SBA unveils recertification rules for small businesses

Starting next June, federal rules will tighten guidelines for how companies can use a small business designation to win government contracts and how agencies can use it to earn credit toward procurement goals.

The new rules represent a win for small businesses, which have been pushing for changes to how they are certified. In addition, the Small Business Administration announced that it will begin rating agencies on their efforts to give small companies contracts.

Currently, a company that wins business either through small business preference programs or other types of competition can keep that designation for the life of a contract. But with the growing use of long-term contracts that range up to 20 years, companies can undergo major changes that allow agencies to claim credit for working with a small firm even if the business has, for example, been bought out by a Fortune 500 company.

Under the new rules, published by Small Business Administration in a Wednesday Federal Register notice, contract-holders that are registered as small will have to recertify their size status any time they buy another company, are acquired by a company, or merge.

Recertification also will be required after five years of a long-term contract, and thereafter whenever an option is exercised.

The process will not affect contract terms and conditions, and agencies will be able to continue doing business with providers that have outgrown their small status. But they will not receive small business credit for such spending. The new process will apply to all contracts, including those signed before the rule change takes effect.

"This regulation will go a long way toward ensuring that contract awards get in the hands of small business owners, federal agencies get the proper credit toward their small business contracting goals, and small business contract awards are fairly and accurately reported," SBA Administrator Steven Preston said in announcing the rule change.

Some small business advocates had called for companies to recertify annually, and SBA's proposed rule -- first released for public comment in April 2003 -- initially supported that approach. But the agency received comments that an annual requirement would place a heavy administrative burden on small businesses.

Some advocates also have expressed concern that annual recertification would undermine one of agencies' key incentives in hiring small firms. Agencies work toward a governmentwide goal of awarding 23 percent of contracts to small companies. If companies are evaluated annually on size, agencies could run the risk of losing their credit shortly after a contract is signed. They also might be reluctant to renew the award of a company that has performed well, but outgrown the contract.

Paul Denett, the head of procurement policy at the Office of Management and Budget, said, "Small businesses must be given fair opportunity to grow as they perform federal contracts. This rule is intended to strike the right balance between fostering growth and accurate data gathering."

Rep. Nydia Velazquez, D-N.Y., ranking member of the House Small Business Committee, said SBA's new rule does not address the problem of ineligible entities coded as small businesses. In July, she published a report indicating that some of the groups labeled as small businesses were large, long-established companies, universities, and even state and local government agencies.

SBA reported that 25.4 percent of federal prime contracting dollars went to small businesses in fiscal 2005, but Velazquez contested that figure, claiming the rate was actually 21.6 percent, and therefore short of the 23 percent goal.

On Monday, SBA also announced a new score card that will rate agencies on their small business contracting in the same traffic-light style used by OMB for quarterly President's Management Agenda grades. The SBA score card will cover 24 agencies, and will be released twice a year, with ratings for both accomplishments and progress.

SBA already collects small business contracting data from agencies, said Calvin Jenkins, an agency official who worked on the rating tool. In addition to comparing agencies' performance to their individual goals in programs such as those for women-owned businesses and companies in historically underutilized areas, the ratings will factor in agencies' data accuracy, top-level support for small business contracting, success in breaking up large contracts so more companies can participate, and the establishment of an effective subcontracting plan, Jenkins said.

The first score card will be published in early 2007, once fiscal 2006 data is finalized, Jenkins said. "We believe it will be a management tool that will not only help us meet our statutory requirements of assessing the agencies and reporting out their accomplishments, but also [help] the agencies themselves … because they'll have access to best practices from other agencies," he said.