The VA’s Verification Assistance Brief for SDVOSB and VOSB joint ventures flat-out misstates the law regarding the manner in which joint venture profits must be split.
SDVOSBs and VOSBs often rely on Verification Assistance Briefs to guide them through the CVE verification process, and CVE analysts sometimes use Verification Assistance Briefs, too. Which begs the question: how many CVE-verified joint ventures are legally invalid?
The VAAR provides that a joint venture can be eligible for a VA SDVOSB or VOSB set-aside contract so long as the joint venture (among other things) adopts a joint venture agreement meeting the requirements of the SBA’s SDVOSB regulations. So far, so good–joint ventures are complex enough; the last thing we need is a separate, VA-specific list of SDVOSB joint venture requirements.
Effective August 24, 2016, the SBA overhauled its requirements for SDVOSB joint ventures. The SBA moved the regulations from 13 C.F.R. 125.15 to 13 C.F.R. 125.18, and made many substantive changes and additions.
The SBA made a further correction, effective December 27, 2016, which governs how profits are split. The current regulation on profits is codified at 13 C.F.R. 125.18(b)(2)(iv), which states that every SDVOSB joint venture agreement must contain a provision “tating that the SDVO SBC(s) must receive profits from the joint venture commensurate with the work performed by the SDVO SBC.” (Here’s a link to the Federal Register, which officially adopted this formula as law).
That brings us to the VA’s Verification Assistance Brief on joint ventures. Now, to be fair, I’m a fan of the Verification Assistance Briefs as a general matter. I like that the CVE has made the effort to put verification information in a user-friendly and accessible format. But the Verification Assistance Briefs are only helpful if they contain accurate and up-to-date information. As of the date of this post, the SDVOSB/VOSB joint venture regulation does not.
According to the Verification Assistance Brief:
4. The joint venture agreement must contain a provision “tating that the SDVO SBC must receive profits from the joint venture…commensurate with their ownership interests in the joint venture…” 13 CFR § 125.18(b)(2)(iv).
Later on the Brief reiterates:
The SDVOSB or VOSB must receive a distribution of profits commensurate with its ownership interests in the joint venture.
Wrong, wrong, wrong! This hasn’t been accurate since December 2016.
Far from being helpful, then, this Verification Assistance Brief is dangerous. It invites SDVOSBs and VOSBs to submit legally deficient joint venture agreements. It invites CVE analysts to approve legally deficient joint venture agreements. And, to the extent that the CVE has approved deficient SDVOSB or VOSB joint ventures (and I’d bet a fair bit that it has), it exposes those joint ventures to the possibility of successful SDVOSB status protests.
Has the CVE simply been slow to update its information to reflect the December 2016 change? Well, the Verification Assistance Brief (which, by the way, is the “Featured” Brief on the VA OSDBU website) says that it was “Reviewed and Revised May 2017.” Yikes. It needs a re-review, and fast.
One more thing: if the CVE has approved any JVs containing the wrong profit-splitting provision, the CVE ought to unilaterally contact those companies and ask them to revise their JV agreements now. It would be a horrible thing if a well-meaning JV were to lose an SDVOSB eligibility protest–and a contract–simply because it followed an incorrect Verification Assistance Brief.
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The government missed its Fiscal Year 2016 HUBZone goal by a country mile, and didn’t hit the 5% WOSB goal, either. But according to the SBA, the government deserves an “A” for its FY 2016 small business achievements.
That’s some rather generous scoring, wouldn’t you say?
On May 18 ,the SBA issued a press release announcing that the government had exceeded its 23% small business goal for the fourth straight year. The SBA’s report card gave the government an overall “A” grade for its achievements. Among individual agencies, 18 received grades of “A+” or “A,” four received a “B,” and one earned a “C.” No agency received a “D” or “F.”
Exceeding the 23% goal is a good thing, and something we shouldn’t take for granted. It wasn’t that long ago that I was blogging about a string of failures in that regard. But are the FY 2016 results really “A” level work? Let’s take a look at some of the not-so-great specifics:
Overall small business achievement was down significantly: from 25.75% in FY 2015 to 24.34% in FY 2016.
Small disadvantaged achievement dropped too: from 10.06% in FY 2015 to 9.52% in FY 2016.
After hitting the 5% WOSB goal in FY 2015, the government backslid. The FY 2016 result: 4.79%.
HUBZone awards took another step backward: from 1.81% in FY 2015 to 1.67% in 2015. That’s right: the government barely exceeded half of the 3% HUBZone goal.
Of the five prime contract categories tracked (small business, SDB, SDVOSB, HUBZone, and WOSB), only SDVOSBs saw an increase, and it was tiny: 3.98% in FY 2016 versus 3.68% the prior year.
Things weren’t much better on the subcontracting side. There, although overall subcontracting achievement was up slightly over the prior year, the government missed its overall 33.7% goal, and also missed the HUBZone and SDVOSB goals by wide margins. The government exceeded its WOSB and SDB subcontracting goals, but achievement in both categories dropped versus FY 2015.
I could go on. And you know what, I think I will.
The Department of Energy, for instance, earned an “A” for its small business achievement, despite the fact that it mustered a mere 0.38% for HUBZones, versus a 3% goal. Oh, and the DOE also “achieved” 0.76% for SDVOSBs, versus a 3% goal. The DoD got an “A” despite missing its HUBZone and WOSB goals by considerable margins. The DOJ scored an “A” with a measly 1.05% to HUBZones. The State Department earned a coveted “A+” despite missing its HUBZone goal. And so on.
The SBA published its FY 2016 Scorecard Grade Calculation Methodology, and I’m sure someone smart at math can give me the ins and outs of how the numbers work. But you don’t need a degree in statistics to think that a system is broken if it allows agencies (and the government as a whole) to earn high small business goaling scores for middling performance.
In a world with so many women-owned small businesses, it is downright embarrassing for the government to miss its meager 5% WOSB goal. And with new tools available to make it much easier to contract with HUBZone firms (such as the ability to joint venture with non-HUBZones), it’s absurd that the government is moving backwards on its HUBZone achievement.
Here’s what I think: neither the government nor any agency should get an “A” if it doesn’t meet every single one of its prime contracting goals, and an “A+” should be awarded only if every prime contracting and subcontracting goal is met. Additionally, the scoring methodology should take into account year-to-year performance; top scores should not be awarded if an agency is moving backwards.
This stuff matters. If agencies can earn top scores despite missing major components of their goaling, why should they try to get any better? Why should the DOE care if it improves on its 0.76% HUBZone achievement, if it can tout an “A”? For that matter, what incentive is there for the government as a whole to hit its socioeconomic goals if it is awarded “A” grades for meeting only some of them?
There’s been a lot of talk in the media about the way the SBA calculates goaling achievement. But the grades the SBA assigns are every bit as important as the numbers the SBA reports. And if you ask me, the FY 2016 grades are way off the mark.
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It’s been a whirlwind of a week here in Kansas. I was fortunate enough to speak yesterday at the 16th Annual DOE Small Business Forum & Expo just up the road in Kansas City. My presentation focused on recent legal updates in federal contracting. It was a wonderful event put on by the Department of Energy and I was glad to be a part of it.
Before we sail off into the weekend, it’s time for the SmallGovCon Week In Review. This edition looks at a plan to make the Transactional Data Reporting rule voluntary, it appears LPTA is still as hated as ever, the federal government notched its 4th consecutive year of hitting the 23% small business contracting goal, and much more.
Plans to make the mandatory Transnational Data Reporting rule into a voluntary requirement should be in place by summer. [ExecutiveGov]
An interagency working group is about to turn the government’s concept of cloud computing on its head. [Federal News Radio]
It turns out that lowest price technically acceptable is still a hated and despised way to run a procurement. [Washington Technology]
A former defense contractor from Gig Harbor was sentenced to prison for tax fraud and ordered to pay over $40k in restitution. [Sky Valley Chronicle]
The Department of Veterans Affairs is proposing to amend and update portions of its VA Acquisition Regulation. [Federal Register]
Nextgov takes a look at how much agencies are actually spending on new contracts. [Nextgov]
The SBA announced that the federal government reached its small business federal contracting goal for the fourth consecutive year. That’s great news–but not all is rosy, because the government missed the mark on its HUBZone and WOSB goals. [PR Newswire]
A reform bill aimed at DoD’s ability to buy commercial products, contract audits and services acquisition will eventually be folded into the 2018 defense authorization bill. [Federal News Radio]
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One common way that contractors attempt to avoid affiliation is by limiting a particular individual to a minority ownership interest (often 49%).
But as a recent SBA Office of Hearings and Appeals case demonstrates, when a company’s owners are spouses (or other close family members), the SBA may disregard the legal ownership split, and treat the family members as one person for purposes of the affiliation rules.
OHA’s decision in Size Appeal of Gregory Landscape Services, Inc., SBA No. SIZ-5817 (2017) involved an Army solicitation seeking grounds maintenance at Fort Rucker, Alabama. The solicitation was issued as a WOSB set-aside under NAICS code 561730 (Landscaping Services), with a corresponding $7.5 million size standard.
After opening bids, the Air Force announced that Gregory Landscaping Services, Inc. was the apparent awardee. An unsuccessful competitor then filed a size protest. Although the size protest was untimely, the SBA saw potential merit to the protester’s allegations. The SBA adopted the size protest and initiated a size determination.
The SBA determined that Bethany Kellis owned 51% of Gregory. Her husband, Rhett Kellis, owned the remaining 49%. Rhett’s parents and siblings controlled Kellis Joint Venture, LLC (which OHA referred to as “KJV”). Additionally, Rhett’s parents and brother controlled NaturChem, Inc. Rhett was a minority owner of KJV, and was employed by NaturChem as its Vice President of Sales.
The SBA Area Office determined that “[a]s spouses, Bethany Kelllis and Rhett Kellis are treated as one party with a shared identity of interest as there is no clear line of fracture between them.” Therefore, “Bethany Kellis and Rhett Kellis each have the power to control [Gregory].”
Next, the SBA Area Office determined that Rhett’s parents and brother controlled KJV and NaturChem, “but they too share an identity of interest with Rhett Kellis.” Therefore, Gregory was presumed affiliated with KJV and NaturChem. The only remaining question was whether Gregory could rebut the presumption of affiliation by showing a clear line of fracture between Rhett, on the one hand, and his parents and siblings, on the other.
