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Recent changes to the Small Business Administration’s (SBA) regulations requiring recertification of size status by businesses
holding certain Federal contracts may affect Mergers and Acquisitions (M&A) activity in the government market. Under the
current SBA rules, large companies were able to include in their growth strategies acquisitions of small businesses that were
thriving by competing for and winning government contracts set-aside exclusively for small businesses under the SBA’s Small
Business Set-Aside Program. There was no requirement for the acquired small business to recertify that it still met the SBA’s
small business size eligibility unless the deal resulted in a novation or a name change. The acquired business could continue
performing the small business set-aside contracts even though it no longer met the size eligibility requirements, which the
SBA estimates resulted in $3.78 billion or 26.6% of the $14.2 billion in small business multiple award contracts being performed
by businesses that were no longer small.
The SBA’s rule changes are intended to address these issues and the inherent inaccuracies in the SBA’s data regarding small
business contracts by requiring small businesses to recertify that they still meet the size eligibility criteria for small
businesses. The recertification requirement takes effect June 30, 2007, and applies to all existing and new contracts. The
timing of the new recertification requirement is based on the period of performance of the underlying contract, or on M&A
activity involving the small business.
The Recertification Requirements Under The New Rule.
A. For Long Term Contracts. The new rule applies to long term contracts, e.g., with a performance period longer than five years, and requires companies to recertify their small business size status prior
to: (1) the sixth year of performance; and (2) every time an option is exercised after that. Therefore, the new rule is intended
to prevent long term contracts awarded to companies that were small businesses at time of award and are no longer small during
performance from being reported as small business contracts.
B. For M&A Activity. The new rule expands the recertification requirement related to M&A activity, which currently only requires small business
contract holders to recertify if there is a novation or a change of name. After the new rule takes effect on June 30, 2007,
any merger or acquisition activity involving small business contract holders requires either a recertification of size status,
or notification to the procuring agency if the business no longer meets the size eligibility requirements. The procuring
agency then can no longer take credit for the contract as a small business contract.
C. At the Discretion of the Contracting Officer. Both the Government Accountability Office and the Court of Federal Claims have held in bid protests that the contracting
officer has the discretion to request small businesses recertify their size status when responding to task or delivery orders
under multiple award type contracts. The new rule codifies those holdings by expressly stating in the rule that the contracting
officer has the discretion to request recertifications.
The Effect on Existing Contracts When Size Eligibility Is Not Met.
While it is impossible at this point to assess the full impact the rule changes will have over the long run, the SBA repeatedly
emphasizes in its preamble and explanation of the change to the regulations that a business’s inability to recertify will
not change the terms and conditions of the contract. In addition, the only explicit direction in the new rule to the procuring
agency following a contractor’s failure to recertify as small is that the agency is prohibited from taking credit for and
reporting the contract as a small business contract. Therefore, while it recognizes that a contracting officer may decide
to terminate an existing contract or not exercise an option if the agency cannot count the contract towards meeting its small
business contracting goals, the SBA leaves to the discretion of the contracting officer whether to allow continued performance
of the contract, or to exercise an option on a small business contract when the contractor has outgrown its size status and
failed to recertify.
The net result for small businesses and M&A activity is uncertainty regarding how a particular contracting officer will exercise
his or her discretion when the contractor is unable to recertify its size status. Factors that should be considered to better
assess the risk that the contract will be terminated or an option will not be exercised due to the change in size status include:
(1) how well the procuring agency is doing in meeting its small business goals; (2) whether the contract requires specific
skills or capabilities that are difficult to replace; (3) the contractor’s past performance on the contract; (4) the relationship
with the procuring activity; and (5) the competition in the marketplace.
