Frequently Asked Questions About the Small Business Administration 8(a) Business Development Program

calendar iconDecember 7, 2022

The Small Business Administration (SBA) 8(a) program offers small, disadvantaged businesses tremendous opportunities for sole source and limited competition contracts. However, the SBA 8(a) program has rigorous program requirements for participation approval, as well as annual compliance and reporting requirements.

Cherry Bekaert’s Government Contractor Industry accountants and advisors have an in-depth understanding of the SBA 8(a) program and advise 8(a) government contractors throughout the life of the program.

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Below we have identified some of the most frequently asked questions (FAQs) we receive about the SBA 8(a) program:

What key parameters within the required 8(a) Annual Update should participants keep in mind?

SBA 8(a) program participants are required to submit a business plan as a condition of participation and to annually review that plan with the Agency. As a part of this effort, the SBA collects information on the “8(a) Annual Update” or Form 1450 to ensure compliance with eligibility requirements.

Within the 8(a) Annual Update, personal financial information of each disadvantaged owner upon whom the 8(a) certification is based, and each spouse of said owner, must be provided using Form 413. Submitting this information certifies that the owners still meet economic limitations required for continuation in the program. The personal financial requirements can be broken down into a few tests of the owner’s assets, as well as income and withdrawals from the 8(a) company. One eligibility requirement is the personal income test, which requires owners to maintain a three-year average, adjusted gross income on their individual return below $400,000. A second eligibility requirement is that the owners must maintain a net worth below $850,000 after considering allowed exclusions, including the value of a personal residence, ownership interest in the 8(a) company and most qualified retirement plans. A final eligibility requirement is that the owner’s net assets are below $6,500,000 after excluding qualified retirement accounts. Additionally, an excessive withdrawal test limits the amount an owner can withdraw from the 8(a) company based on company sales.

Often, 8(a) owners don’t accurately or completely provide or review this information before submitting to the SBA, which can cause problems. We recommend enlisting a government contracting specialist, knowledgeable of the SBA requirements, to review the 8(a) Annual Update prior to submission. Additionally, understanding the requirements and applying some tax planning strategies can extend the contractor’s compliance with, and therefore participation in, the SBA 8(a) program.

What are the requirements for SBA 8(a) program financial statements submissions?

To remain compliant with the SBA 8(a) program requirements, companies must submit financial statements. Requirements vary by revenue size and provide different levels of assurance over the financial information of the company. They also have different due dates.

Participants with gross annual receipts of more than $10,000,000 must have annual financial statements that have been audited by a CPA firm in accordance with U.S. generally accepted accounting principles (U.S. GAAP) within 120 days of the close of the fiscal year. Exceptions are granted in certain circumstances as allowed by 13 CFR 12.602, such as:

  • A waiver by the SBA District Director
  • Companies in their first year over the threshold require an audit of the balance sheet and same compliance requirement as the prior year over the income statement
  • Companies owned by a Tribe, ANC, NHO or CDC require the parent company’s audited financial statements with certain certifications

Participants with gross annual receipts between $2,000,000 and $10,000,000 must have annual financial statements reviewed by a CPA firm in accordance with U.S. GAAP within 90 days after the close of the fiscal year.

Participants with gross annual receipts of less than $2,000,000 must submit SBA financial statements that have been compiled or prepared in-house. Such statements must be verified by the participant and submitted within 90 days of the company’s fiscal year.

We often find new clients are unaware of this requirement and see situations where a company has been in the program for a couple of years with revenue more than $10M who have not had their financial statements audited. Even if no one from the SBA has asked about audited financials, the requirement is still in effect. A recent SBA Inspector General audit noted the lack of monitoring of program participants. Why should companies care about the findings of this report? Office of Inspector General (OIG) reports often foreshadow what might be expected in the coming year, giving 8(a) companies a preview of what SBA may focus on. Listen to one of our recent GovCon podcasts to learn more about the OIG report findings: OIG Report: SBA’s Business Development Assistance to 8(a) Program Participants.

When should an 8(a) company focus on sole source vs. competitive contracts?

8(a) program participants are considered subcontractors of the SBA and are provided a strategic competitive advantage, which includes access to both sole source and competitive contracts. Sole source contracts are entered without a competitive process, based on the justification that only one known source exists or that a single supplier can fill the requirement. Within the SBA, sole source contracts can be obtained if there is reasonable certainty that no other 8(a) contractor provides the same service, the award has previously been sole source and it is below a threshold of $4.5 million (or $7 million for manufacturing contracts).