The SBA Area Office acknowledged that Rhett “holds no ownership interest in NaturChem; that [Gregory] and NaturChem do not share employees, facilities, or equipment; that there are no ‘loans, promissory notes, or other financial assistance” between [Gregory] and NaturChem; that the two companies perform ‘different services’ and are not in the same line of business; and that the business dealings between the companies amount to less than 1% of each company’s annual revenues.” However, Rhett was an owner of KJV and an officer of NaturChem, and NaturChem had done business with Gregory. The SBA Area Office found that Gregory had not demonstrated a clear line of fracture between Rhett and his relatives. The SBA Area Office issued a size determination finding Gregory to be affiliated with KJV and NaturChem.
Gregory filed a size appeal with OHA. Gregory argued that the SBA Area Office had effectively treated the presumption of affiliation as irrebuttable, and had erred by finding Gregory affiliated with KJV and NaturChem.
OHA wrote that it has “extensive case precedent” interpreting the SBA’s affiliation regulations “as creating a rebuttable presumption that close family members have identical interests and must be treated as one person.” A challenged firm can rebut the presumption by showing a clear line of fracture. Factors that may be pertinent in showing a clear line of fracture “include whether the firms share officers, employees, facilities, or equipment; whether the firms have different customers and lines of business; whether there is financial assistance, loans, or significant subcontracting between the firms; and whether the family members participate in multiple businesses together.”
In this case, OHA said, Gregory “identified several considerations that would tend to rebut the presumption” of affiliation.” Nevertheless, “the major obstacle for [Gregory] in establishing a clear line of fracture is Rhett Kellis’s employment at NaturChem.” OHA explained that “when a family member works at a company owned and controlled by other close family members, this may be grounds for finding no clear fracture between them.” Additionally, “Rhett Kellis . . . shares a common investment with his parents and brother in KJV.” On these facts, “the Area Office could reasonably conclude that [Gregory] did not establish a clear line of fracture, and did not rebut the presumption of identity of interest.” OHA affirmed the Area Office’s size determination.
OHA’s decision in Gregory Landscaping Services demonstrates how the familial relationships affiliation rule can be applied at two levels–both internally and externally. Although Rhett Kellis was only a 49% owner of Gregory, the SBA aggregated his interest with that of Bethany Kellis, his wife, and found that Rhett Kellis controlled Gregory. The SBA then looked externally, and presumed Gregory to be affiliated with companies controlled by Rhett’s parents and brother.
Gregory Landscaping Services shows that when a company’s owners are close relatives, legal ownership splits–such as the 51/49 split here–may be disregarded in the SBA’s affiliation analysis. And the decision is another reminder that small businesses must be very careful about relationships with companies controlled by close family members. Even where, as here, the companies themselves do little business together, affiliation can exist.
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Having started my journey in the federal contracting community close to 30 years ago, I’ve seen quite a few changes in policy and process that have both improved and degraded the ability of small business concerns to participate as contractors and subcontractors. I’m not referring solely to changes where the language targeted small business, I’m also including those intending to change how business is done based on a specific commodity, contract cost type, procurement method, agency mission or government-wide initiative.
In this, my first contribution to GovCon Voices, I’m taking a look back at recent proposed changes that resulted in lots of conversations with my friend Steve Koprince, a slew of articles and blogs and way too many anxious moments awaiting the outcomes. This is the second of a three part series I’m calling ‘The Good, the Bad and the Just Plain Ugly Changes That Almost Were!’
The Bad (Part 2)
In the final days of calendar year 2014, the Small Business Administration issued a proposed rule that would create much discussion about substantive changes to small business subcontracting. As mentioned in Steve Koprince’s January 2015 post to SmallGovCon, these proposed changes were focused on how small business subcontracting limits are calculated,and how those limits are enforced. While many of the changes would be welcomed, one provision spelled out rules that would be detrimental to small business concerns should these changes become final. The previously mentioned SmallGovCon article explains this proposed change that’s entitled:
Identification of Subcontractors
“The proposed rule states that if a prospective prime contractor intends to use similarly situated entities to comply with the applicable limitation on subcontracting, the prime contractor “must identify the similarly situated entities in its offer . . .” Further, the “percentage of the prime contract award that will be spent on each similarly situated entity must be identified in a written agreement” between the prime contractor and similarly situated subcontractor. The written agreement “must identify the solicitation number at issue, be signed by each entity, and be attached to the prime contractor’s offer.””
This Could Leave a Mark!
If we understand that a ‘Similarly Situated Entity’ is a small business concern participating in the same SBA program as an eligible small business offeror and awardee (the prime contractor), this proposed change was perched to place significant burdens on small business. Consider this. For companies pursuing acquisition programs such as GSA ALLIANT, NASA SEWP, CMS SPARC and any number of agency-specific and government wide contract vehicles of similar ilk, there are not defined requirements where firm partnerships and work-share can be established.
At this stage relationships are based on what’s anticipated to occur and are subject to change at the task order level if the right mix of experience, capabilities and capacities are not in-hand. For these pursuits, teaming and subcontracting is dynamic, to say the least. As opposed to requirements programs tied to specific business or mission objectives, such as the MSC Shipboard Managment Infrastructure System (SMIS) or the BLS Consumer Price Index (CPI) Maintenance, where offerors have an opportunity to form partnerships based on defined needs. While it would have been interesting to see how this would have been implemented given the pervasiveness of multiple-award contract vehicles, I’m happy to speculate about what would have been.
Rest In Peace (or Not!)
Interestingly, the strain imposed on small federal contractors would far outweigh the burdens placed on ‘other than small business’ prime contractors, whose activities account for many more dollars and much greater impact on small business and federal contracting overall. It would have also increased the cost of doing business, specifically the cost of acquiring business (we call it C.A.B. Fare) for small business. When you factor in proposed changes referenced as ‘Notification of Changes’ and ‘Penalties’ (Penalties made it into the final rule – see 13 C.F.R. 125.6(h)), it seems Uncle Sam intended to overcompensate for its shortcomings in enforcing the small business subcontracting performance of habitual offenders (‘other than small business concerns’), at the expense of the small business community.
Your comments and questions are always welcome! Stay tuned for part 3 featuring ‘The Good’ change that almost was.
Guy Timberlake, The Chief Visionary http://www.theasbc.org | @theasbcguy | @govconguy |@govconchannel
“The person who says it cannot be done should not interrupt the person doing it.”
Guy Timberlake, Chief Visionary Officer and Co-Founder,
The American Small Business Coalition, LLC
(410) 381-7378 x200 | firstname.lastname@example.org
‘Go-To’ Guy Timberlake is an accomplished veteran of federal contracting with nearly 30 years of experience, knowledge and relationships acquired in support of civilian, defense and intelligence agency programs since Operation Desert Storm. He’s called ‘Edutainer’ for his ability to make mundane discussions about business essential topics (like finding and winning federal contracts and subcontracts!) interesting, and presenting them so they are practical and sticky. Most important is that Guy is a devoted husband, a proud father and loves pizza night with his family and friends. ‘Go-To-Guy’ is the nickname given to him by his defense customers in the 1990’s.
GovCon Voices is a regular feature dedicated to providing SmallGovCon readers with candid news, insight and commentary from government contracting thought leaders. The opinions expressed in GovCon Voices are those of the individual authors, and do not necessarily reflect the opinions of Koprince Law LLC or its attorneys.
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I have food memories of the 1990s–my Duke Blue Devils won back-to-back titles, it was the heyday of Seinfeld, and Furbies were all the rage. (Ok, Furbies aren’t exactly a fond memory for much of anyone). But somehow, despite soaking up all kinds of ’90s culture, I missed out on one of the biggest live acts of the decade: Garth Brooks. But better late than never. Tomorrow night, I’ll catch the 2017 version of Brooks’ country crooning–part of seven shows he is playing over the course of just two weekends in Kansas City (yep, KC loves some Garth).
Before I go enjoy a country music time warp–followed by a Mother’s Day celebration–it’s time for some government contracting news. In this week’s SmallGovCon Week in Review, a former USACE program manager is accused of bid rigging, the GSA is working on translating President Trump’s priorities into acquisition policy, and more.
A former program manager for the Army Corps of Engineers in Nebraska is accused of rigging bids on nine contracts in exchange for about $33,000 worth of bribes. [The Oregonian]
The GSA starts translating President Trumps priorities into acquisition policy. [Federal News Radio]
A longtime DoD contractor in Afghanistan reflects on some lessons learned. [GovExec]
A contractor who worked on the Navy’s supply and transport arm is facing a five-count indictment for his alleged role in a bribery scheme that allegedly netted him $3 million. [Federal Times]
The SBA will start adoption of the Digital Accountability and Transparency Act but the CFO and Associate Administrator don’t have much faith in the new law. [Federal News Radio]
Agencies “embrace of FedRAMP is still uneven,” a new report concludes. [FCW]
More bad behavior: a former Army contractor pleads guilty to a bribery scheme involving contracts at Aberdeen Proving Ground. [Department of Justice]
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The Supreme Court’s landmark ruling in Kingdomware Technologies, Inc. v. United States does not require SDVOSBs to recertify their eligibility in connection with individual GSA Schedule task orders.
In a recent decision, the SBA Office of Hearings and Appeals held that Kingdomware doesn’t affect the SBA’s SDVOSB eligibility regulation for multiple-award contracts, which specifies that if a company qualifies as an SDVOSB at the time of the initial offer for a multiple-award contract, it ordinarily qualifies as an SDVOSB for all orders issued under the contract.
OHA’s decision in Redhorse Corporation, SBA No. VET-263 (2017) involved a GSA RFQ seeking transition ordering assistance in support of the Network Services Program. The RFQ contemplated the award of a task order under the GSA Professional Services Schedule. The order was set aside for SDVOSBs under NAICS code 541611 (Administrative Management and General Consulting Services). The GSA contracting officer did not request that offerors recertify their SDVOSB eligibility in connection with the order.
After evaluating quotations, the GSA announced that Redhorse Corporation was the apparent awardee. An unsuccessful competitor subsequently filed a protest challenging Redhorse’s SDVOSB status. The SBA Director of Government Contracting sustained the protest and found Redhorse to be ineligible for the task order.
Redhorse filed an SDVOSB appeal with OHA. Redhorse argued that it was an eligible SDVOSB under the Professional Services Schedule and was not required to recertify its status for the order. Therefore, Redhorse contended, the SDVOSB protest should have been dismissed. OHA agreed with Redhorse and granted the appeal.
The competitor then filed a request for reconsideration. The competitor argued, in part, that OHA’s decision was at odds with Kingdomware. According to the competitor, Kingdomware establishes that “any new order off of a multiple award contract . . . is an independent contract in and of itself,” and therefore requires a new SDVOSB certification.
OHA wrote that the competitor hadn’t discussed Kingdomware in its initial appeal, and couldn’t raise it belatedly in a request for reconsideration. But for good measure, OHA addressed the issue anyway.
