After a long week that included two ice storms here in the Midwest, I hope you’re ready for a relaxing weekend. But first, it’s Friday, which means that it’s time for the SmallGovCon Week In Review.
In today’s edition, a Utah man pleads guilty to wire fraud and money laundering for his role in a scheme to obtain government construction contracts set aside for SDVOSBs, a former CEO pleads guilty to an $8.1 million “Made In The USA” marketing scheme and government contract fraud, the federal services market has experienced a jolt of dealmaking activity in recent months as companies position themselves to capture new government spending, and much more.
SDVOSB fraud: a Utah man has pleaded guilty to wire fraud and money laundering charges. [justice.gov]
Speaking of guilty pleas, a former CEO has pleaded guilty in relation to a scheme to sell Chinese-made combat boots as “Made in America.” [justice.gov]
Merger mania? Dealmaking accelerates as federal contractors jockey for spending. [standard.net]
Are RFIs a waste of time and money? [fcw.com]
The GAO has sustained a protest of a $771 million award. [nextgov.com]
One commentator says that increases in the micro-purchase and simplified acquisition thresholds are a “win-win.” [Federal News Radio]
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Civilian agencies may issue class deviations to quickly implement provisions of the 2018 National Defense Authorization Act increasing the micro-purchase threshold to $10,000 and the simplified acquisition threshold to $250,000.
In a memorandum for civilian agencies issued on February 16, the Civilian Agency Acquisition Council says that agencies may elect to adopt interim authority allowing their Contracting Officers to take advantage of these higher thresholds, even as the FAR Council goes through the formal process of codifying those changes.
The memorandum states that an official FAR Case has been opened to “implement that appropriate statutory changes in the FAR that are compelled” by the 2018 NDAA. However, “agencies may have a need to use the increased thresholds prior to publication of the FAR changes.” Therefore, the memorandum “constitutes consultation in accordance with FAR 1.404 with the Chair of the CAAC allowing agencies to authorize a class deviation to implement the changes.”
The CAAC’s memorandum makes it relatively easy for agencies to adopt class deviations: the CAAC provides agencies with the relevant FAR text, together with “highlights of the appropriate FAR citations needing changes to implement the increased thresholds.” The highlighted provisions may serve “as a basis for issuing a class deviation.”
The CAAC memorandum “is effective immediately, and remains in effect until the increased thresholds are incorporated into the FAR or is otherwise rescinded.”
It’s very important to note that the CAAC memorandum is not itself a class deviation. Instead, it authorizes civilian agencies to adopt their own class deviations while the FAR Case is pending. If I don’t miss my guess, many Contracting Officers are going to be pushing their agencies for class deviations to take advantage of this new authority more quickly.
We’ll keep you posted.
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As a contractor, you strive to do the best job for the fairest price and to develop a good working relationship with the government. But in government contracts—like in any other—disputes sometimes arise. So what’s the best way to protect your interests under the contract?
Here are five things you should know about the basics of claims:
What is a claim?
A claim is a written demand to the agency requesting some type of relief under a contract. Unlike other means of resolving disputes, the Contract Disputes Act requires a contracting officer to respond, in writing, to a claim. If the Contracting Officer fails to do so, you can take your case directly to a judge under a theory called “deemed denial.” Under this process, the contractor and the government basically litigate their dispute before a judge with jurisdiction to consider the matter.
A claim can help define your rights and obligations under a contract.
If you have a dispute under your contract, a claim is generally the formal, legal way to get it resolved. Sometimes, a contracting officer might interpret a contractual provision differently or request that work be performed in a manner that differs from the solicitation. Other times, the agency might cause delays that increase your cost of performance. Whenever a dispute arises under a contract, you may wish to consider a claim—otherwise, you could risk losing money and adverse performance ratings (or even termination).
File your claim with the contracting officer, not GAO or a Board of Contract Appeals.
Perhaps because their bid protest decisions are so common, some contractors think that claims must be filed at the Government Accountability Office. Nope—disputes as to contract administration (in other words, claims) fall outside GAO’s jurisdiction. Other contractors hope to file a claim directly with a Board of Contract Appeals, like the Armed Services Board of Contract Appeals. Boards do get involved in claims but only at the appellate level after the Contracting Officer issues a decision (or a deemed denial).
Claims are, instead, filed directly with the contracting officer for resolution. Each claim should be in writing and explain the factual and legal reasons why you’re entitled to the relief sought. This relief, moreover, could be money or some type of contract modification.
The claim process is set by statute.
The Contract Disputes Act governs the claim resolution process. In a nutshell, contractors generally have six years to file a claim (but try to avoid waiting this long—and make sure that a shorter period doesn’t apply in your case). You must do so, as mentioned, by sending your written claim to the contracting officer. Claims valued at greater than $100,000 have to be certified by the contractor.
Once the contracting officer receives the claim, she has a soft 60-day response deadline. Her response should be in writing and give the reasons why a claim was accepted or denied. If the claim is denied, the contractor can appeal to appropriate Board of Contract Appeals or federal court.
A claim doesn’t have to harm your relationship with the agency.
One of the most common questions I hear from contractors considering a claim is whether it will hurt their relationship with the contracting officer. My response is simple: it doesn’t have to.
The vast majority of contracting officers understand that claims are part of the cost of doing business. If a contractor presents a claim in a professional and civil manner, contracting officers usually reciprocate. And if a valid dispute exists, most contracting officers would rather resolve it through an early claim than have it blow up into something larger (and harder to fix). A claim simply doesn’t have to ruin a relationship.
But if you still have concerns, consider a less-formal option. The FAR, for example, encourages contracting officers to use alternative dispute resolution proceedings if requested by a contractor. You can also request that your contract be equitably adjusted—though similar to claims, requests for equitable adjustment are usually less formal and might be viewed as less adversarial. Sometimes these approaches can also save time and money. No matter which option you choose, don’t let fear of ruining a relationship stop you from protecting your rights under a contract.
So that’s it: five things you should know about the basics of claims. If you have a dispute with an agency under a contract and are considering a claim, call me to discuss your options.
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A subsidiary cannot file an SBA size protest on behalf of its parent company.
Last week, I wrote about an SBA Office of Hearings and Appeals case holding that a parent couldn’t file a size appeal on behalf of its subsidiary. Unsurprisingly, it turns out that the same principles apply to initial size protests, too.
OHA’s decision in Size Appeal of Conrad Shipyard, LLC, SBA No. SIZ-5873 (2017) involved a DOT solicitation for the construction of an ice-breaking tugboat. The solicitation was issued as a small business set-aside under NAICS code 336611 (Ship Building and Repairing), with a corresponding 1,250-employee size standard.
Conrad Shipyard, LLC submitted a proposal. Conrad Shipyard, LLC is part of a family of companies ultimately owned by Conrad Industries, Inc. Conrad Shipyard, LLC has two wholly-owned subsidiaries: Conrad Orange Shipyard, Inc. and Conrad Shipyard Inc. (In this case, the two relevant companies are Conrad Shipyard, LLC and Conrad Orange Shipyard, Inc. For ease of reference, I am going to call them “Conrad Shipyard” and “Conrad Orange,” respectively).
After evaluating competitive proposals, the DOT announced that Gulf Island Shipyards, LLC was the apparent successful offeror. Conrad Orange then filed a size protest, arguing that GIS was not an eligible small business. In the size protest, Conrad Orange stated that it was an interested party because it had submitted an offer in response to the DOT solicitation.
The Conrad companies apparently realized their mistake. Five days after filing the initial size protest, Conrad Shipyard–the offeror–filed a “Notice of Amendment” to the size protest. Conrad Shipyard asked the the size protest be amended to reflect Conrad Shipyard, not Conrad Orange, as the protester.
The SBA Area Office held that Conrad Orange was not an interested party because it did not submit an offer. The SBA Area Office dismissed Conrad Orange’s size protest. The SBA Area Office treated Conrad Shipyard’s “amendment” as a separate size protest, and dismissed it too, holding that it was untimely filed outside the five-day size protest window.
Conrad Shipyard filed a size appeal with OHA. Conrad Shipyard alleged that it should have been permitted to correct a “minor, clerical error” by substituting Conrad Shipyard for Conrad Orange as the protester. Alternatively, Conrad Shipyard alleged that Conrad Orange was an interested party because “as a member of the same corporate family as [Conrad Shipyard], it has direct economic interest in the award to GIS.”
OHA wrote that “[a] size protest against an awardee of a small business set aside contract may be filed by: any offeror the contracting officer has not eliminated from consideration for any procurement-related reason, the contracting officer, the SBA Area Director, and other interested parties.” A size protest filed by anyone other than the SBA or Contracting Officer “must be filed within five business days after the CO has notified the protestor of the identity of the apparent successful offeror.”
Here, there was no dispute that the “amendment” filed by Conrad Orange was filed after expiration of the five-day period. Thus, if the SBA Area Office was correct to treat it as a separate protest, the amendment was untimely.
Under the SBA’s size rules, OHA said, “protestors are not permitted to amend protests after the filing deadline.” Indeed, “[a]fter filing a protest, the regulation contemplates no further role for the protestor in the size determination process. It has no further submissions to make.” Otherwise, “new protest allegations could constantly be added up until issuance of the size determination.” Here, Conrad Shipyard’s “time for filing had expired, and the Area Office was not compelled to accept the October 11th filing as an amendment.”
OHA then turned to Conrad Shipyard’s contention that Conrad Orange, as its wholly-owned subsidiary, was an interested party. OHA wrote that GAO has held in its bid protest cases that “a parent corporation has no standing to file a protest on behalf of a subsidiary, because it is not the parent who would be contracting with the Government.” OHA found the GAO’s reasoning persuasive. Here, “Appellant’s subsidiary attempted to file a protest on its behalf, but it was not the offeror on this procurement. Where a parent may not file for its subsidiary, a subsidiary surely may not file for its parent.”
OHA denied the size appeal and affirmed the SBA Area Office’s decision.
As I wrote in my post last week, in practice, parent and subsidiary companies often downplay or largely ignore the legal distinctions between them. But when it comes to the SBA size protest and appeals process, those distinctions are critical. As demonstrated in the Conrad Shipyard case, members of the same corporate family are not permitted to file size protests for one another.
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Love was in the air this week with Valentine’s Day falling on Wednesday. If all the chocolate and flowers distracted you from the latest and greatest in government contracting news, you’re in luck. It’s time for our weekly roundup, the SmallGovCon Week in Review.
