Industry sweats details of new small business rules

In a discussion Monday on newly adopted regulations that will tighten the process of certifying companies as small businesses beginning next summer, industry lawyers and federal contracting specialists focused on complex scenarios involving partial ownership as well as possible short-term loopholes.

The discussion centered around rules published last month in the Federal Register that will require companies considered small for purposes of federal contracts to recertify their size status after five years and when a contract option is exercised after that. It also will require recertification in the event of mergers, acquisitions, or transfers of contract responsibility through a novation.

The new rules will apply not only to the straightforward purchase of one company by another, but also to changes in the controlling interests of publicly traded companies, said John Klein, SBA's associate general counsel for procurement law. The discussion took place at a seminar convened by the Professional Services Council of Arlington, Va.

If 51 percent of a small company's stock is purchased by a single buyer, that would trigger the requirement for a size recertification, Klein said. But a change of hands in a controlling minority interest could have the same effect, he said. This type of situation can arise when most of a company's stock is spread among numerous shareholders, so the owner of a small percentage of the business has effective control.

Under the new rules, if a business no longer counts as small after recertification, then the buying agency can continue its contracts but it will not receive credit for them toward its small business contracting goals.

The new rules do not affect individual task orders signed under long-term contracts. Once a task order is completed with a small business, that work will continue to receive credit toward agency contracting goals until it is completed, regardless of whether the business later loses its small size status.

This could lead to a jump in small business contracting before the new rules take effect on June 30, 2007, according to panelist Tom Peltier, an expert in mergers and acquisitions with Stifel, Nicolaus and Co. in Baltimore.

PSC President Stan Soloway said it was too soon to tell how agencies will decide between continuing a contract with a familiar business that has lost its size status or recompeting the work to a smaller company. Peltier said the uncertainty about opportunities for future work could hurt small businesses seeking loans.

Although the new rules do not require recertification when individual task orders are awarded, they reserve the right for a contracting officer to demand that companies go through the process. PSC Senior Vice President Alan Chvotkin said increased scrutiny from the Democratic-controlled Congress in 2007 could lead officials to take that extra step.

Chvotkin said other factors that could shape small business policies include criticism of the new rules from the rising leaders of both the House and Senate small business committees. Sen. John Kerry, D-Mass., and Rep. Nydia Velazquez, D-N.Y., have said the rules fall short of what is needed to address the problem of large businesses winning work set aside for small concerns. Each supported annual recertification -- which was originally proposed when a draft rule was floated in 2003 -- rather than after five years.

SBA's inspector general also called for annual size updates, and in a year-end report published in November, the IG pledged to look into the issue.

Dean Koppel, who heads SBA's Office of Policy and Research, said the agency may draft rules that would apply recertification requirements to federal subcontractors, since the new rules apply only to prime contractors. Such a rule would not be developed immediately, he said, but could be unveiled before the end of next year.

Klein said long-duration task orders fall outside the scope of the new rules and present another area ripe for scrutiny.