On June 6, the Small Business Administration (SBA) issued a final rule that, effective August 5, 2024, implements a provision of the National Defense Authorization Act for Fiscal Year 2024 (2024 NDAA), which eliminates the ability of service-disabled veteran-owned small businesses (SDVOSBs) to self-certify their small business socioeconomic status for subcontracts and other non-set aside prime contracts.
Once the final rule goes into effect, SDVOSBs will be required to certify their socioeconomic status through the Veteran Small Business Certification (VetCert) program for all contracting and subcontracting opportunities. As detailed in earlier blog posts here and here, the VetCert program is a government-wide certification process for Veteran-Owned Small Businesses (VOSBs) and SDVOSBs to verify that they qualify for these designations. This new rule affects small businesses that previously used the self-certification pathway to obtain subcontracts and other non-set aside prime contracts.
Section 864 of the 2024 NDAA
Agencies and prime contractors are generally required to set aside a certain percentage of contracts and subcontracts to socioeconomically disadvantaged businesses, including SDVOSBs. For a contract or subcontract award to count toward this goal, SDVOSBs must certify their socioeconomic status. However, for subcontracts and other non-set aside prime contracts, contractors routinely circumvented the VetCert certification by self-certifying their status as an SDVOSB. Section 864 of the 2024 NDAA eliminates the ability for SDVOSBs to self-certify.
Specifically, Section 864 of the 2024 NDAA states that "[e]ach prime contract award and subcontract award that is counted for the purpose of meeting the goals for participation by small business concerns owned and controlled by service-disabled veterans in procurement contracts for Federal agencies, as established in section 15(g)(2) of the Small Business Act (15 U.S.C. 644(g)(2)), shall be entered into with small business concerns certified by the Administrator as small business concerns owned and controlled by service disabled veterans under section 36 of such Act (15 U.S.C. 657f)." SBA was also instructed to issue a rule implementing this provision "[n]ot later than 180 days after the date of the enactment of" the 2024 NDAA.
Moving forward, contractors relying on SDVOSB status for any contracting or subcontracting opportunity must be VetCert certified to count toward an agency's or prime contractor's goals for participation by small business concerns owned and controlled by SDVOSBs.
Importantly, SDVOSBs have a grace period to comply with these new requirements during which they may continue to self-certify, so long as they file an application to certify with VetCert by December 22, 2024. The purpose of the grace period is to give SBA time to make final determinations on newly-submitted VetCert applications. Firms that fail to apply for certification through VetCert by December 22, 2024 will not be able to self-certify thereafter.
SBA's Implementation of Section 864
Implementing Section 864 of the 2024 NDAA, the SBA issued a direct final rule to eliminate any language permitting SDVOSB self-certification from its regulations and explicitly require certification to be eligible for SDVOSB contracts. Specifically, the final rule changes language in 13 CFR § 125.3(a), and (c)(1)(xi) and 13 CFR § 128.200(c)(2).
The final rule adds "certified" to 13 CFR § 125.3(a) to now state that the "purpose of the subcontracting assistance program is to provide the maximum practicable subcontracting opportunities for...certified small business concerns owned and controlled by service-disabled veterans..." The final rule also removes "certified" from the phrase "certified small business concerns owned and controlled by socially and economically disadvantaged individuals" as this language references the Small Disadvantaged Business certification, which is a self-certification. Similarly, the final rule revises 13 CFR § 125.3 (c)(1)(xi) to read "certified small business concerns owned and controlled by service-disabled veterans."
Finally, the final rule revises 13 CFR § 128.200 (c)(2) to explicitly require a firm to be "certified...to receive a subcontract from a Federal prime contractor for the purpose of meeting subcontracting goals for SDVOSBs in Federal procurement contracts."
Direct Final Rule
To implement these changes, the SBA issued a direct final rule, meaning the rule is not subject to a period of public comment. Generally, agencies are required to receive public comment before issuing a final rule to allow for public participation in potential policy changes. But a direct final rule is justified, pursuant to 5 USC § 553(b)(B), when prior public participation is impracticable, unnecessary, or contrary to the public interest. The SBA argued in the final rule that public comment on this final rule was unnecessary because it is merely an implementation of a provision in the 2024 NDAA. Given that the SBA does not have the authority to alter the 2024 NDAA, even critical public comment would not result in reinstatement of the SDVOSB self-certification pathway or any substantive change in the policy. Further, since the SBA was given 180 days to implement Section 864 of the 2024 NDAA, a period of public comment would jeopardize the SBA's ability to meet this obligation.
Despite no period of public comment, the SBA will withdraw the rule if it receives significant adverse comment that provides strong justifications for why the rule should not be adopted or for changing the rule.
Conclusion
In sum, contractors that previously relied on SDVOSB self-certification should apply for official certification through the VetCert program by December 22, 2024, to take advantage of the final rule's grace period, and most importantly, to maintain eligibility for future SDVOSB contract or subcontract opportunities. Please contact the author if you have any questions about the SDVOSB program, certification thereunder, or how this final rule may impact your business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.