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Koprince Law LLC

Contractors would be wise to keep a close watch on FedBizOpps.gov, otherwise they run the risk missing the chance to protest a sole source award.

When an agency decides to make an award without competition, it often must publish a Justification and Approval (referred to simply as a “J&A”) on FedBizOpps explaining why a competition would not meet the agency’s needs. A potential competitor seeking to protest such an award at the GAO must file the protest before 10 days have passed from publication of the J&A, otherwise the protest may be untimely. A competitor that is not paying attention could be out of luck.

GAO dismissed a protest of a sole source award earlier this month where the protestor missed the cutoff by just one day. The protest, Western Star Hospital Authority, Inc., B-414198.2 (June 7, 2017) involved an Army procurement for ambulance services for the U.S. Army at Fort Dix, New Jersey.

The work was originally competed, and Western Star Hospital Authority, Inc. submitted a proposal. The Army rejected Western Star’s proposal, saying that Western Star had not proposed pricing for all CLINs, as required by the solicitation.

Western Star protested the evaluation, saying that the Army had not correctly evaluated its CLIN pricing. The Army told GAO it was going to take corrective action, readmit Western Star to the competition, evaluate its proposal, and make a new award decision. After receiving the Army’s notice of corrective action, Western Star withdrew its protest. It may have figured the Army would quickly evaluate the omitted CLINs and award the contract.

But nearly two months passed without a word. Meanwhile, the incumbent contractor, Logistical Customer Service, Inc., had been performing a five-month bridge contract that the Army had awarded on a sole source basis when Western Star’s initial protest activated a stay. In March, the bridge contract was set to expire. So, on March 24, the Army posted a J&A on FedBizOpps, saying that it was going to award another short-term, sole-source contract to the incumbent to prevent a break in services while the corrective action was completed.

Around that same time, the 120-day acceptance period of all proposals expired. The Army asked Western Star to extend the acceptance period another five months. But Western Star balked and said that it was going to involve GAO. Without an acceptable proposal, the Army excluded Western Star from further consideration.

Western Star filed a second GAO protest on April 4, challenging, among other things, the second sole-source contract to the incumbent. The Army argued that the protest should be dismissed as untimely.

The GAO agreed. It wrote, “nder our Bid Protest Regulations, a protest based on other than alleged improprieties in a solicitation must be filed no later than 10 calendar days after the protester knew, or should have known, the basis for protest, whichever is earlier.”  In this case, “as the Army correctly points out, [Western Star’s] protest is untimely because it was filed on April 4, or 11 days after the agency posted the notice and J&A to issue the sole source contract.”

GAO agreed and dismissed this aspect of Western Star’s protest. (It denied the other claims on the basis that Western Star had expressly refused to extend the time for acceptance of its proposal and the proposal could not be revived.)

While Western Star apparently didn’t raise the issue, it’s worth noting that it wouldn’t have made any difference if Western Star had not actually seen the FedBizOpps posting until sometime after March 24. The GAO has previously held that contractors are “charged with constructive knowledge of procurement actions published” on FedBizOpps. In other words, under the GAO’s timeliness rules, a contractor “should have known” of an item published on FedBizOpps, even if it didn’t have actual knowledge.

Thus, Western Star lost the protest and the chance to perform the work because of a document that it may or may not have even known existed. This goes to show that there is little room for error when it comes to GAO bid protests. In the case of a sole source award, a contractor must keep a close watch on FedBizOpps or risk losing out on the chance to file a GAO bid protest.

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Koprince Law LLC

To federal construction contractors, the true legwork may seem to begin only after the government has accepted a proposal and performance has begun. However, a recent Armed Services Board of Contract Appeals decision reinforces that federal construction contractors’ work often should begin long before contract award.

In Zafer Construction Company, ASBCA No. 56769 (2017), the ASBCA rejected a construction contractor’s allegations of unilateral mistake, unconscionability, and differing site conditions (among other claims for additional costs). The problem? The contractor did not attend a government scheduled site visit, conduct an independent site visit, review technical drawings, submit any inquiries during the proposal stage, or otherwise take reasonable steps necessary to better ascertain the nature of the work prior to submitting a multimillion dollar proposal on a complex project.

By way of background, the contract in Zafer involved the U.S. Army Corps of Engineers’ procurement of renovation work at the Afghanistan National Military Hospital in Kabul, Afghanistan. In 2004, the buildings at this site had fallen into varying states of disrepair. In preparation for issuing the solicitation, the government employed an assessment team (called the Baker team) to survey the site, assess the condition of the buildings and infrastructure, and prepare a report for the government’s use in budgeting and defining the scope of work.

The solicitation used the Baker report and designated certain building as part of a “base bid” and other buildings under “option bids.” The solicitation and Baker report both referenced “Russian drawings” (voluminous, highly-detailed, and specific drawings of the buildings created by the Soviet Union in the 1970s), which were available at the facility’s engineering office for inspection by prospective offerors. The Solicitation incorporated both FAR 52.236-2 (Differing Site Conditions) and FAR 52.236-3 (Site Investigation and Conditions Affecting the Work). These FAR provisions placed affirmative duties on the contractor in submitting a proposal and during contract performance.

Specifically, the Differing Site Conditions clause required:

(a) The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in this contract, or (2) unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.

Additionally, the Site Investigation and Conditions Affecting the Work clause states in relevant part:

(a) The Contractor acknowledges that it has taken steps reasonably necessary to ascertain the nature and location of the work, and that it has investigated and satisfied itself as to the general and local conditions which can affect the work or its costs, including but not limited to… (4) the conformation and conditions of the ground; and (5) the character of equipment and facilities needed preliminary to and during work performance. The Contractor also acknowledges that it has satisfied itself as to the character, quality, and quantity of surface and subsurface materials or obstacles to be encountered insofar as this information is reasonably ascertainable from an inspection of the site…as well as from the drawing and specifications made a part of this contract. Any failure of the Contractor to take the actions described and acknowledged in this paragraph will not relieve the Contractor from responsibility for estimating properly the difficulty and cost of successfully performing the work, or for proceeding to successfully perform the work without additional expense to the Government.

Despite not attending any site visit, obtaining technical drawings, or inquiring about site conditions, Zafer submitted a proposal at a firm-fixed price of $16,508,725, which was roughly 28 percent lower than its chief competitor and 43 percent less than the total independent government estimate. After confirming Zafer’s proposed price, the Corps awarded the contract to Zafer.

