The SBA’s strict SDVOSB ownership rules can produce “draconian and perverse” results, but are nonetheless legal, according to a federal judge.
In a recent decision, the U.S. Court of Federal Claims condemned the SBA’s SDVOSB unconditional ownership requirements, while holding that the SBA was within its legal rights to impose those requirements on the company in question.
The Court’s decision emphasizes the important differences between the SBA and VA SDVOSB programs, because the Court held that although the company in question didn’t qualify as an SDVOSB under the SBA’s strict rules, it was eligible for VA SDVOSB verification under the VA’s separate eligibility rules.
The Court’s decision in Veterans Contracting Group, Inc. v. United States, No. 17-1188C (2017), is the third in a series of ongoing battles between the SBA and a self-certified SDVOSB. The cases involved an Army Corps of Engineers IFB for the removal of hazardous materials and the demolition of buildings at the St. Albans Community Living Center in New York. The Corps set aside the IFB for SDVOSBs under NAICS code 238910 (Site Preparation Contractors).
After opening bids, the Corps announced that Veterans Contracting Group, Inc. was the lowest bidder. An unsuccessful competitor subsequently filed a protest challenging VCG’s SDVOSB eligibility.
DoD procurements fall under the SBA’s SDVOSB regulations, not the VA’s separate rules. (As I’ve discussed various times on this blog, and will again here, the government currently runs two separate SDVOSB programs: one by SBA; the other by VA). The protest was referred to the SBA’s Director of Government Contracting for resolution.
The SBA determined that Ronald Montano, a service-disabled veteran, owned a 51% interest in VCG. A non-SDV owned the remaining 49%.
The SBA then evaluated VCG’s Shareholder’s Agreement. The Shareholders Agreement provided that upon Mr. Montano’s death, incapacity, or insolvency, all of his shares would be purchased by VCG at a predetermined price. The SBA determined that these provisions “deprived [Mr. Montano] of his ability to dispose of his shares as he sees fit, and at the full value of his ownership interest.” The SBA found that these “significant restrictions” on Mr. Montano’s ability to transfer his shares undermined the SBA’s requirement that an SDVOSB be at least 51% “unconditionally owned” by service-disabled veterans. The SBA issued a decision finding VCG to be ineligible for the Corps contract.
When the SBA issues an adverse SDVOSB decision, the SBA forwards its findings to the VA Center for Verification and Evaluation. After receiving the SBA’s findings, the VA CVE decertified VCG from the VetBiz database.
VCG then took two separate, but concurrent actions. First, it filed an appeal with the SBA Office of Hearings and Appeals, arguing that the SBA’s decision was improper and that VCG was eligible for the Corps contract. Again, because this was a non-VA job, the SBA’s SDVOSB rules applied to the Corps contract. Second, VCG filed a bid protest with the Court of Federal Claims. VCG’s bid protest didn’t challenge its eligibility for the Corps contract, but instead challenged the VA’s decision to remove VCG from the VetBiz database.
The Court and OHA reached different conclusions.
As my colleague Shane McCall wrote in this post, the Court concluded that the VA should not have removed VCG from the VetBiz database. While the Court didn’t directly overrule the SBA, the Court wrote that the SBA’s application of the “unconditional ownership” requirements was flawed.
The Court cited with approval two cases dealing with the VA’s SDVOSB regulations, AmBuild Co., LLC v. United States, 119 Fed. Cl. 10 (2014) and Miles Construction, LLC v. United States, 108 Fed. Cl. 792 (2013), agreeing with these cases that a restriction on ownership that is not executory (meaning not taking effect until a future event occurs) does not result in unconditional ownership. The Court issued a preliminary injunction ordering the VA to restore VCG to the VetBiz database, but reserved a final decision until further briefing in the case.
Things turned out far differently at OHA. As I wrote in a September post, OHA held that the restrictions in VCG’s Shareholders Agreement prevented Mr. Montano from unconditionally controlling the company. OHA issued a decision upholding the SBA’s determination, and finding VCG ineligible for the Corps contract.
That brings us to the Court’s recent SDVOSB decision, which involved VCG’s challenge to OHA’s eligibility determination. Unlike the first Court case, the question before the Court in the new case was not whether the VA had properly removed VCG from the VetBiz database, but rather whether OHA had erred by upholding the finding that VCG was ineligible, under the SBA’s SDVOSB rules, for the Corps contract.
The Court began by writing that “[t]his post-award bid protest features interactions between complex and divergent regulatory frameworks, giving rise to a harsh, even perverse, result.” The Court then walked through the statutory and regulatory framework, explaining in detail that the government operates two SDVOSB programs, each with its own eligibility rules. The Court noted that Congress has directed the SBA and VA to work together to consolidate their SDVOSB requirements, but to date, “[n]o such implementing regulations have been promulgated.”
In this case, the Court said, VCG’s “attempt to rely on this court’s decisions in AmBuild and Miles is misplaced because both cases interpret VA’s procurement regulations, not SBA’s.” The court’s earlier decisions “are irrelevant to bid protests concerning solicitations from the U.S. Army Corps of Engineers and or other non-VA agencies,” which fall under the SBA’s SDVOSB rules.
VCG asked the Court to look, by way of analogy, at the SBA’s 8(a) and WOSB programs, both of which define unconditional ownership in a manner that “allows for the succession planning outlined in [VCG’s] shareholder agreement.” In contrast, SBA’s SDVOSB regulations don’t define “unconditional ownership,” which has resulted in OHA applying a very strict definition of the term.
