Small Disadvantaged Business (SDB) Status: Increased Goals Offer New Opportunities – But Also Present Increased Risks
The Biden Administration has instructed Executive Branch agencies to significantly increase their goals for contracting with Small Disadvantaged Businesses. By 2025, the Administration aims to award 15 percent of prime contracting dollars to SDBs, an enormous increase over the current goal of just five percent.
The push for increased SDB contracting offers new opportunities for government contractors to take advantage of their disadvantaged status. In fact, your business may qualify as an SDB even if you have assumed otherwise. And if you don’t qualify as an SDB, you can use targeted teaming strategies to take advantage of this shift in the federal marketplace.
The Administration’s 15 percent goal also carries new risks, however, particularly for businesses that may have checked the “SDB” box in the System for Award Management without fully understanding what it takes to be eligible. As the government ramps up its SDB contracting, the likelihood of investigations and audits will increase, too. Additionally, the U.S. Small Business Administration has recently proposed a new rule to allow protests of self-certified SDBs.
The new SDB goals mark a significant shift in the government contracting landscape. So let’s take a closer look at the new opportunities and risks it presents.
Certified Versus Self-Certified SDBs
Before we dive into the risks and rewards of the 15% goal, let’s briefly cover the basics of SDB status. At the federal level, SDBs come in two flavors: certified and self-certified.
If you’re thinking, “wait . . . I’ve never heard of a formal SDB certification,” think again. The federal government’s SDB certification program is simply known by a different name: the 8(a) Business Development Program. The 8(a) Program, as you’re probably aware, is run by the U.S. Small Business Administration. To qualify for 8(a) status, a company must go through an extensive application process. Many applicants are denied, but those companies admitted to the 8(a) Program automatically qualify as SDBs throughout their period of participation.
A self-certified SDB, on the other hand, is simply a contractor that has represented itself as a Small Disadvantaged Business by checking the appropriate box in its SAM profile. The SBA does not oversee self-certification; when it comes to SDB eligibility, SAM simply takes the contractor’s word for it. But as we’ll discuss in more detail in the “risks” section, many self-certified SDBs do not fully understand what it takes to qualify.
For the purpose of meeting its annual SDB goal, the government counts prime contract dollars awarded to both certified and self-certified SDBs. In other words, when the Administration talks about a 15% SDB goal, it’s not necessarily talking about awarding 15% of dollars to 8(a) Program participants. That would do the trick, but so would 10% of dollars to 8(a)s and 5% to SDBs, 7% to 8(a)s and 8% to SDBs, or any other combination meeting the 15% mark.
With that brief background, let’s jump into the new opportunities presented by the government’s 15% SDB goal.
New Opportunities for Contractors
The Increased Value of 8(a) Certification
For contractors, the push for 15% means that 8(a) Program certification will almost certainly become even more valuable over the next few years. According to the U.S. Government Accountability Office, as of December 2021, there were 4,237 active participants in the 8(a) Program. Collectively, these companies were awarded $19.7 billion in 8(a) contracts in 2021, an average of more than $4.5 million. 8(a) Program Participants already have access to a large pool of contracts restricted just for them. Now imagine what will happen if and when Contracting Officers lean on the 8(a) Program to meet their increased SDB goals!
What about self-certification? You’d think that SDB self-certification would become more valuable, too. In fact, I’ve seen articles floating around the internet suggesting that, thanks to the 15% goal, self-certified SDBs will receive more prime contracting opportunities. I’m skeptical.
While the government has regulatory authority to establish 8(a) set-aside competitions and award sole source contracts to 8(a) companies, it does not have similar authority with respect to self-certified SDBs. Quite the opposite: in response to a federal court decision and Congressional action, the SBA eliminated all prime contracting benefits for SDBs in a lengthy process culminating in 2020.
That’s not to say that SDB self-certification is meaningless; large prime contractors often seek self-certified SDBs to meet their subcontracting goals. At the prime contract level, though, I’m not aware of a viable legal avenue for Contracting Officers to steer contracts to self-certified SDBs. Perhaps I’ll be proven wrong, but I strongly suspect that Contracting Officers intent on meeting the increased goals will just make greater use of the already available tools: 8(a) set-aside competitions and 8(a) sole source awards.
