RFI_3_Attch_1_LoS_Rule_2014-29753.pdf

This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules.

Proposed Rules Federal Register

77955

Vol. 79, No. 248

Monday, December 29, 2014

SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121, 124, 125, 126 and

[Docket No. SBA–2014–0006]

RIN 3245–AG58

Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

SUMMARY: The U.S. Small Business Administration (SBA or Agency) is proposing to amend its regulations to implement provisions of the National Defense Authorization Act of 2013, which pertain to performance requirements applicable to small business and socioeconomic program set aside contracts and small business subcontracting. SBA is also proposing to make changes to its regulations concerning the nonmanufacturer rule and affiliation rules. Further, SBA is proposing to allow a joint venture to qualify as small for any government procurement as long as each partner to the joint venture qualifies individually as small under the size standard corresponding to the NAICS code assigned in the solicitation. Finally, SBA is requesting comments on the timeline and procedures for North American Industry Classification System code appeals.

DATES: Comments must be received on or before February 27, 2015.

ADDRESSES: You may submit comments, identified by RIN: 3245–AG58, by any of the following methods:

• Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments.

• For mail, paper, disk, or CD/ROM submissions: Brenda Fernandez, U.S.

Small Business Administration, Office of Policy, Planning and Liaison, 409 Third Street SW., 8th Floor, Washington, DC 20416.

• Hand Delivery/Courier: Brenda Fernandez, U.S. Small Business Administration, Office of Policy, Planning and Liaison, 409 Third Street SW., 8th Floor, Washington, DC 20416.

SBA will post all comments on www.regulations.gov. If you wish to submit confidential business information (CBI) as defined in the User Notice at www.regulations.gov, please submit the information to Brenda Fernandez, U.S. Small Business Administration, Office of Policy, Planning and Liaison, 409 Third Street SW., 8th Floor, Washington, DC 20416, or send an email to brenda.fernandez@ sba.gov. Highlight the information that you consider to be CBI and explain why you believe SBA should hold this information as confidential. SBA will review the information and make the final determination on whether it will publish the information.

FOR FURTHER INFORMATION CONTACT:

Brenda Fernandez, Office of Policy, Planning and Liaison, 409 Third Street SW., Washington, DC 20416; (202) 207– 7337; brenda.fernandez@sba.gov.

SUPPLEMENTARY INFORMATION:

Proposed Changes Pursuant to the National Defense Authorization Act of

Section 1621 of the National Defense Authorization Act of 2013 (NDAA), Pub.

L. 112–239, 126 Stat. 1632 (Jan. 2013), revised the Small Business Act regarding the responsibilities of Procurement Center Representatives (PCRs). Section 1621 clarifies that PCRs have the ability to review barriers to small business participation in Federal contracting and to review any bundled or consolidated solicitation or contract in accordance with the Small Business Act. SBA proposes to amend 13 CFR 125.2(b)(1)(i)(A), based on the changes in Section 1621(c)(6)(H) of the NDAA.

This rule would add language to § 125.2(b)(1)(i)(A) and to § 125.2(b)(1)(ii), which clarifies that PCRs advocate for the maximum practicable utilization of small business concerns in Federal contracting, including advocating against the unjustified consolidation or bundling of contract requirements.

Pursuant to Section 1621(c)(6)(G) of the NDAA, SBA proposes new § 125.2(b)(1)(iv), which states that PCRs will consult with the agency’s Office of Small and Disadvantaged Business

(OSDBU) and Office of Small Business Program (OSBP) Director regarding an agency’s decision to convert an activity performed by a small business concern to an activity performed by a Federal employee. SBA also proposes new § 125.2(b)(1)(v) pursuant to the language enacted by Section 1621(c)(6)(F) of the NDAA, which allows PCRs to receive unsolicited proposals from small business concerns and to provide those proposals to the appropriate agency’s personnel for review and disposition.

SBA also proposes to amend paragraphs 125.2(b)(1) and (2), which pertain to Breakout PCRs (BPCRs).

Sections 1621(e) and (f) of the NDAA effectively eliminate the statutory authority for the separate BPCR role. As a result, SBA proposes to reassign the responsibilities currently held by BPCRs to PCRs. SBA proposes to add § 125.2(b)(1)(i)(F), which states that PCRs also advocate full and open competition in Federal contracting and recommend the breakout for competition of items and requirements which previously have not been competed. SBA proposes the elimination of § 125.2(b)(2) that provided guidance on the role and responsibilities of BPCRs and proposes redesignating current § 125.2(b)(3) as the new § 125.2(b)(2) and removing any reference to BPCRs from that paragraph.

Section 1651 of the NDAA, as codified at 15 U.S.C. 657s, requires that the limitations on subcontracting for full or partial small business set-aside contracts, HUBZone contracts, 8(a) BD contracts, SDVO SBC contracts, and WOSB and EDWOSB contracts, be evaluated based on the percentage of the overall award amount that a prime contractor spends on its subcontractors.