This argument didn’t sway the Court, which concluded that the SBA could have looked to its 8(a) and WOSB regulations for guidance in interpreting the SDVOSB “unconditional ownership” requirement, but that the SBA’s “choice not to do so has some basis in the regulations.” The Court pointed out that the SBA’s rulemakers have been aware of OHA’s strict interpretation for more than ten years, but have chosen not to update the regulations in response.
The Court concluded:
SBA’s omission of a definition of unconditional ownership n the [SDVOSB] program produces draconian and perverse results in a case such as this one. Nevertheless, without at least some indicia of SBA’s intent or inadvertence regarding that omission, the court cannot remake the regulations in reliance on SBA’s actions in the closely related contexts of the 8(a) and WOSB programs. Therefore, OHA’s decision stands and [VCG] is ineligible to participate in SBA’s [SDVOSB] program, even though it is eligible to participate in VA’s correlative program.
The Court granted the government’s motion for judgment on the administrative record.
For SDVOSB advocates, the Court’s decision is very disappointing, although certainly understandable. The Court’s role isn’t to make public policy, but to decide whether an agency is rationally applying the law. Here, the Court was obviously very frustrated with how the SBA has chosen to interpret “unconditional ownership” in its SDVOSB regulations, but even a “draconian and perverse” rule isn’t necessarily illegal.
The Court rightly pinned the blame on the SBA. For years, OHA has interpreted “unconditional ownership” very strictly, but the SBA’s rulemakers have failed to update the regulations to soften the requirement. Veterans Contracting Group shows just how harsh that interpretation is: VCG supposedly wasn’t an SDVOSB in part because Mr. Montano couldn’t dispose of his shares as he saw fit upon his death.
Think about that for a second. Not to be morbid, but this circumstance will only arise when Mr. Montano is dead. At that point, unless ownership of the company passes to another service-disabled veteran, the company wouldn’t be an SDVOSB anymore anyway.
So how, exactly, does a provision regarding what happens when Mr. Montano dies impact the company’s eligibility for the Corps contract, at a time when Mr. Montano (presumably) was very much alive? When Mr. Montano passes on, he won’t exactly be in a position to dispose of his interest “as he sees fit,” or benefit from the “full value” of those shares. Because he’ll be, you know, dead. And yet, somehow, this provision about what happens when Mr. Montano dies undermined VCG’s SDVOSB eligibility while he was alive. To me, that’s just crazy.
The purpose of the SBA’s rules is to ensure that service-disabled veterans own, control and benefit from the set-aside program. That’s a noble goal: as a policy matter, no one wants pass-throughs or “rent-a-vets.” The requirement for “unconditional ownership” sounds like a good way to implement this policy, and applied well, it can be. For example, if VCG’s 49% owner had the right to buy 2% of Mr. Montano’s interest, at any time, for a pre-determined price, it would be fair to say that Mr. Montano didn’t unconditionally own 51%.
But cases like Veterans Contracting Group show that the SBA has taken things too far. There’s no good policy reason to prohibit ordinary commercial and estate planning provisions like those at issue in this case. To the contrary, unnecessarily strict rules like these simply discourage non-veterans from investing in SDVOSBs, to the detriment of the very veterans the SDVOSB program is intended to help. And they penalize well-meaning veterans like Mr. Montano, who adopt paperwork that reasonably appears to them as providing for unconditional ownership. Indeed, VCG was verified as an SDVOSB by the VA CVE, which presumably reviewed the same Shareholders Agreement and saw nothing amiss. But even with that VA verification in his back pocket, Mr. Montano lost the Corps contract, and probably has some hefty legal bills to pay, too. Is this really what the SDVOSB program was intended to do?
On this point, Veterans Contracting Group is a stark example of the divergence in the SBA and VA SDVOSB regulations. In my experience, many (perhaps most!) veterans think that VA verification applies government-wide, and that if the company is VA-verified, it’s essentially bulletproof for non-VA SDVOSB jobs. Clearly, that ain’t so.
The Court’s decision shows that the same company, operating under the same paperwork, can be a VA-verified SDVOSB, but ineligible for non-VA SDVOSB contracts. No doubt, many VA-verified SDVOSBs have documents with commercially reasonable restrictions much like those at issue in Veterans Contracting Group. If those companies plan to bid non-VA jobs, they better take a careful second look at those VA-approved corporate documents before submitting their next non-VA proposal.
Fortunately, change is on the way. Sometime in 2018, the SBA and VA ought to unveil their proposed regulation to consolidate the SDVOSB eligibility requirements. Once that regulation takes effect, the problem of the two programs’ divergence will at least be solved–although it may be 2019 before that happens.
But Veterans Contracting Group shows that consolidating the two SDVOSB regulations, while undoubtedly a good thing, isn’t enough. The substance of the rules need to change, also, to protect service-disabled veterans while accommodating ordinary commercial and estate planning restrictions like the ones in VCG’s Shareholders’ Agreement.
SBA, if you’re reading, here’s a good rule of thumb: when a federal judge calls your rules “draconian and perverse,” it’s a wise idea to strongly consider changing those rules. Here’s hoping the upcoming consolidated regulation does that.
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The U.S. Air Force cannot buy sporks, at least not in many situations.
One would think that the recently passed $700 billion defense bill would provide a little wiggle room for the military to buy paper plates and utensils for its civilian contractors, but, according to the GAO, that is not necessarily the case.