Following contract award, Zafer conducted a preconstruction site assessment visit and discovered it had significantly miscalculated its estimated work area, including failing to account for basements and above-grade areas. Zafer proceeded to perform the work, but following contract completion, Zafer submitted a certified claim for $4,104,891 for renovation work in basements and above-grade areas that was alleged to be beyond the scope described in the solicitation.

Following the government’s denial of the claim, Zafer submitted a timely appeal to the ASBCA. Among the claims alleged, Zafer argued unilateral mistake, unconscionability, and differing site conditions. The ASBCA methodically denied each of these arguments.

With respect to the unilateral mistake argument, the ASBCA outlined the five elements necessary for establishing such a mistake occurred, but concluded Zafer had failed to establish at least three of the elements. Specifically, Zafer had not established: (1) a mistake in fact occurred prior to contract award, (2) the mistake was a clear-cut clerical or mathematical error or a misreading of the specifications and not a judgment error, or (3) proof of the intended bid. First, Zafer did not establish its proposal was based on or embodied a mistake rather than a business decision to assume the risks of a lower-priced proposal. Second, a misreading of specifications imposes a duty to inquire where there are gaps, inconsistencies, or insufficient information. Here, Zafer’s mistake resulted from “gross negligence in failing to read and consider the specifications thoroughly, and the contract made assumptions without any attempt of verification with the government.” Finally, Zafer failed to show any evidence of the basis of its price proposal other than a listing of the lump-sum prices it had proposed for each building.

The Board rejected Zafer’s unconscionability argument for similar reasons. In assessing this argument, the Board noted, “an unconscionable contract is ‘one which no man in his senses, not under a delusion, would make, on the one hand, and which no fair and honest man would accept on the other.’” Disparity in proposal prices alone is insufficient to establish such a claim. In this case, the government had confirmed Zafer’s price proposal prior to award. Additionally, the contracting officer reasonably believed that the price disparity arose because the next lowest offeror proposed using a subcontractor based in the United States, whereas Zafer had proposed a local (and presumably, cheaper) workforce.

The Board also entertained Zafer’s claim for differing site conditions, but noted that it was not entirely clear whether Zafer intended to pursue relief under this theory. Regardless, the Board explained that the FAR’s Differing Site Conditions clause allows contractors to submit more accurate bids by eliminating the need for contractors to inflate their bids to account for contingencies that may not occur. “Differing site conditions can arise in two circumstances: (1) the conditions encountered differ from those indicated in the contract (Type I), or (2) the conditions encountered differ from those normally encountered (Type II).”

The Board rejected both types, finding Zafer faced the same impediments to satisfying a claim for differing site conditions as a claim for unilateral mistake. In assessing Type I, the Board found the information provided by the government, including the Baker sketches and Russian drawings, clearly indicated the existence of basements and above-grade areas, and Zafer furnished no evidence that it even attempted to obtain this information until after contract award. As for Type II, Zafer presented no evidence that the basements and above-grade areas were “unknown conditions” or of an “unusual nature.”

The Board denied all of other Zafer’s arguments, too, and rejected its appeal.

Zafer ultimately provides words to the wise federal construction contractor – do some legwork upfront, when that’s what circumstances suggest a reasonable bidder would do.  This may include, as appropriate, conducting a pre-award site visit, reviewing the solicitation specifics in depth, asking questions where the solicitation is unclear, and otherwise taking steps to ascertain the full nature of the work. Such pre-award steps are particularly important when submitting a proposal on a multimillion dollar complex construction project, because the government isn’t to blame if a contractor’s failure to do its due diligence results in an underpriced proposal – an expensive and hard-learned lesson for Zafer.

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Koprince Law LLC

Contrary to common misconception, a contractor’s small business status under a receipts-based size standard ordinarily is based on the contractor’s last three completed fiscal years–not the last three completed fiscal years for which the contractor has filed a tax return.

In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that a contractor cannot change the relevant three-year period by delaying filing a tax return for the most recently completed fiscal year.

OHA’s decision in Teracore, Inc., SBA No. SIZ-5830 (2017) involved the major DHS PACTS II solicitation for IT support services.  The solicitation was set aside for SDVOSBs and contemplated the award of numerous IDIQ contracts.  Functional Category 1, which pertained to program management and technical services, was assigned NAICS code 541611 (Administrative Management and General Management Consulting Services), with a corresponding $14 million size standard.

On July 11, 2014, Teracore, Inc. submitted a proposal, self-certifying as an SDVOSB.  At that time, Teracore’s 2013 fiscal year had ended, but Teracore had not yet filed its 2013 tax return.

In February 2017–about two-and-a-half years after Teracore submitted its proposal–the DHS announced that Teracore would be awarded a contract under Functional Category 1. Two competitors subsequently filed protests challenging Teracore’s size under the $14 million size standard.

The SBA Area Office asked Teracore to produce its 2013 tax return, even though that tax return had not yet been filed on July 11, 2014.  The SBA Area Office then calculated Teracore’s size using Teracore’s 2011, 2012, and 2013 tax returns.  The SBA Area Office determined that Teracore exceeded the $14 million size standard, and was ineligible for award.

Teracore filed a size appeal with OHA.  Teracore argued that the 2013 tax return was not available until October 2014, several months after Teracore self-certified as small for the PACTS II solicitation.  Teracore argued that the SBA Area Office should have calculated Teracore’s receipts using the company’s 2010, 2011, and 2012 tax returns.

Under the SBA’s regulations at 13 C.F.R. 121.104(b)(1), “[a]nnual receipts of a concern that has been in business for three or more completed fiscal years means the total receipts of the concern over its most recently completed three fiscal years divided by three.”  Further, 13 C.F.R. 121.104(a)(2) specifies that where a company has not yet filed a tax return for a particular year, “SBA will calculate the concern’s annual receipts for that year using any other available information,” such as books of account, financial statements, or even “information contained in an affidavit by a person with knowledge of the facts.”

In this case, OHA wrote that because Teracore self-certified as small in July 2014, “the proper period of measurement for computing [Teracore’s] receipts is from 2011 to 2013–‘the most recently completed three fiscal years’ immediately preceding self-certification.”  Although Teracore’s 2013 tax return had not yet been filed when Teracore submitted its proposal, “the unavailability of a tax return does not alter the period of measurement, but instead requires the consideration of ‘other available information.'”

Of course, by the time the SBA evaluated Teracore’s size in 2017, Teracore had filed its 2013 tax return.  OHA held that it was appropriate for the SBA Area Office to consider the tax return, even though it had been filed after the July 2014 self-certification.  “At a minimum,” OHA wrote, “the Area Office could properly consider a tax return filed after the date of self-certification to be ‘other available information’ which can be used to calculate size.”

