Navigating New SBA and DFARS Rules Impacting Small Business Contracting in 2025
Published: January 17, 2025
Federal Market AnalysisSmall Business
Recent revisions to the Small Business Administration’s (SBA) size and socioeconomic status rules and the Defense Federal Acquisition Regulation Supplement (DFARS) are changing the landscape for small businesses.
Recently, the SBA finalized rules regarding the HUBZone program, small business size and socio-economic status re-representations and small business certification requirements. An amendment to the DFARS revised past performance evaluations of firms that include small business subcontractors for competitive procurements. Finally, a proposed rules submitted in November and December 2024 look to change contracting thresholds, streamline subcontract reporting, ensure subcontractors receive timely payments. Comments are due by February 18, 2025. The highlights of each follow.
HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs
Effective January 16, the HUBZone Program Updates and Clarifications, and Clarifications to Other Small Business Programs rule redefines a firm’s principal location, clarifies the definition of a HUBZone employee, and revises the HUBZone eligibility rule. The rule requires
- A firm’s principal location to be in a Historically Underutilized Business Zone with at least 35% of its employees living there. Firms may have up to four “legacy” HUBZone employees (those who are previous residents of the zone) at any given time but must have at least one other HUBZone employee for this rule to apply.
- Employees to work a minimum of 10 hours per week during a four-week period versus 40 hours per month to be considered a “HUBZone employee.”
- HUBZone firms to be eligible on the date proposals are submitted for a HUBZone contract
- Firms must recertify every three years instead of annually.
The rule also standardized eligibility requirements across all socio-economic categories.
Federal Acquisition Regulation: Rerepresentation of Size and Socioeconomic Status
The Rerepresentation of Size and Socioeconomic Status rule becomes effective January 17. Initially proposed in 2020 by the Department of Defense, GSA and NASA, the amendment to FAR 48 CFR Parts 4, 8, 16, 19, and 52 addresses the change in business size during the life of a multiple award contract (MAC). The amended rule ensures task orders set aside for small businesses under a MAC are awarded to small businesses that qualify based on the NAICS code standards assigned for the proposed order. This is especially important to firms following mergers and acquisitions resulting in firms losing their small business status.
Under this rule, the status at the contract level no longer applies for task order procurements issued under small business set-asides. Firms holding a MAC originally set aside for small businesses may continue competing for task orders under their original status for the contract duration. However, firms awarded MACs via an unrestricted procurement must recertify their small business status at the task order solicitation NAICS code level. If a firm loses its small business status due to a merger or acquisition, it can only compete for unrestricted task orders under the MAC. Contracting Officers must verify the firms’ size and/or status before issuing the task order. Agencies that award task orders to firms that no longer qualify as a small business under the applicable NAICS code or category cannot receive credit toward their small business goals.
Contracts awarded under GSA Federal Supply Services schedules are excluded.
Effective November 15, 2024, the amended rule increases subcontracting opportunities for small businesses with strong past performance portfolios by mandating that contracting officers include the relevant past performance of small business firms’ proposed subcontractors when evaluating competitive procurements. The rule does not apply to contracts valued at or below the simplified acquisition threshold for commercial products (including commercial off-the-shelf (COTS)) products, commercial services or those under existing solicitations or contract clauses.
Government Contracting: Subcontracting Program
In December, the SBA proposed an amendment to the Small Business Subcontracting Program regulations in 13 CFR 125.3 responding to changes in the FY 2024 National Defense Authorization Act (NDAA). If finalized, the revision will streamline subcontract reporting, expedite subcontractor payments and ease the market research process for prime contractors seeking small business subcontractors. It also relieves the prime contractors’ burden of having to assign a NAICS code based on the nature of the subcontract. Highlights from the rule include the following:
- Requires prime contractors to report overdue payments to its subcontractors and complete corrective actions to ensure the subcontractor receives timely payments.
- Permits contracting officers to include negative reporting on the prime contractor’s past performance rating if subcontractor payments are late.
- Allows prime contractors to use the subcontractor’s primary NAICS code for determining the size status for commercial subcontracting plans, for subcontracts awarded under the Micro-Purchase Threshold (MPT) and for the indirect costs for subcontracts resulting from solicitations without a NAICS code. This relieves the prime contractor’s burden of having to assign a NAICS code based on the nature of the subcontract.
- Allows prime contractors to use the SBA Dynamic Small Business Search (DSBS) to conduct market research for subcontracting purposes in addition to the Systems for Award Management (SAM) program.
- Permits prime contractors an option to base their subcontracting plans on the federal government fiscal year.
Small Business Contracting: Increasing Small Business Participation on Multiple Award Contracts
Proposed in October 2024, this “Rule of Two” will increase competition among small business opportunities for MACs while limiting large competition for large business and leveraging potential teaming and Joint Venture arrangements. The revised regulation would require agencies to set aside task orders under MACs when there is a reasonable expectation of receiving offers from two or more small business contract holders under the MAC that are competitive in terms of market prices, quality and delivery. The rule would apply to all purchases under the MAC, not just new contract awards. The proposed removal “off ramping” small businesses that have outgrown their size standard allows them to continue competing as a small business until their scheduled recertification date. However, this opens the door to possible protests if a business competes for a task order under a specific NAICS code even if it does not meet the small business size standard for that NAICS code.
Federal Acquisition Regulation: Inflation Adjustment of Acquisition-Related Thresholds
Finally, the FAR Council Proposed Rule in November 2024 seeks to increase multiple contract thresholds including:
- Standard micro-purchase threshold from $10K to $15K
- Standard simplified acquisition threshold from $250K to $350K
- Simplified acquisition threshold for commercial items under FAR 13.500 from $7.5M to $9.5M
- Reporting Tier 1 subcontracting executive compensation from $30K to $40K
- 8(a) sole source justification requirement from $25M to $30M
- Approval thresholds for other-than-full-and-open competition outlined in FAR 6.304 from $750K to $950K; from $15M to $20M; and from $100M to $150M, respectively.
- Ceiling for the use of simplified procedures for select commercial products and services in FAR 13.500 from $7.5M to $9.5M and from $15M to $20M, respectively
- Cost or pricing data threshold from $2M to $2.5M
- Justification for single award indefinite delivery contracts from $100M to $150M
- Requirement for prime contract subcontracting plans from $705K to $950K (and from $1.5M to $2M for construction contracts.
This merry-go-round, roller coaster or other amusement park scenario of changes is not so amusing. Nevertheless, there are numerous benefits to small businesses. The changes clarify procurement certification requirements, increase opportunities, ensure financial timely compensation for subcontracting work and streamline acquisition processes for prime contractors and contracting officers. However, to take advantage of these benefits, federal contractors must stay on top of these changes. Additionally, commenting on proposed rulings can drive the outcome. Compliance with the final rulings is non-negotiable and vendors must remain diligent in understanding the changing acquisition environment, more so with the upcoming administration change.
For additional information on recent changes surrounding small business contracting, see Alex Rossino’s recent blogs on Small Business Sections in the FY 2025 National Defense Authorization Act and Drop a Dime On Your Prime? Subcontractor Utilization Enhancement in the Senate Draft FY 2025 NDAA.)