In Air Force Reserve Command-Disposable Plates and Utensils, B-329316, 2017 WL 5809101 (Comp. Gen. Nov. 29, 2017), GAO determined that disposable plates and utensils are, like food, a personal expense that must be born by the individual user.
The ruling begs the question: What does the Air Force and the Government Accountability Office have against sporks? The answer, apparently—and I swear I am not making this up—is that sporks do not advance the mission of the Air Force, therefore, taxpayer money ordinarily cannot buy them.
(I should note at this point, dear reader, that the GAO decision this blog is based on does not actually use the word “spork.” Instead it talks about paper plates and “disposable utensils.” But a “spork” is a disposable utensil and it lends an additional air of absurdity, so I am going to keep using it.)
How did the United States government come to this anti-spork conclusion, you might be asking. Unlike most of the GAO decisions we cover here at SmallGovCon, the ruling came about not due to a bid protest, but instead because the Air Force asked GAO to provide an advance ruling on the status of these products.
Just over a year ago, Grissom Air Reserve Base, located north of Kokomo, Indiana, announced that it had discovered there was too much lead and copper in the water on post to drink, and ordered that the faucet water could not be used for consumption, making coffee, or washing dishes.
The base operates 24 hours a day and employs both civilian and military personnel who work 12-hour shifts during which they may not leave the work area. They eat meals in a break room which has a sink, microwave, and toaster. Since discovering the tap water was undrinkable, the Air Force had been buying bottled water for workers. But without potable water, employees had to take their dishes home to wash.
In response, the base comptroller authorized the temporary purchase of disposable plates and utensils “to protect the building’s occupants from health related issues associated with unsafe lead and copper concentrations.” That sounds like a reasonable alternative to making Air Force employees wash their dished at home. But the Staff Judge Advocate, the command-level Judge Advocate, and the command-level Financial Management decided that while appropriated funds could be used to purchase drinking water, they could not be used to purchase disposable plates and utensils. They asked GAO to rule.
GAO said that the Air Force has a duty to provide drinking water for its employees, and “agencies may use their appropriations to provide bottled water to employees where no potable water is available.” But once the agency provides potable water, “the remaining flexibility lies with individual employees to make choices that suit their preferences.”
GAO continued: “employees may choose to 1) purchase and use their own disposable plates and utensils; 2) wash plates and utensils at home and transport them back to the office; or 3) wash plates and utensils using the water provided.” Because employees had these options, “AFRC does not demonstrate a legal necessity to provide these items.” GAO concluded: “ecause the purchase of disposable items is for the personal benefit of AFRC employees, appropriated funds are unavailable.”
In other words, sporks, legally speaking, did not advance the Air Force’s mission and were more valuable to the individual employees than it was to the government. Therefore, absent Congressional approval, or significantly differing circumstances, the government cannot use taxpayer dollars to provide them.
Since the Spork Act of 2018 seems unlikely, for the time being, the employees of Grissom will have to make do. Meanwhile, here at SmallGovCon, we’ll continue to keep you updated on government contracts legal developments in the new year–be they major Supreme Court rulings, or slightly less groundbreaking updates on the government’s spork policy.
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It’s hard to believe it, but Monday is Christmas. Hopefully you will be able to enjoy some time with family and friends this weekend and maybe even get that special gift you’ve been hoping for under your tree. Before we head off into the holiday weekend, we wouldn’t think of leaving you without the SmallGovCon Week In Review.
In this edition, two defense contractors will fork over $1.4 million (and spend some time in the pokey) as a result of a procurement fraud scheme, the GAO releases a study on DoD contracts awarded to minority-owned and women-owned businesses, a contractor will pay a whopping $63.7 million to settle False Claims Act allegations, and more.
SmallGovCon Week in Review will be off next week, but we’ll be back with more government contracts news and notes in 2018. Happy holidays!
Two San Diego defense contractors will forfeit $1.4 million and serve jail time for their roles in conspiring to commit wire fraud and file false claims against the government. [Times of San Diego]
A contractor will pay $63.7 million to settle False Claims allegations relating to improper billing practices and unlawful financial inducements in violation of the Anti-Kickback Act. [United States Department of Justice]
A new DoD memorandum allows Contracting Officers, at their discretion, to eliminate cost or price as an evaluation factor when awarding certain multiple-award contracts. [Office of the Undersecretary of Defense]
GAO released a report on the number and types of contracts for the procurement of products or services that the DoD awarded to minority-owned and women-owned businesses. [Military Technologies]
The Defense Logistics agency wants to beef up its Business Decision Analytics decision tool to better help it better identify and combat procurement fraud. [GCN]
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A recent SBA Office of Hearings and Appeals decision confirms that there is no exception for nonprofit organizations when it comes to affiliation issues.
In the case, SBA OHA found affiliation between a self-certified small business and a nonprofit organization based on close family members controlling both the business concern and the nonprofit. Adding in the receipts from the affiliated nonprofit made the business in question ineligible for small business status.
In Johnson Development, LLC, SBA No. SIZ-5863 (2017), OHA considered the case of a business (Johnson Development) that was awarded a VA contract for clinic leasing space under NAICS code 531190, Lessors of Other Real Estate Property, with a corresponding $38.5 million annual receipts size standard. While the procurement was unrestricted, small business offerors would receive credit under the evaluation.
In its evaluation of proposals, the VA assigned small business credit to Johnson Development under the solicitation’s evaluation scheme. The VA subsequently announced that it had awarded the contract to Johnson Development.