OHA denied Teracore’s size appeal, and affirmed the SBA Area Office’s size determination.

In my experience, contractors who are approaching a size standard ceiling often think–like Teracore–that they can affect the relevant three-year period by delaying filing a tax return.  Nope.  As the Teracore size appeal demonstrates, the SBA doesn’t decide which three-year period to use based on whether tax returns have been filed, but rather based on whether the fiscal year has been completed.

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Koprince Law LLC

This Sunday we celebrate Father’s Day.  I’m looking forward to celebrating with my kids, my father, and my brother (himself the father of three). Happy Father’s Day to all the other dads out there!

In this mid-June edition of SmallGovCon Week In Review, about 500 new small business partners were added to the GSA 8(a) STARS II vehicle , a USAID Deputy Director pleads guilty to procurement fraud charges, new SBA Administrator Linda McMahon wants to implement more efficient processes for contractors to obtain socioeconomic certifications, and much more.

  • An Army Colonel and his wife have been charged in a bribery scheme, accused of accepting $60,000 in payments from a contractor. [FOX 54]
  • Sometimes, through no fault of a contractor, a contract is terminated anyway.  Here are some steps to prepare for that possibility. [Washington Technology]
  • The DHS has had a tough couple weeks, having lost one major bid protest and canceling a second large procurement–but one commentator writes that the DHS is still an example of an agency “getting strategic sourcing right.” [Federal News Radio]
  • A USAID Deputy Director has pled guilty to charges alleging that he engaged in cronyism and contract-steering, choosing to reward a friend with federal money instead of actively seeking the most qualified and cost-effective bidder. [United States Department of Justice]
  • The Civilian Agency Acquisition Council released a memorandum that temporarily retracts the Fair Pay and Safe Workplaces final rule, pending a final change removing these provisions from the FAR. [GSA Office of Governmentwide Acquisition Policy]
  • The two highest-ranking officials in the GSA’s acquisition service are resigning after a shakeup in the service’s structuring that includes new leadership. [fedscoop]
  • A contracting dispute is delaying the OPM’s background investigations processing after the GAO sustained a protest of the award. [Government Executive]
  • SBA Administrator Linda McMahon wants to make SBA’s certification programs “more user-friendly,” saying that the application forms are complex. Amen to that–but McMahon more ominously says that if SBA can’t make the programs more effective and efficient, “those programs have to go.” [Government Executive]
  • The GSA 8(a) STARS II GWAC recently added approximately 500 qualified industry partners during an Open Season. [General Services Administration]

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Koprince Law LLC

It’s been more than a year since the SBA issued a final rule overhauling the limitations on subcontracting for small business contracts.  The SBA’s rule, now codified at 13 C.F.R. 125.6, changes the formulas for calculating compliance with the limitations on subcontracting, and allows small businesses to take credit for work performed by similarly situated subcontractors.

But the FAR’s corresponding clauses have yet to be changed, and this has led to a lot of confusion about which rule applies–especially since many contracting officers abide by the legally-dubious proposition that “if it ain’t in the FAR, it doesn’t count.”  Now, finally, there is some good news: the FAR Council is moving forward with a proposed rule to align the FAR with the SBA’s regulations.

By way of quick background, way back in January 2013, former President Obama signed the 2013 National Defense Authorization Act into law.  The 2013 NDAA made major changes to the limitations on subcontracting.  The law changed the way that compliance with the limitations on subcontracting is calculated for service and supply contracts–from formulas based on “cost of personnel” and “cost of manufacturing,” to formulas based on the amount paid by the government.  And, importantly, the 2013 NDAA allowed small primes to claim performance credit for “similarly situated entities.”

Interestingly, about a year later–well before either the SBA or the FAR Council had amended the corresponding regulations–the GAO issued a decision suggesting (although not directly holding) that the similarly situated entity concept was currently effective.  But most contractors and contracting officers continued to apply the “old” rules under the FAR and SBA regulations.

On May 31, 2016–about three and a half years after the 2013 NDAA was signed into law–the SBA published a final rule implementing the changes.  The SBA’s regulation took effect on June 30, 2016.  Less than a month later, the VA issued a Class Deviation, incorporating by reference the new SBA regulations for VA SDVOSB and VOSB acquisitions.  But for many other procurements, contracting officers continued to include FAR 52.219-14, which uses the old formulas and makes no mention of similarly situated entities.  (FAR 52.219-14 applies to small business, 8(a) and WOSB contracts.  For HUBZone and non-VA SDVOSB procurements, the subcontracting limits are implemented by other clauses, which use the old formulas but allow the use of similarly situated entities).

This, of course, has led to a lot of confusion.  Does a contractor comply with the SBA regulation?  The FAR clause?  Both?  Some contracting officers have taken the position that the FAR clauses govern until they’re amended.  But the SBA, of course, wants contractors to follow the SBA regulations.  Indeed, a joint venture formed under the SBA’s regulations must pledge to comply with 13 C.F.R. 125.6.  It’s a mess.

Now, it seems, the FAR Council seems to be making progress on eliminating the FAR/SBA discrepancy.  (The FAR Council is a shorthand term for the body of defense and civilian agency representatives who propose and implement changes to the FAR.  If you’re interested in how this works, FAR 1.2 is chock full of fun and exciting details).

In its most recent list of “Open FAR Cases,” published on June 9, 2017, the FAR Council says that it is working on a “Revision of Limitations on Subcontracting.”  Specifically, the new FAR rule “mplements SBA’s final rule” from last year, and “[a]lso implements SBA’s regulatory clarifications concerning the application of the limitations on subcontracting, nonmanufacturer rule, and size determination of joint ventures.”

As of June 5, the CAAC–that’s the civilian side–has concurred “with draft interim FAR rule.”  FAR Council staff are “preparing to send to OFPP after DoD approval to publish.”

This is important news for a couple reasons.  First, this means that the draft rule is well along in the process.  Review by the Office of Federal Procurement Policy is one of the final steps before a rule or proposed rule is published in the Federal Register.  Second, it appears that the FAR Council intends to adopt an interim rule, rather than a proposed rule.  An interim rule takes effect immediately (or very soon) after publication, and then can be adjusted after receipt of public comments.  A proposed rule, on the other hand, doesn’t take effect until public comment is received and a final rule is published.  In other words, if the FAR Council uses an interim rule, the changes will take effect a lot sooner.

It likely will still be a few months until an interim rule is published, but it appears that an end to the confusion is on the horizon.  Stay tuned.

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Koprince Law LLC

An agency has been caught creating fake source selection documents to pad its file in response to several GAO bid protests.