In today’s edition, a California father-and-son team pleaded guilty to using false financial statements and other lies in order to win more than $4 million in federal contracts, one commentator says the Department of Homeland Security must improve the quality of post-award debriefings, the GSA awarded its Alliant 2 small business small contract on Wednesday, and much more.
A California father-and-son team pleads guilty to fraudulently obtaining more than $4 million in government contracts. [nbcsandiego.com]
The GAO says that the DoD can improve its practices for developing acquisition program managers. [GAO]
A new report says that a significant percentage of government contractors have experienced cybersecurity breaches. [Washington Technology]
Speaking of cybersecurity, the DoD is warning contractors to better protect their networks, or risk losing contracts. [GovExec]
One commentator says that DHS’ post-award debriefings are underwhelming, and offers ideas for improvements. [hstoday.us]
The GSA has awarded the $15B Alliant 2 SB contract to 81 small businesses. [fedscoop.com]
The DoD recently used Other Transaction Authority to make a $950 million award. But what the heck is Other Transaction Authority, anyway? [Federal News Radio]
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When an agency solicits competitive proposals to establish multiple blanket purchase agreements, the agency may include “on-ramp” procedures to potentially award additional BPAs at a later date.
In a recent bid protest decision, the GAO confirmed that the FAR allows agencies to use on-ramp procedures to add additional BPAs–and that on-ramped BPA holders don’t enjoy an inherent unfair competitive advantage, at least not under the facts at issue.
The GAO’s decision in Al Baz 2000 General Trading & Contracting Company W.L.L., B-415353.5 (Feb 12, 2018) involved an Army solicitation for the establishment of up to eight BPAs. The awardees were to provide non-tactical vehicle leasing and maintenance services. The solicitation provided that the initial BPAs would be for a base year, and would include six one-year option periods.
Each offeror was to propose BPA ceiling unit prices. Those ceiling prices would be incorporated in the BPAs of the awardees. Orders would then be competed among BPA holders. When bidding on an order, each BPA holder could propose its ceiling unit prices, or provide discounted prices.
The solicitation included on-ramp procedures under which the Army could add new BPA holders. According to the solicitation, the Army could use the on-ramp at any time by reopening the competition and using the same basis of award established in the initial solicitation. Any additional BPAs added as a result of an on-ramp were to contain the same terms and conditions as the initial BPAs, including the same period of performance.
Al Baz 2000 General Trading & Contracting Co. filed a pre-award bid protest challenging the on-ramp procedures. Al Baz contended that the on-ramp would result in unfair competition for orders because new potential offerors would have insight into the initial BPA awardees’ total pricing. Al Baz also argued that the new awardees would have less risk as compared to the initial BPA holders because of the shorter period of performance and a better understanding of market conditions.
The GAO wrote that “the incorporation of on-ramp procedures is consistent with the authority granted to agencies to add additional BPAs pursuant to FAR 13.303-5(d).” That FAR provision “authorizes the establishment of additional BPAs to ensure maximum practicable competition.” Thus, “we find no basis to challenge the agency’s inclusion of a provision that, in essence, incorporates this regulatory authority.”
Turning to Al Baz’s specific objections, the GAO first said that “we can discern no reasonable possibility of competitive prejudice from the disclosure of the initial awardee’s total evaluated prices.” The GAO noted that the total evaluated price “is calculated by summing the proposed ceiling prices for more than 1,200 contract line item numbers.” Thus, “we find no reasonable basis to conclude that a potential offeror on a future on-ramp procurement could reasonably discern confidential proprietary or business pricing information based on the total evaluated price.”
The GAO then held that Al Baz’s final objection, regarding unfair competition, was “misplaced.” The GAO wrote that even if additional awardees had better knowledge of market conditions, they would merely be “in a better position to establish BPAs with lower ceiling prices.” However, “all BPA holders competing for individual orders are free to provide lower prices based on actual market conditions at the time the agency solicits an order.”
The GAO denied the protest.
The term “on-ramp” is often used to describe a procedure in which a contracting officer may add new small businesses throughout the life of a multiple-award set-aside contract. Such provisions are sometimes called “open season.”
As the Al Baz case demonstrates, on-ramps aren’t limited to small business set-aside GWACs. Under the FAR, the government can add new BPAs “to ensure maximum practicable competition.”
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A procurement may not be set aside for SDVOSB concerns without also including mandatory VA set-aside VAAR provisions, including the limitation on subcontracting.
In a recent bid protest decision, the GAO held that a solicitation was flawed where the cover sheet indicated that the solicitation would be set aside for SDVOSBs, but the solicitation omitted the mandatory VAAR SDVOSB set-aside clause.
Office Design Group, B-415411, __ CPD ¶ __ (Comp. Gen. Jan. 3, 2017) involved a procurement for office furniture installation for the Department of Veterans Affairs. The procurement was designated as a total Service-Disabled Veteran-Owned Small Business set-aside on block 10 of Standard Form 1449 (the standard cover sheet for commercial items procurements).
As a total SDVOSB set-aside procurement, VAAR 819.7009 required the Contracting Officer to incorporate VAAR 852.219-10, VA Notice of Total Service-Disabled Veteran-Owned Small Business Set-Aside. Of importance here, VAAR 852.219-10(c) incorporates the SBA’s limitation on subcontracting requirements found in 13 C.F.R. § 125.6, which, for this supply and services contract, prevents the prime contractor from paying more than 50 percent of the amount paid by the government to non-SDVOSB subcontractors.
Before the deadline for proposals, one offeror contended there was a general lack of SDVOSB contractors capable of performing the installation work, which made compliance with the limitation on subcontracting difficult. In response, the VA amended the Solicitation to eliminate VAAR 852.219-10 and references to the limitation on subcontracting. SF 1449, however, continued to state the contract was set-aside for SDVOSB concerns.
Two days before the close of proposals, the president of Office Design emailed the contracting officer noting that while SF 1449 still listed the procurement as set-aside for SDVOSBs, the removal of VAAR 852.219-10 created an ambiguity as to whether the solicitation was actually set-aside. The VA responded that SF 1449 still indicated the procurement was set-aside for SDVOSB concerns, thus the procurement is set-aside.
Nine days later, Office Design protested the ambiguities within the Solicitation before GAO.
As a preliminary matter, Office Design’s protest raised questions regarding its timeliness. The VA alleged that Office Design’s protest was an untimely protest of patent ambiguities within the Solicitation, which needed to be protested prior to the due date set for the receipt of proposals. Office Design, on the other hand, argued it had timely challenged the Solicitation’s terms at the agency level when it emailed the agency requesting clarification of the ambiguity resulting from the removal of VAAR 852.219-10.
GAO concluded Office Design had the better of this argument. Under GAO bid protest regulation 4 C.F.R. § 21.2(a)(3), an agency-level protest may be taken to GAO within 10 days of the agency’s decision. As GAO explained, “[a] letter (or email) does not have to explicitly state that is intended as a protest for it to be so considered; rather, it must, at a minimum, express dissatisfaction with an agency decision and request corrective action.”
In GAO’s eyes, Office design’s email raising concerns with the ambiguity of the procurement’s SDVOSB set-aside status resulting from the removal of VAAR 852.219-10 from the Solicitation expressed frustration with the Solicitation’s terms and requested the agency clarify the ambiguity. In other words, Office Design’s email “express[ed] dissatisfaction with an agency decision and request corrective action.” Taking the VA’s email response on September 19th as a denial, GAO concluded Office Design’s GAO protest timely followed an agency-level protest.
Moving to the merits of the protest, the VA argued the Solicitation was not ambiguous because SF 1449 still indicated the procurement was set-aside for SDVOSB concerns. GAO disagreed. As GAO explained, a solicitation is ambiguous when “two or more reasonable interpretations of the terms or specifications of the solicitation are possible.” Due to the VA’s deletions, two interpretations were possible. On one hand, SF 1449 continued to represent that the procurement was set-aside for SDVOSB concerns. On the other hand, the removal of VAAR 852.219-10—the mandatory SDVOSB solicitation and contract provision—indicated the Solicitation was no longer set-aside. According to GAO “[g]iven the conflicting information in the solicitation, it is impossible to determine conclusively whether the solicitation was set aside for SDVOSBs; in short, the amended solicitation was patently ambiguous.”
GAO sustained Office Design’s protest and recommended any awards be terminated and the Solicitation be revised to include mandatory provisions, as necessary.
GAO’s decision in Office Design shows that when it comes to set-asides, an agency cannot have it both ways. Here, the VA was trying to execute an SDVOSB procurement without including the associated limitations on subcontracting. But the limitations on subcontracting are part and parcel of the VA SDVOSB program because of their inclusion in VAAR 852.219-10. As such, the VA could not have one without the other, and its attempt to do so resulted in an ambiguous and flawed solicitation.
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Not too many government contracting disputes make it to a federal court of appeals—the level just a step below the U.S. Supreme Court. The most notable recent examples would probably be the Federal Circuit’s decision in Kingdomware Technologies (which, as SmallGovCon readers know, was ultimately overturned by the Supreme Court in 2016) and the D.C. Circuit’s decision Rothe Development (which the Supreme Court declined to consider).
But recently, the Federal Circuit issued a decision of note to government contractors. In AgustaWestland North America v. United States, the Court issued guidance on what constitutes a “procurement decision” and upheld the Army’s decision to buy helicopters on a sole-source basis.
Let’s take a look.
The facts of AgstaWestland date back to the Army’s 2005 decision to procure light utility helicopters by full and open competition. Airbus was ultimately awarded that contract in 2006 and, under it, the Army would purchase UH-72A Lakota helicopters.
In 2012—four years before Airbus’s contract expired—the defense budget underwent dramatic reductions. As a result, the Army implemented Army Execution Order 109-14, which, among other things, retired the Army’s existing helicopter training platform and designated the UH72A Lakota (procured under Airbus’s then-ongoing contract) as its institutional training helicopter.
To comply with the Order, the Army thought that it needed to increase its number of Lakota helicopters. It issued a sources sought notice in 2014 to explore its sole source options but ultimately decided to instead exercise Airbus’s remaining options (permitting the procurement of 412 helicopters). This left the Army 16 helicopters short of its total requirement; so, in late 2015, the Army issued a Justification & Approval to acquire these helicopters from Airbus on a sole-source basis.
AgustaWestland was a disappointed bidder under the Army’s 2005 solicitation and filed a complaint in the Court of Federal Claims, challenging the Army’s sole-source decision here. The Court of Federal Claims granted AgustaWestland a preliminary injunction (preventing the Army from proceeding with the acquisition), from which the Army appealed.