An unsuccessful competitor filed a size protest, alleging that Johnson Development was affiliated with several other entities. The SBA Area Office determined that it had jurisdiction over the protest, even though the solicitation was unrestricted, because small business status was beneficial to offerors.
The SBA Area Office determined that Johnson Development was owned by Johnson Healthcare Holdings, LLC (JHH), which in turn was owned by James Johnson and his wife, Sallie Johnson. Their children are Milton Johnson and Sumner Rives. The SBA Area Office found the four family members affiliated based on identity of interest and found Johnson Development affiliated with 31 other companies controlled by the family members, including JHH.
Apparently, though, these affiliations didn’t push Johnson Development over the $38.5 million size standard. The SBA Area Office then turned to potential affiliation with a nonprofit entity, the James Milton and Sallie R. Johnson Foundation. The SBA Area Office determined that Ms. Rives was the Foundation’s President, and Johnson family members were the only directors and contributors. The SBA Area Office concluded that Johnson Development was affiliated with the Foundation based on common management and familial identity of interest.
Johnson Development filed a size appeal with OHA. Johnson Development emphasized that it was a “non-profit, charitable organization.” Johnson Development contended that there was a clear line of fracture between Johnson Development and the Foundation for two reasons. First, because the Foundation’s assets were “contributions for the public benefit” and the Foundation paid no compensation or reimbursement of expenses to any Johnson family member. Second, because all donations contributed to the Foundation was irrevocable, the Foundation was in a “a completely different line of business from [Johnson Development],” and there were no business connections such as loans, customers, or shared facilities between the two.
OHA first addressed the big picture issue: can a nonprofit be an affiliate? Citing 13 C.F.R. § 121.103(a)(6), OHA wrote that it “has consistently found no difference between for profit and non-profit entities” under the SBA’s affiliation rules. OHA continued:
Having concluded that the Foundation could be an affiliate, OHA then rejected the argument that there was a clear line of fracture between Johnson Development and the Foundation. OHA wrote that, under the SBA’s affiliation rules as they existed at the time, companies controlled by close family members are presumed to be affiliated. Although this presumption can be rebutted by showing a “clear line of fracture,” a clear line of fracture “is a fracture between the family members themselves,” not between the entities in question.
Here, “Johnson family members operate the for-profit entities together.” Therefore, “there is no clear fracture between them,” and the presumption of affiliation could not be rebutted.
OHA affirmed the SBA Area Office’s size determination and denied the size appeal.
This decision is an important reminder that a nonprofit is treated the same as any other entity for affiliation purposes. Contractors shouldn’t make the mistake of thinking that, because nonprofits are treated differently under some laws, they will be treated differently for affiliation purposes.
One final note regarding the identity of interest rule for companies owned by close family members. The solicitation in this case was issued in 2015, and proposals were due in April 2016. But in a rulemaking effective June 30, 2016, the SBA tinkered with the identity of interest rule–which arguably can now be read as requiring the entities in question to conduct business with each other for the presumption to apply. We’ll keep our eyes peeled for case law interpreting the updated rule to see how OHA interprets it.
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The GAO lacks jurisdiction to determine whether an offeror is a service-disabled veteran-owned small business.
In a recent bid protest decision, the GAO rejected the protester’s creative attempt to convince the GAO to take jurisdiction, and confirmed that, for non-VA acquisitions, the SBA has sole authority to determine whether an offeror is an SDVOSB.
The GAO’s decision in OBXtek, Inc., B-415258 (Dec. 12, 2017) involved a DHS RFQ for cybersecurity support services. The RFQ was issued to holders of the GSA’s OASIS Small Business (Pool 1) IDIQ contract. The DHS set aside the order for SDVOSBs.
After evaluating quotations, the DHS announced that it would make award to Analytic Strategies, LLC. OBXtek, Inc., an unsuccessful competitor, subsequently filed a bid protest at the GAO.
OBXtek argued, in part, that Analytic Strategies had misrepresented its SDVOSB status in order to compete for the set-aside RFQ. Specifically, OBXtek contended that Analytic Strategies had been acquired by another company in August 2016, and was not an eligible SDVOSB at the time it submitted its quotation in mid-2017.
OBXtek conceded that the GAO doesn’t have authority to determine whether a company is an SDVOSB. However, OBXtek argued that Analytic Strategies’ SDVOSB eligibility wasn’t at issue. Rather, OBXtek argued, it was asking the GAO to determine whether Analytic Strategies had made a material misrepresentation in its proposal by expressly certifying that it was an SDVOSB. And, as OBXtek pointed out, the GAO ordinarily has the ability to determine whether an offeror made a material misrepresentation in its proposal.
It was a creative effort, but GAO didn’t buy it. Under the Small Business Act, the GAO wrote, “the SBA is the designated authority for determining whether a firm is an eligible SDVOSB concern” for most non-VA acquisitions, and “it has established procedures for interested parties to challenge a firm’s status as a qualified SDVOSB concern.” As a result, the GAO “will neither make nor review SDVOSB status determinations.”
Here, “[w]hile the protester may be correct in asserting that allegations of a vendor submitting a quotation with a material misrepresentation is within our Office’s jurisdiction, the issue as it is here, of whether a vendor is an SDVOSB (and eligible to compete under a set-aside) is a matter within the jurisdiction of the SBA.” In other words, determining whether Analytic Strategies had made a material misrepresentation would require GAO to determine whether Analytic Strategies was (or was not) an SDVOSB–a determination that the GAO is not permitted to make.
The GAO dismissed this portion of OBXtek’s protest.
