Stan Soloway | Size recertification rule falls short of mark

Last month, the Small Business Administration released its anxiously anticipated rule on the recertification of small-business size status. On balance, SBA got it partly right. The rule covers recertification on long-term contracts and after a merger or acquisition, and is designed to ensure that those doing work designated for small businesses actually are small businesses.

The rule's coverage of routine recertifications is fairly clear and reasonable. Small businesses retain for the life of the contract their status as it stood at the time of award, although government contracting officers can request a recertification at any time.

Growing concerns that some small-business dollars were going to businesses that had long outgrown the designation generated support for requiring annual recertifications. The Professional Services Council and others argued that an annual recertification requirement would be chaotic and essentially impossible to carry out.

Fortunately, SBA agreed, and under the final rule for certain long-term contracts, small businesses must recertify their status at least once every five years, and at each option period thereafter, unless a contracting officer requests it earlier.

The rule's treatment of mergers and acquisitions is more complicated. Unless contracts are novated as the result of an acquisition, the acquired company can keep its size status for the life of the contracts it holds at the time of acquisition. The new rule will require that small businesses recertify their size within 30 days of a merger or acquisition.

As of the following calendar year or at the next "trigger" event for any contracts the small business holds, such as the expiration of an option period, the government no longer can take small-business credit for those contracts, although terms and conditions of the contract continue unchanged.

Notwithstanding the rule's basic logic, this requirement could have unintended and chilling effects on companies it is designed to help. Indeed, the rule may well improve the certainty of small-business data, but may not be in the overall best interests of small firms with growth ambitions.

Even though the rule clearly states that the contract itself is unaffected, many of these companies are justifiably concerned that the rule will give contracting officers the incentive to terminate affected contracts, especially those with agencies that are struggling to meet their small-business goals. Therein lies the problem.

In the federal market, the opportunities for midtier companies have been diminishing. According to the Center for Strategic and International Studies, the midtier has lost 20 percent of market share, 40 percent in IT services.

Faced with that daunting reality, small businesses that are close to exceeding their size standards must consider a merger or acquisition as possibly their best option for survival or exit. But if they lose their small-business status almost instantly on merging or being acquired, ? and thus are threatened with the potential loss of their contract backlog ? their value in the market would plummet, effectively putting the kibosh on raising capital or being acquired.

Having no flexibility or transition times, the rule could have a harshly punitive effect on high-performing small businesses.

The federal market for services is highly dynamic. Understanding that broader market, and the market effects of federal policy and buying behaviors, has never been more important.

The SBA rule offers an excellent example of a well-intended, major policy change that must be underpinned by just that kind of analytical framework. Getting it partly right is not good enough.

Stan Soloway is president of the Professional Services Council. His e-mail address is soloway@ps
council.org.