8(a) Eligibility Misconceptions
Maybe you’re thinking, “unfortunately, my company doesn’t qualify for the 8(a) Program.” Perhaps you’re right, and if so, I’ll offer a couple of suggestions in the next subsection. But first, it’s worth double-checking to make sure you really are ineligible because, in my experience, there are some common misconceptions about 8(a) eligibility. Let’s take a look at two of the misconceptions I hear most often:
- “I’m Not a Minority.” It’s widely assumed that the 8(a) Program eligibility is limited to members of racial or ethnic minority groups. Not true! One of the 8(a)’s bedrock eligibility criteria is called “social disadvantage.” Members of certain groups, such as African Americans, are presumed to be socially disadvantaged, thereby making it easier to qualify. However, individuals who do not fit within these categories can still qualify as socially disadvantaged by meeting a test spelled out in the SBA’s regulations at 13 C.F.R. 124.103(b)(2). In my legal career, for example, I helped several Caucasian women qualify their companies for the 8(a) Program by showing that they had experienced social disadvantage based on their gender.
- “I Have Too Many Assets.” When contractors learn that the 8(a) Program’s economic disadvantage component includes a $750,000 net worth limit, they sometimes misunderstand what that means, in two important ways. First, some people treat the $750,000 limit as an asset limit when, in fact, it is a limit on net worth. Your liabilities, like mortgages and student loan debt, reduce your net worth! Second, many people fail to realize that under the SBA’s rules, the $750,000 limit excludes the equity in the business itself, the equity in your primary residence, and amounts saved in an IRA, 401(k), or similar retirement account. I have worked with several individuals whose total net worth was upwards of $1 million but who still qualified after these exclusions.* See 13 C.F.R. 121.104 for more information about how the SBA calculates net worth.
An 8(a) certification may not be worth its weight in gold, but it’s pretty darn valuable, especially given the new 15% goal. Before you discount the possibility of qualifying for the 8(a) Program, do your due diligence. For more information about the 8(a) Program, check out this in-depth Govology series I co-presented with Jackie Robinson-Burnette, the SBA’s former 8(a) Program Director.
Strategies for Savvy Non-8(a) Companies
Despite misconceptions about 8(a) eligibility, the fact is that not every company qualifies. Some are too large, while others don’t meet one or more of the other eligibility requirements. If your company is on the outside looking in, it may seem like the new 15% goal could be bad news. Not necessarily! Savvy non-8(a) companies can receive significant revenues from 8(a) contracts through teaming and mentoring strategies.
Teaming and mentoring are deep topics, and this article will cover them at a very high level. If you’re interested in learning more, Govology has several great resources, including this in-depth series.
- Subcontracting. Just because a prime contract is awarded to an 8(a) company, it doesn’t mean that the 8(a) must self-perform the entire job. 8(a) companies are allowed to subcontract a significant amount of the work to non-8(a)s: up to 50% of services and supply contracts, 75% of specialty trade construction contracts, and a whopping 85% of general construction contracts! Working as a subcontractor to one or more 8(a) companies can be a very lucrative business. For more information about the subcontracting limits, see 13 CFR 125.6.
- Joint Venturing. 8(a) companies are also allowed to form joint ventures with certain non-8(a) companies. In a joint venture, both partners serve at the prime contract level. Under the SBA’s regulations, the non-8(a) partner in an 8(a) joint venture can perform up to 60% of the work and receive a corresponding share of the profits. Many non-8(a)s have walked away with the lion’s share of the profits on 8(a) contracts by forming joint ventures. But be careful: an 8(a) joint venture must be structured and operated in the manner prescribed by 13 CFR 124.513.
- SBA Mentor-Protege Program. Many people believe that the SBA’s Mentor-Protege Program is a form of teaming arrangement, but it’s not. Instead, it is a program under which one business helps another achieve certain business development goals. The SBA offers some important benefits to its mentors. As a mentor to an 8(a) company, your business can form joint ventures with your protege, even if your company is too large to otherwise qualify as a joint venture partner. With SBA approval, a mentor can also purchase an equity stake of up to 40% in its protege. For more information about the rules governing the SBA’s Mentor-Protege Program, see 13 CFR 125.9.
Sometimes, these strategies can be used in tandem. For example, assume you’re a mentor to an 8(a) company with a 40% equity stake. You form a joint venture with your protege and win an 8(a) set-aside contract. The total profits from the contract amount to $1 million. You perform the maximum work allowed – 60% of the joint venture’s work – so your company receives 60% of the profits, or $600,000. Additionally, thanks to your equity stake, you ultimately receive 40% of the 8(a)’s profits, or $160,000. When the dust settles, your company walks away with 76% of the profits!
The bottom line is simple: just because you’re not eligible for the 8(a) program doesn’t mean you can’t take advantage of the likely increase in 8(a) awards under the new 15% SDB goal. With effective teaming and mentoring strategies, your non-8(a) company can position itself to generate substantial new business from this shift in the federal marketplace.