As I was reading the case, I kept wondering–why did OBXtek protest to the GAO in the first place? Ordinarily, the answer would be simple: the company was confused by the nuanced jurisdictional rules of federal bid protests, and simply filed in the wrong place. But OBXtek, by advancing its creative argument, seemed to understand that the SBA was the right place to file an SDVOSB protest. So why not file there?
I can only speculate, but it’s possible that OBXtek didn’t think that it could file a viable SBA SDVOSB protest. Under the SBA’s SDVOSB regulations, a company that qualifies as an SDVOSB at the time of initial offer on a multiple-award contract ordinarily is considered an SDVOSB for the life of that contract, including “for each order issued against the contract.” There are exceptions to this rule, but if none of them applied, Analytic Strategies might not have been required to be an SDVOSB at the time of its quotation on the DHS order. If my speculation is correct, OBXtek’s protest might have been an effort to circumvent this rule.
Regardless of the reasons why OBXtek took its case to GAO, the OBXtek, Inc. decision is an important reminder: the GAO cannot determine SDVOSB eligibility. For most non-VA acquisitions, SDVOSB determinations must be left to the SBA.
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The GAO ordinarily lacks jurisdiction to consider a protest of a task or delivery order under a DoD multiple-award contract unless the value of the order exceeds $25 million.
In a recent bid protest decision, the DoD confirmed that the 2017 National Defense Authorization Act upped the jurisdictional threshold for DoD task orders from $10 million to $25 million.
The GAO’s decision in Erickson Helicopters, Inc., B-415176.3, B-415176.5 (Dec. 11, 2017) involved a solicitation under the U.S. Transportation Command’s Trans-Africa Airlift Support multiple-award IDIQ contract. The agency sought to procure personnel recovery, casualty evaluation, and airdrop services in various parts of Africa.
In May 2017, the agency issued a task order RFP to all three IDIQ contract holders. After evaluating proposals, the agency awarded the order to Berry Aviation, Inc. AAR Airlift Group, Inc., an unsuccessful offeror, filed a protest challenging the award.
The agency directed Berry to suspend performance of the task order pending the outcome of AAR’s protest. But in the interim, the agency issued a sole source order to Berry to provide the same services.
In August 2017, three days after the agency issued its sole source justification, Erickson Helicopters, Inc. filed a protest challenging the sole source award to Berry. Erickson alleged, in part, that the award to Berry was flawed for various reasons, such as that Berry did not provide fair and reasonable pricing.
The GAO wrote that, under statutory authority modified by the 2017 NDAA, “our Office is authorized to hear protests of task orders that are issued under multiple-award contracts established within the Department of Defense (or protests of the solicitations for those task orders) where the task order is valued in excess of $25 million, or where the protester asserts that the task order increases the scope, period, or maximum value of the contract.”
In this case, many of Erickson’s arguments did not allege that the task order increased the scope, period, or maximum value of the underlying IDIQ. After a detailed analysis, the GAO concluded that the total value of the task order would be “no more than $23,189,823.90.” This amount, GAO said, “is less than the $25 million threshold necessary to establish the jurisdiction of our Office.”
GAO dismissed these portions of Erickson’s protest.
For many years, the GAO had jurisdiction over DoD task order protests valued in excess of $10 million. But in the 2017 NDAA, Congress upped the threshold to $25 million. This significantly varies from the threshold for orders under civilian IDIQs, which remains at $10 million.
It’s easy for prospective protesters to get tripped up by these jurisdictional rules. Jurisdiction may not be the most exciting topic in the world, but anyone wishing to protest a task or delivery order at the GAO must consider whether the GAO has jurisdiction.
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As we reach the halfway point of December, we have managed to escape any real signs of winter weather here in Lawrence. Our chances for a white Christmas may also be dwindling as the long range forecast is predicting sunny skies and zero precipitation. But I’m not complaining: bring on the sun and (relative) warmth, I say.
As the holidays approach, there’s plenty happening in the world of government contracts. So if you’re an Eggnog fan (I’m not, but perhaps it’s an acquired taste), pour yourself a tall glass, sprinkle on some cinnamon, and enjoy this edition of the SmallGovCon Week in Review. This week, the Pentagon has delayed a much-discussed January 1 deadline for contractors to meet the NIST 800-171 standards, a bribery scheme involving a contract at the Hoover Dam has led to the indictment of a longtime former official for the U.S. Bureau of Reclamation in Nevada, government contracts guru Larry Allen discusses how the recent emphasis on preventing sexual harassment may impact contractors, and much more.
After knowingly disclosing confidential information to private companies bidding on contracts at Scott Air Force Base the Chief of Project Management has plead guilty to one charge of government procurement fraud. [The Telegraph]
Larry Allen to discuss the recent rules regarding sexual harassment on Capitol Hill and takes a look at if contractors will be next to target sexual harassers. [Federal News Radio]
A Pennsylvania man has been indicted for conspiring to defraud the United States through repeated bribes and contractor kickbacks related to a U.S. Army renovation project. [Daily Record]
President Donald Trump signed a major government technology revamp into law Tuesday as part of the 2018 NDAA. [Nextgov]
The GSA cannot proceed with the $50 billion Alliant 2 Unrestricted contract for IT services until the resolution of several protests. [Washington Technology]
Ellen Lord, the DoD’s new undersecretary for acquisition, technology and logistics is requesting more “flexibility” to cut down the amount of cost and pricing data it requires companies to cough up when bidding on certain contracts. [Federal News Radio]
The DoD intents to award a cloud computing contract next year that could disrupt the entire federal market. [Nextgov]
The Pentagon will delay a January 1 deadline for all of its suppliers to meet a set of new regulations largely designed to better protect sensitive military data and weapons blueprints. [Nextgov]
An ex-official for the U.S. Bureau of Reclamation in Nevada has been indicted on federal charges for his alleged role in a bribery scheme involving a government contract at the Hoover Dam. [U.S.News]
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Almost a year ago, we wrote of a memorandum from the Office of Federal Procurement Policy urging agencies to strengthen the debriefing process. OFPP’s rationale was simple: because effective debriefings tend to reduce the number of protests, agencies should be inclined to enhance the debriefing process.
