The Small Business Administration (SBA) just rolled out a series of significant changes to the Historically Underutilized Business Zone (HUBZone) Program. The Final Rule is found here and is now in effect (and has been since December 26, 2019).
The aim of the HUBZone Program is to encourage small business participation in specific geographic areas identified by the Government. In order to take advantage of the Program’s set-aside contracting opportunities, a business must not only be located in the underutilized area, but must also employ residents of the community (specifically, in order to qualify as a HUBZone, 35% of employees must live in a HUBZone designated area).
These requirements – and the employee residency requirement, in particular – previously made establishing and maintaining HUBZone compliance a challenge. In fact, running a HUBZone often felt like trying to hit a moving target.
The Final Rule aims to encourage greater use of the HUBZone Program and remove some of the uncertainty outlined above. Many of the changes are also meant to maximize the benefit to the residents of underutilized communities.
Increased Certainty Regarding Eligibility and Compliance (But Also New Challenges)
As noted above, a major criticism of the former HUBZone Program was the moving target for compliance. By tying compliance expressly to employee residency, HUBZone owners literally faced a daily question regarding the Program’s 35% requirement.
The Final Rule tackles some of the uncertainty regarding residency issues by grandfathering the status of employees that establish significant roots in the community:
An employee who resided in a HUBZone for at least six months at the time of certification or recertification, and continues to reside in a HUBZone for at least six months thereafter, may continue to be considered a HUBZone resident so long as the individual is employed by the firm, even if he/she moves to a non-HUBZone area, or if the area of his/her residence loses HUBZone geographical eligibility.
The Final Rule now places a greater burden on HUBZone firms in terms of establishing residency. The requirement for 180 days of residency prior to certification/re-certification is geared towards eliminating the practice of employees moving in and out of HUBZone areas on a contract-by-contract basis.
While the burden is greater, the Rule also eliminates the uncertainty of losing a long-time employee simply because they decide to move. In fact, according to SBA, this update is designed to reward businesses for creating an environment where successful employees may work to achieve upward mobility.
Additionally, SBA will now update HUBZone maps (which designate specific HUBZone areas in which businesses/employees must reside) every five (5) years. This is a significant uptick from the prior practice of updating the maps annually. Again, stability is the key. SBA wants to encourage businesses and employees alike to have confidence when choosing to reside in a HUBZone.
Improved Set-Aside Contracting Provisions
SBA’s Final Rule also aims to simplify and improve the contracting experience for HUBZone firms. The updates to the Program include the following:
If a firm is a certified HUBZone small business at the time of its initial offer for a contract, it generally will be considered a HUBZone small business throughout the life of that contract. HUBZone status will no longer be determined as of the time of award.
To go along with this change, SBA also implemented a 20% “floor” for the residency requirement during contract performance. A firm falling below 20% would be automatically considered as failing to make good faith efforts to meet the 35% requirement and subject to decertification.
The new 20% floor provides clarity for HUBZone firms and removes the anxiety over an unexpected employee departure immediately jeopardizing compliance.
The SBA is also implementing annual certifications for HUBZone firms (rather than the current contract-by-contract system):
Once certified as a HUBZone small business, a firm will be eligible for all HUBZone contracts for which the firm qualifies as small, for one year from the date of its initial certification (and subsequently, for one year after each annual recertification), unless the firm acquires, is acquired by, or merges with another firm during that period.
Anticipating increased participation in the HUBZone Program, SBA also saw fit to expand the protest process. Now, HUBZone firms and joint ventures receiving set-aside awards are subject to protests from other interested parties (i.e., other HUBZone businesses that missed out on the award).
As with any set of new rules, we are sure to find areas of ambiguity as we dig deeper into the Final Rule. Existing and prospective HUBZone firms alike should expect new challenges and increased opportunities moving forward.