OHA wote that “because Kingdomware decided the narrow question of whether task orders must be set aside for veteran-owned small businesses pursuant to 38 U.S.C. 8127(d), Kingdomware does not affect SBA’s existing regulations pertaining to protests against task orders and recertification under long-term, multiple-award contracts.” OHA continued:
Kingdomware, then, is not inconsistent with the regulation at issue here, 13 C.F.R. 125.18(e)(1), which states that “if an [SDVOSB] is qualified at the time of initial offer for a Multiple Award Contract, then it will be considered an [SDVOSB] for each order issued against the contract, unless a contracting officer requests a new [SDVOSB] certification in connection with a specific order. The CO did not request recertification for the instant task order, so Redhorse remains an [SDVOSB] for this task order based on its earlier certification at the GSA Schedule contract level.
OHA dismissed the request for reconsideration and affirmed the original decision.
As we approach the one-year anniversary of Kingdomware next month, it remains to be seen how broadly the decision will affect government contracting. So far, OHA has held that Kingdomware doesn’t affect size protest timeliness and–as it ruled in Redhorse Corporation–doesn’t require SDVOSBs to recertify for individual GSA Schedule task orders. But the SBA has also taken the position that Kingdomware should apply to the FAR’s small business “rule of two,” not just the SDVOSB/VOSB “rule of two” under 38 U.S.C. And in the meantime, the VA seems to have implicitly determined that Kingdomware doesn’t apply to acquisitions subject to SBA nonmanufacturer rule waivers, but hasn’t provided any legal rationale (at least not of which I am aware) for that position.
Needless to say, there will be plenty more protests, appeals and other decisions about the broader impact of Kingdomware. Stay tuned.
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We previously have written about the trending preference toward fixed-price contracts, and away from cost reimbursement contracts, in defense procurements. The Defense Department’s supplement to the FAR (known as DFARS), in fact, already includes restrictions on using cost-reimbursement or time and materials contracts.
Now the President has come out in favor of fixed-price defense contracting. In a Time Magazine article published today, President Trump signaled strong support for the fixed-price contracting preference, going so far as to “talk of his plans to renegotiate any future military contracts to make sure they have fixed prices.”
The article, called “Donald Trump After Hours,” is wide-ranging and does not delve into specifics as to how President Trump might reshape defense contracting. But in language a bit too salty for this blog, he makes clear that time and materials contracts aren’t his favorite method of contracting.
It’s unclear what the practical effect of President Trump’s preference for fixed-price contracts might be. Will the President push for more specific laws or regulations mandating his contract preferences? Will Secretary Mattis or other Trump appointees issue additional internal guidance? We don’t know, but will continue to follow this issue.
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The Service Contract Act requires contractors to pay certain provide no less than certain prevailing wages and fringe benefits (including vacation) to its service employees. The amount of vacation ordinarily is based on an employee’s years of service—and service with a predecessor contractor counts. The FAR’s Nondisplacement of Qualified Workers provision, in turn, requires follow-on contractors to offer a “right of first refusal” to many of those same incumbent employees.
A follow-on contractor is to be given a list of incumbent service personnel, but that information ordinarily isn’t available at the proposal stage. So what happens when a follow-on contractor unknowingly underbids because it isn’t aware how much vacation is owed to incumbent service personnel? The answer, at least in a fixed-price contract, is “too bad for the contractor.”
So it was in SecTek, Inc., CBCA 5036 (May 3, 2017)—there, the Civilian Board of Contract appeals held that a contractor must pay employees retained from the incumbent nearly $170,000 in wage and benefit costs based on its underestimate of those costs in its proposal.
In 2015, the National Archives and Records Administration issued a request for quotations to provide security services at two NARA buildings. This solicitation fell under the Service Contract Act and also included the FAR’s the Nondisplacement of Qualified Workers clause (FAR 52.222-17). In other words, the successful contractor had to provide a right of first refusal to qualified service employees, and honor years of service incurred by those employees with the predecessor contractor.
The solicitation included a wage determination that informed offerors that incumbent employees’ benefits were defined in part under a collective bargaining agreement. Under this agreement, the predecessor contractor had agreed to provide its employees with the following levels of vacation time:
2 weeks, for employees with 1-4 years of service;
3 weeks, for employees with 5-14 years of service; and
5 weeks, for employees with 15+ years of service.
Before submitting its final quote, SecTek asked whether the government would provide a list of the incumbent contractor’s security officers, including their seniority, before proposals were submitted. The government did not, citing the FAR’s provision that this list must instead be provided after award.
Without this list, SecTek was forced to guess the amount of vacation that would be due incumbent personnel. SecTek estimated that the average length of service for incumbent personnel was only three years and provided 80 hours of vacation time for all guards.
SecTek’s fixed price offer was $40,918,522.84. It was awarded the contract and, ten days later, was given a seniority list of the predecessor contractor’s service employees.
After award, SecTek learned that some of the incumbents service employees were owed more than 80 hours of vacation, given their seniority. So SecTek sought an equitable adjustment of its contract for this vacation time, totaling nearly $170,000. NARA denied this request, saying that it fully complied with the FAR’s requirements in disclosing the seniority list.
SecTek then filed a formal certified claim seeking a contract adjustment. After NARA refused to timely respond, SecTek appealed the deemed denial to the Civilian Board of Contract Appeals.
The issue, on appeal, was relatively straightforward: did NARA’s failure to provide SecTek with a seniority list of the incumbent contractor’s service employees before contract award entitle SecTek to a price adjustment reflecting those employees’ true vacation time? According to SecTek, the government’s refusal to provide this information precluded it from knowing the actual level of vacation pay that it would be required to pay the incumbent contractor’s employees; had it been provided this information, it could have priced its offer accordingly.
The Board denied SecTek’s appeal, finding that NARA did not violate any FAR provision by refusing to provide the incumbent contractors’ seniority levels before the award. Just the opposite, in fact:
Although information about the seniority of the predecessor contractor’s employees may have been helpful in estimating the level of benefits extended to those employees, this does not mean that the information must be, or even could have been, provided in advance of the contract award. . . . The Government . . . is not entitled to request the list [from the incumbent contractor] until thirty days prior to the expiration of the contract. In addition, the Government is not permitted to release the seniority list to the successor contractor until after contract award. The Government furnished the seniority list to SecTek on August 28, 2014—ten days after contract award and in full compliance with the FAR requirement.
Because NARA could not have properly provided SecTek with the incumbent contractor employee seniority list before the award, it did not bear any responsibility for SecTek’s low estimate of incumbent employee vacation time. The Board noted that the contract had been awarded on a fixed-price basis, and that “the general rule in fixed-price contracting is that, in the absence of a contract provision reallocating the risk, the contractor assumes the risk of increased costs not attributable to the government.” Here, SecTek “bore the risk that its cost projections might prove to be insufficient,” and SecTek alone was on the hook for the additional vacation time costs.
Through no fault of its own, SecTek underestimated the amount of vacation time due incumbent employees (which it was required to make make good faith efforts to hire) and, as a result, must absorb nearly $170,000 in additional benefit costs. SecTek, Inc. shows that when the Service Contract Act and Nondisplacement of Qualified Workers provisions intersect on a fixed-price contract, the result can be harsh.
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I am back in Lawrence after a great trip to Omaha, where I spoke at the SAME Omaha Post Industry Day. My talk focused on recent legal changes in federal contracting, including pieces of the 2017 National Defense Authorization Act and the SBA’s implementation of the All Small Mentor-Protege Program.
Thank you very much to Anita Larson and the rest of the Planning Committee for organizing this great event and inviting me to speak. Thank you also to all of the clients, contractors, and government representatives who stopped by my “booth” in the Exhibit Hall to ask questions and chat about the nuances of government contracts law. As much as I enjoy speaking to large groups, it’s these one-on-one discussions that make for a truly outstanding conference.
Next up for me: the Department of Energy Small Business Conference, which will be right in my backyard (Kansas City) next week. Hope to see you there!
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An Alaska Native Corporation subsidiary was not affiliated with its parent company and two sister companies under the ostensible subcontractor affiliation rule, even though the company in question would rely on the parent and sister companies for managerial personnel, financial assistance and bonding.
A recent decision of the SBA Office of Hearings and Appeals highlights the breadth of the exemption from affiliation enjoyed by ANC companies.
OHA’s decision in Size Appeal of Olgoonik Diversified Services, LLC, SBA No. SIZ-5825 (2017) involved a Department of State solicitation seeking a contractor to provide design-build construction services in Baghdad. The solicitation was issued as a small business set-aside under NAICS code 236220 (Commercial and Institutional Building Construction), with a corresponding $36.5 million size standard.
After evaluating competitive proposals, the agency announced that Olgoonik Diversified Services, LLC was the apparent successful offeror. An unsuccessful competitor subsequently filed a size protest. The protester alleged, in part, that Olgoonik was affiliated with other entities under the ostensible subcontractor rule.
The SBA Area Office determined that Olgoonik was established in 2011 as a wholly-owned subsidiary of Olgoonik Development, LLC (“OD”), an ANC holding company. OD, in turn, was a wholly-owned subsidiary of an ANC. OD had 11 other subsidiaries besides Olgoonik, referred to as Olgoonik’s “sister companies.” These sister companies included O.E.S., Inc. (“OES”) and Olgoonik Specialty Contractors, LLC (“OSC”).
The SBA Area Office found that Olgoonik had relied on OES and OSC for the relevant past performance identified in its proposal. OD would provide bonding and other financial assistance to allow Olgoonik to perform the contract. All six key employees listed in the proposal (including the Program General Manager responsible for overall project management) were OSC employees.
Although Olgoonik had not named OES or OSC as subcontractors in its proposal, the SBA Area Office found that Olgoonik was unusually reliant on its sister companies for contract performance. The SBA Area Office issued a decision finding Olgoonik affiliated with OES and OSC under the ostensible subcontractor rule (the SBA also found an affiliation for another reason, which is outside the scope of this post).
Olgoonik filed a size appeal with OHA. Olgoonik argued that the ostensible subcontractor rule did not apply because OSC and OES were not proposed as subcontractors for the project. Additionally, Olgoonik argued that a regulatory exemption from affiliation precluded a finding of affiliation. That exemption, which is found in 13 C.F.R. 121.103(b)(2)(ii), provides, in part, that businesses owned and controlled by Indian Tribes, ANCs, Native Hawaiian Organizations, and Community Development Corporations are not considered affiliated with other businesses owned by these entities “because of their common ownership or common management.” However, “[a]ffiliation may be found for other reasons.”