Congress seems to have taken note: the 2018 National Defense Authorization Act requires the Department of Defense to make significant improvements to the debriefing process. That said, those improvements are limited to large DoD acquisitions, leaving many small businesses stuck with the much more limited debriefing rights currently available under the FAR.
NDAA Section 818—entitled Enhanced Post-Award Debriefing Rights—imposes three significant changes of which contractors should be aware.
First, the NDAA bolsters the amount of information offerors will receive under DoD debriefings. For small business awards valued between $10 million and $100 million—and for any contract valued over $100 million, regardless of the awardee’s status—defense agencies must disclose the agency’s written source selection award determination (redacted as necessary to protect other offeror’s confidential information).
This is a significant increase in the amount of information disclosed as part of debriefings: currently, agencies need only disclose basic information about the awardee’s scores and a summary of the rationale for award.
Second, the NDAA also makes clear that written or oral debriefings will be required for all contract awards and task or delivery orders valued at $10 million or more.
This also represents a significant expansion of debriefing rights: now, the FAR only requires debriefings under negotiated procurements (FAR part 15) and for task and delivery orders valued over $5.5 million (FAR 16.505).
Third, the NDAA requires agencies to give offerors the ability to ask questions following receipt of the debriefing—specifically, within two business days after receiving the debriefing.
True, the FAR already requires agencies to allow offerors the ability to ask questions; but oftentimes, agencies require questions to be posed before the debriefing is received. I’ve always thought this requirement is nonsensical, as it’s tough for an offeror to know what questions to ask if it lacks any information about the evaluation. Congress apparently agrees and now wants to make clear that questions must be allowed after the debriefing is received.
Congress also seeks to improve the debriefing process by giving some teeth to the requirement that agencies accept questions. That is, although the FAR already contemplates that offerors be given the opportunity to ask questions, agencies sometimes ignore this mandate and close the debriefing before questions can be asked. The NDAA hits back at this practice: it says that a contractor’s bid protest clock does not start ticking until the government delivers its response to any questions posed by an offeror. In other words, the longer the agency waits to allow for and respond to questions, the more time a protester will have to develop potential protest arguments.
All told, the NDAA makes significant changes to the post-award debriefing process in DoD procurements. These changes are a big step in the right direction but not a perfect solution to the problem OFPP identified. The changes will apply only to DoD, not civilian agencies. And even for small businesses, enhanced debriefings will only be available for large acquisitions of $10 million or greater. As a result, many small businesses won’t be entitled to enhanced debriefings, even in DoD acquisitions.
Perhaps, though, the rollout of this enhanced debriefings process will prove that, contrary to a common agency perception, better post-award communication actually decreases protests. If so, agencies might begin offering enhanced debriefings even when they’re not required, which would be a real win for everyone in the contracting community.
President Trump signed the 2018 NDAA into law on December 12. It’s only a matter of time before these changes take effect.
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Recently, there’s been a lot of discussion about the fact that the GAO bid protest “effectiveness rate” was a sky-high 47% in FY 2017.
But, somewhat under the radar, contractors did even better at the Armed Services Board of Contract Appeals. According to the ASBCA’s annual report, contractors prevailed (in whole or in part) in 57.6% of FY 2017 ASBCA decisions.
The annual report reveals that the ASBCA decided 139 appeals on the merits in FY 2017. Of those merit-based decisions, “57.6% of the decisions found merit in whole or in part.”
If 139 sounds like a low number, it is–many more appeals were resolved without a merits-based decision. The report states that the ASBCA dismissed 539 appeals in FY 2017. Although one might think that a contractor loses when the appeal is dismissed, that often isn’t the case. As the ASBCA points out, “ in the majority of cases, a dismissal reflects that the parties have reached a settlement.”
The report doesn’t provide additional details, but in my experience, a settlement typically results in the contractor getting at least some of what it wants. In other words, many of the dismissed appeals would likely be best classified as “wins” (or at least partial wins) for the appellants.
The FY 2017 numbers aren’t an outlier. The ASBCA’s prior annual reports show a history of appellants prevailing more than half the time in merit-based decisions dating back at least ten years.
Unlike bid protests, the appeals process hasn’t been the subject of political scrutiny in recent years. But, like bid protests, ASBCA appeals are surprisingly successful on a percentage basis.
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The 2018 National Defense Authorization Act put a new twist on potential costs a contractor may incur in filing a GAO bid protest.
While many federal contractors are familiar with the costs arising from a GAO protest, including their attorneys’ fees and consultant and expert witness fees, and some are lucky enough to recoup such costs upon GAO’s sustainment of a protest, under the 2018 NDAA, some large DoD contractors may also be required to reimburse DoD for costs incurred in defending protests denied by GAO.