Significantly, the NDAA excludes from the limitations on subcontracting calculation the percentage of the award amount that the prime contractor spends on similarly situated entity subcontractors. When a contract is awarded pursuant to a small business set-aside or socioeconomic program set-aside, a similarly situated entity subcontractor is a small business concern subcontractor that is a participant of the same SBA program that qualified the prime contractor as an eligible offeror and awardee of the contract.

Currently, SBA’s regulations contain different terms for compliance with the

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http://www.regulations.gov http://www.regulations.gov mailto:brenda.fernandez@sba.gov mailto:brenda.fernandez@sba.gov mailto:brenda.fernandez@sba.gov http://www.regulations.gov

77956 Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / Proposed Rules performance of work requirements based on the type of small business program set-aside at issue. The method for calculating compliance not only varies by program set-aside type, but also based on whether the acquisition is for services, supplies, general construction, or specialty trade construction. Section 1651 of the NDAA creates a shift from the concept of a required percentage of work to be performed by a prime contractor to the concept of limiting a percentage of the award amount to be spent on subcontractors. The goal is the same: to ensure that a certain amount of work is performed by a prime contractor small business concern (SBC) that qualified for a small business program set-aside procurement due to its socioeconomic program status. SBA proposes to revise all references to ‘‘performance of work’’ requirements found in parts 121, 124, 125, 126, and 127 to ‘‘limitations on subcontracting.’’

The current method for determining whether a firm is in compliance with the limitation on subcontracting requirements requires the Contracting Officer (CO) to evaluate the percentage of the cost of the contract performance incurred for the prime contractor’s personnel. This calculation excludes profit or fees from the cost of the contract and includes only those costs incurred for the prime contractor’s personnel, which was defined as direct labor costs and any overhead which has only direct labor as its base, plus the contractor’s General and Administrative rate multiplied by the labor cost.

Additionally, Title 13, parts 124, 125, 126, and 127 repeated the performance of work requirements, and in places, contained additional information affecting the calculation for the performance of work requirements.

SBA proposes to totally revise § 125.6 to take into account the new definition and calculation for the limitations on subcontracting, as described in Section 1651 of the NDAA. SBA believes that it is critical that small businesses that obtain set aside contracts comply with applicable subcontracting limitations.

The Government’s policy of promoting contracting opportunities for small businesses, HUBZone SBCs, SDVO SBCs, WOSBs/EDWOSBs, and 8(a) SBCs is seriously undermined when firms pass on work in excess of applicable limitations to firms that are other than small or that are not otherwise eligible for specific types of small business contracts.

In addition, the section would be reorganized and simplified for easier use. Proposed § 125.6(a) would explain how to apply the limitations on subcontracting requirements to small business set-aside contracts. Instead of providing different methods of determining compliance based on the type of small business set-aside program at issue and the type of good or service sought, Section 1651(a) of the NDAA provides one method for determining compliance that is shared by almost all applicable small business set-aside programs, but varies based on whether the contract is for services, supplies or products, general construction, specialty trade construction, or a combination of both services and supplies.

The approach described in Section 1651(a) and (d) of the NDAA is to create a limit on the percentage of the award amount received by the prime contractor that may be spent on other-than-small subcontractors. Specifically, the NDAA provides that a small business awarded a small business set-aside, 8(a), SDVO small business, HUBZone, or WOSB/EDOSB award ‘‘may not expend on subcontractors’’ more than a specified amount. However, as noted below, work done by ‘‘similarly situated entities’’ does not count as subcontracted work for purposes of determining compliance with the limitation on subcontracting requirements. Proposed §§ 125.6(a)(1) and (a)(3) would address the limitations on subcontracting applicable to small business set-aside contracts requiring services or supplies. The limitation on subcontracting for both services and supplies is statutorily set at 50% of the award amount received by the prime contractor. See 15 U.S.C. 657s(a).

Proposed § 125.6(a)(3) addresses how the limitation on subcontracting requirement would be applied to a procurement that combines both services and supplies. This provision would clarify that the CO’s selection of the applicable NAICS code will determine which limitation of subcontracting requirement applies.

Proposed §§ 125.6(a)(4) and (5) would address the limitations on subcontracting for general and specialty trade construction contracts. SBA proposes to keep the same percentages that currently apply: 15% for general construction and 25% for specialty trade construction.

As noted above, the NDAA prohibits subcontracting beyond a certain specified amount for any small business set-aside, 8(a), SDVO small business, HUBZone, or WOSB/EDOSB contract.