A recent GAO bid protest decision shows that, after award, the agency created new source selection documents and revised others, then pretended those documents had been part of the contemporaneous source selection file.  And although the agency’s conduct resulted in the cancellation of a major procurement, it’s not clear whether the agency employees who created the fake documents will face any punishment.

The GAO’s decision in EDC Consulting et al., B-414175.10 et al. (June 9, 2017) involved the DHS solicitation for the Flexible Agile Support for the Homeland or “FLASH” procurement.  The solicitation was to result in 8 to 12 IDIQ contracts, with an estimated value of $1.54 billion. The solicitation called for a “best value” tradeoff considering technical merit, staffing, past performance, and price.

DHS made initial award decisions in November 2016, but after several GAO bid protests were filed, the agency elected to perform a reevaluation.  The reevaluation involved a technical evaluation team and price evaluation team, each of which prepared consensus reports.  The TET chair and contracting officer conducted a best value analysis and recommended awards; the ultimate award decisions were made by a source selection authority.

On March 6, 2017, the SSA made award to 11 offerors, all of which had been recommended by the TET chair and contracting officer.  The March 6 source selection decision document stated that the best value decisions were based on the documents in the source selection file.

Nine unsuccessful offerors, including EDC Consulting, LLC, filed protests at the GAO.  During the course of the protest “a question was raised as to whether the documents supporting the agency’s source selection decisions, filed with the agency reports (AR), had been prepared or revised after the March 6 decisions were made.”

The GAO asked the DHS to respond.  On May 1, the DHS’s counsel admitted that the price evaluation report was “incorrect” and that “some of the information provided in the AR . . . was prepared or changed after award.”  These post-award changes involved “the insertion of a multi-page table, as well as the creation of several memoranda regarding the price realism evaluation and findings.”  Additionally, “[a]fter award, the agency revised the Technical Evaluation Report and [the] Best Value Tradeoff Analysis.”

The GAO, obviously, was deeply concerned.  After a series of conference calls, it informed the parties that it intended to conduct a hearing to address various matters, “including the agency’s preparation and submission of the altered documents.”  This, itself, is rather unusual, as most GAO bid protests are resolved without hearings.  (The GAO held hearings in 2.5% of cases in Fiscal Year 2016).

The DHS apparently had no desire to be cross-examined about its conduct.  On May 26, just a few days before the hearing was to occur, the DHS announced that it would terminate all of the awards and cancel the procurement.  In its notice of corrective action, the DHS stated that because documents had been created and revised after award, “DHS has determined that the evaluation process and documents do not meet DHS’ standards for award.”  DHS also said that there were other pieces of the solicitation that needed to be resolved to meet “DHS’ evolving mission needs.”

There must  be something in the water, because this is the second time in less than two months that an agency has been caught creating fake “contemporaneous” documents to defend against a bid protest.  As I wrote in late April, the Court of Federal Claims sharply criticized the U.S. Special Operations Command for creating backdated market research to support a set-aside decision.

Judge Thomas Wheeler’s comments in that case apply equally to DHS’s conduct here.  Judge Wheeler said:

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.

I’ve said it before, and I’ll say it again–in my experience, the vast majority of agency officials are honest, honorable people.  But the integrity of the competitive contracting process is harmed when agency officials don’t live up to those standards.  Indeed, the mere perception that the game might be rigged is extraordinarily harmful–what reason is there for a company to participate in the process if it appears that the agency won’t play fair?

The GAO’s decision doesn’t mention what sanctions, if any, the DHS employees responsible for the misconduct might face.  DHS has a chance to send a strong message by terminating, or otherwise severely punishing, those responsible.  We’ll see what happens.

For now–and I can hardly believe I’m saying this–contractors and their counsel who receive source selection documents as part of a protest might want to check when those documents were created.  Just in case.

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Koprince Law LLC

A company bidding to replace an incumbent service contractor cannot presume incumbent workers will take major pay cuts without setting itself up for a potentially successful protest.

FAR 22.12 generally requires successor service contractors to give a right of first refusal to qualified employees under the previous contract. And even when these nondisplacement rules don’t apply, many offerors’ proposals tout their efforts to retain incumbent employees. But asking incumbent employees to take significant pay cuts–and expecting them to accept–is unreasonable and can torpedo a proposal. Case in point: GAO sustained a protest recently against an awardee who had proposed high retention rate of incumbent workers, but lower pay for those positions.

The GAO decision, A-P-T Research, Inc., B-413731.2 (Apr. 3, 2017) involved a NASA solicitation seeking a contractor to provide safety and mission assurance support services. A-P-T Research, Inc. was the incumbent contractor.

The solicitation envisioned awarding a single cost-plus-fixed-fee contract to the offeror judged the best value to the government. It asked offerors to propose costs related to five safety and mission assurance engineer labor categories, three specialist labor categories, and an analyst labor category. One of the evaluation factors asked offerors to specify an incumbent capture rate and to justify the methods used to achieve it. The same factor included an assessment of the employee compensation plan. The cost factor indicated that the government would perform a realism analysis.

Alphaport, Inc. submitted a proposal. Alphaport proposed to retain a large percentage of the incumbent workforce (the precise percentage was redacted from GAO’s public decision). Alphaport’s proposed direct labor rates were considerably lower than APT’s. In its final evaluation, NASA found that Alphaport’s most probable cost was $48.1 million, versus $57.0 million for APT.

NASA compared Alphaport’s proposed direct labor rates to date from salary.com and the Economic Research Institute. NASA determined that the rates were “within an average range (in some cases slightly below average)”. Although it initially expressed doubts about Alphaport’s ability to retain incumbent staff, NASA was satisfied with Alphaport’s explanation in discussions, and did not assign Alphaport a weakness for its total compensation plan.

NASA picked Alphaport for award on December 23, 2016, in part because of its lower-evaluated cost. APT filed a bid protest challenging, among other things, the evaluation of Alphaport’s compensation from both a technical factor standpoint and a matter of cost realism.

GAO agreed, finding that “the record contains no meaningful explanation of how the agency concluded that Alphaport would be able to retain . . . the incumbent employees at the compensation offered.” GAO continued:

Our review of the contemporaneous record here reveals only conclusory and general statements that the agency’s earlier concerns about the realism of Alphaport’s compensation were addressed during discussions.  Specifically, there is no explanation of how the agency has reconciled its earlier concerns about the apparent inconsistency between Alphaport’s claims that it would retain a high percentage of incumbent personnel, despite the significant decreases it had proposed in compensation.  The record does not, for example, suggest that NASA had identified specific reasons that SMA engineers would agree to lower-than-average compensation levels, such as the work being perceived as relatively simple, an abundance of eligible candidates in the market keeping compensation levels low, or counterbalancing fringe benefits.

