Proposed Changes to SBA’s HUBZone Program

By Taimur Rabbani and Andrew Campbell

SBA HUBZone Program

Since 1997, the Small Business Administration’s Historically Underutilized Business Zone (HUBZone) Program has spurred economic development in non-metropolitan, underdeveloped and impoverished areas by providing federal contracting assistance to small businesses located in these areas. The HUBZone program, unlike other federal contracting assistance programs like SBA’s 8(a) Business Development Program or the Woman-Owned Small Business Program, relies on a firm’s geographic location, rather than socioeconomic or other criteria, to target federal contracting assistance. At its core, the HUBZone program is a location-based federal contracting assistance program that promotes the economic development of small businesses located in underserviced communities.

For a small business to qualify for the HUBZone Program, the firm must be located within a current HUBZone and have 35 percent of its employees permanently residing in either the same or different HUBZone. Before the procurement of HUBZone contracts, the business must certify under the SBA and, under current SBA rules, a certified HUBZone entity must recertify every three years to remain eligible under the program.

SBA’s Proposed Changes

The SBA proposed modifications to HUBZone rules on October 31, 2018. The proposed changes are aimed to increase the program’s efficiency and effectiveness by reducing certain regulatory burdens on both HUBZone small businesses as well as federal agencies. Additional modifications aim at clarifying the rules and modifying the HUBZone certification process.

A recent CRS report analyzed the effectiveness of location-based economic assistance programs, and provided justifications both for continuing and discontinuing the HUBZone program as it existed prior to the SBA’s proposed changes. The CRS Report highlighted increased Congressional interest in the HUBZone program due to GAO reports of fraud in the program. The SBA’s proposed changes are designed to reduce instances of fraud within the program by reducing certain burdens on small businesses, making it easier for small businesses to be resilient to unexpected, sudden changes that would otherwise disqualify a small business under current rules.  

These proposed modifications would do three things:

  1. Freeze the HUBZone map until December 31, 2021

The SBA has proposed freezing the HUBZone map to allow the proposed modifications to take effect without automatically disqualifying current HUBZone small businesses during the transition, and allow for time to update the tracts following the 2020 census. Any HUBZone small business which is currently located within a redesignated area, so long as the redesignation occurred on or after December 12, 2017, will now have the benefit of their HUBZone extended to 2021. Under the new rules, after 2021 any redesignated areas would expire three years from the date they are deemed to no longer meet the statistical requirement for a HUBZone. 

  • Modify the current “35 percent” rule

Under the current “35 percent” rule, a business may only count an employee toward the 35 percent HUBZone residency requirement if that employee lives and intends to continue to live within a HUBZone indefinitely. Under the new rule, employees would no longer need to prove an indefinite intent to live at the HUBZone residence and instead will need to reside there for at least 180 days before the application or recertification of the firm to count toward the 35 percent requirement.

With growing interest of small businesses procuring overseas contracts, the SBA proposes new regulations on how to treat those employees who reside in a HUBZone but are temporarily residing abroad for the performance of a contract. For HUBZone purposes, the SBA would consider employees temporarily residing abroad for the performance of a contract to reside at their domestic residence. If the HUBZone expired while the employee is temporarily residing abroad, the SBA would allow firms to count said employee toward the residency requirement so long as the employee continues to work for the same company.

The SBA recognizes that a contracting firm may have to hire additional employees to meet the demands of a newly procured contract. Under the current rule, the firm must “attempt to maintain” their 35 percent requirement. The current rule defines “attempt to maintain” as “making substantive and documented efforts such as written offers of employment, published advertisements seeking employees, and attendance at job fairs.” [[i]] The SBA proposes to add a minimum of 20 percent HUBZone residency requirement to clarify that once a HUBZone small business reaches below 20 percent during the performance of a contract, the SBA will deem that the firm has not made an “attempt to maintain” the residency requirement and will recommend decertification of the firm.

The SBA also proposes that firms may count employees of their affiliates toward the 35 percent residency requirement of the HUBZone applicant or current HUBZone small business so long as the firm and its affiliate act as one. The SBA determines a business is acting as one if there is “no clear line of fracture” between the firm and its affiliate, and the employees are shared. [[ii]] Elements that the SBA would consider in determining whether or not the business is acting as one include: a similar type of practice, same geographical location of practice, shared equipment or office space, and other aspects of the same. This allows small firms who would otherwise not be qualified for the program to qualify using their affiliates.

  • Modify when a HUBZone must demonstrate its eligibility

In addition to the changes to the ’35 percent’ rule, the SBA proposes to reduce the burden on certified HUBZone small business by requiring them to recertify annually instead of triennially. While it initially appears to place a more considerable burden on HUBZone small businesses, the SBA also includes a modification not to require a firm to prove their eligibility under the HUBZone Program at the time of offer and time of award for any HUBZone contract. Instead, the firm will only have to do this once every year instead of for every contract.

What to look out For

These proposed modifications by the SBA are likely to be implemented in 2020. However, there are a variety of ambiguities within the proposed modifications. For example, it is unclear whether or not freezing the HUBZone map is solely for currently certified HUBZone small businesses or allows for new firms to apply to the program under those maps. The SBA needs to explicate how freezing the HUBZone map will differently impact applicants and certified firms, if at all.

Additionally, the SBA ought to clarify the proposed modification to the ’35 percent’ rule which implements a 180-day residency requirement for HUBZone employees instead of providing proof of residency and an intent to reside at that address indefinitely. The proposed modification may pose many challenges contrary to what the SBA hopes will be accomplished by this. Requiring employees to live in a HUBZone for 180 days before being able to count toward the 35 percent may limit the ability for a firm to hire more employees to perform awarded work. By limiting the applicant pool, the firm may no longer invite an applicant to move to a HUBZone and hinders the ability for the firm to perform the contract awarded work while maintaining their HUBZone status. Ultimately, this proposed modification may put more of a burden on a HUBZone small business instead of reducing it.

O’Riordan Bethel specializes in helping small businesses determine eligibility, apply for, and maintain active status for HUBZone certification and other government set-aside programs.  Please contact one of our attorneys to see if we may be able to assist your business.

[[i]] 13 CFR 126.103.

[[ii]] 383 FR 541812.

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