OHA first addressed the low-hanging fruit: the fact that OD, OES and OSC were not proposed to be subcontractors on the State Department project. OHA wrote that it has “consistently held that in order for the ostensible subcontractor rule to apply, the alleged affiliate must actually be a subcontractor of the challenged concern.” In this case, “there is no record of subcontracting in [Olgoonik’s] proposal,” meaning that OD, OES and OSC could not be Olgoonik’s ostensible subcontractors.
But OHA didn’t stop there: it also found that the SBA Area Office had erred by failing to apply the “common ownership” and “common management” exceptions from affiliation. OHA wrote that “an ANC transfers personnel among its sister companies as part of the common management of its concerns, and an ANC’s exercise of common management is a clear exception to a finding of affiliation.” Additionally, OHA explained, “relying on its parent company for financial assistance in justifying a finding of affiliation based on a joint venture or ostensible subcontractor is equally illogical.” ANCs are “excepted from affiliation based on common ownership, thus it would be reasonable for a subsidiary to rely on its parent company’s financial resources, and for bonding . . ..”
OHA granted Olgoonik’s size appeal.
The SBA’s regulations do not expressly exempt ANCs, Tribes, NHOs and CDCs from ostensible subcontractor affiliation. But as the Olgoonik Diversified Services size appeal demonstrates, the types of relationships that might ordinarily be deemed indicative of ostensible subcontractor affiliation are often part and parcel of common ownership and management. Olgoonik Diversified Services confirms that OHA will broadly apply the regulatory exception to cover things such as transferred personnel, financial assistance, and bonding assistance.
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Feliz Cinco de Mayo! Whether you are celebrating the Mexican Army’s “unlikely victory over French forces at the Battle of Puebla” back in 1862 or just looking for an excuse to grab a cold margarita on the patio, I hope you have a wonderful May 5.
Even though it’s not an official holiday here in the U.S., it’s still Friday–and that means it’s time for our weekly roundup of government contracts news. This edition of SmallGovCon Week In Review includes a defense contractor heading to prison in connection with a $53 million fraud and gratuity scheme, the GAO provides six recommendations to reduce fraud, waste, and abuse, California lawmakers debate “blacklisting” contractors who work on the President’s proposed border wall, and more.
With last week’s potential government shutdown temporarily averted, contractors breathed a sigh of relief, but what happens in a few months? Forbes takes a look at the toll a shutdown would take on women federal contractors. [Forbes]
Federal News Radio gives us a look at eight trends its expects to continue into 2018 for federal contractors. [Federal News Radio]
A defense contractor will be spending five years in prison after being sentenced for a $53 million fraud and gratuity scheme. [United States Department of Justice]
The GAO makes six recommendations to reduce fraud, waste and abuse in small business research programs. [GAO]
What can Congress and the administration do now to speed up the modernization of IT procurement? [Defense Systems]
California lawmakers are debating whether to blacklist contractors who help build the president’s proposed border wall. (My opinion: regardless of one’s political leanings, punishing contractors for working on federal government contracts of any type is a very bad idea). [NPR]
Government contracts guru Mark Amtower busts seven pervasive contracting myths. [Washington Technology]
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A NAICS code appeal can be a powerful vehicle for influencing the competitive landscape of an acquisition. A successful NAICS code appeal can dramatically alter a solicitation’s size standard, causing major changes in the number (and sizes) of potential competitors.
But a NAICS code appeal cannot be filed until the solicitation is issued. As the SBA Office of Hearings and Appeals recently confirmed, a NAICS code appeal cannot be filed with respect to a presolicitation.
OHA’s decision in Marvin Test Solutions, Inc., SBA No. NAICS-5826 (2017) involved a Navy procurement for Common Aircraft Armament Test Set systems and Pure Air Generator System Adapter Set units. On March 28, 2017, the Navy published a presolicitation notice. The presolicitation notice indicated that the forthcoming solicitation would be classified under NAICS code 334519 (Other Measuring and Controlling Device Manufacturing), with an associated 500-employee size standard.
On April 13, 2017, Marvin Test Solutions filed a NAICS code appeal with OHA. Marvin alleged that the procurement should be classified under NAICS code 336413 (Other Aircraft Parts and Auxiliary Equipment Manufacturing), with an associated 1,250-employee size standard.
OHA noted that under the SBA’s regulations, “[a] NAICS code appeal must be filed within 10 calendar days after issuance of the initial solicitation.” OHA explained that “mere publication of a presolicitatoin notice does not guarantee that the procuring agency will issue a solicitation or that it will assign the NAICS code anticipated in the presolicitation.” OHA continued: “[p]ublication of a presolicitation notice does not constitute a NAICS code designation within the meaning of [the SBA’s regulations] and, therefore, an appeal of a presolicitation notice must be dismissed as premature.”
OHA dismissed Marvin Test Solutions’ NAICS code appeal.
While Marvin Test Solutions confirms that it is too early, when a presolicitation notice is issued, to file a NAICS code appeal, it doesn’t mean that a prospective contractor must sit on its hands until the solicitation is issued. The period after a presolicitation notice is issued provides a window to lobby the contracting officer to change the NAICS code, and–if that fails–get a head start on drafting a persuasive NAICS code appeal. Given the limited 10-day window in which a NAICS code appeal is viable, that head start can be quite beneficial.
On a final note, speaking of that 10-day window: because Marvin Test Solutions’ NAICS code appeal was premature, Marvin Test Solutions will get a second chance to file its appeal if the solicitation is issued under NAICS code 334519. But Marvin Test Solutions is lucky that the March 28, 2017 publication was only a presolicitation, and not the solicitation itself. By my count, Marvin Test Solutions filed its NAICS code appeal 16 days after the presolicitation was issued. Had the March 28 publication been the solicitation itself, Marvin Test Solutions’ NAICS code appeal likely would have been dismissed as untimely–and there would be no second bite at the apple.
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To encourage joint venturing, the SBA’s size regulations provide a limited exception from affiliation for certain joint venturers: a joint venture qualifies for award of a set-aside contract so long as each venturer, individually, is below the size standard associated with the contract (or one venturer is below the size standard and the other is an SBA-approved mentor, and they have a compliant joint venture agreement). In other words, the SBA ordinarily won’t “affiliate” the joint venturers—that is, add their sizes together—if the joint venture meets the affiliation exception.
Because of this special treatment, it can be easy for the venturers to assume that they are completely exempt from any kind of affiliation. But as the SBA Office of Hearings and Appeals recently confirmed, however, the exception isn’t nearly so broad.
The facts in Veterans Construction Coalition, SBA No. SIZ-5824 (Apr. 18, 2017) are relatively straightforward: AWA Business Corporation (an 8(a) company) and Megen Construction Company (a small business) formed a joint venture called Megen-AWA 2 (“MA2”), to bid on and perform various construction projects at Wright-Patterson Air Force Base, under an 8(a) set-aside solicitation. The solicitation in question was issued under NAICS code 236220 (Commercial and Institutional Building Construction), with a corresponding $36.5 million size standard.
After evaluating competitive proposals, the Air Force announced that MA2 was the apparent awardee. An unsuccessful competitor filed a size protest, arguing that AWA and Megan were affiliated in various ways, including identity of interest (as the companies were owned by brothers), common management (the brother who owned AWA used to be vice president of Megen), and totality of the circumstances (the companies had worked together under other joint ventures before).
In response to these allegations, MA2 argued, in part, that it qualified as a small business because AWA and Megen both fell below the solicitation’s $36.5 million size standard, as required by the joint venture exception from affiliation. The SBA Area Office agreed, but went a step farther: it held that because AWA and Megan were parties to a joint venture, they could not be affiliated on the “general affiliation” grounds of identity of interest, common management, or totality of the circumstances. The SBA Area Office issued a size determination finding MA2 to be an eligible small business.
On appeal, OHA asked the SBA Office of General Counsel to comment on the breadth of the joint venture exception from affiliation found in 13 C.F.R. § 121.103(h)(3). The SBA Office of General Counsel wrote that the provision “created an exception to affiliation on the basis of participation in a joint venture.” The provision does not create a general exemption to affiliation for joint ventures—“[t]hat is, firms exempted from joint venture affiliation . . . still could be found to be affiliates for reasons other than those set forth in § 121.103(h).”
OHA agreed with the Office of General Counsel. OHA wrote that the affiliation exemption at issue “applied to ‘affiliation under paragraph (h),’ which is affiliation based on joint ventures. Logically, then, the exception was confined to contract-specific affiliation based on joint ventures and did not extend to issues of general affiliation[.]” Because the Area Office did not consider the general affiliation allegations (like identity of interest, common management, and totality of the circumstances), OHA remanded to the Area Office for additional analysis.
Sometimes, small businesses think that their participation in a joint venture serves as a broad exemption from affiliation with their partner. Veterans Construction confirms this isn’t true—joint venture partners can still be deemed affiliated for reasons other than their participation in the joint venture. Knowing when such affiliation might be found—and taking steps to minimize any indicia of affiliation—just might save a contract award.
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An agency may modify a contract without running afoul of the Competition in Contracting Act, so long as the the modification is deemed “in scope.” An “out of scope” modification, on the other hand, is improper–and may be protested at GAO.
In a recent bid protest decision, GAO denied a protest challenging an agency’s modification of a contract where the modification was within scope and of a nature that competitors could have reasonably anticipated at the time of award. In its decision, GAO explained the difference between an in scope and out of scope modification, including the factors GAO will use to determine whether the modification is permissible.
The GAO’s decision in Zodiac of North America, Inc., B-414260 (Mar. 28, 2017), involved a U.S. Army Contracting Command solicitation for a contractor to produce a seven-person inflatable combat raiding craft (I-CRC) and a 15-person inflatable combat assault craft (I-CAC). The Army initially issued the solicitation in February 2013.
The solicitation included purchase descriptions, which set forth the product requirements for the boats and motors. Specifically, the submersible outboard motors for the I-CRC and I-CAC required “they propel a fully-loaded craft (2,120 pounds and 4,000 pounds, respectively) at 16 knots during sea state 1 (calm water) within two minutes.” As part of the solicitation, offerors were also informed that they were required to provide two units of each the I-CRC and I-CAC for article testing in accordance with FAR 52.209-4. If the government disapproved the first article, upon the government’s request, the contractor was required to make any necessary changes, modifications, or repairs to the first article or select another first article for testing.
The Army evaluated proposals and awarded the contract. Zodiac, an unsuccessful offeror, protested the award to GAO arguing that the Army should have found the awardee’s proposal technically unacceptable because the awardee’s proposed boats were insufficient to meet the speed requirements detailed by the solicitation. GAO denied the protest in Zodiac of North America, B-409084 et al. (Jan. 17, 2014) finding that Zodiac had proposed the same motors as the awardee, and the Army had reasonably relied on the awardee’s test reports demonstrating the product’s compliance with the solicitation’s speed requirements.
