Effective March 14, 2011, the Small Business Administration (
SBA) revised its rules and regulations to strengthen its 8(a) Business Development Program. These efforts aim to reduce fraud and abuse and ensure benefits flow to intended recipients. In light of legislative concerns and revised regulations, applicants and participants can expect greater scrutiny and increased enforcement procedures.
The Basics
Section 8(a) of the Small Business Act created a business development program for small disadvantaged businesses that offers participating contractors a broad scope of support, including federal contract procurement, financial assistance, mentoring, teaming and training, management assistance, technical training and surety bonding. The objective of the program is to provide these contractors with access to federal government contracting opportunities.
To qualify for the program, a contractor must be owned and controlled by a socially and economically disadvantaged individual who can provide supporting financial documentation. Additionally, contractors must meet appropriate size standards. The updated rules provide further clarity regarding social and economic disadvantage, as well as program duration and graduation.
Participating contractors are not guaranteed a contract under the 8(a) program, but they may receive sole-source contracts and bid for competitively awarded 8(a) contracts. Participants undergo periodic eligibility reviews and are subject to many SBA 8(a) program regulations, including restrictions relative to the contract type and size and the number of contracts awarded. While a company may not qualify as an 8(a) contractor, involvement opportunities arise out of the
Mentor-Protégé program.
The SBA Mentor-Protégé program enhances the capabilities of 8(a) participants by partnering them with more experienced and well-established contractors. Protégés benefit from the mentors’ management, financial and technical assistance, as well as increased access to government contracts via joint venture agreements. This assistance ultimately provides access to stronger surety relationships and capacity, which otherwise may be limited or unavailable to protégés. Mentors and joint venture participants also benefit from increased access to federal contracts and business development opportunities.
Joint Venture Agreements
The SBA must approve all joint venture agreements pertaining to the performance of an 8(a) contract. Careful preparation is a must, as the SBA requires adherence to a lengthy list of contract provisions prior to approval. An 8(a) joint venture is permissible only when:
- the 8(a) contractor lacks the necessary capacity to perform the contract on its own;
- the agreement is fair and equitable;
- the venture is of substantial benefit to the 8(a) contractor; and
- the 8(a) contractor contributes substantial resources or expertise to the joint venture.
There are two types of 8(a) joint ventures, either between formally approved SBA mentor-protégé partners or between an SBA-approved 8(a) contractor and a non-mentor contractor. SBA-approved mentor-protégé joint ventures may contain a NAICS “large” contractor/mentor. Both types of 8(a) joint ventures adhere to different SBA regulations, including size and revenue standards.
New rules state the 8(a) firm must perform at least 40 percent of the work for each 8(a) joint venture contract, including mentor-protégé joint ventures. This 40 percent performance requirement also applies when 8(a) entities engage in other SBA set-aside contracts, such as HUBZones and service-disabled veteran-owned small businesses. Furthermore, an 8(a) joint venture awarded an 8(a) contract may not subcontract work to the non-8(a) joint venture partner, including a “large” business mentor, unless no other potential subcontractors are available. These changes will greatly impact prior industry practices relevant to who actually performs the work. Also, the 8(a) venturer must receive profits “commensurate” with the 8(a) venturer’s work, rather than the former requirement of at least 51 percent of the profits.
The underlying project contract must be executed in the name of the joint venture entity and not the 8(a) contractor individually. Closer scrutiny of informal/silent joint ventures is anticipated, as 8(a) entities must meet performance of work and revenue requirements. Prime contractor/ subcontractor arrangements or teaming agreements will be watched closely to find de facto affiliation equating to a de facto joint venture, which in turn must comply with all 8(a) rules.
Firms providing third-party indemnity to a surety in order to help an 8(a) contractor qualify for bonding do not gain privity to the prime set-aside contract, including conditional provisions and afforded defenses. In this situation, if issues arise the surety may exercise any number of its options while third-party indemnity remains non-cancellable. When surety credit is obtained by virtue of a larger contractor’s indemnity or collateral, ultimately providing increased access to 8(a) set-aside work, it is viewed as a strong indicator of affiliation (possibly creating a de facto joint venture) for SBA 8(a) purposes. Whatever the nature of the business relationship may be, contractors collaborating (either formally or informally) with 8(a) contractors should exercise due diligence.
Proceed with Caution
The 8(a) program is a valuable resource to small and large businesses alike, but every contractor should proceed only after a full analysis. There are important business risks and contractual considerations for non-8(a) contractors and sureties to take into account when engaging either formally or informally with an 8(a) contractor. Fraud and abuse remain a concern.
Last year, the SBA directed the U.S. Government Accountability Office (
GAO) to perform an audit of the 8(a) program. The GAO identified 14 ineligible construction companies that received $325 million in 8(a) sole-source and set-aside contracts. In most cases, participation in the program and contract awards were based on false statements and misrepresentations made by 8(a) contractors. The report recommended the program strengthen fraud protection controls. Subsequently, legislative committees conducted hearings and responded with the recently updated regulations.
Sureties also are taking necessary precautions. For example, as part of the bonding process, sureties may require a letter to be sent directly from their office to senior SBA 8(a) program officials detailing surety arrangements and disclaiming knowledge of, or investigation into, the 8(a) contractor’s or joint venture’s program compliance and eligibility. Sureties are concerned about providing credit for potentially fraudulent contractual situations, which may lead to suspension from bonding federal contracts and ultimately contribute to increased losses. 8(a) qualified and non-qualified 8(a) participating contractors risk varying degrees of punishment—including permanent suspension from contracting with the government—if found in violation of the SBA regulations.
With proper risk management strategies, including best surety practices, 8(a) program benefits are abundant. Joint venture and mentoring relationships promote business development and help foster expertise and long-term success in the construction industry. If abided by properly, this program provides contractors with increased opportunities to compete for federal 8(a) contracts and enjoy the benefits of federal set-aside funding.
The U.S. Small Business Administration’s (
SBA)
Surety Bond Guarantee Program can guarantee bid, payment and performance bonds for small and emerging contractors. By guaranteeing the surety company will incur between 70 percent and 90 percent of the losses and expenses if a contractor defaults, the SBA encourages sureties to issue a bond to a small business it otherwise would not bond due to inherent risks.
The SBA Bond Guarantee Program reaches out to:
- contractors with limited working capital or an insufficient track record of successful performances of construction contracts, but that can perform a particular contract;
- contractors that have been bonded in the past, but in the current economy cannot obtain the lines of credit needed to compete for larger projects; and
- contractors that are ready to bid on a bigger job than they have performed in the past.
For more information, visit
www.sba.gov/about-offices-content/1/2891.