On June 6, 2024, the U.S. Small Business Administration (SBA) published a direct final rule eliminating self-certification for service-disabled veteran-owned small businesses (SDVOSB) when considering contracts for agency goaling or subcontracting credit. The rule means that self-certification as an SDVOSB will have virtually no benefit moving forward, and self-certified companies should instead consider seeking certification by the SBA through its Veteran Small Business Certification (VetCert) Program. Before this new rule, self-certified SDVOSBs could not compete for federal sole-source or set-aside contracts, but they would still count as an SDVOSB for purposes of meeting the Agency's participation goals for non-SDVOSB set-asides or sole-source contracts, as well as a prime contractor's SDVOSB subcontract goals. Moving forward, agencies and prime contractors will only be able to take credit for SBA-certified SDVOSBs.
What are small business participation goals, anyway?
Congress sets government-wide statutory small business contracting goals, with the percentage goal for SDVOSB contracts set at 5 percent. Agencies have additional, agency-specific small business contracting goals negotiated with SBA, and, while such goals are aspirational and do not have punitive consequences attached, agencies that fail to meet these goals must submit a "corrective action report" to SBA setting forth a plan to meet its goals in the future. Relatedly, contractors with contracts exceeding $750,000 must have small business subcontracting plans setting percentage goals for using small businesses as contractors. Contractors are eligible to receive credit toward these subcontracting plans when the subcontracting plan applies to a single contract with a single agency. Under FAR 52.219-9(k), failure to comply with the subcontracting plan constitutes "a material breach of the contract and may be considered in any past performance evaluation of the Contractor."
How do these goals relate to set-aside competitions?
Because the U.S. government prioritizes contracts with small or other categories of businesses, SDVOSB status allows entities to compete for sole-source and set-aside contracts across federal agencies. But, as the new rule explains, "[i]n order to be awarded [an SDVOSB] set-aside or sole source contract, firms must be certified by SBA through the [VetCert] Program." Firms that merely self-certify as SDVOSBs cannot compete for such sole-source and set-aside contracts, but nonetheless may benefit from self-certification because agencies might prefer them in the competition, as agencies can credit awards to self-certified SDVOSBs for the purposes of meeting their participation goals.
Why is self-certification being eliminated?
Self-certification entails a company identifying itself as an SDVOSB on the System for Award Management (SAM), where the business meets the SBA's SDVOSB criteria. While this process helped reduce barriers to certification for small businesses, it has been a topic of much discourse lately, with the process being critiqued for helping mask fraud and abuse and allowing agencies to take credit even where non-SDVOSB businesses reap the benefits of U.S. government initiatives related to small business contracting despite not being the targeted recipient of such benefits.
This rule is the product of that debate. Senator Joni Ernst proposed a stand-alone version of this bill in May 2023 (press release here) and then proposed to amend the National Defense Authorization Act (NDAA) for fiscal year (FY) 2024 to include the bill in July 2023 (amendment here, reporting here). Ultimately, Section 864 of the FY24 NDAA amended existing SDVOSB requirements so that each prime and subcontract award counted toward the agency and prime contractor SDVOSB participation goals only if such SDVOSBs were certified in VetCert. SBA's new rule implements this statute.
What does this rule mean for self-certified SDVOSBs?
SBA estimates in its new rule that there are 20,408 self-certified SDVOSBs that are not currently certified by SBA in VetCert. The final rule now requires these entities to be officially certified in VetCert for the agency to count them toward its participation goals, and for prime contractors to receive subcontracting credit for their work.
Consistent with the statute, the rule provides that self-certified SDVOSB contractors have a grace period: contractors that file an application for certification with SBA by December 22, 2024 may continue to self-certify for federal contracts until SBA makes a final decision on their application. Self-certified SDVOSBs that do not file an application for certification by December 22, 2024 and are not certified in the VetCert program will not be eligible to self-certify after that date.
SBA estimates that application for certification will take approximately two hours, although industry often disagrees with the government's estimates of the burden of compliance with federal regulations and programs. SDVOSBs seeking certification must establish an SBA account and apply via the Veteran Small Business Certification portal, which allows applicants to access checklists and guides, confirm the SDVOSB's eligibility, request information, and complete the application. The required documentation for applications is detailed on SBA's website and includes documents related to the formation of the business entity and written explanations of any unusual situations, such as if the service-disabled veteran is not the most highly compensated individual in the business.
Upon submission, SBA intends to review applications and make certification decisions in approximately 30 days, though longer wait times may apply. SBA can ask for additional information if it determines more is needed. Certification expires in three years, and if circumstances change affecting the entity's eligibility, the business is required to voluntarily decertify. If certification is denied, SBA will inform the affected entity of the reason for its denial, and the entity will have opportunity to appeal.
Reminder; To be eligible for certification as a SDVOSB, contractors must:
- Be a small business, according to the size standard corresponding to the NAICS code available on the SDVOSB's SAM account and
- Ensure at least 51% of the business is owned and controlled by service-disabled veterans
What larger impacts could the rule have?
The effects of this rule will likely be felt throughout the supply chain. SBA states that the rule effectively shifts enforcement of SDVOSB certifications from procuring agencies to the SBA, potentially saving the former some time and money. Prime contractors subcontracting to SDVOSBs will have to ensure their chosen subcontractors are certified by SBA to receive subcontracting credit. And SDVOSBs that want to continue to be eligible for preferred consideration in federal procurements will need to move beyond self-certification and instead seek certification from the government. (For SDVOSBs that are already certified in the VetCert program, there are no additional costs or requirements attached to this rule, except to maintain certification, which expires after three years.)
Venable is here to help contractors affected by this rule change. If you have any questions or concerns about your entity's certification status and the requirements of certification, please do not hesitate to contact us for assistance.
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