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GAO Ruling Makes it Harder for Agencies to Remove Work from the 8(a) Program

by Stephen L. Bacon and Jeffery M. Chiow

Once an agency’s requirement is accepted into the SBA’s 8(a) program, that work must generally remain in the 8(a) program. This rule, however, does not apply to an agency’s follow-on procurement for a “new requirement.” In other words, if the agency is soliciting a “new requirement,” the procurement does not need to be set aside for 8(a) contractors.

So, what is a “new requirement”? Under the SBA’s regulations, a “new requirement” may be “[t]he expansion or modification of an existing requirement…where the magnitude of change is significant enough to cause a price adjustment of at least 25 percent (adjusted for inflation) or to require significant additional or different types of capabilities or work.” 13 C.F.R. § 124.504(c)(1)(ii)(C). In our experience, agencies have in some cases manipulated this rule by changing the size of a follow-on procurement in order to create a “new requirement” that can be removed from the 8(a) program.

In those circumstances, an 8(a) contractor was usually left without much recourse if it wanted to challenge the agency’s decision to remove the work from the 8(a) program. That is because, for many years, GAO and the SBA have consistently interpreted the “new requirement” rule as meaning that a requirement will be considered “new” if the anticipated value of the work is 25 percent more or less than the existing 8(a) contract. See, e.g., SKC, B-415151, Nov. 20, 2017, 2017 CPD ¶ 366 at 5; B&D Consulting, Inc., B-413310, et al., Sept. 30, 2016, 2016 CPD ¶ 280 at 5; Rothe Computer Solutions, LLC d/b/a Rohmann Joint Venture, B-299452, May 9, 2007, 2007 CPD ¶ 92 at 6; NANA Services, LLC, B-297177.3, B-297177.4, Jan. 3, 2006, 2006 CPD ¶ 4 at 10.

In Eminent IT, LLC, B-418570; et al. (June 23, 2010), GAO and the SBA have now adopted a less rigid interpretation of the “new requirement” rule that is more favorable to 8(a) small businesses. In that decision, GAO agreed with the SBA’s view that price differential alone is not determinative of whether a requirement is “new.” Rather, an agency’s requirement is “new” only if a change in the requirement actually caused the price to increase or decrease by 25 percent. This is a significant development for 8(a) contractors because the Eminent ruling will make it more difficult for agencies to remove contracts from the 8(a) program.

8(a) Contractor Successfully Challenges the Agency’s “New Requirement” Determination

In 2015, the Department of State awarded a task order to an 8(a) small business named Buchanan & Edwards (“B&E”) under GSA’s 8(a) STARS II Governmentwide Acquisition Contract. Under the task order, B&E was required to maintain, operate and manage PeopleSoft v9.1 to support development of the agency’s Global Employment Management System.

In 2020, the agency issued a solicitation for competition among small businesses under GSA Schedule 70. The agency sought a vendor to maintain, operate and manage PeopleSoft v9.x or later in a production environment, including any follow-on functional requirements and application support using a Scaled Agile Framework (SAFe) methodology.

Eminent, an 8(a) small business, filed a pre-award protest at GAO challenging the agency’s decision to remove the requirement from the 8(a) program. Eminent argued that the agency violated FAR 19.815 and 13 C.F.R. § 124.504(d) because it removed the work in question from the 8(a) program without authorization.

The agency argued that the SAFe requirement qualified as a “new” because it includes additional services and processes. According to the agency, the B&E task order did not require the use of a SAFe methodology but, rather, a standard waterfall systems development life cycle.

GAO, however, agreed with Eminent and the SBA that the agency failed to demonstrate that the SAFe methodology qualified as a “new requirement.” The B&E task order requirements were virtually identical to the agency’s SAFe solicitation. Moreover, GAO concluded that the B&E task order did not actually require use of a different development methodology.
Although the agency’s SAFe requirement was double the value of the B&E task order, GAO agreed with the SBA that this price differential was not dispositive of whether the agency was soliciting a “new requirement.” The SBA expressed its view that the SAFe requirement was not “new” because “the primary and vital requirements” of the B&E task order were “nearly identical.”

When considering the magnitude of the price differential between a new and existing requirement, the SBA believes agencies should exclude general inflation of labor rates and any additional “services that are ancillary to the primary and vital requirements of the contract.” GAO agreed with the SBA’s interpretation, citing the general rule that GAO “accords great weight to the SBA’s interpretation of its own regulations.” In adopting the SBA’s interpretation, GAO noted the SBA’s view that “applying the 25 percent rule rigidly in all cases could allow procuring agencies to circumvent the intent of the 8(a) release rules.”

The record did not establish that the price change between the B&E task order and the agency’s new solicitation was attributable to the introduction of the SAFe methodology. As a result, GAO sustained the protest because it could not conclude that the solicitation constituted a “new requirement” under 13 C.F.R. § 124.504(c)(1)(ii)(C).

Eminent is Consistent with SBA’s Proposed Rule Change

The SBA’s interpretation of the “new requirement” rule, as expressed in the Eminent decision, is generally consistent with a pending rule change proposed by the agency. See 84 Fed. Reg. 60846 (Nov. 8, 2019). In November 2019, the SBA proposed to add a new flexible definition of “follow-on requirement” to the rule. Under that proposed definition, whether a procurement is a “follow-on requirement” that must remain in the 8(a) program depends on the following considerations:

“(1) Whether the scope has changed significantly, requiring meaningful different types of work or different capabilities;

(2) Whether the magnitude or value of the requirement has changed by at least 25 percent; and

(3) Whether the end user of the requirement has changed.”

84 Fed. Reg. at 60871. The proposed definition also provides: “As a general guide, if the procurement satisfies at least one of these conditions, it may be considered a new requirement. Conversely, if the procurement satisfies none of these conditions, it is considered a follow-on procurement. The 25 percent rule, however, cannot be applied rigidly in all cases because by doing so could encourage a result that is inconsistent with the intent of another provision in this part [i.e. the ‘once an 8(a), always an 8(a)’ rule].” Id. (emphasis added).

In proposing this change, the SBA reiterated that it “intends the 25% amount to be a guide, and not necessarily dipositive of whether a requirement qualifies as ‘new.’” 84 Fed. Reg. at 60852. As an example, the SBA noted that it would be inappropriate for a procuring agency to circumvent the intent of the SBA’s rule by combining two 8(a) requirements together to create a “new requirement.”

The SBA has not finalized this proposed rule change. But given the SBA’s interpretation of the rule in Eminent, it seems very likely that the SBA will eventually codify a less rigid version of the 25% rule.

Conclusion

The Eminent decision and the SBA’s proposed rule change are favorable to 8(a) small businesses that want to keep procurements within the 8(a) program. Agencies can longer remove contracts from the 8(a) program by simply changing the value of a follow-on solicitation enough to trip the 25 percent threshold. Instead, agencies must look at whether a change in their requirements actually caused the price to change by 25 percent.

Eminent and the SBA’s rule change, if finalized, will likely create more opportunities for 8(a) small business to successfully challenge decisions by agencies to remove procurements from the 8(a) program. This is significant, particularly given that the SBA recently issued a rule that expanded the pool of eligible 8(a) participants by raising the initial economic disadvantage threshold for the program to a net worth of $750,000. See 13 C.F.R. § 124.104.

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