SBA redefines rules for 8(a)s and small businesses | Federal Contract Law
New Small Business Administration rules covering federal preferences for minority-owned
contractors took effect on July 30. The new rules are reflected in the Federal Acquisition
Lets start with the new criteria for 8(a) status. To participate, a business must
be owned and controlled, as before, by a socially and economically disadvantaged U.S.
Social disadvantage is presumed, but not proven, if the person is a member of a listed
ethnic group. Others can qualify if they prove social disadvantage by a preponderance of
evidence. This is a relaxation of the old clear-and-convincing standard of proof.
One group expected to benefit from the relaxed 8(a) requirements is women entrepreneurs
who are not members of a group legally presumed to be disadvantaged. SBA Administrator
Aida Alvarez expects that the new standards of review will encourage thousands of new
participants in the 8(a) program, half of whom will be women.
As before, economic disadvantage is measured by net worth. Those entering the 8(a)
program cannot have a net worth exceeding $250,000, excluding the value of the business
and the applicants personal residence. To stay in the program, however, the new
rules impose a ceiling on net worth of $750,000.
The final criteria are that the business owner must be of good character and exhibit
the potential for success. Unless a company becomes disqualified earlier, it can
participate for nine years. A new limit on participation is a ceiling on total 8(a)
contracts. Companies that entered the 8(a) program after Dec. 31, 1997, are limited to
$100 million worth of 8(a) contractsnot counting contracts valued at less than
Another way to exit the 8(a) program is for the owners to make excessive withdrawals of
the companies assets. Companies with sales of up to $1 million are limited to
withdrawals of $150,000 annually.
At $2 million in sales, the limit increases to $200,000. The ceiling is at $300,000,
when sales exceed $2 million. Excessive withdrawals include salary, bonuses and dividends,
payments to immediate family members, charitable contributions and speculative ventures.
Such a broad and vague definition invites problems in compliance and enforcement.
The second part of the affirmative action program is for small, disadvantaged
businesses (SDBs). They benefit from separate goals under required subcontracting plans,
and from an evaluation preference in competitive procurements.
Under the new rule, SDBs must have a certification from SBA or an organization approved
by the agency to certify SDB status. The criteria for SDB status are based on those for
the 8(a) program. Companies participating in the 8(a) program automatically qualify as
SDBs. But there is no limit to the period during which a company can enjoy this status, so
companies that have graduated from the 8(a) program frequently continue to participate as
The new regulations expand the benefits of SDB status. Under the first rule, effective
Oct. 1, agencies will be required to provide a price evaluation adjustment for small
disadvantaged businesses in certain industries.
The adjustment, determined by the Commerce Department to be 10 percent, will apply to
all offers by SDBs except for procurements that do not exceed the $100,000 simplified
acquisition threshold, 8(a) awards and small business set-asides. The 10 percent
adjustment applies to SDBs in 54 industrial categories to counter persistent and
significant underutilization of minority companies.
Key point: Although electronic and other electrical equipment categories are included,
computers are expressly excluded.
A second interim rule, effective Jan. 1, 1999, provides a preference in the form of an
evaluation factor for the participation of SDBs in contract performance when the 10
percent price differential isnt used.
In addition, there is an incentive program for SDB subcontracting and a requirement for
contracting officers to evaluate the past performance of bidders in meeting with SDB
participation targets and SDB subcontracting goals.
It is far from clear that all of these changes were required by the recent Supreme
Courts decision narrowing the scope of minority preferences. That ruling sparked a
broad policy review, which gave us this newly overhauled system. It may take another high
court ruling to find out if the revised rules are indeed constitutional.
Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo &
Powell, PLLC. E-mail him at [email protected].
William E. Conner Esq., contributed to this article .