Economic Dependence/The 70% Rule- as it applies to 8(a) Program Eligibility
Economic Dependence is a significant obstacle to the eligibility of many applicants desiring to gain 8(a) Certification for their firms. In fact, it is currently the issue for which we have to turn the greatest number of potential applicants away, until the issue is resolved.
First, a little history on the Economic Dependence issue, or the 70% rule as we often refer to it. Per the Faison Office Products Office of Hearings and Appeals case in 2007, an applicant can be found to be dependent upon a single non-government entity if that entity constitutes 70% or more of the total revenues.
Businesses frequently start with a single client. The application of this rule, and the timeframe for calculating this percentage, makes this an issue that must be examined closely.
In the past, such figures have been calculated by the SBA Area Size Manager over the previous fiscal year, or over the last 12 months. The Size Manager will review the last three years of revenues, and thus revenue history even out beyond the last 12 months may be a factor in the final determination. However, the 2013 OBTek OHA case found that the SBA could not reach into the past to determine this economic dependence, if the applicant “can prove, by clear and convincing evidence, that its interests are separate from those of the other concern”. The applicant met that burden. In this case the court found against economic dependence due to the fact that the applicant’s revenues from a single entity had diversified to below 70% (only 18%), over a period of one month, which was the month immediately prior to certification.
This case continues to change the understanding of this issue, and its impact on 8(a) eligibility. For some potential applicants, this means that this issue may be overcome in a relatively short time period, depending upon the circumstances. This case implies that the month immediately prior to application must demonstrate that there is not a 70% issue based on the revenues deposited in the company bank account. This should also be true during the month that a firm applies, and be able to be sustained for the duration of the application processing period, which can be six months or more. The SBA reserves the right to request updated information at any time during the application process.
However, the OBTek OHA case had a very specific set of circumstances, which may not match the scenario of each potential applicant. If you think that your firm may face a challenge on the 70% issue, we recommend that you speak to a qualified consultant before determining whether to proceed with an application for 8(a) Certification.
The risks are greater than merely a denial of 8(a) Certification. If a firm is found to be economically dependent upon another entity, and a resulting size determination concludes that they are other than small, that would exclude the firm from being recognized as a small business for the purposes of contract awards. This could be devastating to a small business.