GAO sustained the protest.

GAO’s decision in A-P-T Research is in keeping with a similar decision last year, in which GAO held that an offeror’s proposal to retain incumbent workers while asking them to take a pay cut was an obvious price realism concern. As both cases indicate, expecting professionals to stick around when their salaries are slashed, at least without a good explanation as to why the employees would accept those cuts, seems naive–and calls into question whether the offeror can deliver what was promised in the proposal.

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Koprince Law LLC

I’m not sure what the weather is going to be like in your neck of the woods, but we are ready for a few 90+ degree days here in Lawrence. It’s a great weekend for sitting in the shade with a cold lemonade and some good reading material. And if you need something to read, we’ve got you covered with the latest in government contracting news.

In this week’s SmallGovCon Week in Review, a Texas contractor has made nearly $2.5 million to settle procurement fraud allegations, the SBA’s administrative judges gain authority to hear size standard appeals, the last protest of the GSA’s EIS contract has ended, and much more.

  • The new Air Force Secretary is placing emphasis on expanding the fleet of planes to meet worldwide demands and to do so more quickly. [Government Executive]
  • The company with the last bid protest on General Services Administration’s long-delayed $50 billion Enterprise Infrastructure Solution contract folded its cards. [Nextgov]
  • Allegations claiming a North Texas contractor violated the False Claims Act and Anti-Kickback Act in connection with federal contracts obtained form the U.S. Bureau of Prisons has resulted in a $2.475 million settlement. [Department of Justice]
  • A comedy of errors led the Department of Homeland Security to cancel its $1.5 billion agile contract vehicle. [Federal News Radio]
  • The SBA is amending the rules of practice of its Office of Hearings and Appeals, which authorizes OHA to decide Petitions for Reconsideration of Size Standards. [Federal Register]
  • Nextgov looks at what exactly went wrong with the DHS’s contracting vehicle that pre-approved certain vendors selling agile software services. [Nextgov]
  • The GSA is planning a major reorganization by moving the Technology Transformation Service into the Federal Acquisition Service. [Federal News Radio]

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Koprince Law LLC

Last month, I wrote that the SBA shouldn’t have awarded the government an “A” for its FY 2016 small business goaling achievement.  Even though the government exceeded the 23% small business goal, it missed the WOSB and HUBZone goals (the latter by a lot).

In a different context, a recent U.S. Army Corps of Engineers proposal evaluation offers a grading lesson for the SBA.  In that case, the Corps assigned a large prime offeror a middling “Acceptable” score for small business participation where the offeror proposed to meet the contract’s overall small business subcontracting goal, but not the SDB, WOSB, HUBZone, VOSB and SDVOSB goals.

The evaluation came to light in a recent GAO bid protest decision, Pond Constructors, Inc., B-414307; B-414307.2 (May 1, 2017).  The Pond Constructors protest involved a Corps solicitation for recurring maintenance and minor repair services.  The solicitation was issued on an unrestricted basis, and award was to be based on four factors: technical approach, past performance, small business participation, and price.

With respect to small business participation, the solicitation set forth various small business goals, including goals for subcontracting to SDBs, WOSBs, HUBZones, VOSBs, and SDVOSBs.  The solicitation stated that offerors would be assigned adjectival ratings of outstanding, good, acceptable, or unacceptable for the small business participation factor.

Pond Constructors, Inc. submitted a proposal.  In its proposal, Pond committed generally to subcontracting 36 percent of the work to small businesses.  However, it did not commit to meeting the goals for SDBs, WOSBs, HUBZones, VOSBs and SDVOSBs.  The Corps assigned Pond a middle-of-the-road “acceptable” score for the small business participation factor, and awarded the contract to a competitor (which scored “outstanding” for its small business participation).

Pond filed a GAO bid protest.  Among its allegations, Pond contended that the Corps should have assigned it a higher score under the small business participation factor.

The GAO noted that Pond had committed to subcontracting 36 percent of the work to small businesses.  However, “Pond’s proposal, on its face, committed to subcontract 0 (zero) percent to small disadvantaged businesses; 0 percent to WOSBs; 0 percent to HUBZone small businesses; 0 percent to VOSBs, and 0 percent to SDVOSBs.”  Accordingly, “the agency’s rating was reasonable because the protester failed to meet any of the solicitation’s small business subcategory participation goals . . ..”

The GAO denied Pond’s protest.

Pond got the adjectival equivalent of a “C,” which is about right (and perhaps even a little generous) for a company that proposed to satisfy the overall small business subcontracting goals, but not the individual socioeconomic goals.  At the national level last year, the government hit its small business target, but missed two of the four socioeconomic goals.  Maybe that deserves a B or B-minus, but in my book, it ain’t A-level achievement if you don’t hit all of the socioeconomic goals.

SBA, I hope you’re taking notes.

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I am very pleased to announce that Jennifer Tucker has joined our team of authors here at SmallGovCon.  Jennifer is an associate attorney at Koprince Law LLC, where her practice focuses on federal government contracts law.  Before joining Koprince Law LLC, Jennifer practiced contracts law with the Kansas Department of Transportation and the University of Kansas.  Jennifer also had the fortune (or is that misfortune?) of being classmates with a certain other government contracts attorney in the 2015 Leadership Lawrence program.

You can check out Jennifer’s biography on the Koprince Law LLC website, and her first SmallGovCon post (about the GAO’s very strict rules for electronic proposals) right here.  Be sure to check back regularly for more legal news and notes from Jennifer and our other great SmallGovCon authors.

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You’ve hit send on that electronic proposal, hours before the deadline and now you can sit back and feel confident that you’ve done everything in your power – at least it won’t be rejected as untimely – right?

Not so fast. If an electronically submitted proposal gets delayed, the proposal may be rejected–even if the delay could have been caused by malfunctioning government equipment. In a recent bid protest decision, the GAO continued a recent pattern of ruling against protesters whose electronic proposals are delayed. And in this case, the GAO ruled against the protester even though the protester contended that an agency server malfunction had caused the delay.

Western Star Hospital Authority, B-414216.2 (May 18, 2017) involved an Army RFP for emergency medical services.  The RFP required that proposals be submitted no later than 4:00 pm., EST on January 30, 2017, to the Contracting Officer’s email address.

The RFP incorporated FAR 52.212-1 (Instructions to Offerors-Commercial Items).  Paragraph (f)(2) of that clause provides that any “offer, modification, revision, or withdrawal of an offer received at the Government office designated in the solicitation after the exact time specified for receipt of offers is ‘late’ and will not be considered.”