Section 1651(b) of the NDAA creates an exclusion from the limitations on subcontracting for ‘‘similarly situated entities.’’ In effect, the NDAA deems any work done by a similarly situated entity not to constitute ‘‘subcontracting’’ for purposes of determining compliance with the applicable limitation on subcontracting. A similarly situated entity is a small business subcontractor that is a participant of the same small business program that the prime contractor is a certified participant of and which qualified the prime contractor to receive the award.

Subcontracts between a small business prime contractor and a similarly situated entity subcontractor are excluded from the limitations on subcontracting calculation because it does not further the goals of SBA’s government contracting and business development programs to penalize small business prime contract recipients that benefit the same small business program participants through subcontract awards.

SBA proposes to include three examples to § 125.6(b) to demonstrate how a small business concern or Federal agency should apply the exclusion for similarly situated entities and determine compliance with the limitations on subcontracting.

SBA has concerns about the practical application of a regulation that would require only a certain percentage of contract awards to be either retained by the prime contractor, or spent on a similarly situated entity. SBA’s concern is that an approach that limits its review solely to the first tier of the contracting process (agreements between the prime contractor and its direct subcontractors) could be fraught with abuse. For example, if small business A is awarded a $500,000 small business set-aside service contract and subcontracts $450,000 of the work to small business B, if the limitation of subcontracting requirements apply only to the first tier, then the Government’s review would be complete. Small businesses A and B clearly meet the 50% rule. However, if small business B could further subcontract all of its $450,000 to a large business with impunity, then SBA believes that the intent of the subcontracting limitation requirements would be circumvented and small businesses would not be properly protected. In such a case, a large business would have performed $450,000 of a $500,000 contract (or 90%) of a contract that was set-aside exclusively for small business. In SBA’s view, a large business that ultimately performs 90% of a small business set-aside contract unduly benefits from a contract intended to be performed by small business.

SBA believes that the intent of the changes in the NDAA were to ensure that contracts awarded, and the benefits of those contracts, flow to the proper

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77957 Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / Proposed Rules beneficiaries. SBA does not believe that an intended consequence of the change was to make it easier to divert these benefits to ineligible entitles by merely moving contracts down one or two tiers in the contracting process. As such, SBA has retained a requirement that firms benefiting from contracts, and their similarly situated subcontractors, perform a required amount of work on the contract themselves. SBA believes that requiring firms awarded these contracts to perform significant portions of the work, as well as retain a significant portion of the contract award, will continue to help ensure that the benefits from these contracts flow to the intended parties.

SBA welcomes comments on this issue, including whether SBA’s belief that there may be unintended consequences are misplaced, as well as comments about SBA’s proposed solution. SBA also requests comments on whether prime contractors should be required to report to the contracting officer concerning meeting the performance of work requirements, and comments concerning the frequency and method of reporting.

SBA proposes to relocate the definitions that are relevant to the limitations on subcontracting that are currently found in § 125.6(e) to § 125.1 with the other definitions that are applicable to part 125. Section 1651(e) of the NDAA provides the definitions of ‘‘similarly situated entity’’ and ‘‘covered small business concern.’’ Proposed § 125.1(x) interprets the statutorily prescribed definition for similarly situated entity.

Proposed § 125.6(c) would explain how a small business concern certifies its compliance with the limitations on subcontracting and the date upon which compliance is determined.

Proposed § 125.6(d) would require that small business concern prime contractors, which intend to exclude subcontracts to similarly situated entities from the limitations on subcontracting, must identify those similarly situated entities and the percentage of the prime contract award amount that will be spent on each similarly situated subcontractor.

Proposed § 125.6(e) would address the process for continued compliance with the limitations on subcontracting when the award amount of a small business set-aside or small business program set-aside contract is modified. This process would require that the prime contractor provide the contracting officer with documentation to demonstrate how it will continue to satisfy the applicable limitations on subcontracting. SBA seeks comments on this process and specifically requests suggestions for how procuring agencies can more effectively monitor compliance with the limitations on subcontracting when the award amount has been modified after award.

Proposed § 125.6(i) would address how the limitations on subcontracting apply to members of a Small Business Teaming Arrangement (SBTA) that are exempt from affiliation according to § 121.103(b)(9). Proposed § 125.6(k) states that the limitations on subcontracting apply to the combined effort of the SBTA members, not to the individual members of the SBTA separately.

