HUBZone Program Changes Take Affect August 24

HUBZone program changes approved by the U.S. Small Business Administration (SBA) earlier this year take affect tomorrow, August 24. These changes expand the SBA’s HUBZone application process as well as HUBZone joint ventures.

By revising 13 C.F.R. § 126.306, the SBA makes available new information about how it processes HUBZone applications. The regulation now reads:

  • The SBA’s Director Office of HUBZone (“D/HUB”) is authorized to approve or decline applications for certification. SBA will receive and review all applications and request supporting documents. Applications—including all required information, supporting documentation, and HUBZone representations—must be complete before processing; SBA will not process incomplete packages. SBA will make its determination within 90 calendar days after the complete package is received—this is a significantly longer than the period contemplated by the current regulations, which provide that “SBA will make its determination within 30 calendar days after receipt of a complete package whenever practicable.” In practice, SBA hasn’t met this aggressive 30-day deadline; a 2014 GAO report indicated that the average processing time was 116 days from the date of the initial application.
  • SBA may request additional or clarifying information about an application at any time.
  • The burden of proof for eligibility is now squarely placed on the applicant concern. “If a concern does not provide requested information within the allotted time provided by SBA, or if it submits incomplete information, SBA may presume that disclosure of the missing information would adversely affect the business concern or demonstrate lack of eligibility in the area or areas to which the information relates.”
  • The applicant must be eligible as of the date it submitted its application and up until the time the D/HUB issues a decision. The decision on the application will be based on the facts set forth in the application, any information submitted in response to a clarification request, and “any changed circumstances since the date of application.”
  • As to this last requirement, the new regulation states that “[a]ny changed circumstance occurring after an application will be considered and may constitute grounds for decline.” The entity applying for certification has a duty, moreover, to notify SBA of any changes that could affect its eligibility; “[t]he D/HUB may propose decertification for any HUBZone SBC that failed to inform SBA of any changed circumstances that affected its eligibility for the program during the processing of the application.”

The SBA also made changes to rules affecting HUBZone joint ventures. These changes affect 13 C.F.R. § 126.616.

The new regulations allow HUBZone small businesses to “enter into a joint venture agreement with one or more” small businesses, with an approved mentor (per the new mentor-protégé regulation), or, if also an 8(a) program participant, an approved 8(a) mentor, for the purposes of submitting an offer on a HUBZone contract. The joint venture itself need not be certified as a qualified HUBZone small business (emphasis added).

The new regulation also adopts a two-pronged approach for determining the joint venture’s size.

  • For a joint venture that includes at least one qualified HUBZone small business and one or more other business concerns, the joint venture “may submit an offer as a small business for any HUBZone procurement or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement.”
  • For a joint venture between a protégé and its approved mentor (under SBA’s new small business mentor-protégé regulation), the joint venture will be deemed small if the protégé qualifies as small under the solicitation’s operative size standard.

HUBZone businesses now can joint venture with any small business—whether a qualified HUBZone or not–as well as with large mentor firms, as long as the following regulations are followed:

  • Purpose. The joint venture agreement must set forth the purpose of the joint venture.
  • Managing Venturer. The joint venture agreement must designate a HUBZone small business as the managing venturer, and an employee of the managing venturer as the project manager responsible for contract performance. The project manager “need not be an employee of the HUBZone SBC at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the HUBZone SBC if the joint venture is the successful offeror.” The project manager cannot, however, be employed by the mentor and become an employee of the HUBZone managing venturer for purposes of performance under the joint venture. The plain language of the regulation does not appear to prevent an employee from a non-mentor, non-HUBZone small business partner from becoming the project manager, but SBA’s intent in this regard is unclear. Hopefully, SBA will provide clarification on this point.
  • Ownership. The joint venture agreement must state that, with respect to a separate legal entity joint venture, the HUBZone small business owns at least 51% of the joint venture entity.
  • Profits. The agreement must also state that the HUBZone small business will receive profits from the joint venture commensurate with the work it performs or, in the case of a separate legal entity joint venture, commensurate with its ownership interest.
  • Bank Account. The joint venture agreement must provide for a special bank account in the name of the joint venture. The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on a set-aside contract will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
  • Equipment, Facilities, and Other Resources. The koint venture agreement must itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. If the contract is indefinite in nature—like an IDIQ or multiple award contract might be—the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
  • Parties’ Responsibilities. The joint venture agreement must specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture and the HUBZone partner(s) to the joint venture will meet the performance of work requirements, “where practical.” Again, if the contract is indefinite in nature, “the joint venture must provide a general description of the anticipated responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, not including the ways that parties to the joint venture will ensure that the joint venture and the HUBZone partner(s) to the joint venture will meet the performance of work requirements . . . or, in the alternative, specify how the parties to the joint venture will define such responsibilities once a definite scope of work is made publicly available.”
  • Guaranteed Performance. The joint venture agreement must obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer.
  • Records. The joint venture agreement must state that accounting and other administrative records of the joint venture must be kept in the office of the HUBZone small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the HUBZone small business managing venturer upon completion of the contract.
  • Statements. The joint venture agreement must provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract.

Limitations on Subcontracting

For a joint venture that is comprised only of qualified HUBZone small businesses, “the aggregate of the qualified HUBZone small businesses to the joint venture—not each concern separately—must perform the applicable percentage of work required by 13 C.F.R. § 125.6.

For a joint venture between only one qualified HUBZone protégé and another (non-HUBZone) small business concern or its SBA-approved mentor, “the joint venture must perform the applicable percentage of work required by § 125.6 . . . and the HUBZone SBC partner to the joint venture must perform at least 40% of the work performed by the joint venture.” The work performed by the HUBZone small business must be more than ministerial or administrative, so that it gains substantive experience.

Certification of Compliance

As with the small business mentor-protégé program, the new HUBZone joint venture requirements mandate self-certification of the joint venture agreement’s contents: “Prior to the performance of any HUBZone contract as a joint venture, the HUBZone SBC “must submit written certification to the contracting officer that the parties “have entered a joint venture agreement that fully complies with” the requirements. The HUBZone small business must also certify that the parties will perform the contract in compliance with the joint venture agreement and with the performance of work (or limitation on subcontracting) requirements.

Past Performance and Experience

The new regulation also provides significant improvement in the evaluation of a joint venture’s past performance: When evaluating the past performance and experience of an entity submitting an offer for a HUBZone contract as a joint venture established pursuant to this section, a procuring activity must consider the work done individually by each partner to the joint venture as well as any work done by the joint venture itself previously.

The new HUBZone regulations take effect on August 24, 2016. They represent a significant expansion of opportunities for HUBZone small businesses–but also represent compliance challenges, especially in ensuring that joint venture agreements met all of the requirements of the new rule.

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