On the date the proposals were due, Western Star emailed four proposal documents to the CO’s email address. The emails were sent at 2:43 p.m., 2:57 p.m., 3:01 p.m. and 3:06 p.m., well before the 4:00 p.m. deadline. For reasons unknown, the emails did not arrive at the initial point of entry to the Government infrastructure until after 6:00 p.m., well after the deadline. The Army rejected the proposal as late.

Western filed a GAO bid protest challenging the Army’s decision. Western argued that it was “guilty of no fault” and that it was “completely unfair and unreasonable to reject its bid because of factors beyond its control.”

Western argued that the agency’s servers were “not accessible,” and furnished a mail log from its service provider supporting its position. The Army disputed Western’s position. The Army provided a statement from its Information Assurance Manager, who said that the emails were “delayed by the protester’s servers” and that the delay “was not the fault or responsibility of the Government, which has no control over commercial providers used by the Protester.”

The GAO declined to resolve the question of whose servers had malfunctioned. Instead, the GAO indicated that Western’s proposal would be considered late regardless of whose equipment had malfunctioned. Citing its own prior authority, the GAO wrote, “[w] have repeatedly found that it is an offeror’s responsibility to ensure that an electronically submitted proposal is received by–not just submitted to–the appropriate agency email address prior to the time set for closing.” Because Western’s proposal “was not received at the agency’s servers until after the deadline for receipt of proposals,” the proposal was late.

The GAO also cited FAR 52.212-1(f)(2)(i)(A), which states that a late proposal, received before award, may be accepted if it was transmitted electronically and received at the initial point of entry to the Government infrastructure no later than 5:00 p.m. one working day prior to the due date. But Western did not submit its proposal by 5:00 one working day prior to the due date, so it could not avail itself of that exception.

The GAO declined to discuss any of the other exceptions to FAR 52.212-1(f)(2), such as the important “government control” exception, stating that the exceptions were “not pertinent” to the issue in Western. As we’ve written before, the Court of Federal Claims disagrees with the GAO when it comes to the question of whether these exceptions apply to electronic proposals, and we think the Court has the better position.

For now, though, Western Star Hospital Authority stands as an important warning to contractors who submit proposals electronically. Under the GAO’s current precedent, a late-submitted electronic proposal is late–even if the lateness was due to malfunctioning government equipment. The only exception recognized by the GAO under FAR 52.212-1 is the “5:00 p.m. one working day prior” exception, and contractors would be wise to take that into account when determining when to submit electronic proposals.

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The government’s use of specifications within a contract carries an implied warranty that the specifications are free from errors. When a contractor is misled by the erroneous specifications, the contractor may seek recovery through an equitable adjustment to the contract. But what happens when the government seeks services through a requirements contract and is simply negligent in estimating its needs?

A recent Federal Circuit decision, Agility Defense & Government Services, Inc., v. United States, No. 16-1068 (Fed. Cir. 2017)  finds that a contractor may be able to recover damages in such instances under a negligent estimate theory.

The underlying contract at issue in Agility Defense was a requirements contract whereby Agility agreed to dispose of as much surplus military property as required by the DLA Defense Reutilization and Marketing Service (“DRMS”). While DRMS had historically performed the underlying services, in 2007, DLA determined it needed help to sustain the workload, and decided to solicit outside contractors.

During the solicitation period, DRMS issued several amendments relevant to the anticipated workload and costs. Amendment 002, issued in February 2007, directed offerors to a website containing DRMS workload history and inventory levels. DRMS updated its website biweekly to reflect line items received, scrap weight, and scrap sales during the prior weeks. Amendment 004, issued in June 2007, stated, “[w]e anticipate an increase in property turn-ins.” The amendment also added clause H.19, which notified contractors of possible significant workload increases or decreases and provided a process for the contract to renegotiate the price in the event of a 150% workload increase when compared to the previous three months. The following month, DRMS issued Amendment 007, which projected a stable workload for the first two years and then workload decreases for option years three through five.

Agility, one of three offerors, received notice of award in November 2007, and was issued its first task orders in early 2008. These task orders incorporated a workload baseline derived from the same website referenced in Amendment 002. Upon starting performance, Agility quickly fell behind after inheriting a backlog of approximately 70,000 line items and a larger volume of line items than anticipated. In response to DRMS’s performance concerns, Agility  increased its staffing by 50%. After issues arose concerning the increased workload and interpretation of clause H.19, the parties modified clause H.19 to allow for a price adjustment if the workload increased by more than 25% above monthly averages.

The contract was terminated for convenience in June 2010, and Agility filed a claim to recoup the increased costs of performing the contract. After DRMS awarded only a fraction of costs claimed, Agility pursued its claim in the Court of Federal Claims. The court denied Agility’s claim, finding DRMS’s conduct was acceptable because it provided Agility with “reasonably available historical data.” Upon appeal, the Federal Circuit court disagreed.

In finding DRMS’s estimates unrealistic, the court noted that to prove the government negligently estimated its requirements contract needs, “the contractor must show by preponderant evidence that the government’s estimates were ‘inadequately or negligently prepared, not in good faith, or grossly or unreasonably inadequate at the time the estimate was made.’”

By way of background, for requirements contracts, FAR 16.503 requires contracting officers to provide offerors with a “realistic estimate” of the workload. The FAR caveats this requirement with the following terms:

This estimate is not a representation to an offeror or contractor that the estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. The contracting officer may obtain the estimate from records of previous requirements and consumptions, or by other means, and should base the estimate on the most current information available.

In Agility Defense, the court held that the Court of Federal Claims’ decision was “clearly erroneous” because it ignored that DRMS had provided both historical data and requirements estimates in Amendment 007, and the historical data was not “the most current information available.” Since Amendment 007 projected stable and then declining scrap weight, DRMS estimated that property turn-ins would be constant and then decline.

Furthermore, the court found that providing historical data was not per se reasonable. Since DRMS possessed not only is historical requirements, but also information concerning its anticipated requirements, DRMS was aware of an anticipated surge in workloads. Thus, DRMS could not rely on the fact that it provided historical workload data to satisfy the requirements of FAR 16.503. While “DRMS was not obligated to guarantee the accuracy of its estimates or perfectly forecast its requirements,” DRMA was negligent in not providing Agility was a realistic estimate.

Agility Defense shows that the government is given much latitude in estimating its needs under a requirements contract. However, this is latitude is not unlimited. Where the government’s estimates are unrealistic and not based on the most current information available, a contractor is not left to bear the risk.