Ultimately, the Federal Circuit ruled in the Army’s favor and reversed the Court of Federal Claims. In doing so, it addressed a couple of questions important for government contractors to bear in mind:
What is a “procurement?”
This seems like a straightforward question, but it’s sometimes not. It’s important, too: under the Tucker Act, the Court of Federal Claims has jurisdiction to consider an alleged violation of a statute or regulation in connection with a procurement or proposed procurement. But the Act doesn’t actually define what a “procurement” is.
But, applying the definition applied to the Office of Federal Public Policy, the Court noted that a “procurement” is “all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion or closeout.” In other words, a “procurement” involves the initiation of the government’s process for determining the need for an acquisition all the way through contract closeout.
Applying that definition, the Court found the Execution Order was not a procurement. It was instead a part of a restructuring initiative for existing Army assets; the Order did not direct or discuss the need to procure additional helicopters.
On the other hand, the Army’s sole source acquisition of 16 helicopters from Airbus was a procurement decision. As a result, the Court of Federal Claims had jurisdiction under the Tucker Act to consider the propriety of the sole source decision.
Was the sole-source decision properly supported?
Under the FAR, a sole-source contract is permitted when it is a follow-on contract for the continued development or production of a major system or specialized equipment, and award to an alternative source would result in substantial duplication of costs or unacceptable delays in fulfilling the agency’s requirements. Applying this definition here, the Federal Circuit found it “irrelevant” that the sole-source award was a new contract to Airbus—all that mattered was that it was a contract for the continued development or production of a major system.
Supporting the sole-source decision, the contracting officer found that Airbus was the only responsible source for the contract because it has exclusive ownership of all data rights required to produce, maintain, and modify the UH-72 Lakota. According to the Army, procuring a new helicopter from another source would result in significant duplication of costs and would unreasonably delay the Army’s ability to fill gaps in its helicopter fleet.
The Federal Circuit found this rationale to be sufficient, meaning that the sole-source decision was neither arbitrary nor capricious.
* * *
At the end of the day, AgustaWestland’s nuanced legal principles will probably be more applicable to contracting officers (or government contracts attorneys) than contractors. But contractors considering a protest challenging a sole-source justification might nonetheless pay attention to the Court’s rationale.
In any event, AgustaWestland is worth discussing given the relative infrequency of bid protest decisions from the Federal Circuit.
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An SBA size appeal must be filed by someone “adversely affected by a size determination.” Because parent and subsidiary companies are not directly affected by contracts bid upon by their corporate affiliates, those entities cannot file SBA size appeals on behalf of one another.
In a recent size appeal decisions, OHA confirmed that a parent company cannot file a size appeal on behalf of a subsidiary.
OHA’s decision in Size Appeal of Cliffdale Manufacturing, LLC, SBA No. SIZ-5879 (2018) involved two Army solicitations, which were set aside for small businesses under NAICS code 336413 (Other Aircraft Parts and Auxiliary Equipment Manufacturing) and NAICS code 332912 (Fluid Power Valve and Hose Fitting Manufacturing).
Cliffdale Manufacturing, LLC submitted offers on the Army solicitations. Cliffdale was announced as the awardee of both Army contracts, but its size was successfully protested by a competitor. RTC Aerospace LLC, Cliffdale’s parent company, filed size appeals with the SBA Office of Hearings and Appeals, challenging the SBA’s size determinations.
OHA wrote that SBA’s regulations “dictate ‘any person adversely affected by a size determination’ has standing to appeal a size determination to OHA.” In its prior cases, “OHA has refrained from extending standing to alleged affiliates, proposed subcontractors, and even ostensible subcontractors to appeal the size determination of a challenged firm because the size determination has no impact on their size or status.”
Applying these rules, OHA said that “Cliffdale submitted the proposals for the subject procurements, was awarded the two subject contracts, and would be the firm contracting with the Government, not RTC.” Because “[t]he size determination has no impact or consequence on RTC’s status,” OHA concluded, “RTC lacks standing to file the instant appeals on behalf of its wholly-owned subsidiary, Cliffdale.”
OHA dismissed RTC’s size appeal.
In practice, parent and subsidiary companies often downplay or largely ignore the legal distinctions between them. But when it comes to SBA size appeals, the rule is clear–the appellant must be the entity that submitted the proposal, not a parent company.
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It has been a cold week here in Lawrence, Kansas. I hope everyone is staying warm. It’s time to get some hot cocoa (or the Friday afternoon beverage of your choice) and enjoy the top government contracting news and notes for the week.
This week’s news includes the release of the major Section 809 Panel’s first acquisition reform report, a Maryland company pays the government more than half a million dollars to settle False Claims Act allegations relating to unallowable costs, HHS agency officials are heading on a cross-country tour to demystify selling to the government, the GAO says that the SBIR and STTR databases are riddled with errors, and much more.
The Section 809 Panel put out its first “Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations.” [Section 809 Panel]
An 8(a) contractor has protested a major DoD cloud computing services contract that could be worth up to $950 million. [Federal News Radio]
A defense contractor will pay more than $500,000 to settle False Claims Act allegations relating to unallowable costs. [justice.gov]
HHS has kicked off a tour to encourage selling to the government. [Nextgov.com]
The new GSA Administrator is looking to bring more transparency to the procurement process, especially in the GSA Schedule program. [Federal News Radio]
The SBA’s SBIR and STTR program databases are hobbled by errors, according to the GAO. [Fedscoop.com]
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The FAR and DFARS have 27 distinct definitions of the term “subcontract,” according to an acquisition reform panel.
In its first report, the Section 809 Panel urges policymakers to adopt a consolidated definition of the term “subcontract,” as well as a common definition of “subcontractor,” a term that has 21 distinct definitions in the FAR and DFARS.
The Section 809 Panel was established by Congress in the 2016 National Defense Authorization Act, and tasked with recommending ways to streamline and improve the defense acquisition process. The Panel intends to release a three-volume series of reports on ways to potentially improve and reform DoD acquisitions. The Panel released its first report on January 31.
The 642-page report is chock full of interesting information–including the fact that DoD small business contract awards have dropped sharply since FY 2011, something I wrote about earlier this week. But the report also includes some other important nuggets that may fly under the radar, such as the need for common definitions of what it means to be a subcontractor or award a subcontract.
The Panel writes that “[t]he FAR currently defines the term contract, an important term widely used throughout the FAR and DFARS.” However, “neither the FAR nor DFARS defines the term subcontract, another term used throughout the FAR and DFARS.” Similarly, the term “subcontractor” is used frequently, but does not have a common definition.
The Panel says that both terms have “numerous definitions” under current regulations:
A search of the FAR and DFARS produced 27 distinct definitions of the term subcontract. Seventeen of these definitions were essentially the same with only minor differences. The other 10 were unique one way or another, but shared many of the same common elements.
The FAR and DFARS search also produced 21 distinct definitions of subcontractor. Most of these definitions shared common elements that could be conducive to drafting a single, common definition. Several had a unique element that would require an accommodation.
The Panel recommends adopting common definitions of the terms “subcontract” and “subcontractor,” and provides suggested definitions that could be adopted.
The Panel’s discussion of this terminology is a very minor part of a very large report. But it struck a chord with me, because clients have asked me many times whether a particular arrangement constitutes a “subcontract” or whether a particular company qualifies as a “subcontractor.”
It drives me absolutely batty (yes, that’s official legal terminology), that I have to respond “it depends.” And, as a policy matter, it makes little sense to treat an agreement as a subcontract in certain contexts, but as something else in others. A set of rules that defines the same terms more than 20 different ways is the sort of unnecessary complexity that discourages companies–particularly small businesses–from participating in government contracts in the first place.
The Section 809 Panel’s report will come under intense scrutiny, and some of its recommendations will likely garner significant push back from various segments of the government contracting community. But I hope that pretty much everyone can get behind the need for common definitions of important terms like “subcontract” and “subcontractor.”
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The number of DoD small business contract actions has dropped almost 70 percent since Fiscal Year 2011, even as the total number of small business dollars increased significantly. This is one of the important new findings from an acquisition reform panel’s initial report.
The Advisory Panel on Streamlining and Codifying Acquisition Regulations–better known as the Section 809 Panel–recently released the first in an anticipated three-volume series of reports on ways to potentially reform and improve DoD acquisitions. The report, which clocks in at a whopping 642 pages, includes a detailed section on DoD small business acquisitions–and suggests that DoD’s focus on achieving dollar-based small business goals has obscured the fact that far fewer small businesses have been awarded DoD contracts in recent years.
If you haven’t heard of the Section 809 Panel, don’t feel bad. It’s an important entity, but to date, its work has largely flown under the radar of many in the acquisition community. The Panel is an 18-person group established by Congress in the 2016 National Defense Authorization Act (in Section 809–gotta love the creative naming!), and assigned the task of recommending ways to streamline and improve the defense acquisition process. The Panel’s recommendations are only advisory, but in light of the Congressional mandate, they’re likely to carry quite a bit of weight with policymakers.
Some small business advocates have been worried that the Section 809 Panel will be detrimental to small contractors. After all, when it comes to government contracting, terms like “streamlining” sometimes seem to be code for bundling, consolidation, and similar processes.
It remains to be seen whether the Section 809 Panel’s recommendations, in the aggregate, will prove beneficial or detrimental to small businesses. From what I can tell so far (keeping in mind that we’re only one-third of the way into the Panel’s reporting), the answer may well depend on where a small business sits in the marketplace. But this post isn’t intended to be a soapbox screed on the Panel’s recommendations as a whole–although that may come at a later date. For now, though, I want to focus on a very important small business statistic buried in the lengthy report:
The number of small business contract actions dropped nearly 70 percent from FY 2011 to FY 2016, but during that same timeframe the value of DoD small business contracts rose approximately 290 percent. Small companies are receiving contracts of substantial value from the government, including DoD, but the decline in the number of small business contract actions indicates DoD’s small business contracting is not promoting competition and fostering robustness in the defense market.
The Panel blames this decline in part on DoD’s “almost singular focus on the aggregate dollar value of small business contracts.” In other words, under the current small business goaling system, DoD gets credit when it awards a certain percentage of its prime contracting dollars to small businesses–but it makes no difference whether those dollars are divided between 1,000 small businesses or 100,000 small businesses.
In Fiscal Year 2016, for example, the DoD awarded 22.94% of its prime contracting dollars to small businesses, and earned an “A” for its efforts. However, there has been a “decline of nearly 100,000 small companies registered in [SAM] to do business with the federal government since 2012,” and DoD’s achievement of its dollar goals masks a sharp drop in the number of contracts awarded to small companies since FY 2011.