Likely unsatisfied with GAO’s decision, Zodiac subsequently filed a Freedom of Information Act request in October 2016. Through this request, Zodiac learned the Army had modified the contract requirements after the awardee twice failed product testing. The modification revised both the purchase description for the boats and the motors. It resulted in a 10 percent reduction in the propeller weight of the motors, a three-inch dimensional increase in the hard deck floor and storage bag, and removal of the airborne transportability requirement. Believing these revisions of the contract terms amounted to an improper sole source award contract, Zodiac protested again.
GAO explained that the Competition in Contracting Act ordinarily requires “the use of competitive procedures” to award government work. However, “[o]nce a contract is awarded…[it] will generally not review modifications to the contract because such matters are related to contract administration and are beyond the scope of [its] bid protest function.”
While a modification that changes the contract’s scope of work is an exception to this rule, such a modification is only objectionable where there is a “material difference” between the modified contract and the original contract. A material difference exists when “a contract is so substantially changed by the modification that the original and modified contracts are essentially and materially different.” A material difference typically arises when an agency enlarges a contract’s scope of work, the relaxation of contract requirements post-award (as alleged by Zodiac) can also be a material difference.
In assessing whether there is a material difference, GAO will look to:
“[T]he extent of any changes in the type of work, performance period, and costs between the modification and the original contract, as well as whether the original solicitation adequately advised offerors of the potential for the change or whether the change was the type that reasonably could have been anticipated, and whether the modification materially changed the field of competition for the requirement.”
In this case, considering these factors, GAO found that the modification did not substantially change the scope of the original contract, competitors for the initial solicitation could have reasonably anticipated the changes to the contract, and the changes to the contract would not have had a substantial impact on the field of competition for the original contract award. Importantly, the deliverables still functioned as seven-person I-CRCs and 15-person I-CACs, and the awardee remained subject to the same performance period. GAO held that there was not a material difference, and denied Zodiac’s protest.
Zodiac of North America is a useful primer on when a modification crosses the line into an improper sole source award. As demonstrated in Zodiac, the key is whether there is a material difference between the modified contract and the awarded contract.
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There is no cost to register in SAM or other government contracting databases–but that hasn’t stopped some companies from charging would-be contractors hefty fees for assistance in the registration process. Some of these companies are out-and-out frauds, like the Tampa firm whose owner recently pleaded guilty to wire fraud in a FEMA registration scheme. And others, while not fraudulent, still often neglect to mention an important (but for them, inconvenient) fact: government contracts registration assistance is available for free through Procurement Technical Assistance Centers and other reputable sources.
Now, a bipartisan new Senate bill aims to get the word out about the free registration assistance available to prospective contractors.
The bill, titled the “Procurement Fraud Prevention Act,” was introduced by Senator Gary Peters (D-MI) on April 25, 2017. Numbered “S.938” in the Senate’s numbering system, the bill’s stated purpose is simple: “To require notice of cost-free Federal procurement technical assistance in connection with registration of small business concerns in procurement systems.” The bill is co-sponsored by Senators Susan Collins (R-ME), Tom Carper (D-DE) and Jack Reed (D-RI).
In an era of bloated legislative language, the operative text of the bill is blissfully brief. It states, in full:
The Administrator of General Services, in consultation with the Director of the Office of Management and Budget, shall establish procedures to ensure that any notice or direct communication regarding registration of a small business concern in a procurement system contains information about cost-free Federal procurement technical assistance services that are available through the Small Business Administration, Procurement Technical Assistance Centers of the Defense Logistics Agency, the Department of Commerce (including the Minority Business Development Agency), and other Federal agencies and programs.
The bill would require the for-pay operators of government contracts registration services to disclose that free registration assistance is available through PTACs and other resources. It’s an important step, because these entities–even the more legitimate ones–don’t exactly go out of their way to mention that their services can be obtained for free elsewhere. If you’re curious, Google “government contractor registration” (or something similar) and take a look at the for-pay results that pop up. Still hunting for that PTAC mention? Yeah, me too.
Would-be contractors ought to be able to make an informed decision about how best to pursue government contracts registration. In some cases, there may be a good reason to use a for-pay resource to assist in the process–but that choice should be made with full knowledge of the free alternatives available.
The Procurement Fraud Prevention Act has been referred to the Committee on Homeland Security and Governmental Affairs. I hope that the Committee will take up this important bipartisan bill soon and move it to the full Senate for a vote. Stay tuned.
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I’m starting to feel like the old Johnny Cash and Lynn Anderson song, I’ve Been Everywhere. After two trips out west earlier this month, I spent time this week in Wichita with the Kansas PTAC, and soon enough I will be back on the road for the SAME Omaha Post 2017 Industry Day. I am always grateful for the opportunity to meet contractors, government officials, and others in the industry–and I am always heartened by how many people I meet at these events have kind words to say about SmallGovCon.
It’s Friday, and time for our weekly look at the latest in the government contracting world. In this edition of SmallGovCon Week In Review, a contractor faces potential jail time for selling Chinese-made items to the government, Defense analysts anticipate little impact from the recent “Buy American and Hire American” executive order, one commentator says that a recent LPTA National Guard contract hurts those who work to support our troops, and much more.
When it comes to wishlists for the last half of 2017, financial and contracting experts say perhaps the most agencies can hope for from Congress is the status quo. [Federal News Radio]
Defense analysts are anticipating little impact from President Donald Trump’s “Buy American and Hire American” executive order. [National Defense]
One commentator says that a recent “low-ball” National Guard contract is hurting those who work to ‘support our troops.’ [San Francisco Chronicle]
The federal government’s biggest challenge in defending its civilian, military and intelligence networks from hackers isn’t technology, it’s people. [Nextgov]
The Army has announced that several cloud RFPs are already in the works under the new ACCENT contract. [Federal News Radio]
A contractor (who is also a member of the Army Reserves) has been convicted of selling Chinese-made items to the government in violation of the Buy American Act, Berry Amendment, and the contracts’ “100% U.S. MADE” requirement. [United States Department of Justice]
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The VA has adopted a Class Deviation to the VAAR, severely restricting the ability of VA Contracting Officers to request waivers of the nonmanufacturer rule–and, even more troubling, suggesting that Contracting Officers need not apply the statutory SDVOSB and VOSB preferences even when the SBA has already granted a class waiver.
You may be wondering “does the VA’s Class Deviation comply with Kingdomware?” Good question.
Before diving into the details of the Class Deviation, let’s step back for a second to review why this is so important.
Under the SBA’s regulations, when any contract is set-aside for small businesses (including SDVOSBs and VOSBs) under a manufacturing NAICS code, there are two ways that the prime contractor can satisfy the requirements of the limitations on subcontracting. As one option, the prime contractor can agree to pay no more than 50% of the amount paid by the government to it to firms that are not similarly situated. In other words, the prime can do most or all of the manufacturing itself (or work with similarly situated small businesses). Alternatively, the prime can sell the products of another business, so long as the prime qualifies as a nonmanufacturer.
For VA SDVOSB set-asides, VAAR 852.219-10 (VA Notice of Total Service-Disabled Veteran-Owned Small Business Set-Aside) provides the applicable limitation on subcontracting. While this clause has not yet been updated to reflect the new wording of the SBA’s regulations, it also recognizes the nonmanufacturer exception. A nearly-identical provision is set forth in VAAR 852.219-11, which governs VOSB set-asides.
The nonmanufacturer rule, in turn, states that a company qualifies when it meets four requirements. Among those, the company must “supply the end item of a small business manufacturer, processor or producer made in the United States or [obtain] a waiver of such requirement.” The SBA is the only agency empowered to grant nonmanufacturer rule waivers.
An SBA nonmanufacturer rule waiver can be a “class” waiver, which applies to a class of products after the SBA determines that there are no small business manufacturers available to participate in the Federal procurement marketplace. Anyone can request that the SBA process a class waiver. Alternatively, the SBA can grant an “individual” nonmanufacturer rule waiver when it determines that no small business manufacturers are likely to be available for a particular solicitation. Only a Contracting Officer can request an individual waiver.
So, to sum up, if a small business (including an SDVOSB or VOSB) wants to sell the product of a large business under a set-aside contract, the small business may do so provided that an SBA class waiver or nonmanufacturer rule waiver is in place (and provided that the small business satisfies the other criteria of the nonmanufacturer rule). Many small businesses validly sell products this way: the SBA’s current class waiver list spans 14 pages.
That takes us to the VA’s recent Class Deviation. The Class Deviation does two things.
First, the Class Deviation states that a Contracting Officer must receive the approval of the Head of the Contracting Activity, or HCA, to request an individual nonmanufacturer rule waiver from the SBA. As this helpful GAO report states (see pages 3 and 4) there are only eight HCAs in the entire VA. (For comparison, that’s the same number of people who have been in the Rolling Stones).
So the Class Deviation strips the discretion to request nonmanufacturer rule class waivers from VA Contracting Officers (where the FAR says it belongs) and limits it to only eight individuals. Further, the HCA’s authority to approve individual nonmanufacturer waiver requests “cannot be redelegated.” Anyone want to guess what this is likely to do to the number of requested and approved individual nonmanufacturer rule waiver requests?
Second, the Class Deviation says that “[w]here the SBA has issued a class waiver to the Nonmanufacturer Rule, a contracting officer must receive approval from the HCA prior to utilizing other than competitive procedures or restricted competition as defined in 38 U.S.C. 8127.” The Class Deviation says that “[t]his is necessary to ensure HCAs have situational awareness of issues prompting the requests or use and, if needed, can take actions to mitigate requests or use.” This authority, too, “cannot be redelegated.”
If you think that 38 U.S.C. 8127 sounds familiar, you’re absolutely right–it’s the “rule of two” statute made famous by Kingdomware. When the Class Deviation says “other than competitive procedures,” it means “SDVOSB and VOSB sole source contracts.” When the Class Deviation says “restricted competition” it means “SDVOSB and VOSB set-asides.”
In other words, the Class Deviation provides that a Contracting Officer cannot make an SDVOSB or VOSB sole source award or establish an SDVOSB or VOSB set-aside competition for a product covered by an SBA nonmanufacturer rule class waiver unless the HCA approves. The almost-certain result is that many procurements that otherwise would have been set aside for SDVOSB and VOSB nonmanufacturers will be issued as unrestricted instead, with awards going to non-veteran companies.
The Class Deviation seems to make the assumption that the VA gets to pick and choose when to “use” a nonmanufacturer rule class waiver. I’m not sure that the SBA would agree. It seems to me that a class waiver either exists, or it doesn’t.
