Small Business Administration Issues Rule Requiring Formal Veteran-Owned Small Business Certification for Federal Contract Set Asides

By Brett W. Johnson and Mary Colleen Fowler

On November 28, the Small Business Administration (SBA) finalized a rule that requires veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs) to obtain formal SBA certification to participate in federal acquisition set asides for VOSBs and SDVOSBs (the Rule).¹ This Rule eliminates the current self-certification process for VOSBs and SDVOSBs, which has been relied upon significantly by companies doing business with the federal government. As such, prior to re-certification to a contracting office on a current contract or in bidding on a new opportunity, companies will need to ensure compliance with the new Rule.

Similar to the current VA certification program,² the SBA certification will still consider some of the traditional factors such as VOSB and SDVOSB ownership and control structures. However, the SBA certification will no longer consider other factors, such as the VA requirement that an VOSB or SDVOSB owner show “good character,” particularly as it relates to the impact of whether an individual who owns or controls part of the concern is incarcerated or on parole. Although the SBA Rule considered variations on the “good character” requirement, it ultimately decided to drop it from its analysis because it found that the requirement is unnecessary, and the requirement is incorporated via other rules or programs. Moreover, the SBA recognized that such factors are more appropriate for analysis of whether an VOSB’s or SDVOSB’s can perform the contract—a responsibility issue rather than a responsive or eligibility issue.

The SBA certification will require VSOBs and SDVOSBs to renew every three years. Notably, the Rule includes an exception for self-certified SDVOSBs to continue to serve as subcontractors, but this exception will only be in effect for the next five-years. Moreover, as part of the transition period, the Rule takes into account businesses that are already VA -certified or self-certified. VSOBs already certified by the VA will keep their existing three-year certifications and may be eligible for an additional year extension before needing SBA formal certification.The Rule also allows a year-long transition period for self-certified contractors to apply for formal SBA certification to prevent a deluge of applications.

As the new year approaches, VSOBs and SDVOSBs should consider evaluating their current standing under the Rule. For the time being, VA-certified and self-certified concerns will still remain eligible for veteran-related set asides. Although VA-certified and self-certified VSOBs and SDVOSBs will have a grace period to obtain SBA certification, consider working with legal counsel to monitor developments in SBA guidance during the transition period to ensure proper certification steps are met. In addition, prime contractors that enter into teaming agreements or otherwise subcontract to VSOBs and SDVOSBs may need to do additional due diligence. Furthermore, those contractors required to submit subcontracting plans for review by the federal government will also need to engage in additional due diligence. A major focus area for the Department of Justice and individual agency Offices of Inspector General is false claims associated with inappropriate certifications.  Although this new Rule should avoid some of those claims, contractors at all tier levels should remain diligent and consider evaluating policies and procedures related to vendor background confirmations to ensure compliance.