Of course, the dollar goals were in place long before FY 2011, so there must be more going on here. Why is DoD awarding far fewer small business contracts? The Panel points to various potential factors.
For example, some small businesses interviewed by the Panel said that “doing business with DoD is too complex and burdensome.” Among the many complexities, “[a]croynms and jargon that are widely used across DoD are not always comprehensible for small businesses lacking experience in the defense market . . ..” Amen to that. But other issues abound, including the costs of pursuing DoD contracts, the long lead times associated with many DoD procurements, the “lack of clear entry points into the defense market,” and “the potential effects of audits, paperwork, and other [compliance] processes” on small businesses.
This all makes sense, but these factors all existed before FY 2011. It seems to me that the Panel, having identified a very important issue and some potential barriers to small business participation in the DoD marketplace, is ignoring the elephant in the room: streamlining itself may be playing a major role in reducing the number of small business awards.
While definitive statistics can be hard to come by, you can’t go 15 minutes at the typical government contracts conference without hearing about how agencies are moving toward fewer, larger contracts–regardless of whether those contracts meet the FAR’s technical definitions of consolidation or bundling. And I’m not going to get into the long-running debate over category management and strategic sourcing, but it’s a commonly-held view that these initiatives may be detrimental to broad small business participation in the government marketplace.
When contracts become larger and more complex, it follows that fewer small businesses are likely to compete. After all, there are only so many small businesses that can feel confident pursuing and successfully performing set-aside contracts of $25 million, $50 million, $100 million and larger. Indeed, I’ve seen a few large set-aside competitions in which all of the offerors were “non-traditional” small businesses, such as ANC subsidiaries or 8(a) mentor-protégé joint ventures.
The Section 809 Panel report identifies a very important problem in DoD’s small business contracting system, and it’s a good idea to look at ways to reduce the costs and administrative burdens of doing business with DoD. It’s also wise to consider whether the current goaling system can be adjusted to include more metrics that aren’t based on aggregate dollars. However, policymakers should examine the potential negative effects of streamlining itself, including initiatives such as strategic sourcing and category management. Without that analysis, any effort to reverse the major decline in small business awards may be missing a large piece of the puzzle.
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A newly released Government Accountability Office report provides a rare peek behind the curtain of how contracting officers assign North American Industry Classification System codes.
Contracting officers are required by 13 C.F.R. § 121.402(b) to designate the NAICS code that “best describes” the work to be performed. It sounds simple enough, but the report reveals that it can be tricky.
The contracting officers interviewed by GAO as part of its December 2017 Report to the Committee on Small Business, House of Representatives said as much, telling GAO that assigning a NAICS can be challenging, especially “when one or more codes could apply to a contract.”
“Best describes” is a lofty principle, but in practice, nothing tells the contracting officer how he or she is supposed to go about determining what NAICS code best describes the work. There are hundreds of codes with wildly different corresponding size standards. Making sense of them all is surely no easy task—especially since none of the agencies studied provide NAICS-specific training.
The selection of one code over another can have a massive impact on any procurement. The NAICS code determines whether a business is “small” for the purposes of that procurement. In terms of dollars, size standards vary in annual revenue from $750,000 to $38.5 million. Employee count size standards vary from 100 to 1,500. Thus, that one decision can dramatically affect the contours of the competition.
The report, given to Congress in December, was the result of interviews with contracting officers and small business specialists from the Departments of the Army, the Navy, Homeland Security, and Health and Human Services. But, somewhat disappointingly, GAO’s sample size appears to be extremely small. GAO only interviewed one contracting officer per agency.
Nevertheless, all four contracting officers told similar tales. The steps they generally take are 1) review the statement of work/performance work statement to get an idea of the type of work being done to assign a preliminary code; 2) conduct/review market research; and 3) seek input from the small business specialist.
Reviewing the work, according to those interviewed, includes checking to see what code the work was previously solicited under, if applicable, and whether similar work has been previously procured by the agency.
Although all four of the contracting officers said that the market research contributes to the decision, GAO found evidence of market research in only two of the four contracts reviewed.
Meanwhile, the mechanism for seeking the input of the small business specialist is simply filing out a form. The small business specialist reviews the form prior to the contracting officer issuing the solicitation.
Not to oversimplify a complicated process, but it sounds like the contracting officers generally pick a code after reviewing the work and as long as they do not get any push back, go with that.
The obvious drawback to this system is that it is heavily dependent on the contracting officer’s personal judgement. As one contracting officer told GAO, “assigning the NAICS code is subjective and two different contracting officers could review the same contract and find different codes to be appropriate.”
GAO, in fact, found evidence that this happens. For example, GAO wrote that an order for “a new closed circuit TV (CCTV) System” went out under NAICS code 541330 (Engineering Services), with a corresponding size standard of $15 million. But an order for “installation of intrusion detection and closed circuit video surveillance” went out under code 541512 (Computer Systems Design Services) with a corresponding size standard of $27.5 million. Thus, although the work was very similar, much larger businesses were eligible to compete for the latter procurement.
GAO also noted the challenge associated with IDIQ contracts, because “the statements of work may cover more than one code.” The SBA attempted to give contracting officers more freedom on that front by issuing a rule in 2013 that allowed the assignment of more than one NAICS code to multiple-award contracts. But, according to the GAO findings, contracting officers do not take advantage of the flexibility, in part because there is not a practical mechanism that would allow them to do so. The contract writing systems which feed into the Federal Procurement Data System-Next Generation (FPDS-NG) only allow for one NAICS code per contract.
The study also gave industry groups and firms the chance to opine. Unsurprisingly, they “expressed concern that some contracting officers assign NAICS codes because they want specific size standards, not because they are the most appropriate codes[.]” Both HHS and SBA pushed back against that idea. The SBA argued that the “results of NAICS code appeals as an indication that the practice of assigning NAICS codes based on the size standard was not widespread.”
But, as we recently pointed out, the relative sparsity of sustained NAICS appeals found in this report does not necessarily mean that a good portion of appeals filed are not successful. Furthermore, the standard on appeal is not whether there is a better NAICS code to describe the work, but whether the code picked was in “clear error of fact or law,” which means that the SBA Office of Hearings and Appeals’ job on appeal is not to determine if the selected code “best describes” the work, just if the selected code was obviously wrong.
Unfortunately, the small sample size means that no hard conclusions can be drawn. However, the report highlights the importance of NAICS codes in small business acquisitions, and suggests that policymakers would be wise to undertake further study to determine if the process of assigning NAICS codes can be improved.
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5 Things has previously discussed 8(a) Program basics and eligibility requirements. But the 8(a) Program isn’t the only socioeconomic program benefiting small businesses. In this post, we’ll begin exploring another crucial program for small businesses: the Historically Underutilized Business Zone—or HUBZone—program.
Here are five things you should know about the HUBZone program.
What is the HUBZone program?
At its most basic, the HUBZone program is designed to provide economic assistance to economically-depressed geographic areas by awarding federal contracts to small businesses that operate and employ workers in those areas.
Which geographic areas fall in a HUBZone?
The Department of Housing and Urban Development determines which areas qualify as HUBZones, with reference to the latest census data. The SBA then publishes interactive maps that show whether an address falls within a HUBZone.
For example, a qualified census tract HUBZone is shown shaded on the map below (just across the street to the south and east from Koprince Law LLC). Companies with their principal offices located in the blue area might qualify to participate in the HUBZone program, if they meet the other eligibility requirements; those outside of the HUBZone would not.
Who is eligible to participate as a HUBZone business?
There are four basic requirements a “typical” company must meet to participate in the HUBZone program:
The company must be at least 51% unconditionally and directly owned and controlled by United States citizens;
The company must be a small business under its primary NAICS code;
The company’s principal office must be located in a HUBZone; and
At least 35% of the concerns employees must live in a HUBZone.
These are just the basic criteria. The last two requirements come with their own quirks, so future posts will explore them in greater detail.
It’s also worth bearing in mind that these are the eligibility criteria for typical HUBZones—that is, those owned by individuals. There are separate eligibility criteria for companies owned by Indian tribes, Alaska Native Corporations, Native Hawaiian Organizations, and Community Development Corporations. We will explore the requirements for these special HUBZone firms in future posts, as well.
When is eligibility determined?
HUBZone eligibility is an on-going process. A company has to qualify at the time it submits its offer under a HUBZone contract and at the time of award. And once on the job, the company must “attempt to maintain” its compliance with the regulations. To reiterate: at the time of bid and time of award, the company must be in actual compliance with all eligibility criteria, not just be attempting to maintain compliance.
This ongoing eligibility can cause heartburn for some companies, particularly regarding the 35% employee residency requirement. Consider the following scenario: a company has 10 employees (4 of whom reside in a HUBZone) at the time it submits its bid but then, before the award is made, one of its HUBZone-residing employees takes a job elsewhere. At the time of the bid, 40% of its employees lived in a HUBZone; at the time of the award, only 33% did. Through no fault of its own, the company would not be eligible for the award.
We’ve seen this scenario happen several times—and have prosecuted and defended protests challenging HUBZone eligibility based on similar circumstances. Maintaining 35% residency supports the underlying goal of the HUBZone program—how would an economically-depressed area reap the benefits from a HUBZone contract if its residents aren’t employed to perform the work? That said, we think SBA ought to consider changing the rules to prevent potentially harsh results like the one seen in the example.
Though it might sound daunting, maintaining eligibility isn’t impossible for most firms. It just takes a little vigilance and a strong, effective compliance plan.
What’s the benefit to participating?
The benefits to participating in the HUBZone program can be enormous: the government’s goal is to award 3% of its prime contracts to HUBZone entities annually. Contracting officers are given broad powers to award contracts to HUBZone entities—including through sole-source awards and set-asides. For contracts issued under full and open competition, moreover, HUBZone companies receive a price evaluation preference.
* * *
That’s it: five things about HUBZone basics. Look for future posts explaining HUBZone program requirements in more detail. And of course, please call me to discuss eligibility or applying.
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When a contractor submits a sealed bid that includes a mistake, the contractor may be allowed to correct its bid, if there must be clear evidence of the error on the face of the bid.
According to a recent GAO decision, however, absent clear evidence, it is unreasonable for an agency to allow a bid correction.
Herman Construction Group, Inc., B-415480 (Jan. 5, 2018) involved a construction procurement for renovation and expansion at the Department of Veterans Affairs Palo Alto Health Care System Campus. Five bidders responded to the IFB, including Herman and Talion Construction, LLC.