It’s hard to see this Class Deviation as anything but a premeditated targeting of SDVOSB and VOSB nonmanufacturers as somehow unworthy of the preferences established by 38 U.S.C. 8127 and Kingdomware. I hope that the powers that be at the VA come to their senses and retract this poorly-conceived rule. The Class Deviation itself doesn’t address the interplay between this rule and Kingdomware, and I’ll reserve for another day my thoughts on whether this Class Deviation complies with the Supreme Court’s ruling–but unless the VA does the right thing and withdraws the Class Deviation, my crystal ball sees another battle in the future.
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An agency backdated a market research memorandum to justify its set-aside decision–and when the backdating came to light, the Court of Federal Claims was none too pleased.
In a recent decision, the Court held that the backdated memorandum resulted in a “corrupted record,” which undermined a “fair and equitable procurement process,” and agreed that the agency’s self-imposed sanctions were appropriate.
I’ve said it many times before, and I’ll say it again: in my experience, the vast majority of agency procurement officials, at all levels, act honestly and ethically. But that’s not true 100% of the time. Just last week, I posted on the case of Starry Associates Inc. v. United States, in which the Court held that an agency had engaged in “intransigence and deception” during its evaluation and the following bid protests. Now comes another example of agency misbehavior, again in an apparent effort to undermine a bid protest.
The Court’s decision in Gallup, Inc. v. United States, No. 16-1656C (2017) involved a U.S. Special Operations Command procurement for its Global Research and Assessment Program. On May 31, 2016, the agency issued an RFI seeking information regarding “small business’ ability to support GRAP while ensuring compliance with FAR 52.219-14, Limitations on Subcontracting.”
After reviewing responses from interested contractors, the agency concluded that 14 respondents were capable of supporting the GRAP requirements and “the majority of respondents addressed FAR 52.219-14.” On November 14, the agency issued the solicitation as a small business set-aside.
Gallup, Inc., a large business, filed a pre-award bid protest with the Court. Gallup argued that the agency’s set-aside determination was irrational. According to Gallup, a small business could not perform the GRAP requirements while maintaining compliance with the limitations on subcontracting.
On January 6, 2017, the agency filed its Administrative Record responding to the protest. The Administrative Record contained a document entitled “Market Analysis (June 24, 2016).” The Market Analysis memorandum was the only record of the agency’s evaluation of RFI responses. The Market Analysis memorandum stated that a majority of RFI respondents addressed the limitations on subcontracting and that three small businesses “provided the most extensive and detailed information regarding compliance with the clause.” The memorandum concluded: “As such, the GRAP acquisition will be processed as a small business set-aside.”
After briefing on the case had been completed in March, the Government (USSOCOM was represented both by its own attorneys and those of the Department of Justice) filed a Notice of Corrective Action, stating that the agency would cancel the set-aside solicitation. The Government also informed the Court that it had learned, on March 23, that the Market Analysis memorandum “had been prepared on or about December 15, 2016 . . . after the agency had proceeded with the procurement as a small business set-aside and had received [Gallup’s] pre-filing notice” regarding its protest.
The Court issued an order for an oral hearing, and required all individuals who had participated in the production of the Administrative Record to attend. At the hearing, the Contracting Officer testified that she had prepared the Market Analysis memorandum in December, after the acquisition was underway. She had used the June 24 date in an effort to make sure that the record was “in good shape” to defend the protest. The Contracting Officer was contrite, saying that she had made a “huge mistake” and was “deeply sorry” for it.
Following the hearing, Judge Thomas Wheeler asked the Government to explain why the agency should not be sanctioned for its actions. The Government did “not dispute the appropriateness of sanctions in this case,” and agreed to pay Gallup’s attorneys’ fees and litigation costs. The Government also stated that the agency would issue guidance to its contracting staff “emphasizing the importance of completeness, accuracy, and integrity in preparing records and accompanying certifications,” and would conduct training focusing on “accuracy and ethics in preparing and certifying administrative records.” Gallup agreed that these self-imposed measures would be satisfactory.
Given the agreement between the Government and Gallup, the Court found that formal sanctions were unnecessary. The Court ordered the Government to file a status report by May 17 regarding its implementation of the agreement. Judge Wheeler concluded with a warning:
The integrity of the administrative record, upon which nearly every bid protest is resolved, is foundational to a fair and equitable procurement process. While the Government has accepted responsibility for its misconduct, the importance of preventing a corrupted record cannot be overstated. The Court encourages USSOCOM to take all reasonable steps to ensure that its contracting office appreciates the necessity of conducting a well-documented, well-reasoned procurement and producing a meticulous and accurate record for review. The Court will not tolerate agency deception in the creation of the administrative record.
That’s twice in one week that I’ve covered Court decisions in which the presiding judge used the word “deception” to describe agency conduct. As Judge Wheeler noted–and as Judge Bruggink forcefully stated in Starry Associates–the fairness and integrity of the procurement process rest on the assumption that agencies will act fairly and honestly. Conduct like the backdating that occurred here undermine the fairness of the process, and just as importantly, undermine the perception that the process is fair–which is, after all, why contractors are willing to compete in the first place.
That said, I don’t want to give the impression that the misconduct in Gallup rose to the level of that described in Starry Associates. Here, the Government’s attorneys appeared to have unilaterally disclosed the backdating when they discovered it–which was the right and ethical thing to do. The Contracting Officer expressed remorse for her actions, and USSOCOM agreed to reasonable corrective measures without being forced to do so by the Court. Those actions are worthy of acknowledgment, just like the improper backdating is worthy of criticism.
I won’t get up on my soapbox again about why good faith bid protests are such an important part of the competitive process (although you can read my musings on that subject in the Starry post). Perhaps Starry Associates and Gallup will be good lessons for those few agency officials who could be tempted to cross the line. Hopefully, this is the last time for awhile that I’ll be writing about agency “deception.”
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The continuing legal battle over the constitutionality of the 8(a) program’s “socially disadvantaged” criteria may be on its way to the Supreme Court of the United States.
Last September, we covered the decision of the United States Court of Appeals for the D.C. Circuit in Rothe Development, Inc. v. United States Department of Defense, 836 F.3d 57 (D.C. Cir. 2016), where a two-judge majority of the court concluded the 8(a) program did not violate Rothe’s equal protection rights under the Due Process Clause of the Fifth Amendment by establishing a racial classification.
Now, Rothe has filed a Petition for Writ of Certiorari—a formal request that the Supreme Court review (and overturn) the D.C. Circuit’s decision.
By way of background, the main question in Rothe is whether the 8(a) program violates the Fifth Amendment by granting contracting preferences on the basis of race. One of the essential questions in resolving any equal protection challenge is determining the level of scrutiny to which the challenged law will be subjected. Judges can apply three different intensities of scrutiny: rational basis, intermediate, and strict. Think of these like low, medium, and high scrutiny.
Rational basis is the least intense of the scrutiny levels and applies to most laws. To survive a rational basis challenge, a law merely must bear some reasonable relation to a legitimate government interest. Needless to say, most laws reviewed under the “rational basis” test are upheld.
Strict scrutiny, on the other hand, is the most intense level of scrutiny. To survive a strict scrutiny review, the challenged law must be narrowly tailored to meet a compelling government interest. Strict scrutiny is typically applied when a statute is not race-neutral on its face. Many laws do not survive a strict scrutiny review.
In its September decision, the D.C. Circuit majority concluded the statute establishing the 8(a) program is race-neutral. As the court’s majority explained, “Section 8(a) uses facially race-neutral terms of eligibility to identify individual victims of discrimination, prejudice, or bias, without presuming that members of certain racial, ethnic, or cultural groups qualify as such.” Consequently, the D.C. Circuit concluded rational basis was the proper level of scrutiny to apply to the 8(a) statutes. Given the low bar set by rational basis review, the D.C. Circuit concluded the case met constitutional muster.
Rothe’s petition for Supreme Court review challenges the D.C. Circuit’s application of rational basis. Rothe argues that the D.C. Circuit should have reviewed the statute under strict scrutiny, and should have found the statute to violate the Fifth Amendment.
Rothe begins with the long-established principle that “drawing distinctions between citizens based on their race or ancestry is odious to a free people whose institutions are founded upon the doctrine of equality.” Rothe says that “the statutory provisions of the Section 8(a) program contain a paradigmatic racial classification because they distribute burdens and benefits on the basis of race.”
Rothe makes several arguments in support of its petition.
Rothe first argues the D.C. Circuit ignored the plain language of the statute, which Rothe says gives preferences to“’ocially disadvantaged individuals’ based upon ‘their identity as a member of a group without regard to their individual qualities.’” Rothe contends the statute establishes membership in certain racial minority groups as being indicative of social disadvantage; for this reason, Rothe says, the statute is not race-neutral.
Rothe then takes issue with the D.C. Circuit’s holding that the portion of the statute identifying racial classifications was analogous to an unenforceable “preamble.” Rothe writes that the section of the statute containing this language “reads like a definitional section,” and was “voted on and passed” by Congress. Further, Rothe says, “a court should always review the entirety of a statute,” and the D.C. Circuit failed to do so.
Next, Rothe says that the D.C. Circuit erred by finding that the statute was race-neutral because non-minorities are also eligible for the 8(a) program. Rothe concedes that non-minorities can be admitted to the 8(a) program, but writes that members of minority groups “receive an advantage over non-minorities based on their race.” Rothe continues: “this Court applies strict scrutiny whenever the government uses race as a factor in distributing burdens and benefits, regardless of whether race is the sole factor.”
Rothe next dives into the legislative history of the 8(a) program, which Rothe says supports its position. For instance, Rothe writes that a 1978 House-Senate conference committee intended that “the primary beneficiaries of the program would be minorities.”
Finally, Rothe contends that the D.C. Circuit misapplied the doctrine of constitutional avoidance. The doctrine of constitutional avoidance counsels that when a statute is open to multiple reasonable interpretations, courts should select the interpretation that does not present a constitutional issue. Rothe alleges that Section 8(a) is not ambiguous and that the D.C. Circuit had to contort the statutory language to apply the constitutional avoidance doctrine. As such, application of the doctrine was improper and led to the incorrect conclusion.
Rothe concludes by arguing that its case is “an issue of nationwide importance.” Writes Rothe: “[t]here can be little doubt that government contracting is big business, even for small businesses.” Rothe notes that $16.6 billion in 8(a) contracts were awarded in 2015, and says that “when billions of dollars in government contracts are at stake, any preferential treatment has a nationwide, economic impact.”
Now the big question: will the Supreme Court take Rothe’s case? If the Court declines to take the case, the D.C. Circuit’s ruling will stand, solidifying the 8(a) program’s constitutionality–at least for now. But if the Court takes the case, anything is possible.