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Koprince Law LLC

June is here which means we are nearing the official start of summer–and it already feels like summer here in Lawrence with temperatures in the mid-80s. Before I head off to enjoy the warm weather and sunshine it’s time for our weekly look at the latest and greatest in government contracting.

In this edition of the SmallGovCon Week In Review, a food contractor has agreed to pay a whopping $95 million as part of a major procurement fraud settlement, the GSA Inspector General issues a semi-annual report offering some lessons for contractors, Guy Timberlake kicks off a new series over at the GovConChannel with an article about the five fatal flaws killing proposal efforts, and much more.

  • A food contractor for the U.S. forces in Iraq has agreed to pay $95 million and plead guilty to a misdemeanor charge to settle criminal and whistle-blower claims pending in federal court. [myAJC]
  • The new SBA Administrator is bringing some of her lessons learned around the ring to her leadership role at a time when other federal agencies are looking to duck and cover amid a government reorganization. [Federal News Radio]
  • The “Section 809 Panel” is seeking to provide lawmakers with a set of recommendations for legislative or administrative redress that will help improve the speed and performance of the defense acquisition system. [Government Executive]
  • A new series from our friends over at GovConChannel discusses the 5 fatal flaws killing GovCon proposal efforts. [GovConChannel]
  • A New Jersey company will pay $245,000 in back wages and will be prohibited from bidding on government contracts for three years, as part of the resolution of a Service Contract Act case. [New Jersey Herald]
  • The Homeland Security Department has cancelled its $1.5 billion contract vehicle for agile development services. [Federal News Radio]
  • A report from the GSA reviewing its investigations and reports was released which found that 21 contractors didn’t submit accurate and complete information among other things. [Washington Technology]

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Koprince Law LLC

The VA cannot buy products or services using the AbilityOne List without first applying the “rule of two” and determining whether qualified SDVOSBs and VOSBs are available to bid.

Today’s decision of the U.S. Court of Federal Claims in PDS Consultants, Inc. v. United States, No. 16-1063C (2017) resolves–in favor of veteran-owned businesses–an important question that has been lingering since Kingdomware was decided nearly one year ago.  The Court’s decision in PDS Consultants makes clear that at VA, SDVOSBs and VOSBs trump AbilityOne.

The Court’s decision involved an apparent conflict between two statutes: the Javits-Wagner-O’Day Act, or JWOD, and the Veterans Benefits, Health Care, and Information Technology Act of 2006, or VBA.

As SmallGovCon readers know, the VBA states that (with very limited exceptions), the VA must procure goods and services from SDVOSBs and VOSBs when the Contracting Officer has a reasonable expectation of receiving offers from two or more qualified veteran-owned companies at fair market prices.  Last year, the Supreme Court unanimously confirmed, in Kingdomware, that the statutory rule of two broadly applies.

The JWOD predates the VBA.  It provides that government agencies, including the VA, must purpose certain products and services from designated non-profits that employ blond and otherwise severely disabled people.  The products and services subject to the JWOD’s requirements appear on a list known as the “AbilityOne List.”  An entity called the “AbilityOne Commission” is responsible for placing goods and services on the AbilityOne list.

But which preference takes priority at VA? In other words, when a product or service is on the AbilityOne list, does the rule of two still apply?  That’s where PDS Consultants, Inc. enters the picture.

The AbilityOne Commission added certain eyewear products and services for four Veterans Integrated Service Networks to the AbilityOne List.  VISNs 2 and 7 had been added to the AbilityOne List before 2010.  VISNs 2 and 8 were added to the AbilityOne list more recently.

PDS filed a bid protest at the Court, arguing that it was improper for the VA to obtain eyewear in all four VISNs without first applying the rule of two.  The VA initially defended the protest by arguing that AbilityOne was a “mandatory source,” and that when items were on the AbilityOne List, the VA could (and should) buy them from AbilityOne non-profits instead of SDVOSBs and VOSBs.

But in February 2017, just two days before oral argument was to be held at the Court, the VA switched its position.  The VA now stated that it would apply the rule of two before procuring an item from the AbilityOne list “if the item was added to the List on or after January 7, 2010,” the date the VA issued its initial regulations implementing the VBA.  For items added to the AbilityOne List beforehand, however, no rule of two analysis would be performed.

(As an aside–the VA seems to be making a habit of switching its positions in these major cases).

The parties agreed that the VA’s new position mooted PDS’s challenges to VISNs 6 and 8, which would now be subject to the rule of two.  But what about VISNs 2 and 7?  PDS pushed forward, challenging the VA’s position that it could issue new contracts in those VISNs without performing a rule of two analysis.  PDS argued, in effect, that nothing in the VBA allowed products added to the AbilityOne List before 2010 to somehow be “grandfathered” around the rule of two.

Judge Nancy Firestone agreed with PDS:

The court finds that the VBA requires the VA 19 to perform the Rule of Two analysis for all new procurements for eyewear, whether or not the product or service appears on the AbilityOne List, because the preference for veterans is the VA’s first priority. If the Rule of Two analysis does not demonstrate that there are two qualified veteran-owned small businesses willing to perform the contract, the VA is then required to use the AbilityOne List as a mandatory source.

Judge Firestone pointed out that under the VBA, “the VA must perform a Rule of Two inquiry that favors veteran-owned small businesses and service-disabled veteran-owned small businesses ‘in all contracting before using competitive procedures’ and limit competition to veteran-owned small businesses when the Rule of Two is satisfied.”  Citing Kingdomware, Judge Firestone wrote that “like the [GSA Schedule], the VBA also does not contain an exception for obtaining goods and services under the AbilityOne program.”  Judge Firestone concluded:

[T]he VA has a legal obligation to perform a Rule of Two analysis under the VBA when it seeks to procure eyewear in 2017 for VISNs 2 and 7 that have not gone through such analysis – even though the items were placed on the AbilityOne List before enactment of the VBA. The VA’s position that items added to the List prior to 2010 are forever excepted from the VBA’s requirements is contrary to the VBA statute no matter how many contracts are issued or renewed.

Judge Firestone granted PDS’s motion for judgment and ordered the VA not to enter into any new contracts for eyewear in VISNs 2 and 7 from the AbilityOne List “unless it first performs a Rule of Two analysis and determines that there are not two or more qualified veteran-owned small businesses capable of performing the contracts at a fair price.”

The apparent conflict between JWOD, on the one hand, and the VBA, on the other, was one of the major legal issues left unresolved by Kingdomware.  Now, as we approach the one-year anniversary of that landmark decision, the Court of Federal Claims has delivered another big win for SDVOSBs and VOSBs.