After the bid period closed, the VA announced that Talion Construction, LLC had submitted the lowest bid and been selected for award. Talion’s bid price was $6,635,332. Herman Construction Group, Inc. submitted the second-lowest bid: $7,820,508.
After award, Talion contacted the agency and explained it had made a mistake in its bid regarding the cost of drywall installation. Talion asked to revise its bid price to $7,771,658–still the lowest bid, but more than $1 million higher than the awarded bid price.
According to Talion, it had used $500,000 as a placeholder for its bid while waiting for a bid from its anticipated subcontractor. The day before bids were due, Talion’s drywall subcontractor faxed its bid of $1,498,770 to Talion for incorporation into the proposal. According to Talion, this number was not included because Talion typically utilizes subcontractor bids made on the day of proposal submission and had failed to include the drywall subcontractor’s bid price in Talion’s final bid.
To support its contentions, Talion provided the agency with a copy of the fax it received from its subcontractor the day before bids were due. Talion also provide the agency with both its original and “corrected” bid worksheets. The original bid worksheet retained the $500,000 placeholder whereas the corrected worksheet utilized the $1,498,770 number. Notably, both worksheets still named Talion as the drywall contractor, not the subcontractor.
Based on the evidence provided, the agency allowed Talion to correct its bid. Even with the correction, Talion was still the lowest priced bidder and named the awardee. The second place offeror, Herman, subsequently filed a bid protest. While Herman raised multiple allegations regarding the VA’s award to Talion, GAO focused only on the allegation that Talion was unreasonably given the opportunity to correct its bid.
In the unique context of sealed bidding, FAR 14.407-3(a) affords agencies the discretion to allow an offeror to correct its bid after the bid submission deadline, provided the correction will only increase the bid, and “clear and convincing evidence establishes both the existence of the mistake and [what] the bid actually intended[.]” For its part, GAO will review all of the evidence used to establish the existence of an error, and “will not question an agency’s decision based on this evidence unless it lacks a reasonable basis.”
GAO was not convinced such clear and convincing evidence existed here. While Talion may have known the $500,000 place holder in its bid was an error, GAO wrote “there is nothing irregular about the entry for drywall installation that would lead one to believe that a mistake had been made.”
Consequently, there was nothing in the original bid to tip the agency off that there was something amiss with Talion’s bid, particularly since Talion’s bid listed Talion, not its alleged subcontractor, as the drywall installation contractor. Accordingly, GAO considered Talion’s explanation of its internal procedures to be “uncorroborated and self-serving, as well as not offering clear and convincing proof of a mistake, because the explanation has no connection to the worksheet other than the amount of the mistaken value.”
Turning its attention to the agency, GAO concluded clear and convincing evidence of a mistake did not exist. Therefore, “the agency improperly permitted Talion to correct the mistake in its bid.” GAO recommended the agency cancel its current award to Talion and either re-award to Talion at its original price, or make award to Herman.
GAO’s decision in Herman Construction highlights the importance of accuracy in sealed bidding. Taking Talion at its word, Talion’s internal procedures resulted in Talion submitting an incorrect bid that appeared complete. Self-serving or not, Talion’s statements about its procedures were not enough to constitute “clear and convincing” evidence of a bid mistake in the eyes of GAO. Having made a mistaken bid, Talion was stuck with it.
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I’m back in the office from my great trip to Nashville for the 2018 National 8(a) Association Small Business Conference. This weekend, I’m looking forward to watching the Super Bowl and cheering on the Eagles (or rather, with apologies to our New England-based clients, cheering against the Patriots).
Before we prepare for hours of football and outlandish commercials, let’s recap what went on this week in the world of government contracting. This week, we take a look at why it’s a good time to be a federal contractor, why RFIs may be a waste of time and money, a financial fraud case involving a scheme to falsely secure more than $13.8 million in SDVOSB contracts, and much more.
PV Puvvada, president of Unisys Federal, sat down with Federal News Radio Executive Editor Jason Miller and discussed why it’s a good time to be a federal contractor [Federal News Radio]
A proposed rule by the SBA will provide one definition of ownership and control for VOSBs and SDVOSBs, which will apply to the VA in its verification and Vets First Contracting Program procurements, and all other government acquisitions which require self-certification. [Federal Register] (and see my take here).
RFIs may be a waste of time, money, and resources, especially for small businesses. [FCW] (And see Guy Timberlake’s classic “RF-Why” column from a few years ago).
Over the years some have questioned whether GSA Schedule prices are fair and reasonable, and such concerns have let to the GSA launching efforts, such as Transactional Data Reporting and horizontal pricing analysis. [Federal News Radio]
Here’s an interesting trivia question for all you acquisition lovers in the government: How many rules did the FAR Council finalize during the first year of the Trump administration? [Federal News Radio]
There have been several initiatives undertaken across the government space focused on moving the federal procurement process onto commercial e-commerce portals. [Federal News Radio]
SDVOSB fraud: the former owners of a construction company have pleaded guilty in federal court to their roles in a “rent-a-vet” scheme to fraudulently obtain more than $13.8 million in federal contracts. [U.S. Department of Justice]
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I am back in Lawrence after a wonderful three days at the National 8(a) Association 2018 Small Business Conference in Nashville. I was part of a great panel on Wednesday on the SBA’s All Small Mentor-Protege Program, and spent a lot of time on the trade show floor talking about government contracts with 8(a)s, government leaders, and large businesses.
A big “thank you” to Ron Perry, Paula Arevalo, and the rest of the National 8(a) Association for inviting me to participate in this fantastic event. Thank you, also, to everyone who attended my panel or stopped by the Koprince Law LLC booth to say hello. It was great to see so many familiar faces and make many new connections.
I’ll be sticking close to home in February, but head to sunny Florida in early March for the APTAC Spring Conference. PTAC counselors, I look forward to seeing you there!
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It happened again this morning. I was at a government contracts conference (which was great, by the way), and stepped away from my trade show booth for a few minutes.
While I was gone, someone stole one of my display copies of Government Contracts Joint Ventures, our new GovCon Handbook. It’s not the first time a display copy of one of my books has been pilfered at an industry event. Why do people keep stealing my books at government contracts conferences?
Perhaps people are just confused and somehow think the books are free. Nope.
The way the books are set up at the booth makes it quite obvious that these are display copies, not giveaways. And of course, no one ever comes up and tries to take one when I’m actually at the booth. But just in case, I tested this theory a few years ago by placing a sign next to my book (at that time, The Small-Business Guide to Government Contracts). The sign said “FOR DISPLAY PURPOSES ONLY.”
When I came back from presenting my breakout session, The Small-Business Guide to Government Contracts had grown legs and walked off.
I suppose some folks just want to save money. But petty theft isn’t a great way to fund your next family vacation. Besides, Government Contracts Joint Ventures is a mere $9.99 in paperback and $6.99 on Kindle. You can get a copy the honest way for less than it costs to “Build Your Sampler” at Applebee’s. And after you read the nutritional information in the sidebar, you’re going to be happy that you skipped the boneless wings anyway.
So all I can conclude is that, unfortunately, like any major gathering of people, a government contracts conference attracts a few dishonest types–the sort who see a chance to steal something, and take it. Not because they’re confused, not because they want to save money, but simply because they’re the sort of people who steal things.
Don’t get me wrong. I love government contracts conferences, and undoubtedly the vast majority of people who attend them are honest and ethical. But it’s sad that if I forget to take my display copies with me when I leave my booth (which is what I’ve been doing for a few years now, but forgot to do this morning), the odds are good that those books will mysteriously vanish while I’m gone.
So if you’re the lowlife who took Government Contracts Joint Ventures, this morning, please don’t call me if you have questions. I don’t want you as a client–and I feel sorry for your joint venture partners.
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The SBA has released its proposed consolidated rule for SDVOSB eligibility, which was published in the Federal Register today. Once the rule becomes final, it will apply government-wide, to both VA and non-VA SDVOSB contracts.
For SDVOSBs, a uniform set of rules is a very good thing. There has been far too much chaos and confusion under the current system, in which the SBA and VA have different SDVOSB eligibility requirements. But how about the substance of the proposal itself? Well, there are certainly some things to like–and some areas that could use improvement.
As SmallGovCon readers will recall, the 2017 National Defense Authorization Act directed the SBA and VA to work together on a consolidated SDVOSB eligibility rule, with the SBA taking the lead in the effort. As a result, the SBA’s proposal incorporates some pieces of the existing VA SDVOSB ownership and control rules. The SBA also includes some entirely new provisions, such as an exception to the ordinary control requirements in a handful of “extraordinary” circumstances.
Here are some of the highlights (and a few lowlights) of the proposal.
The proposed rule would update 13 C.F.R. 125.12 to provide additional guidance about how an SDVOSB must be owned. Unsurprisingly, the rule retains the general requirement that an SDVOSB be “unconditionally and directly owned by one or more service-disabled veterans.”
The proposed rule provides an exception for surviving spouses, but only in very limited circumstances: for a surviving spouse to qualify as an SDVOSB owner, the veteran must have either had a 100 percent service-connected disability, or have died as a result of the service-connected disability.
The proposed rule also includes an exception for employee stock ownership plans, or ESOPs. Unfortunately, however, the proposed exception is essentially worthless: it says that “n the case of a publicly traded business,” stock owned by an ESOP need not be 51% owned by veterans. But when was the last time you saw a publicly traded SDVOSB? The next time I run across one of those will be the first. For everyone else, there’s still no exception for ESOPs, which is unfortunate. In my view, service-disabled veterans ought to have the flexibility to offer ordinary ESOPs to their employees.
The proposed rule adds a requirement that service-disabled veterans receive at least 51 percent of the profits of a corporation, partnership, or LLC. Additionally, a service-disabled veteran’s ability to share in the profits “must be commensurate with the extent of his/her ownership interest in that concern.” For example, if a service-disabled veteran owns 75% of an SDVOSB, he or she must receive 75% of the profits. These profit-sharing requirements aren’t part of the SBA’s current SDVOSB rules, but have been incorporated essentially word-for-word from the VA’s regulations.
The proposed rule also provides that service-disabled veterans must receive “100 percent of the value of each share of stock owned by them in the event that the stock or member interest is sold,” and “[a]t least 51 percent of the retained earnings of the concern and 100 percent of the unencumbered value of each share of stock or member interest owned in the event of dissolution of the corporation, partnership, or limited liability company.” Again, these requirements aren’t found in the current SBA SDVOSB regulations, but have long been a part of the VA’s rules.
The proposed rule retains the requirement in 13 C.F.R. 125.13 that, for a company to qualify as an SDVOSB, “the management and daily business operations of the concern must be controlled by one or more service-disabled veterans.” However, “in the case of a veteran with a permanent and severe disability, the spouse or permanent caregiver of such veteran” may control the company.
