxes.
Sam: Okay.
Damien: As the rule is once you become aware that you’re going to cross, and you’ve closed off that fiscal year, then you update SAM and you are now a large business. There is a lag. There’s a persistent myth that if you don’t file your taxes, you don’t know what your numbers are, you don’t have to recertify. And so you have folks filing on extensions in September. And that nine months, they’re qualifying as a small business in SSAM, but they’re not. I see that mistake quite a bit. That happens.
I’ll hit just two more, and then we can continue on other topics too. But SBIR, SDVOSB, WOSB they require in different ways, direct ownership, right? We see problems with that all the time because folks go to a tax lawyer or an estate lawyer that says, if you organized this way, it would be more tax efficient. That may be true. But it is non-compliant with those programs and that’s got a really long tail because that’s going all the way back to when you made that change. And we see it in the SBIR program a lot and we see it on occasion in some of the other programs. The SBA certification process has weeded a lot of that out, but it still exists. And so the important part there is just if you are restructuring your business, have a government contracts lawyer, have a small business lawyer to look at it.
The last topic I’ll hit is JVs. OHA has no patience for errors in joint ventures, right? There are the requirements and those have got to be hit, and you’ve got to update it every time you submit a bid because you have to actually break out how the work share is going to look. The regulations say you got to identify the work and the materials and the locations, and the only way to do that functionally is to update your JV agreement every time you bid. A lot of times folks go to their lawyer; they get a great JV agreement. It’s right for the first contract, and it’s wrong for every contract after that because they don’t update it, and you’ve got issues that you will lose a size protest on that basis.
The other JV issue that comes up is really esoteric, but the way that you calculate revenue coming from a mentor protege JV, or any JV, it’s not the intuitive answer. Okay I got a subcontract from the JV and I count that as income, and the other party got a subcontract from the JV and they count that as income because the JV is unpopulated. But that’s not how the regs work. If there is other income right in that JV, there are other subcontractors, et cetera, you need to divide that revenue and allocate it to the parties. That is not an intuitive outcome and people get caught on that as well.
Sam: Oh, interesting. So they don’t realize that’s the way the SBA JV rules work.
Damien: It’s all stuff that’s not intuitive. The policy rationale makes perfect sense. It’s just not, if you told a man on the street that, they’d go bang their head on a wall for a while.
Sam: We have to do some education, to put this out there.
Damien: This is part of why I’m thrilled to be on this. Not only because of the folks that you’ve had on it before, but that we can do some education.
Sam: That’s great. And thanks so much for coming on. How can people find you?
Damien: On the web, the picture’s a little old. The bio’s a little old. But if you want to email me, my email address is DSpecht, so D-S-P-E-C-H-T at mofo.com. That’s mofo.com for real.
Sam: Morrison Foerster, a great abbreviation. Damien Specht, thanks so much for being on the show.
Damien: Thanks for having me. This was awesome.
Sam: Thanks everybody.
About the guest
Damien Specht is a partner in Morrison Foerster’s Government Contracts & Public Procurement practice. Damien represents clients in government contracts transactions, regulatory counseling, subcontract and teaming agreement negotiations, contract disputes, size protests, and protests. He has played a significant role in hundreds of government contracts transactions, representing industry leaders, private-equity firms and entrepreneurs.
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.