SBA proposes to add new paragraph 125.6(j), which would exempt small business set aside contracts valued between $3,000 and $150,000 from the limitations on subcontracting requirements. Section 46 of the Small Business Act mandates that the statutory performance of work requirements (limitations on subcontracting) apply to small business set-aside contracts with values above $150,000, and contracts of any amount awarded to socioeconomically disadvantaged contracting programs, such as 8(a) set-aside contracts, Women- Owned and Economically Disadvantaged Women-Owned small business set-aside contracts, HUBZone set-aside contracts and Service-Disabled Veteran-Owned set-aside contracts. 15 U.S.C. 657s. Although the limitations on subcontracting apply to all of these contracts, Section 46 does not specifically cite Section 15(j) of the Small Business Act, which is the statutory authority for non-socioeconomically disadvantaged small business set-asides between $3,000 and $150,000. Further, Section 15(j) of the Small Business Act does not mention any limitation on subcontracting requirements in connection with the performance of set aside contracts under Section 15(j). Thus, the FAR provides that ‘‘[t]he contracting officer shall insert the clause at 52.219–14, Limitations on Subcontracting, in solicitations and contracts for supplies, services, and construction, if any portion of the requirement is to be set aside or reserved for small business and the contract amount is expected to exceed $150,000.’’ FAR 19.508(e).

Therefore, this proposed rule would not expand the application of the limitations on subcontracting to apply to small business set-asides below $150,000, but would merely adopt what the FAR has done. SBA wants to make clear, however, that the proposed rule would exempt the limitations on subcontracting requirements only with respect to small business set asides valued between $3,000 and $150,000.

The limitation on subcontracting requirements would continue to apply to all 8(a), HUBZone, SDVO, and WOSB/EDWOSB set aside contract awards regardless of value, including but not limited to contracts with values between $3,000 and $150,000. SBA requests comments regarding whether the limitations on subcontracting should apply to small business set aside contracts valued between $3,000 and $150,000.

SBA’s proposal to not apply the subcontracting limitations to non-socioeconomically disadvantaged small business set-aside contracts between $3,000 and $150,000 does not, however, reduce the importance of these limitations on small business set aside contracts over $150,000 and all contracts that are set aside for socioeconomically disadvantaged small businesses. It is critical that firms that obtain set aside and preferential contracts comply with applicable subcontracting limitations. The Government’s policy of promoting contracting opportunities for small and socioeconomically disadvantaged businesses is seriously undermined when firms pass on work in excess of applicable limitations to firms that are other than small or that are not disadvantaged. In addition, SBA requests comments on whether, for policy reasons and for purposes of consistency, the performance of work/ subcontracting limitation requirements should apply to small business set aside contract with a value between $3,000 and $150,000. If SBA were to amend its regulations to apply those requirements to small business set aside contracts valued between $3,000 and $150,000, then a corresponding change to the FAR would be required for consistency purposes.

Consistent with this concern, Section 1652 of the NDAA, codified at 15 U.S.C.

645 (Section 16 of the Small Business Act) prescribes penalties for concerns that violate the limitations on subcontracting requirements. SBA proposes to add new § 125.6(k) to incorporate these penalties into the regulations. Paragraph 125.6(k) states that concerns that violate the limitations on subcontracting are subject to the penalties listed in 15 U.S.C. 645(d) except that the fine associated with these penalties will be the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.

This rule also proposes to revise § 121.103(h)(4). Paragraph (h) discusses the circumstances under which SBA

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77958 Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / Proposed Rules will find affiliation among joint venturers for size purposes. Paragraph (h)(4) addresses the ostensible subcontractor rule, which is the concept that a subcontractor who performs the majority of the primary and vital requirements of a contract or whom the prime contractor is unusually reliant upon may be considered a joint venturer with the prime contractor and thus affiliated with the prime contractor for size determination purposes. SBA proposes to revise this paragraph to exclude subcontractors that are similarly situated subcontractors, as that term is defined in 13 CFR 125.6(g)(3), from affiliation under the ostensible subcontractor rule. Such a position clearly flows from the NDAA’s treatment of similarly situated subcontractors.

SBA proposes to amend §§ 124.510(a), (b), and (c) to reflect the limitations on subcontracting rules with respect to the 8(a) Business Development (BD) program. Part 124 addresses the 8(a) BD program and the limitations on subcontracting that apply to procurements set-aside for competition among 8(a) BD participants. SBA proposes to delete paragraphs (a) and (b) and add new paragraph (a). Currently, paragraphs (a) and (b) discuss how 8(a) BD participants can comply with the performance of work requirements even though these specifications are also discussed in § 125.6. To eliminate confusion and repetition, SBA proposes to remove current paragraph (b) and add a new paragraph (a), which will direct 8(a) BD participants to comply with the limitations on subcontracting set forth in § 125.6. The proposed rule would redesignate current paragraph (c) as paragraph (b) and include references to the limitations on subcontracting as opposed to the performance of work requirements in newly redesignated paragraph (b). The NDAA uses the term ‘‘limitations on subcontracting’’ to describe the concept that is currently referred to as ‘‘performance of work requirements.’’ This change provides consistency throughout the rules.