I’m not a fan of the “spouse or permanent caregiver” provision. No, not because I don’t think that veterans with permanent and severe disabilities ought to be able to delegate day-to-day control–to me, that’s fair. My concern is that the SBA’s rule would continue to provide that the caregiver must “have managerial experience of the extent and complexity needed to run the concern.”
Now how likely is it that the typical spouse or appointed permanent caregiver has that experience–much less the time and interest, when the caregiver is busy providing for the needs of a severely disabled veteran? I’ll let Mr. Jerry Seinfeld answer that one. In my view, it would be better to allow the veteran to designate a experienced non-caregiver manager, provided that the designated person satisfied certain reasonable criteria (e.g., no conflicts of interest). This would ensure that the company is run by someone who knows what he or she is doing, and allow the caregiver to devote full attention to the disabled veteran, instead of spending his or her time trying to run a business.
Unlike the current rule, the proposed rule would define “daily business operations.” The proposed definition states that those operations “include, but are not limited to, the marketing, production, sales, and administrative functions of the firm, as well as the supervision of the executive team, the implementation of policies and the setting of the strategic direction of the firm.” This one’s slightly odd: I think of “setting the strategic direction of the firm” as big-picture management, not a day-to-day operation. Regardless, though, the added definition should provide some additional insight as to what the SBA wants to see when it comes to control.
The SBA has provided some additional guidance about when service-disabled veterans will be deemed to control a company’s Board of Directors. This language is largely borrowed from the 8(a) and VA regulations, and I don’t have any particular concerns about it.
The proposed regulation includes another odd provision regarding super majority voting: it states that “[o]ne or more service-disabled veterans must meet all super majority voting requirements.” That’s not the odd part, although it seems inconsistent with the limited “extraordinary decisions” language I’ll discuss momentarily. The odd part is the requirement that “an applicant must inform the Department of Veterans Affairs, when applicable, of any super majority voting requirements provided for” in its governing documents.
As I read it, this means that VA CVE applicants would have to highlight super majority voting requirements in their governing documents. Does this mean that the SBA doesn’t trust the VA to find these during its document review? And why should the veterans have to identify any requirements that they satisfy? For instance, if a veteran owns 75% of a company, then a 66% super majority voting requirement shouldn’t be problematic, should it?
The SBA’s proposed rule adopts some current VA regulations regarding situations where non-veterans may be found to control a company. For instance, the SBA adopts the VA’s position that the service-disabled veteran generally must be the highest-compensated in the company. But the SBA proposal provides additional examples of things that may constitute impermissible control. SBA’s proposal says, for example, that impermissible control may exist “in circumstances where the concern is co-located with another firm in the same or similar line of business, and that firm or an owner, director, officer, or manager, or a direct relative of an owner, director, officer or manager of that firm owns an equity interest in the firm.”
The SBA also proposes to adopt a “rebuttable presumption that a service-disabled veteran does not control the firm when the service-disabled veteran is not able to work for the firm during the normal working hours that firms in that industry normally work.” In its comments, SBA says that “[t]his is not a full time devotion requirement” and that a veteran can rebut the presumption by “providing evidence of control.” The SBA doesn’t explain what sort of evidence it will accept, however.
The SBA also proposes a problematic new “close proximity” requirement. This one says:
There is rebuttable presumption that a service-disabled veteran does not control the firm if that individual is not located within a reasonable commute to firm’s headquarters and/or job-site locations, regardless of the firm’s industry. The service-disabled veteran’s ability to answer emails, communicate by telephone, or to communicate at a distance by other technological means, while delegating the responsibility of managing the concern to others is not by itself a reasonable rebuttal.
I don’t like this one. Granted, it’s just a rebuttable presumption–not conclusive ineligibility–but as the world moves more and more in the direction of telecommuting, it’s unfortunate that the SBA views physical location as so important, “regardless of industry.” Also, the “and/or” in the proposed language doesn’t make any sense. Does the veteran have to be close to headquarters, job sites, or both? If both, how is that possible for a company that bids regionally or nationally, and has job sites spread across the country?
Finally, the SBA says that it won’t find a lack of control “where a service-disabled veteran does not have the unilateral power and authority to make decisions in ‘extraordinary circumstances.'” But only five actions would count as extraordinary: (1) adding a new equity stakeholder; (2) dissolution of the company; (3) sale of the company; (4) merger of the company; or (5) declaring bankruptcy. Non-veteran owners could have veto power over these five actions, but nothing more.
I’m glad that the SBA is recognizing that complete, unfettered unconditional control actually harms service-disabled veterans by scaring away potential investors. But I think this list is too narrow, and misses some fundamental items that the SBA Office of Hearings and Appeals has identified in its size and affiliation cases. These include such things as issuing new shares of stock (which could dilute the interests of minority members, even without adding a new owner), selling all the firms assets, increasing or decreasing the size of the Board of Directors, and selling or disposing of all of the firm’s assets. I hope the SBA will look at broadening this list to better enable service-disabled veterans to attract qualified investors.
Keep in mind that for now, this is just a proposal, not a law. The SBA is accepting public comments on the proposal on or before March 30, 2018. To comment, go to the Federal Register and follow the instructions.
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GAO interprets its bid protest timeliness rules very strictly, as readers of this blog will know. These timeliness rules typically pertain to the initial protest, but are equally important when a protester files a supplemental protest. Often, supplemental protests are filed after the protester receives the agency’s response and comes to learn new information that wasn’t previously available.
If a supplemental protest raises allegations independent of those set forth in the initial protest, the supplemental protest must independently satisfy GAO’s strict timeliness rules. A recent GAO decision shows how easy it can be to slip up on these deadlines when considering a supplemental protest.
In Medical Staffing Solutions USA, B-415571 (Dec. 13, 2017), the protester (MSS) objected to the award of a contract to WJM Professional Services, LLC for emergency physician services at an Army fort.
MSS timely filed its initial protest on October 16, 2017. The four initial protest grounds were:
Failure to evaluate WJM’s lack of past performance.
That if WJM had been assigned a neutral past performance rating, it would not have been eligible for award.
Improper evaluation of WJM’s technical proposal.
An “unreasonable best-value tradeoff evaluation because MSS’s better past performance rating and lower price should have outweighed WJM’s superior technical rating and lack of past performance.”
In a GAO bid protest, when an agency intends to respond to a protest on its merits, the agency is required to submit an agency report, which contains the agency’s legal opposition and all relevant documentation. On November 3, the Army submitted a partial agency report containing all relevant documents except for the legal memorandum and contracting officer’s statement of facts.
The partial agency report included a Price Negotiation Memorandum, a technical evaluation document, and the relevant portions of WJM’s proposal. On November 15, the due date, the Army submitted the remainder of its agency report.
After an agency report is filed, the ball is back in the protester’s court. If the protester wants to continue the process and obtain a GAO decision, the protester must file comments on the agency report within 10 days of receipt.
On November 27, MSS filed its comments on the agency report. The comments were filed within the 10-day deadline after receipt of the complete agency report, that is, 10 days after November 15. (If you’re scratching your head wondering how November 27 can be 10 days after November 15, don’t worry, you’re not going crazy. Under GAO’s rules, if the 10th day falls on a weekend or federal holiday, the protester has until the next working day to file its comments. November 25, 2017, was a Saturday).
In its comments, MSS seemed to make new allegations based on the information MSS had learned in the November 3 partial agency report. For example, MSS contended that the agency had not properly evaluated the realism of WJM’s price.
GAO wrote that any independent protest grounds raised by MSS in its comments on the agency report were untimely. Under the GAO’s timeliness rules, a protest ordinarily must be filed within 10 days of the date the protester knew or should have known of the basis of protest. There’s no exception when the protester learns of the basis of protest as part of a partial agency report. Here, the submission of the partial agency report on November 3 triggered the knew-or-should-have-known date, and the supplemental protest grounds were raised on November 27, well after the 10-day period had ended on November 13.
While the calendar math is pretty easy, deciding what constitutes an “independent” protest ground seems much more difficult. GAO does not provide a definition for what makes for an independent protest ground, but it did a comparison of the initial and supplemental protest grounds that sheds a little light on the definition. In MSS’s case, GAO wrote:
GAO dismissed the protest.
The price realism distinction seems clear to me. The protestor did not attack the price-realism evaluation in the initial protest but raised it in the supplemental protest.
In contrast, the distinction between (a) WJM lacking “relevant past performance” (raised in the initial protest) versus (b) the agency “should have rated WJM’s past performance less favorably” (supplemental protest) is a pretty fine one. It’s hard to think MSS argued in its initial protest that the awardee had no past performance without also arguing that the evaluation of the past performance was flawed. But that was what GAO held.
Agencies often produce the entire agency report at the same time, meaning that the comments deadline and supplemental protest deadline are the same. But not always.
My take home lesson is: get a supplemental protest on file within 10 days of the first documents received from the agency, rather than having to rely on a comparison of the allegations raised in the initial and supplemental protest to determine if the supplemental grounds are “independent.” And if there’s any doubt as to whether a particular allegation is new, err on the side of caution and consider it a supplemental protest. That way, you potentially avoid losing a protest on such fine distinctions.
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In its past performance evaluation, an agency typically can consider the past performance of an offeror’s affiliate, so long as the offeror’s proposal demonstrates that the resources of the affiliate will affect contract performance.
But, as demonstrated in a recent GAO decision involving an Alaska Native Corporation subsidiary, ordinarily there is no requirement that an agency consider an affiliate’s past performance. In other words, unless the solicitation speaks to the issue, the agency’s consideration of an affiliate’s past performance is optional.
The GAO’s decision in Eagle Eye Electric, LLC, B-415562, B-415562.3 (Jan. 18, 2018) involved a Social Security Administration solicitation for support services at the National Records Center. The SSA issued the solicitation as a competitive set-aside for participants in the 8(a) Program.
The solicitation called for a best-value tradeoff considering three factors: experience, past performance, and price. With respect to experience, offerors were to provide a description of up to three contracts that demonstrated relevant experience. Under the past performance factor, offerors were to have references complete and submit questionnaires for each reference cited in the experience section of the proposal. The solicitation did not state whether the SSA would consider the experience of an offeror’s corporate affiliates.
Eagle Eye Electric, LLC submitted a proposal. Eagle Eye is a subsidiary of Bering Straits Native Corporation, an ANC.