Sole source contracts allow 8(a) program participants to focus on completing the award without the added burden of a competitive contract. By focusing on sole source contracts during the early years of participation in the 8(a) program, companies can strategically strengthen their qualifications and experience for use in the competitive setting.

The SBA monitors sole source contracts because while they do have a strategic benefit, the purpose of the SBA’s 8(a) program is to grow small businesses into viable large companies ready to compete in a full and open environment. The SBA has various mechanisms to evaluate and award sole source contracts, making it more challenging for 8(a) companies to be awarded such contracts during the last five years of the program, such as review of the revenue outside of 8(a) contracts.

What is needed to support a sole source proposed price?

While sole source contract proposals are not competitive in nature, such contracts must be awarded in compliance with Federal Acquisition Regulation (FAR) Subpart 15 to satisfy the Federal government’s duty to pay a fair and reasonable, yet competitive, price.

A fair and reasonable price must be justified through the buildup of pricing considerations regardless of whether the contract is fixed or variable in nature, based on time and materials. Details on price buildup may not initially be requested, but contractors are required to justify such prices and can be subject to a cost proposal audit (including Firm Fixed Price awards). The price should be based on proposed costs such as salaries, estimated hours and materials costs as best estimated by historical information, pricing quotes, escalation indices, estimated indirect rates and reasonable profit margin expectations. Such calculations and source documents should be maintained by the company. For 8(a) companies seeking sole source awards, it is recommended that they are advised on the proper level of documentation and basis for the cost build-up to the price proposed.

While sole source contracts are not considered competitive in nature, qualifications to do the work must be provided. These qualifications are more simplified than the significant amount of technical data required for a competitive proposal.

What are the next steps after identifying an 8(a) competitive opportunity?

Once a company identifies an 8(a) competitive opportunity, you should begin planning before the request for proposal (RFP) is published by the contacting agency. The typical planning procedures might include participating in agency industry days, gaining maximum knowledge in advance of agency needs, reviewing RFP drafts, identifying and organizing teaming partners and key personnel for the proposal team, and ensuring readiness to proceed with drafting the proposal as soon as the formal RFP is published. Once the RFP is published, the proposal team should carefully read and review the RFP in its entirety, specifically focusing on Section B (Supplies and Services and Price/Costs), Section C (Statement of Work), Section L (Instructions, Conditions, and Notices to Offerors) and Section M (Evaluation Factor for Award). While it’s important to review all Sections of the RFP, these will be the most impactful to submitting a successful proposal. As the proposal team reviews the RFP, it is critical to understand all contract requirements, including any FAR clauses specifically referenced within the RFP. Lastly, it is important to answer all the RFP instructions and address all the requirements in the instructions. If you are not successful in winning the contract, you should request a proposal debrief with the contracting agency to understand how your RFP was evaluated and why your proposal was not chosen.

What are important focus areas during each phase of the SBA 8(a) program?

The SBA 8(a) program is a nine-year program that allows government contracting companies to receive business training, counseling, marketing and technical assistance with hopes that the company will graduate and thrive in a competitive business environment. The program is broken into two different stages: the Development Stage (Years 1 – 4) and Transition Stage (years 5 -9). During each stage, there are specific focus areas that are critical for success in the program. During the Development Stage, companies focus on developing basic business processes and establishing a strong organizational structure, including an acceptable accounting system. The company will want to establish a process to monitor the economic requirements and size standards dictated by the 8(a) program. Also during this stage, the company should focus on refining business practices to be competitive and better positioned for bidding, including critical skills for contract costing, proposal writing, adequate accounting systems and reporting, and marketing and business development teams.

The second half of the SBA 8(a) program is the Transition Stage where the company should begin by focusing on areas that will be critical to their success as they graduate from the 8(a) program. During this stage, the company should advance the systems and processes to track and monitor business activities (accounting, human resources, contracts, program management) to remain compliant with 8(a) requirements and prepare for continued growth. Also during the Transition Stage, the company should grow the leadership team and strengthen its organizational structure to succeed after 8(a) graduation. This would include expanding compensation and incentive employment plans, strengthening benefits to attract and retain key talent, and leveraging contract and agency past performance and qualifications to compete for new work. Lastly, the company should think towards the future beyond the SBA 8(a) program and focus on how to remain competitive, including organizing teaming arrangements on large procurements, capitalize on opportunities to subcontract on recompetes of existing 8(a) contracts that may expire upon graduation, or consider mentor-protégé opportunities. Ultimately, the goal of the Transition Stage is to set the company up for success after graduating the SBA 8(a) program.

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