SBA proposes to revise §§ 125.15(a)(3) and (b)(3), which address the requirements for an SDVO SBC to submit an offer on a contract. SBA proposes to revise paragraph (a)(3) to state that a concern that represents itself as an SDVO SBC must also represent that it will comply with the limitations on subcontracting, as set forth in § 125.6, as part of its initial offer, including price. SBA proposes to revise paragraph (b)(3) to state that joint ventures that represent themselves as an SDVO SBC joint venture must comply with the applicable limitations on subcontracting, as set forth in § 125.6.

SBA also proposes to revise § 126.200(b)(6). This paragraph addresses the requirements that a concern must meet in order to receive SBA’s certification as a qualified HUBZone SBC. Paragraphs (b)(6) and (d) are repetitive as both address the requirement that HUBZone SBCs must comply with the relevant performance of work requirements. SBA proposes to delete paragraph (d) and revise paragraph (b)(6). Specifically, proposed paragraph (b)(6) would state that the concern must represent in its application for the HUBZone program that it will comply with the applicable limitations on subcontracting requirements with respect to any procurement that it receives as a qualified HUBZone SBC.

SBA proposes to revise §§ 126.700 in its entirety, including revision of paragraph (a) and removal of paragraphs

(b) and (c). This section currently addresses the performance of work requirements for HUBZone contracts.

SBA proposes to retitle the section to include the terminology ‘‘limitations on subcontracting’’; remove references to the ‘‘performance of work’’ requirements; and replace the deleted text with a reference to 13 CFR 125.6 for guidance on the applicable limitations on subcontracting for HUBZone contracts. SBA believes that it would be confusing to have each section of SBA’s set-aside program regulations to repeat the relevant limitations on subcontracting, and therefore SBA proposes to list all of the limitations on subcontracting requirements at § 125.6 and provide references to that section in each of the various small business government contracting and business development program sections.

SBA proposes to revise § 127.504(b), which addresses the requirements a concern must satisfy to submit an offer for an EDWOSB or WOSB requirement.

Paragraph (b) states that the concern must meet the performance of work requirements in § 125.6. SBA proposes to revise this paragraph to replace the reference to ‘‘performance of work requirement’’ with ‘‘limitations on subcontracting.’’

SBA proposes to revise § 127.506(d), which addresses the requirements that a joint venture must satisfy in order to submit an offer for an EDWOSB or WOSB requirement. SBA proposes to revise this paragraph by replacing the reference to ‘‘performance of work requirement’’ with ‘‘limitations on subcontracting.’’

Section 1653 of the NDAA, as codified at 15 U.S.C. 637(d) (Section

8(d) of the Small Business Act), addresses amendments to the requirements for subcontracting plans.

Section 1653(a)(2) of the NDAA states that the head of the contracting agency shall ensure that the agency collects, reports, and reviews data on the extent to which the agency’s contractors meet the goals and objectives set out in their subcontracting plans. SBA proposes to add a new § 125.3(f)(8) to incorporate these provisions.

Section 1653(a)(3) of the NDAA modifies the Small Business Act to state that a contractor that fails to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for its subcontracting plan performance or that fails to make a good faith effort to comply with its subcontracting plan will not only be in material breach of the contract, but such failure may also be considered in any past performance evaluation of the contractor. SBA proposes to revise § 125.3(f)(5) to incorporate this language. SBA is also proposing to add a new sentence to the end of § 125.3(f)(5), which prescribes the process for a Commercial Market Representative (CMR) to report firms that are found to have acted fraudulently or in bad faith to the SBA’s Area Director for the Office of Government Contracting Area Office where the firm is headquartered.

Section 1653(a)(4) of the NDAA modifies the Small Business Act to state that contracting agencies also perform evaluations of a prime contractor’s subcontracting plan performance, and that SBA’s evaluations of subcontracting plan performance are completed as a supplement to the contracting agency’s review. SBA proposes to revise § 125.3(f)(1) to incorporate this language.

Section 1653(a)(5) of the NDAA requires that if an SBC is identified as a potential subcontractor in an proposal, offer, bid or subcontracting plan in connection with a covered Federal contract, the prime contractor shall notify the SBC prior to such identification. Section 1653(a)(5) also requires that the Administrator establish a reporting mechanism that allows potential subcontractors to report fraudulent activity or bad faith behavior by a prime contractor with respect to a subcontracting plan. SBA proposes to incorporate these requirements in new §§ 125.3(c)(7) and (8).

Affiliation SBA proposes to make changes to its regulations in § 121.103(f), which defines affiliation based on an identity of interest. Paragraph 121.103(f)

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77959 Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / Proposed Rules discusses the circumstances where an identity of interest between two or more persons leads to affiliation among those persons and their interests are aggregated. SBA is adding additional guidance on how to analyze affiliation due to an identity of interest. SBA believes that the additional clarifications will better enable concerned parties to understand and determine when they are affiliated.