In its proposal, Eagle Eye submitted information for three contracts. Eagle Eye was not involved in the performance of any of the three. Instead, these contracts had been performed by Eagle Eye’s parent company, Bering Straits, and other subsidiaries of Bering Straits. Eagle Eye wrote that these companies were “committed to provide contract performance advice, assistance and resources” in the performance of the SSA contract.
The SSA did not consider the past performance of Eagle Eye’s parent and subsidiary companies. The agency assigned Eagle Eye a “not similar” rating for its experience and “neutral” for past performance. The SSA awarded the contract to a competitor, which was rated “very similar” for experience and “very good” for past performance, but proposed a price more than $6 million more than Eagle Eye’s.
Eagle Eye filed a GAO bid protest. Eagle Eye argued that it was improper for the agency to fail to consider the experience and past performance of its affiliates. Eagle Eye pointed out that it had submitted statements from each affiliate, stating that the affiliate was committed to assisting Eagle Eye perform the contract. According to Eagle Eye, the agency therefore was required to evaluate the experience and past performance of each affiliate.
The GAO wrote that “[a]n agency may consider the experience or past performance of an offeror’s parent or affiliated company where, among other things, the proposal demonstrates that the resources of the parent or affiliate will affect contract performance, and there is no solicitation provision precluding such consideration.” But “[t]here is, however, no requirement that they do so.”
In this case, “the solicitation did not require the agency to consider the experience and past performance of Eagle Eye’s affiliate concerns and therefore, the agency was under no obligation to do so.”
The GAO denied Eagle Eye’s protest.
For many government contractors (including those owned by ANCs, Indian Tribes, and NHOs), the use of affiliated companies’ past performance is commonplace. And in many cases, agencies accept such experience and past performance, provided that the affiliated companies’ resources will affect contract performance.
But as the Eagle Eye Electrical protest demonstrates, unless the solicitation says otherwise, an agency is not required to consider the past performance or experience of an offeror’s affiliates. Where, as here, a solicitation is silent about how such past performance and experience will be evaluated, offerors would be wise to pose a question, if possible, during a pre-proposal Q&A, rather than assuming that the agency’s silence means that such past performance and experience will be considered.
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Next week, I’m off to Nashville for the National 8(a) 2018 Small Business Conference. If you plan to attend the conference, please swing by the Koprince Law LLC booth to say hello and check out copies of Government Contracts Joint Ventures, our recently-published handbook for contractors. Before I head off to Music City we are here to bring you this edition of SmallGovCon Week In Review.
This week, Washington Technology looks at the effect of the shutdown on contractors (and what may lie ahead if it happens again in February), Lockheed Martin agrees to a $4.4 million False Claims Act settlement, an Ohio woman faces penalties in an apparent SDVOSB “rent-a-vet” scheme, the city of Huntsville, Alabama kicks off a new HUBZone accelerator program, and much more.
Lockheed Martin will pay a $4.4 million dollar settlement to resolve allegations that it violated the civil False Claims Act by providing defective communications to the Coast Guard. [United States Department of Justice]
A Tennessee man has been sentenced for his role in a scheme devised to trick the Department of Energy and hide money from the IRS. [Knox News]
After a brief shutdown of the government and the threat of another impasse next month, contractors face a fragile financial environment. [WAMU]
Contractors survived the shutdown but is the worst yet to come? [Washington Technology]
A painting contractor plead guilty to theft from union plans, wire fraud, and discharge of pollutants in connection with Pennsylvania bridge project. [United States Department of Justice]
SDVOSB fraud: an Ohio woman faces a fine and possible jail time for unlawfully securing SDVOSB contracts in an apparent “rent-a-vet” scheme. [Dayton Daily News]
A new HUBZone accelerator program has launched in Huntsville, Alabama. [WAAY 31 ABC]
The General Services Administration is amending the GSAR to clarify the authority to acquire order-level materials when placing an individual task or delivery order against a FSS contract or FSS blanket purchase agreement. [Federal Register]
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Because the NAICS code governs the size standard used to determine whether a company qualifies as a small business, the choice of a NAICS code can dramatically affect the competitive landscape for a set-aside acquisition.
The only legal procedure for challenging the NAICS code assigned by the contracting officer is to appeal the assignment to the SBA’s Office of Hearings and Appeals. A NAICS code appeal can be an extraordinarily powerful tool for a business to challenge whether a contracting officer assigned the correct NAICS code in setting aside a procurement.
So how often are NAICS code appeals filed, and how often do these NAICS code appeals succeed? A recent GAO report has some answers.
The GAO’s report summarizes the use and disposition of NAICS appeals: “Of the 62 NAICS code appeals that were filed in calendar years 2014–2016, OHA dismissed 35, denied 15, and granted 12.” GAO noted that, in the same period, “1.4 million new federal contracts were awarded, and 284 other types of appeals were filed with OHA.”
In other words, NAICS code appeals have been a very small part of the federal contracting world, and a small part of all the appeals handled by OHA (which, of course, also decides size appeals and certain other SBA appeals).
To put these statistics into context, a little background on NAICS code appeals is in order.
Basics of NAICS Code Appeals
GAO writes that OHA expedites NAICS code appeals and will issue decisions as soon as practicable. As a result of this expedited treatment, the NAICS code appeal process takes an average of 18 to 30 days to complete.
Also noteworthy is that interested parties have a short time frame to file NAICS code appeals. These appeals must be filed within 10 calendar days after issuance of the solicitation or amendment to the solicitation affecting the NAICS code. This, of course, differs from the ordinary rule for protesting a defect in a solicitation. At the GAO and Court of Federal Claims, protests of other solicitation defects ordinarily are timely if filed before the due date for initial proposals.
Only small businesses can file NAICS code appeals. While SBA has an independent right to file NAICS code appeals, it only filed 3 out of 62 appeals in the GAO study’s time period.
OHA reviews the assignment of the NAICS code for “clear error of fact or law.” The review of a NAICS code assignment is procedurally different from other types of OHA appeals in that OHA is directly reviewing the contracting officer’s action. For other types of appeals, such as size determinations or SDVOSB eligibility determinations, OHA is reviewing the SBA Area Office’s initial determination.
What are the common outcomes of NAICS code appeals?
GAO’s headline was Most Code Appeals Were Dismissed, but I think the numbers may tell a different tale, just as the headline from a recent report about GAO protests may have missed the mark.
As mentioned in the report, most NAICS Code appeals (57%) were dismissed for various reasons. The reasons for dismissal are:
not filing before the 10-day deadline
the contracting officer cancelled the solicitation
the appeal was withdrawn
the contracting officer amended the NAICS code
the appellant was not authorized to file an appeal
Unfortunately, the report does not break down the number of decisions dismissed for each of these reasons.
Of these reasons, those involving the contracting officer’s actions are basically out of the control of a potential appellant, but dismissals based on timeliness are within the appellant’s control. Given the short timeline on these appeals (and the variance with the ordinary protest rules for challenging solicitation defects), it’s likely that many were dismissed because the appellant didn’t file within the 10-day period.
Of course, not all dismissals are bad news for the appellant. If the result of the appeal was that the contracting officer voluntarily amended the NAICS code, this might be just what the protester was seeking. But without a breakdown of the reasons for dismissal, it’s impossible to determine the overall success rate of NAICS appeals–a metric that would include both favorable OHA decisions and voluntary agency corrective actions.
Counting just those NAICS code appeals decided on the merits, about 45% were granted. This is actually a fairly high success rate, especially given the appellant’s burden of proof. Statistically, then, a NAICS code appeal is likely to succeed almost half the time, provided there are no procedural defects.
There are three major takeaways from these statistics.
First, NAICS code appeals are infrequent. In fact, they seem underused. The GAO handles several thousand bid protests each year. In contrast, contractors file about 20 NAICS code appeals annually. Given the power of NAICS appeals to shape the competitive landscape, it seems that some contractors may not be aware of their NAICS appeal rights.
Second, the dismissal rate of NAICS code appeals is very high. Some of these dismissals are undoubtedly due to voluntary agency corrective action, but many dismissals are likely caused by defects in the appeals themselves, or misunderstandings about how the procedural rules work. For instance, as we’ve written, the ten-day clock on a NAICS code appeal is not paused by a prospective offeror’s discussions with the contracting officer.
A final takeaway, though, is one the GAO did not focus on: of those appeals decided on the merits, nearly half resulted in OHA determining that the contracting officer made a mistake in assigning the NAICS code. For potential appellants, that’s good news. Get the procedural stuff right, and the statistical odds of success aren’t bad.
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GAO bid protests filed by small businesses are (statistically speaking) less likely to succeed than protests filed by large contractors, according to the RAND Corporation’s recent bid protest study.
The disparity isn’t the result of discrimination against small businesses, but rather a product of other factors: primarily, the motivation to protest, the understanding of the protest system, and access to legal counsel. RAND raises an important point, but offers no fair and easy solution. Perhaps, given that protests overall are “exceedingly uncommon,” a solution isn’t needed–but it’s wise to think about whether there are ways to help small businesses become better educated about bid protests.
During the years RAND studied, small businesses filed the majority of bid protests at GAO and the Court of Federal Claims–53% at the GAO and 58% at the Court. However, “mall-business protests are less likely to be effective and more likely to be dismissed for legal insufficiency.” Indeed, at GAO, “small-business [protesters] are 1.5 times as likely to have their protests dismissed for being ‘legally insufficient.'” The overall effectiveness rate of GAO bid protests (that is, sustain decisions plus voluntary agency corrective actions) is also lower for small businesses than it is for large companies.
What accounts for the difference? Well, the biggest factor seems to be the use (or lack thereof) of attorneys. At the Court of Federal Claims, where all protesters are required to use an attorney, “the effectiveness rate for small businesses is the same as for other businesses. ” At GAO, attorneys aren’t required. But, in GAO cases where the protester is represented by an attorney, small business “protest sustained rates are similar to those of larger firms.”
This certainly makes sense. I don’t keep stats, but I bet that I’ve talked more people out of protesting than I’ve filed protests (and I’ve filed my share). Small businesses frequently call our firm with potential protests, and they’re often fired up about something the agency did. But often, my colleagues and I have to give them some bad news: the protest has no chance of succeeding. Maybe it’s untimely–that happens a lot. Or maybe the potential protester is trying to challenge something outside the GAO’s jurisdiction, like the sufficiency of the debriefing or the size status of the awardee. Or maybe the potential protester wants to argue that the evaluators were biased, which is almost impossible to prove, and not exactly calculated to make new friends at the agency.