The raw numbers don’t look good for Rothe. As the Supreme Court’s website says, “[t]he Court receives approximately 7,000-8,000 petitions for a writ of certiorari each Term. The Court grants and hears oral argument in about 80 cases.”
But Rothe’s chances are probably a little better than those numbers would suggest. Rothe’s case presents a constitutional question affecting billions of dollars in government spending. And as the Supreme Court showed in 2015 with Kingdomware, it’s not afraid to take on a major government contracting case.
Continue to check back at SmallGovCon as we keep an eye on the developments in Rothe.
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SDVOSB fraud allegations, stemming from a “secret side agreement” between two joint venture partners, have resulted in a grand jury indictment against the companies and their owners.
According to a Department of Justice press release, an SDVOSB and non-SDVOSB executed a joint venture agreement that appeared to meet the SBA’s requirements, but later undermined the JV agreement with a secret agreement that provided that the non-SDVOSB would run the jobs–and receive 98% of the revenues.
The DOJ press release states that Action Telecom, Inc. and A&D General Contracting, Inc. formed a joint venture named Action-A&D, A Joint Venture. The parties signed a joint venture agreement specifying that Action (which supposedly was an SDVOSB) would be the managing venturer, employ a project manager for each SDVOSB contract, and receive a majority of the JV’s profits.
But six months later, the owners of the two companies “signed a secret side agreement that made clear the JV was ineligible under the SDVOSB program.” For instance, the side agreement stated that A&D (apparently a non-SDVOSB) would run the joint venture’s jobs and retain 98% of all government payments. Additionally, consistent with the side agreement, A&D–not Action–appointed the joint venture’s project manager. The side agreement specified that it superseded the original joint venture agreement, and that its purpose was to allow A&D to “use the Disabled Veteran Status of Action Telecom” to bid on contracts.
The DOJ says that twice, the government asked the joint venture for information about itself. Both times the joint venture provided the original JV agreement, but not the secret side agreement.
Over time, the joint venture was awarded approximately $11 million in government contracts.
On April 7, a grand jury returned a 14-count indictment against the companies and their owners. The charges include wire fraud, conspiracy, and major government contract fraud, among others. The defendants were arraigned on April 21. The same defendants also face civil charges in a False Claims Act lawsuit pending in California federal court.
As is the case with all criminal defendants, Action, A&D and their owners are presumed innocent. But if they are found guilty, they deserve some tough penalties. After all, an SDVOSB joint venture agreement is worthless if the parties develop a secret side agreement to circumvent and undermine the requirements for SDVOSB management and control. If it turns out that the the government’s allegations are true, the defendants not only defrauded the government (and honest SDVOSBs) but actually thought it was a good ideal to document their fraud in writing. There used to be a TV show about crooks like that.
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When we talk about the federal contracting industry, one of the first things that comes to mind is compliance. We are an overly regulated industry with a ton of laws to abide by, FAR changes to keep up with, legislation of which we need to stay on top. None of it is particularly easy or straightforward, and it sometimes takes experts to keep your organization in compliance. In short, no one can claim they are 100% compliant, nor can they claim to know everything with regards to this industry, especially a GovCon CEO. That’s the bad news.
The good news is that no one expects this of the CEO. However, your attitude towards compliance goes a long way within the organization. The example you set at the top will filter throughout the organization and will go a long way towards establishing and maintaining a company culture that follows the rules of this industry. We all talk about making sure that the company is not on the front page of the Washington Post for getting into hot water with the law or for debarment.
How can you contribute to that as a CEO?
How can you build your organization to take it seriously?
How do you keep from bogging down the wheels of progress and allow the mission goals for you and your clients to be met?
Lead by example. It sounds so easy, is in every leadership book, and is touted on every trending article on LinkedIn. But ask yourself, who fills out your timesheet? Do you throw 8 hours of your time into G&A and call it a day? Do you have your admin fill out your timesheet? Do you approve your direct reports? Every GovCon has a timekeeping system that requires daily input and ultimately, signature submission and approval of direct reports time.
Do you travel according to JTRs and/or within the per diem rates? Do you expect your folks to abide accordingly? As a GovCon, you just don’t travel extravagantly. Ever.
Put your Money where your Mouth is. How many emails from the Timekeeping Goon have you received? Do you ever take the time to find out who the repeat offenders are and to speak with them about these transgressions? Ever told your top sales person that they could have their pay docked or lose their jobs if they continue to be non-compliant? It’s that type of discussion (and action) that shows that the company values compliance and takes it seriously.
Have you had your HR folks scrub through your labor categories and the folks associated with them…proactively? Have you righted any salary discrepancies to ensure that your workforce is fairly and consistently paid according to skill set and experience? These suggestions all are dictated by FAR compliance and laws, but in general, they emulate good advice.
Be the leader that the GovCon industry needs and keep your company on the front pages for the work you are contributing to this country; not for running afoul of the rules.
Stephanie Alexander, CEO and Founder
Stephanie Alexander has over 15 years’ experience providing leadership, management and problem solving to government contractors. Stephanie has assisted businesses increase revenue, plan for manageable growth, and map successful strategies for expansion.
Because government contractors often spend most of their resources on business development, but need to strengthen their back office, Stephanie founded BOOST to provide accounting, contracts, HR, and recruiting services to GovCons. She designed this unique business model to provide scalable, customized services to meet the specific needs of GovCons.
In 2015, Stephanie and a partner founded govmates, a free business development tool for government contractors. Govmates is a proprietary database of government contractors seeking teaming partners to bid on opportunities.
BOOST ahead: www.boostllc.net govmates: www.govmates.com Phone: 703-598-4595 Email: email@example.com
GovCon Voices is a regular feature dedicated to providing SmallGovCon readers with candid news, insight and commentary from government contracting thought leaders. The opinions expressed in GovCon Voices are those of the individual authors, and do not necessarily reflect the opinions of Koprince Law LLC or its attorneys.
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I was fortunate enough to spend the beginning half of my week speaking at the 2017 SAME Small Business Symposium in Bremerton, Washington. It was a wonderful event and it was nice to be able to see so many familiar faces (and make some new acquaintances). I am back in the office to wrap up the week and bring you yet another SmallGovCon Week In Review.
In this week’s edition: former President Obama’s “mandatory sick leave” Executive Order may remain on the books after all, IDIQ contracts made up about one-third of all federal contracting spending over a four-year period, contractors react to President Trump’s “Buy American, Hire American” Executive Order, and much more.
Why won’t many small firms won’t sell to the government? FCW provides some answers. [FCW]
Surprise: an Obama Executive Order mandating sick leave for federal contractor employees, once considered primed for reversal by the Trump administration, may be here to stay. [Bloomberg BNA]
The DoD is parsing out exactly how it will split one of its biggest and most infamous sections after Congress mandated the division last year. [Federal News Radio]
Between 2011-2015 the sometimes-controversial contract type known as indefinite delivery/indefinite quantity accounted for an annual $130 billion of agency awards. [Government Executive]
Quantum computing is about to disrupt the government contracts market. [Bloomberg Government]
The White House previewed an Executive Order that will make it tougher to obtain foreign contracting waivers and H-1B visas, which the administration claims will boost manufacturing and skilled labor at home. [Federal Times]
Insider threats present a real danger to federal agencies, and those threats have inspired the GSA to issue a Schedule 70 special item number for Continuous Diagnostics and Mitigation products and services. [FCW]
President Trump’s “Buy American” order is drawing mixed reviews from government contractors. [Government Executive]
The SBA released a notice of termination of the class waiver to the nonmanufacturer rule for rubber gloves. [Federal Register]
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I am back in Lawrence after a great trip to the Pacific Northwest for the SAME 2017 Small Business Symposium, hosted by the SAME Seattle Post. I gave two talks at the Symposium: the first focused on the legal requirements for joint ventures and prime/subcontractor teaming arrangements, and the second on the SBA’s new All Small Mentor-Protege Program.
A big “thank you” to Julie Erickson for organizing the event and inviting me to speak, and thanks also to Thomas Nichols for his kind introductions at both talks. And of course, thank you to all of the contractors, government officials and clients who attended the sessions and asked such insightful questions.
I’ll be sticking around Kansas for the next several weeks, but that doesn’t mean that I’ll be taking a break from speaking about government contracts. Please join me and the Kansas PTAC for in-depth sessions on the government’s four major socioeconomic programs: 8(a), SDVOSB, HUBZone, and WOSB. These sessions will be held in Wichita and Overland Park; click here for details and to register. Hope to see you there!
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A procuring agency’s conduct in the course of evaluating proposals–and defending itself in four subsequent bid protests–was an “egregious example of intransigence and deception,” according to the Court of Federal Claims.
In a recent decision, Judge Eric Bruggink didn’t hold mince words, using terms like “agency misconduct,” “untruthful,” and “lack of commitment to the integrity of the process,” among other none-too-subtle phrases, to describe the actions of the Department of Health and Human Services. But Judge Bruggink’s decision is striking not only for its wording, but because it demonstrates the importance of good faith bid protests to the fairness of the procurement process, in a case where HHS unfairly sought to “pad the record” in support of a favored bidder–and would have gotten away with it were it not for the diligent efforts of the protester.
The Court’s decision in Starry Associates, Inc. v. The United States and Intellizant, LLC, No. 16-44C (2017) ostensibly was a case about attorneys’ fees. The legal question before the Court was whether Starry Associates, Inc., which had prevailed in a prior protest, Starry Associates Inc. v. United States, 127 Fed. Cl. 539 (2016), should recover its fees. But in answering this question, the Court took HHS to task for repeated egregious conduct in its underlying source selection, and in the bid protest process itself.
Back in 2014, HHS issued an RFQ seeking a range of business operations to support HHS’s financial management system, known as the Unified Financial Management System, or UFMS. The RFQ was issued as a small business set-aside, and called for award to the lowest-priced, technically acceptable offeror.
Three companies submitted quotations. Starry Associates, Inc., the incumbent contractor, was one of these companies. However, the lowest-priced quote was submitted by a competitor, Intellizant, LLC. Because Intellizant had submitted the lowest-priced quote, HHS evaluated Intellizant’s quote for technical acceptability.
Technical proposals were evaluated by a Technical Evaluation Panel consisting of three individuals: John Thompson, Karen Slater, and Arlette Peoples. And here’s where things got interesting. According to internal HHS correspondence (as well as sworn statements made in connection with the protest), the composition of the TEP was determined, at least in large part, by an HHS employee named John Davis. Mr. Davis happened to be a former Intellizant employee, and had been involved in Intellizant’s unsuccessful bid for the incumbent contract (the contract won by Starry).