Under Section 827 of the 2018 NDAA, Congress has instructed the Secretary of Defense to implement a pilot program whereby some large DoD contractors filing GAO bid protests between October 1, 2019 and September 30, 2022, will be required to reimburse the DoD for costs incurred by DoD in defending the protest, if the protest is denied. Specifically, Section 827 provides as follows:
The Secretary of Defense shall carry out a pilot program to determine the effectiveness of requiring contractors to reimburse the Department of Defense for costs incurred in processing covered protests…. In this section, the term ‘‘covered protest’’ means a bid protest that was— (1) denied in an opinion issued by the Government Accountability Office; (2) filed by a party with revenues in excess of $250,000,000 (based on fiscal year 2017 constant dollars) during the previous year; and (3) filed on or after October 1, 2019 and on or before September 30, 2022.
Notably, a “covered protest” only includes those protests filed with GAO challenging DoD procurements. It does not cover agency-level protests to DoD or protests filed with the Court of Federal Claims. It also does not cover protests filed in connection with acquisitions by civilian agencies.
Additionally, only large federal contractors (i.e. contractors with revenues in excess of $250,000,000) will be required to reimburse DoD for costs incurred in filing a protest denied by GAO. Consequently, small, medium, and even many large federal contractors need not worry about this pilot program–although if the program proves successful, Congress could adjust the thresholds in the future.
Finally, the pilot program is only set to run between October 1, 2019 and September 30, 2022. After this time, the Secretary of Defense is required to provide a report to the Committees on Armed Services concerning the feasibility of making the program permanent.
Although the 2018 NDAA outlines the basics for DoD seeking reimbursement of costs incurred in defending a protest denied by GAO, many questions remain.
For one, what if GAO dismisses a protest based on a technicality (i.e. untimeliness) and not based on the merits? The language of the statute uses the word “denied,” which isn’t the same as a dismissal. But one of Congress’s goals is to discourage frivolous protests; one would think that dismissals would be covered, too.
What if GAO denies some grounds and not others? GAO decisions are often a mixed bag, with some allegations sustained and others dismissed or denied. Most protesters view a protest as successful if even one ground is sustained–but will such a result still require the payment costs?
Other questions abound: What costs will a contractor be required to reimburse the DoD? Will multiple unsuccessful protesters be required to split the costs, and in what manner? What if the protest involves both large and small protesters; will the large protester have to foot the bill for the entire protest? Will the DoD later expand this program to cover smaller businesses?
These details should come as the pilot program is implemented in regulation. Perhaps that is why Congress allotted two years for the DoD to implement the pilot program.
And, of course, it remains to be seen what effect, if any, this requirement will have on the number and nature of GAO protests filed by large defense contractors. It’s doubtful that many contractors of $250 million or more would make a go/no go protest decision based on the potential to pay costs. But will these contractors choose to turn to the Court of Federal Claims more often to avoid the cost requirement? Will they increasingly seek ways to resolve GAO protests, such as GAO’s outcome-predictive Alternative Dispute Resolution, that avoid decisions on the merits? Time will tell.
Stay tuned as we continue to follow this issue and delve into other matters surrounding the passage of the 2018 NDAA.
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In a recent post, I discussed the basics about SBA’s 8(a) Business Development Program. This follow-up posts discusses 8(a) eligibility requirements in greater detail.
To qualify for the 8(a) Program, a firm must be a small business that is unconditionally owned and controlled by one or more socially- and economically-disadvantaged individuals who are of good character and citizens of the United States and that demonstrates a potential for success.
What does this really mean? Here are five things you should know about 8(a) Program eligibility.
Is your business small enough to become an 8(a) Participant?
The 8(a) Program is only open to businesses that are small under the size standard corresponding to their primary NAICS codes. And remember: SBA will not only consider your company’s size, but will also add to it the size of any affiliates. If there’s a question as to your business’s size, SBA may go so far as to request a formal size determination.
What is your primary NAICS code? While businesses have some leeway to select the code that fits best, the SBA may push back if the NAICS code you choose doesn’t seem to be the one in which your company does the most work. Before applying, it may be useful to review the SBA’s definition of “primary industry” at 13 C.F.R. 121.107.
One final note: some IRS tax returns already provide a spot for a primary NAICS code. For example, Form 1065, which is completed by many LLCs, asks for a primary NAICS in box A, “principal business activity.” Oftentimes, our clients are surprised to notice that an accountant or bookkeeper has identified a primary NAICS code on a tax return. Be aware that the SBA will ask for an explanation if that primary NAICS code isn’t the one the company has selected for 8(a) purposes.
What is “social” disadvantage?
It’s not enough to be a small business to qualify for the 8(a) Program. The business’s owner also must demonstrate suffering from social disadvantage—or, as SBA defines it, “racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.”
Members of certain racial or ethnic groups are presumed by SBA to have suffered social disadvantage, including Black Americans, Hispanic Americans, Native Americans, and some Asian Americans. This presumption is not absolute (as it may be rebutted by credible evidence demonstrating the lack of social disadvantage) or controversy (as its constitutionality has been challenged, but recently upheld). For a full list of groups presumed socially disadvantaged, take a look at 13 C.F.R. 124.103(b).
But participation in the 8(a) Program isn’t limited to only the groups listed in the regulations. Any individual can try to establish social disadvantage by presenting evidence showing chronic disadvantage based on a characteristic or circumstance beyond that person’s control, which has impacted that person’s education, employment, or business histories. For example (and not by way of limitation), our firm has assisted companies owned by Caucasian women and disabled veterans in obtaining 8(a) certification.
What is “economic” disadvantage?