What if all of these people hadn’t called me or another government contracts attorney, but just gone ahead and protested? These protests would have been dismissed or denied. Some of the agency officials on the receiving end would have huffed, “that’s a frivolous protest!” But the protester certainly didn’t intend to file anything frivolous–quite the opposite. The protester probably thought he or she had a winning case, but simply didn’t have a thorough understanding of the nuanced and complex bid protest world.
Outside the absence of attorneys, RAND says that small businesses’ lower success rate may be caused, in part, because in some cases, “small businesses’ reasons for protesting differ from larger businesses’ reasons.” For instance, “when debriefings are uninformative, small businesses lodge protests to gain an understanding of why they lost a procurement.” Large businesses, in contrast, “generally filed a bid protest only if they thought the government did not follow its source-selection procedures or that an error was made that was substantial enough to change the outcome.”
Again, I think that’s largely correct. As I’ve written before, our firm’s clients–as a rule–are more inclined to protest when they leave a debriefing thinking the agency is hiding something. I am not sure I agree that they’re protesting to “gain an understanding” so much as a belief that the agency’s reticence means that there’s a smoking gun lurking in the source selection file. But either way you slice it, the fact remains that better communication with small businesses is very likely to reduce small business bid protests.
Finally, RAND writes that small businesses seem less inclined to forego a protest due to the “potential for ‘ill will’ that could be created when they considered filing a protest.” This could be because many small businesses have no other contracts with the agency or contracting officer in question, whereas large businesses “with a substantial number of contracts with the federal government” may be more invested in preserving certain relationships.
Here, I think RAND only saw half the picture. Yes, it’s true that I’ve occasionally heard something like “what the heck, this is my only bid with these guys, so I don’t care if I burn bridges.” But I think that most small businesses do care about relationships with government customers, and approach the protest process little differently than our large business clients in that regard. (Also, in my experience, the vast majority of contracting officials understand that respectful disagreements are part of the competitive system, and don’t blackball companies for filing good faith protests).
More often, I believe that small businesses are highly motivated to protest because of the relative importance to their overall business of a particular acquisition. For a large business, losing a $10 million contract may be a drop in the bucket, and not worth a protest unless there’s a very obvious error. But for a small business incumbent, that $10 million contract might represent half of the company’s annual revenues. In situations like these, the small business is–very understandably–much more motivated to protest.
RAND Corporation offers a few potential options to reduce the disparity between the success rates of protests filed by large and small businesses. But, as RAND essentially concedes, some of these suggestions aren’t very good ideas.
RAND says, for instance, that “[o]ne option would be to require all protests at GAO to be filed through legal counsel.” However, RAND continues, “this approach might be viewed as unfair, as small businesses might face more-significant economic barriers to filing than larger businesses.”
Yup. Good government contracts lawyers ain’t cheap, and not all small businesses can afford to hire an attorney. Imposing such a requirement would essentially lock the GAO’s doors to the smallest and newest contractors. If it’s a choice between that and accepting some legally deficient “pro se” filings in the GAO’s docket, I say give me the legal deficiencies.
Along the same lines, RAND writes that “the current ‘loser-pays’ pilot program for DoD excludes businesses with annual revenues under $250 million.” RAND’s italicized implication seems to be that Congress shouldn’t have exempted small businesses from “loser-pays.”
I’ve got a ton of respect for RAND and this comprehensive report (and not just because the report cites SmallGovCon twice–check the footnotes!) But here, I think RAND gets it wrong. For the smallest businesses, imposing a “loser-pays” requirement would be no different than requiring attorneys. They can’t afford it, so they’ll essentially be locked out of the protest process. Or, worse: they’ll essentially bet the company on a protest. The stakes of a major bid protest can be high, but they shouldn’t be that high.
RAND finally suggests that “[a]nother option would be to provide legal assistance to small businesses–perhaps through the Small Business Administration.” RAND says that “uch advice might be useful if it is provided early enough that small businesses can determine whether they have valid cases, which could allow them to craft more-persuasive arguments and, possibly, reduce the number of dismissed protests.”
This suggestion focuses on the problem of small businesses lacking a full understanding of the complex bid protest system. I’m all for educating small businesses about protests, and would welcome an initiative to help contractors learn more about protest timeliness, GAO’s jurisdiction, and other common reasons why protests are dismissed or denied.
That said, policymakers have to be very careful how they go about providing this education. The SBA would be a logical choice to lead such an initiative, but most SBA representatives don’t have the knowledge or experience in this area to provide the right guidance. If policymakers want SBA to educate contractors on bid protests, they ought to be sure that the individuals doing the educating have a deep background in the protest world–even if it means that SBA needs to contract with outside government contracts attorneys to provide some of that education.
RAND also seems to suggest that SBA might help potential protesters determine, in individual cases, whether they have valid arguments. This strikes me as highly problematic. It’s one thing for the government to tell contractors, in a vacuum, how the GAO’s jurisdictional and timeliness rules work. It’s quite another for a government employee to weigh in on whether a particular protest should be filed. Our firm doesn’t just represent protesters; we also represent many awardees who intervene in bid protests to help defend their awards. I can only imagine the reaction from these companies when they realize that their taxpayer dollars paid for the SBA to assist the protester in determining whether it had a case.
At the end of the day, there may not be a whole lot that can be done to easily and fairly address the lower success rate of bid protests filed by small businesses. And maybe that’s okay. As RAND concluded, only 0.3 percent of DoD acquisitions are protested. Statistics like these simply don’t warrant major exclusionary changes like forcing small businesses to hire attorneys to file protests.
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The HUBZone program has received its fair share of coverage on our blog, from recommended changes in the 35% employee-location requirement to SBA regulatory updates to the program. Well, the HUBZone program is once again undergoing some changes thanks to the 2018 National Defense Authorization Act–but note that these changes are not effective until January 1, 2020.
These changes include a requirement for an improved online mapping tool, a mandate that HUBZone verifications be processed in 60 days, and more. Here’s a look at some of the most significant HUBZone changes in the 2018 NDAA.
Online Tool, Household Income, and Certification
Online Tool. Section 1701(h) of the 2018 NDAA directs the SBA to “develop a publicly accessible online tool that depicts HUBZones” that will be updated immediately for any changes to a redesignated area, base closure area, qualified disaster area, or Governor-designated covered area. For qualified census tracts and qualified nonmetropolitan counties, the SBA must update the online tool “beginning on January 1, 2020, and every 5 years thereafter.” The SBA must also “provide access to the data used by the Administrator to determine whether or not an area is a HUBZone in the year in which the online tool was prepared.”
HUBZone participants may ask, “but doesn’t SBA already have HUBZone maps? What’s the difference under the 2018 NDAA”? A 2016 decision of the Court of Federal Claims may provide some answers. In that case, the SBA’s HUBZone map said that a certain redesignated tract was still HUBZone qualified, even though that was no longer the case. The Court called the SBA’s characterization of the tract “at best . . . unofficial” and noted that the Department of Housing Urban Development, not the SBA, determines which tracts qualify as HUBZone. The Court upheld an SBA decision sustaining a HUBZone status protest against the company.
It certainly seems like Congress had the Court’s decision in mind. The requirement for “immediate” updates will (hopefully) eliminate erroneous information like that at issue in the Court case. Additionally, the requirement for the underlying data will allow HUBZone companies to verify that the HUD data supports the SBA’s characterization of a qualified tract.
Qualified Nonmetropolitan County. Section 1701(b) changes the metric for comparing median household income. The old statute said the median household income of a qualified nonmetropolitan county had to be “less than 80 percent of the nonmetropolitan State median household income.” The 2018 NDAA deletes the word “nonmetropolitan” from the clause, meaning that the comparison of income will include all metropolitan counties as well. This should have the effect of increasing the number of qualified nonmetropolitan counties, because metropolitan counties generally have higher income. In addition, the income comparison and unemployment comparison are now based on a 5-year average of economic data, not the most recent data available.
Examination and Certification of HUBZone Businesses. The 2018 NDAA has added some statutory requirements to the SBA’s review of businesses hoping to become or continue as a HUBZone small business. While the existing statute mainly left it up to the SBA to create certification regulations, the new statute has some specifics that SBA must follow in reviewing HUBZone status of businesses. For the most part, these changes reflect the rules already found in SBA regulations.
One key change is that SBA must “verify the eligibility of a HUBZone small business concern . . . within a reasonable time and not later than 60 days after the date on which” SBA receives documentation. This change should result in HUBZone applications being processed in a timely manner. That said, it could prove difficult for the SBA to effectively implement this change without significant additional resources. When GAO studied the issue a few years ago, it found that the average processing time was 116 days. Achieving a nearly 50% reduction without additional analysts could prove difficult. Hopefully, the bean counters will do their part to help implement this change.
Base Closure Areas
The 2018 NDAA extends HUBZone eligibility for base closure areas in two key ways. First, the statute now allows the SBA to designate a base closure area as a HUBZone before the base actually closes. This is an important change from prior law, which only allowed HUBZone designation once the base was closed. In the 2018 NDAA, Congress appropriately recognized that the negative economic impact of a base closure begins long before the gates shut for the last time.
The 2018 NDAA also extends the length of time that a base closure area may be considered a HUBZone. Under prior law, the designation applied for five years. The 2018 NDAA allows such a designation to last indefinitely, but “not . . . less than 8 years.”
Governor-Designated Covered Areas
The 2018 NDAA adds a new category to the list of HUBZone areas: “a Governor-designated covered area.” This should result, over time, in increasing the number of HUBZones in the country.
The five existing categories are Qualified census tract, Qualified nonmetropolitan county, Redesignated area, Base closure area, and Qualified disaster area. The Governor-designated covered area designation allows a governor to petition the SBA to turn a rural, low-population, high unemployment area of a state into a HUBZone. The SBA, in reviewing the petition, will look at certain factors such as “the potential for job creation and investment in the covered area,” whether the area is part of a local economic development strategy, and whether there are small businesses interested in an area becoming a HUBZone.
Once this process is implemented, it creates a formal procedure under which the governor, with the input of small businesses and the blessing of the SBA, can create new HUBZone areas. But governor-designated areas don’t give state officials blank checks to create new HUBZones: a governor will only be allowed to propose one new HUBZone each year.
The 2018 NDAA makes some important changes to the HUBZone program that should generally have the effect of expanding the program to more areas of the country, giving states (and potentially small businesses) some say in designating HUBZones and making the online mapping tools more transparent.
The government has been missing its 3% HUBZone goal by wide margins in recent years. Hopefully, these changes (as well as important regulatory changes SBA adopted in 2016, such as allowing HUBZones to form joint ventures with non-HUBZones) will help reverse this trend.
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