Ms. Slater, for her part, was the Contracting Officer’s Representative on an unrelated HHS contract being performed by Intellizant. On November 21, 2014, Ms. Slater prepared a Past Performance Questionnaire for Intellizant on that contract, and rated Intellizant as “Exceptional” in every category. Just four days later, the TEP was convened. When Mr. Thompson asked whether Ms. Slater might appear to be biased, having prepared such a glowing PPQ for Intellizant so recently, Ms. Slater responded that she was asked to serve on the TEP “per the direction of John Davis,” who had informed Ms. Slater that it was appropriate for her to serve on the TEP.
Mr. Thompson rated Intellizant unacceptable overall, finding that the proposal didn’t meet several RFQ requirements. Ms. Peoples also questioned whether she ought to rate Intellizant as unacceptable. However, another HHS official incorrectly informed Ms. Peoples that HHS would be able to hold discussions with Intellizant to clear up those concerns. Ms. Slater, for her part, rated Intellizant’s proposal as acceptable.
The Source Selection Authority, Cassandra Ellis, reviewed the TEP’s report, and then evaluated the proposal herself. She found Intellizant’s proposal to be acceptable. Starry was notified that the award had been made to Intellizant.
Starry filed a GAO bid protest, arguing that Intellizant could not satisfy all of the RFQ’s requirements and lacked key personnel. In January 2015, HHS announced that it would take corrective action. However, upon inquiry from the GAO, HHS stated that it would not solicit new proposals or reevaluate existing proposals; instead, it said that the protest had revealed “gaps in the record” which it would correct in its “contract file.”
Believing this so-called corrective action to be insufficient, Starry announced its intent to file a bid protest with the Court. HHS then changed its tune, stating that it would reevaluate proposals and make a new award decision. In response, Starry agreed to withdraw its notice of intent to protest in the Court.
The same TEP reevaluated proposals. Again, there was no consensus: Mr. Thompson rated Intellizant as unacceptable, while Ms. Peoples and Ms. Slater rated it as acceptable. Ms. Ellis, the SSA, again concluded that Intellizant was acceptable; Intellizant was announced as the awardee for a second time.
Starry protested again at the GAO. This time, among its arguments, Starry alleged that Mr. Davis was biased in favor of Intellizant and had attempted to exert influence to guide the award to that company. In response, Mr. Davis informed the GAO that he had “recused” himself from the protest process. The GAO issued a decision sustaining a portion of Starry’s protest. However, based on Mr. Davis’s representation, the GAO denied the bias allegation.
After receiving the GAO’s decision, Mr. Davis decided to cancel the solicitation entirely. Starry protested again, arguing that the cancellation was an improper pretext to allow the work to be contracted to Intellizant under a new RFQ. The GAO denied the protest in December 2015.
Starry then took its case to the Court. In the Court, Starry was able to obtain additional evidence that had not been available at the GAO. Starry’s new evidence included the depositions of several HHS officials, including Ms. Slater, Ms. Ellis, and Mr. Davis.
In July 2016, the Court issued a decision sustaining Starry’s protest. The Court wrote that “[o]nce the initial decision to award to Intellizant had been made, Ms. Ellis and Ms. Slater make clear that any other result was unwelcome and not seriously considered.” Instead, “they viewed their task as bolstering the initial decision, not reevaluation.” Although HHS told the GAO and Starry that it was performing a full and fair reevaluation following Starry’s record protest, “the record does not reflect such an effort.”
Further, the Court found, in a “cavalier disregard for the truth of representations made to the GAO,” Mr. Davis did not recuse himself from the procurement process. In fact, “he remained directly involved in the selection of the TEP and ultimately made the critical decision to moot out the series of protests by canceling the solicitation.” Further, based on Mr. Davis’s deposition, his ultimate rationale for canceling the solicitation was “completely illusory.”
The Court issued an injunction setting aside the cancellation. The Court also ordered that Ms. Ellis, Ms. Slater, and Mr. Davis could not be involved in “any subsequent agency actions involving this solicitation.”
After winning at the Court, Starry sought attorneys’ fees under the Equal Access to Justice Act. EAJA caps the recovery of attorneys’ fees at $125 an hour (a sum which probably sounded mighty princely when it was adopted back in 1996, but won’t get a traffic ticket defended in many jurisdictions 21 years later). However, there are exceptions to the cap, including when there is a “special factor” that the court finds justifies a higher amount.
At issue in Starry’s case was whether there was a special factor present that justified deviating from the $125 cap (plus a cost-of-living adjustment, which the government did not oppose). Judge Bruggink began his analysis this way: “[w]hat the agency did here constitutes an egregious example of intransigence and deception, not just with regard to the bidder, but to the GAO and to the court. It is fortunate, but relevant, that this was anomalous conduct.”
Judge Bruggink then summarized the history of the procurement. He wrote that, after Starry’s first protest, “HHS did not conduct a meaningful reevaluation but instead undertook an effort to pad the record to better support award to Intellizant.” In the course of the second protest, HHS “misled GAO” with the “untruthful” representation that Mr. David had recused himself from the process. When Mr. Davis later decided to cancel the solicitation, he provided “an illusory basis for that decision.” In addition, “[t]he fact that the agency left the decision of what to do with the procurement to Mr. Davis after it had just represented to GAO that he was uninvolved is a further reflection of its lack of commitment to the integrity of the process.”
The Court continued:
The extreme measures that [Starry] was forced to pursue to vindicate its right to a rational and lawful federal procurement process, combined with the shocking disregard of the truth by the agency, justify an award at higher than the default rate. Both Starry and the GAO were misled on multiple occasions. Although we do not reach the question of bias, the record is replete with examples of agency misconduct.
Judge Bruggink held that Starry was entitled to recover attorneys’ fees and costs under EAJA, and that a “special factor” adjustment was appropriate, allowing Starry to recover for the rates actually billed by its attorneys.
Starry should be congratulated for its perseverance, and Judge Bruggink should be commended for holding HHS’s feet to the fire–and not mincing words when it became apparent that HHS had engaged in improper conduct. It’s rare, to say the least, to see a federal judge unload on an agency like Judge Bruggink did here, but it’s readily apparent that HHS deserved it.
Judge Bruggink labeled the circumstances here “particular and unique,” and I think he’s right. In my experience, the vast majority of agency officials take great care to act fairly and honestly. For example, contrary to common misconception, these fair and honest agency officials do not automatically blackball contractors who file good faith bid protests–in fact, many such good faith protesters are awarded a contract after a fair re-evaluation.
But Starry Associates is a good reminder that must because the vast majority of agency officials act fairly and honestly does not mean that all agency officials do so. In this case, Judge Bruggink found that the agency allowed a former employee of a competitor to make crucial evaluation decisions, “padded the file” to support that competitor, flat-out lied to Starry and the GAO, and more.
There’s been a lot of sky-is-falling complaining lately about bid protests. The former U.S. Chief Technology Officer wants to create a “shame list” of unsuccessful protesters. One GSA official says she has “given up hope” for a reduction in protests. The Senate attempted to enact strict (and poorly conceived) bid protest “reforms.” And so on.
Underpinning these complaints, of course, are several assumptions: bid protests are commonplace, bid protests are frivolous, and–perhaps most important–government evaluators always act fairly and honestly.
All of these assumptions are readily disproved.
Let’s start with the number of protests. In Fiscal Year 2016, there were 2,621 protests filed at GAO, and perhaps a hundred more at the Court. That sounds like a lot, but it’s a drop in the bucket compared to the total number of government contracting actions. A few years ago, former OFPP head Dan Gordon did the math, and concluded that “etween approximately 99.3 percent and 99.5 percent of procurements were not protested.”
Then there’s the assumption that most bid protests are frivolous. Again, those pesky facts get in the way. Year after year, the overall “effectiveness rate” of protests at GAO (that is, cases that result in a positive outcome for the protester, either through a “sustain” decision or voluntary corrective action) hovers somewhere around 45%. Last year, it was 46%. Think about that for a second: the protester has the burden of proof in a protest; given that burden, one would assume that protesters would lose most of the time. Instead, protesters receive a positive outcome in nearly half of cases filed.
And just because a protester doesn’t win doesn’t mean the protest was intentionally frivolous. Lots of protests are close cases, involving subjective judgment calls and gray areas of the law. Many of these close cases (again, that burden of proof thing) go the agency’s way. There’s a huge gap between being a losing protester and a frivolous protester–a gap that some people (I’m looking at you, Mr. “Shame List”) should acknowledge.
Sure, sometimes a protest is filed that appears frivolous. But in my experience, many of these are filed by what we lawyers call pro se protesters, that is, protesters who aren’t represented by counsel. Instead of being exercises in frivolity, many of these protests–although legally insufficient–are the result of a lack of legal understanding, not an attempt to game the system. For example, a pro se protester in a small business set-aside competition may file a GAO bid protest challenging the small business size status of the awardee. The GAO’s bid protest regulations don’t provide for jurisdiction over such issues, so the protest could appear frivolous–but how many non-lawyers have spent time poring over 4 C.F.R. 21.5?
That brings us to the final assumption–that agency evaluators will act fairly and honestly. Again, I want to be clear: in my experience, that is absolutely true in the large majority of cases. But Starry Associates shows that it is not always true. Starry Associates demonstrates that every now and then an agency official pads the file, or allows a conflict of interest to permeate an evaluation, or lies to an offeror. The bid protest process offers a way–perhaps the only way–to combat this type of malfeasance. And human nature being what it is, what would happen if bid protests disappeared, or were severely curtailed? I think that most agency officials would continue operating just as honestly and fairly as before–but a few, knowing that there was no chance of being caught, would be tempted to engage in unfair behavior like that seen in Starry Associates.
The procurement process is about more than speed and efficiency, as some of the “protest complainers” would have it. Those things are important, but the process is also about fundamental fairness. Our system of competition is worthless if the competitors believe–rightly or wrongly–that the game is rigged, and that there is no way to fix it. As Starry Associates makes clear, every now and then, the game is rigged. And even when (as is far more typical) an agency’s evaluation error is the result of an honest mistake, those mistakes happen quite frequently–as evidenced by the 46% bid protest effectiveness rate.
Congress has asked for an independent report on the impact of bid protests at DoD, and lawmakers undoubtedly will continue to get an earful from procurement officials who’d like to see the protest process severely curtailed or wiped out completely. I’m not saying that the protest process cannot be improved–there is room for improvement in almost any process. But I hope that Congress will check the statistics (and perhaps read Starry Associates) before equating “reform” with “greatly reducing access to bid protests.” Improving the procurement process shouldn’t begin with curtailing one of the most important mechanisms available to ensure the fairness and integrity of the competitive system.
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