SBA proposes to divide paragraph (f) into two paragraphs. Paragraph (f)(1) will include further clarification regarding the type of relationships between individuals that will create a presumption of affiliation due to an identity of interest. Specifically, SBA proposes to insert language clarifying that a presumption of affiliation exists for firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings. This is a rebuttable presumption. This proposed rule is based on size appeal decisions that have been issued interpreting this regulation.

In paragraph (f)(2), SBA proposes to adopt a presumption that SBA established for the SBIR Program with respect to economic dependence. If a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other and, therefore, that the two firms are affiliated. Currently there is no fixed percentage that SBA applies when evaluating this criteria. SBA believes that providing clarity on this issue will be beneficial for firms, and enable them to more easily identify their affiliates.

Further, this presumption is rebuttable, such as when a firm is new or a start-up and has only received a few contracts or subcontracts. Often new firms will not have as many partners and clients, and therefore will normally be generating more of their revenue from a much smaller number of other companies. Over time these firms should diversify and become less dependent on one entity.

Joint Ventures SBA proposes to amend § 121.103(h) to broaden the exclusion from affiliation for small business size status, to allow two or more small businesses to joint venture for any procurement without being affiliated with regard to the performance of that procurement requirement. Currently, in addition to the exclusion from affiliation given to an 8(a) protégé firm that joint ventures with its mentor for any small business procurement, there is also an exclusion from affiliation between two or more small businesses that seek to perform a small business procurement as a joint venture where the procurement is bundled or large (i.e., greater than half the size standard for a procurement assigned a NAICS code with a receipts-based size standard and greater than $10 million for a procurement assigned a NAICS code with an employee-based size standard). SBA proposes to remove the restriction on the type of contract for which small businesses may joint venture without being affiliated for size determination purposes. SBA is proposing this change for several reasons. First, this proposed change would encourage more small business joint venturing, in furtherance of the government-wide goals for small business participation in Federal contracting. Second, this change would respond to results from the Small Business Teaming Pilot Program indicating more small business opportunities and greater success on small contracts than on large contracts.

Third, this change would better align with the new provisions of the NDAA governing the limitations on subcontracting, which allow a small business prime contractor to subcontract to as many similarly situated subcontractors as desired. If a small business prime contractor can subcontract significant portions of that contract to one or more other small businesses and, in doing so, meet the performance of work requirements for small business (without being affiliated with the small business subcontractor(s)), it is SBA’s view that similar treatment should be afforded joint ventures—so that a joint venture of two or more small businesses could perform a procurement requirement as a small business when each is individually small.

Calculation of Annual Receipts

SBA proposes to amend § 121.104, which explains how SBA calculates annual receipts when determining the size of a business concern. SBA proposes to clarify that receipts include all income, and the only exclusions from income are the ones specifically listed in paragraph (a). It was always SBA’s intent to include all income, except for the listed exclusions;

however, SBA has found that some business concerns misinterpreted the current definition of receipts to exclude passive income. SBA’s proposed change clarifies the intent to include all income, including passive income, in the calculation of receipts.

Recertification

SBA proposes to amend § 121.404(g)(2)(ii) by adding new paragraph (D) to clarify when recertification of size is required following the merger or acquisition of a firm that submitted an offer as a small business concern. Paragraph (D) clarifies that if the merger or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.

Small Business Innovation Research and Small Business Technology Transfer Programs

SBA proposes to amend § 121.702(a)(2), which addresses the size and eligibility requirements applicable to the Small Business Innovation and Research (SBIR) and Small Business Technology Transfer (STTR) Programs, to clarify that a single venture capital operating company (VCOC), hedge fund, or private equity firm may own more than 50% of the concern if that single VCOC, hedge fund, or private equity firm qualifies as a small business concern which is more than 50% directly owned and controlled by individuals who are citizens or permanent resident aliens of the United States. Business concerns and Federal agencies have misread the language of this paragraph to exclude all VCOCs, hedge funds, or private equity firms that own more than 50% of the small business concern, regardless of the investment entity’s size. This paragraph explains the limitation on ownership by investment entities that are other than small and it is not meant to exclude those business concerns that are owned by investment entities that qualify as small business concerns.

Size Protests

SBA proposes to amend § 121.1001(a), which specifies who may initiate a size status protest. Small businesses and contracting officers have found the current language to be unclear because it contains a double negative, stating that any offeror that has not been eliminated for reasons not related to size may file a size protest. The intent is to provide standing to any offeror that is in line or consideration for award, but to not provide standing for an offeror that has been found to be non-responsive, technically unacceptable or outside of the competitive range.

In addition, the proposed rule would add a new § 121.1001(b)(11) that would authorize the SBA’s Director, Office of Government Contracting, to initiate a formal size determination in connection with eligibility for the SDVO SBC and

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77960 Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / Proposed Rules the WOSB/EDWSOB programs. This change is needed to correct an oversight that did not authorize such requests for size determinations when those programs were added to SBA’s regulations.

