SBA to stop certifying small disadvantaged businesses

Agency will no longer verify status; companies can self-certify or get help from a third-party.

The Small Business Administration will no longer verify the status of companies seeking certification as small disadvantaged businesses, shifting the time-consuming and costly application process to the companies themselves or to third parties.

In an interim final rule published in the Federal Register on Friday, SBA explained that the value of the small disadvantaged business designation has tailed off in recent years as the financial incentives have disappeared or been ignored.

"The SDB certification process is time-consuming and costly for small businesses and offers little to no benefit," the agency noted in its explanation of program changes.

As of Oct. 3, companies seeking to obtain federal prime or subcontracts can self-certify their status as small disadvantaged businesses -- an option that has been available since 2004 -- or use a third-party private certification firm. In limited circumstances, the procuring agency can certify the company.

Companies already certified as small disadvantaged or 8(a) firms will not be affected until that status is scheduled for renewal.

The SDB and 8(a) Business Development programs are designed to provide contracting assistance to small businesses that meet specific social, economic, ownership and control eligibility criteria. Certification lasts for three years.

The Small Business Administration has certified more than 2,800 small disadvantaged businesses and another 9,000 for the 8(a) program. About 12,000 to 13,000 others have self-certified their status, according to Calvin Jenkins, SBA's deputy associate administrator for government contracting and business development.

For the past 10 years, the agency has certified SDBs on behalf of other agencies, which would then reimburse SBA for the administrative costs associated with the application process.

Before December 2004, small disadvantaged businesses could receive a price evaluation adjustment of up to 10 percent on their bids for contracts, providing them a healthy advantage over competing firms. Then the statutory authority for the adjustment expired for all but three agencies: the Defense Department, NASA and the Coast Guard.

The Pentagon generally has ignored the price adjustment tool while still relying heavily on SDB contractors. In fiscal 2006, Defense awarded more than $14.6 billion in prime contracts to small disadvantaged and 8(a) firms, representing more than 6 percent of its total procurement spending and exceeding the 5 percent statutory goal.

NASA and the Coast Guard also rarely use the price evaluation tool, and each consistently meets the 5 percent goal. All three agencies will be allowed to use the price adjustment through the end of fiscal 2009.

Governmentwide, agencies awarded nearly $23 billion, or 6.7 percent, of prime contracts to small disadvantaged businesses.

Since 1998, agencies have reimbursed the Small Business Administration for $27.5 million in SDB certification costs; they are obliged to pay another $1.2 million for fiscal 2008. In the absence of the price evaluation tool or any other potential benefit, agencies told SBA recently that they will cease all reimbursements as of Sept. 30.

"Without the SDB price evaluation adjustment for prime contracts, there is no direct benefit to the SDB firm, and the SDB designation is only used for statistical purposes to determine governmentwide SDB goal achievement," the agency announcement said.

The notice said self-certification "is cheaper, quicker and less burdensome," than SBA certification, but there are potential drawbacks to the honor system. Skeptics say self-certification could open the door for unscrupulous companies to misrepresent themselves to become more attractive to agencies looking to beef up their small business numbers.

Without the price evaluation tool or any governmentwide set-aside contracts exclusively for small disadvantaged businesses, Jenkins doubts that companies will have much incentive to misuse the system. The agency, however, will continue to investigate any protests about a company's SDB status, he said.

A spokeswoman for the Senate Small Business and Entrepreneurship Committee said the panel had no concerns about the rule change.

The Small Business Administration expedited the rule without public comment after learning that most agencies would cease the certification reimbursement at the end of fiscal 2008. SBA will still accept comments on the change through Nov. 3 and consider them in any potential revisions to the rule.