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Memorial Day weekend is almost here, which means the unofficial start to summer! Whether you are hitting the beach or relaxing at home (my plans include BBQ ribs and chicken wings courtesy of the family Big Green Egg), I hope you have an enjoyable long weekend while remembering those that have given their lives to protect our country.

Of course, a relaxing weekend isn’t complete without some good reading material, and we’ve got you covered.  In the final May edition of the SmallGovCon Week In Review, a contracting fraud scheme results in jail time, a bipartisan new bill would help small contractors receive prompt payment for change orders, a survey shows rising confidence among government contractors, and much more.

  • A new report looks to assess the competitive landscape for major federal services contracts over $50 million. [FederalTimes]
  • Cautious optimism is surrounding a bill that would require the Defense Department to use marketplaces like Amazon to buy commercial goods. [Federal News Radio]
  • An interim report from the little-known but important Section 809 Panel has been released, reviewing acquisition regulations and making recommendations for the amendment or repeal of many rules. [Section 809 Panel]
  • An eight-month sentence was handed down to a former Navy civilian employee and construction supervisor for false claims related to government contracts and theft. [Times of San Diego]
  • Government contracts guru (and friend of the blog) Guy Timberlake takes a look at the government’s FY 2016 small business report card, and concludes that the government isn’t that good at math. [GovConChannel]
  • A survey of 424 companies that sell to federal, state, local and educational agencies shows that government contractors overall, have increased confidence in 2017-2018 sales growth. [FederalTimes]
  • Proposed cuts totaling $1.4 trillion would include shrinking the federal workforce and cutting spending at non-defense agencies. [Government Executive]
  • When the Office of Federal Procurement Policy met with vendors, they pulled together the 10 misconceptions they heard most frequently and gathered them in a myth-busting memo. A few years later, some of those myths remain pervasive. [FederalSmallBizSavvy.com]
  • House Small Business Committee Member Rep. Brian Fitzpatrick (R-PA) introduced a new bill to ensure that small business federal contractors get paid in a timely manner for change orders. [Small Business Committee]

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Koprince Law LLC

Last month, Steve wrote about a new Class Deviation rule adopted by the VA that, in effect, would limit the VA’s use of class waivers as part of its decision to restrict competition to SDVOSBs (or otherwise issue solicitations as sole source awards). But in an apparent contradiction to this Class Deviation rule, GAO recently denied a challenge to an SDVOSB set-aside decision for a manufacturing solicitation, based in large part on SBA’s adoption of a class waiver for the particular NAICS code.

Before delving into the facts of the protest decision, a brief background may be helpful:

The Veterans Benefits, Healthcare, and Information Technology Act of 2006 sought to provide SDVOSBs and VOSBs a leg-up in contracting opportunities at the VA. One of the main tools employed by Congress was a mandatory Rule of Two, which requires the VA to set-aside a solicitation if two or more SDVOSBs will submit an offer at a fair and reasonable price. The Supreme Court famously upheld the broad scope of this mandate in the Kingdomware case.  And as we’ve written, GAO will sustain a protest if the VA fails to follow this Rule (or doesn’t undertake reasonable market research).

Walker Development & Trading Group, B-414365 (May 18, 2017) considered the application of the Rule of Two from the opposite perspective: one of a non-SDVOSB challenging a VA solicitation seeking quotations for mobile cardiac outpatient telemetry, holter monitoring, and cardiokey devices for patient care. The solicitation was issued under a manufacturing NAICS code—334510 (Electrical and Electrotherapeutic Apparatus Manufacturing)—but the VA advised potential offerors that the SBA had issued a nonmanufacturer rule class waiver for that code.

After conducting market research that identified two interested and capable SDVOSB concerns, the VA set the competition aside for SDVOSBs. Walker Development, a non-SDVOSB, protested this restriction, saying that the market research was inadequate.

Considering this challenge, GAO began by noting the discretion contracting officers typically enjoy when deciding whether to set aside a procurement for SDVOSBs. “No particular method of assessing the availability of capable small businesses is required,” GAO wrote, but instead, “the assessment must be based on sufficient facts to establish its reasonableness.” If so, GAO will not question the decision to set aside the solicitation.

In making this determination, moreover, an agency does not have to first actually determine the responsibility of potential offerors. All that is required is that an agency “make an informed business judgment that there is a reasonable expectation of receiving acceptably priced offers from small business concerns that are capable of performing the contract.”

GAO found the VA’s market research to be adequate. The contracting officer conducted a review of prior acquisition history and searched various contracting databases (including VA’s vetbiz.gov), posted a sources sought notice, and emailed ninety-one different vendors about the procurement. After receiving responses, the VA concluded that at least two interested SDVOSBs would submit offers at fair and reasonable prices and, thus, set the solicitation aside.

Walker did not provide any basis to question that competition between these two firms would result in the award being made at a reasonable price. Instead, it said that the VA erred by not considering whether the SDVOSBs would meet the limitation on subcontracting and comply with the requirements of the nonmanufacturer rule.

As Steve recently wrote, to comply with the limitation on subcontracting in manufacturing contracts, SBA’s regulations require that the SDVOSB prime contractor must either (1) pay no more than 50% of the amount paid by the government to it to firms that are not similarly situated or (2) qualify as a nonmanufacturer (by representing that it will supply the product of a domestic small business manufacturer or processor unless a waiver is granted by the SBA).

Here, SBA granted a class waiver for the products at issue. GAO found this waiver to be determinative, writing that “[w]hen SBA issues a waiver of the nonmanufacturer rule, a firm can supply the product of any size business without regard to the place of manufacture.” Thus, GAO found “no merit to the protester’s contention that the agency’s market research failed to consider whether the firms identified had the capability to perform and could comply with the [nonmanufacturer] rule.”

GAO denied Walker Development’s protest.

Coming so close on the heels of the VA’s adoption of a Class Deviation to the VAAR, the Walker Development decision is quite interesting. The decision confirms SBA’s authority to grant a waiver of the nonmanufacturer rule and, when SBA does so, the waiver applies in the contest of an SDVOSB “Rule of Two” analysis. The VA’s Class Deviation, however, attempts to usurp this authority by reserving for its Heads of Contracting Activity the authority approve the use of a class waiver for a particular VA solicitation—strongly suggesting that the VA believes that it can simply ignore existing SBA class waivers in the Rule of Two analysis. This wouldn’t be the first time SBA and the VA butted heads on an SDVOSB contracting issue. Time (and further protests) will tell who is right.

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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)Img-1-guy.jpg

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!wheelchair-200x300.jpg

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 guy-img-2.jpgincreased 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 | founder@theasbc.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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