North American Industry Classification System Code Appeals

The Agency is seeking comments on what is the appropriate timeline for filing a NAICS code appeal. SBA’s regulations currently state that, ‘‘[a]n appeal from a contracting officer’s NAICS code or size standard designation must be served and filed within 10 calendar days after the issuance of the solicitation or amendment affecting the NAICS code or size standard.’’ 13 CFR 121.1103(b)(1).

SBA’s current rule is designed to work within the timeframe of a standard procurement, namely that firms will have 30 days from the date the solicitation is issued to submit an offer.

However, the standard 30 day timeframe is not utilized in all procurements, and SBA is currently examining whether the current rule is adequate to address the needs of the various types of procurements and various timeframes that are available. Determining the appropriate timeline for filing a NAICS code appeal should take into consideration that for the NAICS code appeal process to be meaningful there must be sufficient time for a contracting officer to amend the solicitation to notify potentially interested parties of the pendency of the NAICS code appeal, see Advanced Systems Technology, Inc.

v. United States, 69 Fed.Cl. 474 (2006), an opportunity for any interested party to draft and file a cogent response, and time for the Office of Hearings Appeals (OHA) to review the record to determine whether the contracting officer’s NAICS code assignment is based on a clear error of fact or law and issue a decision.

Sometimes a NAICS code appeal is filed within days of the procurement closing.

See generally NAICS Appeal of Phoenix Environmental Design, Inc., SBA No.

NAICS–5582 (2014) (A timely NAICS code appeal filed on Friday, August 8, 2014, for a procurement closing on Friday, August 15, 2014.). SBA is also assessing the effect that a NAICs code appeal should have on the solicitation.

Currently SBA’s regulations require that the contracting officer, ‘‘[s]tay the solicitation.’’ 13 CFR 121.1103(c)(1)(i).

SBA is requesting comments on whether its regulations should provide that contracting officer should not award the contract or that the agency should delay the offer or bid response date.

Nonmanufacturer Rule SBA is proposing to clarify that the limitations on subcontracting and the nonmanufacturer rule do not apply to small business set-aside contracts valued between $3,000 and $150,000.

The statutory nonmanufacturer rule, which is contained in section 8(a)(17) of the Small Business Act, 15 U.S.C.

637(a)(17), is an exception to the limitations on subcontracting. It provides that a concern may not be denied the opportunity to compete for a supply contract under Section 8(a) and 15(a) of the Small Business Act simply because it is not the actual manufacturer or processor of the product. Section 8(a)(17) of the Small Business Act does not, however, also reference section 15(j) of the Small Business Act, the authority requiring small business set-aside contracts valued between $3,000 and $150,000. Thus, there is no specific statutory requirement that the nonmanufacturer rule apply to the mandated small business set-asides between $3,000 and $150,000. SBA believes that not applying the nonmanufacturer rule to small business set-asides valued between $3,000 and $150,000 will spur small business competition by making it more likely that a contracting officer will set aside an acquisition for small business concerns because the agency will not have to request a waiver from SBA where there are no small business manufacturers available. In order to request a waiver, an agency must provide SBA with the solicitation and research on whether manufacturers exist and wait several weeks for SBA to verify the data and grant the waiver. Without a waiver, an offeror on a supply small business set-aside contract must either manufacture at least 50% of the product on its own or supply the product of a small business made in the United States. Many waiver requests below $150,000 are for name brand items (e.g., computers) that are clearly not made by small businesses in the United States.

Whether an agency can procure name brand items is not within the jurisdiction of SBA. The contracting officer must make that determination, which can be protested by interested parties.

SBA is proposing to amend § 121.1203 to require that contracting officers notify potential offerors of any waivers, whether class waivers or contract specific waivers, that will be applied to the procurement. SBA proposes that this notification of the application of a waiver be contained in the solicitation itself. Without notification that a waiver is being applied by the contracting officer, potential offerors cannot reasonably anticipate what if any requirements they must meet in order to perform the procurement in accordance with SBA regulations. SBA believes that providing notice of waivers in the solicitation will provide all potential offerors with the information needed to decide if they should submit an offer.

The proposed rule would also amend § 121.1203, regarding waivers to the nonmanufacturer rule. SBA proposes to amend § 121.1203(a) to specifically authorize SBA to grant a waiver to the nonmanufacturer rule for an individual contract award after a solicitation has been issued, provided the contracting officer agrees to provide all potential offerors additional time to respond. SBA believes that a waiver may be appropriate even after a solicitation has been issued, but wants to ensure that all potential offerors would be fully apprised of any waiver granted after the solicitation is issued and have a reasonable amount of time (depending upon the complexities of the procurement) to adjust their offers accordingly.