Increased Risks for Contractors
As a former federal contracts attorney, I believe in only three certainties: death, taxes, and investigations. I strongly suspect that as the government spends more taxpayer dollars on contracts with SDBs, we’ll see increased scrutiny of whether those dollars were spent appropriately – that is, whether the SDBs in question really qualified. Investigatory bodies such as the Government Accountability Office and SBA Office of Inspector General may be tasked with broad audits of SDB contractors. And on a more individualized level, the SBA just proposed a rule to allow formal protests of an offeror’s SDB self-certification.
Make no mistake: the increased risks I’m talking about will fall primarily on the shoulders of self-certified SDBs. Yes, there is occasional fraud within the 8(a) Program, but the SBA already exercises close oversight over its certified 8(a) contractors. On the other hand, in my experience, many (many!) contractors who check the “SDB” self-certification box in SAM don’t understand what it takes to qualify.
Eligibility Criteria for SDB Self-Certification
The criteria for eligibility as a self-certified SDB are almost identical to the criteria for 8(a) Program eligibility. In fact, the SBA’s regulation at 13 CFR 124.1002(a) states:
(a) Reliance on 8(a) criteria. In determining whether a firm qualifies as an SDB, the criteria of social and economic disadvantage and other eligibility requirements established in [the 8(a) Program regulations], including the requirements of ownership and control and disadvantaged status, unless otherwise provided in this subpart.
This requirement is commonly misunderstood. Many contractors think of self-certified SDB status as “8(a) lite.” For example, some contractors have (erroneously) told me that their business qualifies as an SDB simply because the majority owner is a member of a racial or ethnic minority. But, as we discussed previously, while membership in certain minority groups makes it easier to qualify for the “social disadvantage” component of 8(a)/SDB status, there are many other eligibility criteria: net worth, income caps, good character requirements, strict requirements governing the business’ management and ownership structure, and more.
In my opinion, a significant percentage – possibly a majority – of self-certified SDBs don’t really qualify. In recent years, most of those self-certified SDBs haven’t been called to account, although the government has occasionally assessed penalties for SDB misrepresentations at the subcontracting level.
Soon, though, I expect the landscape to change, with SDB compliance investigations becoming much more frequent. The new investigations will mean a greater chance of penalties for ineligible self-certified SDBs.
Potential Penalties for Misrepresentation
What types of penalties could be assessed against a contractor for incorrectly self-certifying as an SDB? The government will approach each case individually, but two potential penalties are False Claims Act liability and suspension/debarment.
Concerning the False Claims Act, SDB status is one of many representations and certifications required in a contractor’s SAM profile. The FAR requires all representations and certifications to be “current, accurate and complete” when used in connection with any bid or proposal. Additionally, SAM requires offerors to verify that they have done their due diligence regarding their reps and certs, including reading the underlying regulations.
When it comes to self-certified SDB status, many self-certified contractors have not actually read the eligibility requirements, which presents an increased risk of liability under the False Claims Act. Additionally, the False Claims Act allows whistleblowers – who often turn out to be disgruntled former employees – to file claims on the government’s behalf. The whistleblower provision means that no audit or protest is required for an incorrect SDB self-certification to put a contractor in legal jeopardy.
The potential for False Claims Act liability isn’t mere speculation: the government has assessed such penalties in the past for incorrect SDB self-certification. For example, in one case I wrote about, the government assessed nearly $1.9 million in penalties for improper SDB self-certifications.
Another potential risk is suspension or debarment from all government contracting, which, of course, can be devastating to a company. The government has broad authority to refuse to do business with a contractor for good cause. In my experience, a False Claims Act case is often accompanied by a parallel suspension/debarment process. However, civil liability is not required for the government to suspend or debar a contractor it believes acted unethically.
A Few Final Words
The Administration’s push to award 15% of prime contracting dollars to SDBs will mark a significant change in the contracting landscape. For contractors, this may be the right time to pursue an 8(a) certification or build relationships with 8(a) companies. Meanwhile, self-certified SDBs ought to take a closer look at their own eligibility to be sure they qualify – before the government takes its own closer look.
* This doesn’t mean that you can, for example, own a $100 million mansion and still qualify as economically disadvantaged: the SBA’s rules include a second, “catch all” limit of $6 million that includes home equity and equity in the company (but continues to exclude certain retirement savings).
Disclaimer:
Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and information purposes only. Although the author strives to present accurate information, the information provided in this article is not guaranteed to be accurate, complete, or up-to-date. Reading this article does not establish an attorney-client relationship with the author.
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