SBA is also proposing in § 121.1203(b) to allow some waivers to be granted after the contract has been awarded. SBA believes that granting post-award waivers, when additional items that are eligible for a waiver are sought through in-scope modifications, is reasonable and will increase the use of the waiver process and allow firms to complete for contracts in a manner consistent with SBA regulations. SBA envisions these types of post award waivers to be given in situations similar to the example contained in the proposed regulation—where a need for an item occurs after contract award, where requiring the item would be an in-scope modification, and where the item is one for which a waiver would have been granted if sought prior to contract award.

The proposed rule would also add a new § 121.1203(d), dealing with waivers to the nonmanufacturer rule for the purchase of software. SBA is proposing to address whether the nonmanufacturer rule should apply to certain software that can readily be treated as an item and not a service. SBA is proposing to treat this type of software as a product or item of supply rather than a service.

SBA believes that this change will bring SBA’s regulations in line with how most buyers already perceive these types of software. Readily available software that is generally available to both the public and private sector unmodified is almost universally perceived to be a supply item, even though SBA’s regulations

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77961 Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / Proposed Rules currently would treat the production any type of software as a service. This change would also allow for certain types of software to be eligible for waivers of the nonmanufacturer rule.

SBA is proposing to grant waivers on software that meet criteria that establishes that the Government is buying something that is more like a product or supply item than a service.

Clearly, when the Government seeks to award a contract to a business concern to create or modify custom design software, that should be classified as a service requirement and the activity will remain classified in a service NAICS code to which the nonmanufacturer rule does not apply. For a service procurement set aside for small business, the prime (together with one or more similarly situated subcontractors) would have to perform the required percentage of work with its own employees. On the other hand, when the Government buys certain types of unmodified software that is generally available to both the public and the Government from a business concern, SBA believes that the contracting officer should classify the requirement as a commodity or supply.

If the procurement is a supply contract set aside for small business, the prime contractor, together with any similarly situated subcontractors, would have to perform at least 50% of the cost of manufacturing the software, unless SBA granted a waiver of the nonmanufacturer rule.

In order to address this scenario, SBA proposes to amend § 121.201 by adding a footnote to NAICS code 511210, Software Publishers, explaining that this is the proper NAICS code to use when the Government is purchasing software that is eligible for a waiver of the nonmanufacturer rule. The 2012 NAICs manual provides the following definition for this industry:

This industry comprises establishments primarily engaged in computer software publishing or publishing and reproduction.

Establishments in this industry carry out operations necessary for producing and distributing computer software, such as designing, providing documentation, assisting in installation, and providing support services to software purchasers.

These establishments may design, develop, and publish, or publish only.

SBA believes that this accurately reflects the type of companies that would be producing and supplying the Government with the type of software eligible for a waiver. Further, SBA is proposing that the procurement of this type of software would be treated by SBA as a supply requirement, and therefore the nonmanufacturer rule would apply, as long as the acquisition meets all of the requirements of the rule.

SBA reiterates that the custom design or modification of software for the Government will generally continue to be treated as a service. Therefore, if the software being acquired requires any custom modifications in order to meet the needs of the Government, it is not eligible for a waiver of the nonmanufacturer rule because the contractor is performing a service, not providing a supply.

SBA proposes to amend § 121.406(b)(5) to make a technical correction. Section 121.406(b) addresses how a nonmanufacturer may qualify as a small business concern for a requirement to provide a manufactured product or other supply item. Currently, paragraph (b)(5) states that the SBA’s Administrator or designee may waive the requirement set forth in paragraph (b)(1)(iii) of this section, that requires nonmanufacturers to supply the end item of a small business manufacturer, processor or producer made in the United States. The citation to paragraph (b)(1)(iii) is incorrect and as such, SBA proposes to amend this paragraph to include the correct citation, paragraph (b)(1)(iv).

In addition, the proposed rule would amend § 121.406(b)(7) to clarify that SBA’s waiver of the nonmanufacturer rule has no effect on requirements external to the Small Business Act which involve domestic sources of supply, such as the Buy American Act and the Trade Agreements Act. This has always been SBA’s policy, but because SBA has received several inquiries about this issue, SBA believes that for better clarity the policy should be specifically set forth in the regulatory text.

In order to clarify whether the nonmanufacturer rule applies, or whether a general or specific waiver is attached to a procurement, SBA proposes to add a new § 121.1206 to require contracting officers to receive specific waivers prior to posting a solicitation, and also to provide notification to all potential offerors of any waivers that will be applied (whether class or specific) to a given solicitation. SBA believes that this will help to provide clear guidance to prospective offerors. If a solicitation states that a waiver is being applied, prospective offerors will know that the nonmanufacturer rule will not apply to that procurement. If no notice of a waiver being applied is given, prospective offerors will know that the requirements of § 121.406 must all be met. This will give prospective offerors ample time to prepare, and will remove some of the uncertainty surrounding issuances of waivers to the nonmanufacturer rule.