In addition to social disadvantage, you still must show economic disadvantage to be eligible for the 8(a) Program. An economically-disadvantaged individual is one whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to other non-socially disadvantaged persons (in the same or similar line of business).
SBA will take a detailed look at an individual’s financial history to determine his or her economic disadvantage. Though there are caveats and exceptions to these requirements, here are a few numbers to keep in mind:
Net worth: For initial eligibility, the adjusted net worth of the person claiming economic disadvantage must be less than $250,000. The adjustment typically excludes: (1) funds invested in an IRA, 401(k), or other official retirement account; (2) income received from an S corporation, LLC or partnership, if that income was reinvested in the company or used to pay company taxes, (3) the equity interest in the applicant company, and (4) equity in the individual’s primary residence.
Fair market value of all assets: Notwithstanding a person’s net worth or personal income, an individual will not be considered economically-disadvantaged if the fair market value of his/her assets (including the value of the applicant company and the person’s primary residence) exceeds $4 million. But even this calculation excludes funds in traditional retirement accounts.
Personal income: If an individual’s adjusted gross income for the three years prior to the 8(a) application exceeds $250,000, there is a rebuttable presumption the individual isn’t economically disadvantaged. Income from an S Corporation or LLC will be excluded when the funds were reinvested in the company or used to pay company taxes.
Are there any other requirements?
Yes. Again, socially- and economically-disadvantaged individuals have to unconditionally own and control the company. This means disadvantaged individuals must directly own at least 51% of the company and oversee its strategic policy and day-to-day management and administration. Additionally, the individual must manage the company on a full-time basis while holding its highest officer position.
The company must also demonstrate potential for success. This assessment generally requires a holistic view of the company: not only must it have been generating revenues in its primary industry for at least two years, but SBA will also consider every aspect of its business operations (including access to capital and financing, technical and managerial experience of the company’s managers, its past performance, and licensing requirements) to determine if the company is likely to succeed in the 8(a) Program.
The company and its principals must have good character. For example, if the business owner has recently been convicted of a felony or any crime involving business integrity, the SBA may decline the application. The SBA will also examine federal financial obligations: unpaid back taxes and defaults on SBA business loans, for example, may lead to a rejection.
It’s important to note that while these are some of the most important requirements, it’s not an exhaustive list. 8(a) Program eligibility is rather complex.
Do you have to maintain compliance with these eligibility requirements throughout your participation in the 8(a) Program?
Yes. Demonstrating eligibility isn’t a one-time thing; once a company is admitted to the 8(a) Program, SBA will review its eligibility compliance on an annual basis.
Some of the initial eligibility requirements are modified for continuing eligibility. For example, once admitted to the 8(a) Program, caps on net worth and personal income are raised (but not eliminated). But tread lightly: SBA imposes additional requirements on 8(a) Participants to remain eligible, such as limiting the number of withdrawals an individual can take from a Participant and restricting the number of 8(a) awards a Participant may receive.
If these eligibility requirements sound a bit ominous, it’s for good reason: they can be. But that’s not to scare you away from considering the 8(a) Program—as I mentioned in my initial post, the benefits to participating can be tremendous.
If you have questions about your company’s 8(a) Program eligibility, or would like help applying for the Program, please call me.
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For small government contractors, joint ventures can be an important vehicle for successfully pursuing larger and more complex opportunities. As the SBA’s All Small Mentor-Protege Program enters its second full year, the popularity of joint ventures seems to be increasing significantly.
But joint ventures aren’t immune from the FAR’s rules governing organizational conflicts of interest. In a recent decision, the GAO held that an agency properly excluded a joint venture from competition where one of the joint venture’s members–through its involvement in a second joint venture–had assisted in the preparation of the solicitation’s specifications.
HBI-GF, JV, B-415036 (November 13, 2017) involved a Corps of Engineers project to construct cutoff walls for an embankment at Lake Okeechobee, Florida. Gannett Fleming, Inc. was a construction company involved in two joint ventures: HBI-GF and GF-GEI. HBI-GF was a joint venture between Gannett Fleming and Hayward Baker, Inc. GF-GEI, on the other hand, was a joint venture between Gannett Fleming and GEI Consultants.
GF-GEI held an existing IDIQ contract with the Corps. In March 2016, GF-GEI was issued a task order to perform an Independent External Peer Review (IEPR) for the design phase of the cutoff wall project. GF-GEI performed the IEPR and made many comments on the design of the project.
The Corps then requested proposals for construction of the cutoff walls project. HBI-GF submitted a proposal.
After review, the Corps excluded HBI-GF’s proposal because of Gannett Fleming’s role in the earlier IEPR of the design phase. In a letter explaining its decision, the Corps said that the agency had investigated a potential OCI, and concluded that there was “evidence of both biased-ground rules OCI and unequal access OCI.”
After receiving the Corps’ letter, HBI-GF filed a GAO protest challenging its exclusion.
GAO explained that, under the FAR, OCIs “can be broadly categorized into three groups: biased ground rules, unequal access to non-public information, and impaired objectivity.” A biased ground rules OCI “may arise where a firm, as part of its performance of a government contract, has in some sense set the ground rules for the competition for another government contract by, for example, writing or providing input into the specifications or statement of work.” In these cases, “the primary concern is that the firm could skew the competition, whether intentionally or not, in favor of itself.” GAO reviews an OCI determination for reasonableness and encourages Contracting Officers to err “on the side of avoiding the appearance of a tainted competition.”
In this case, GAO found the Corps’ OCI determination reasonable based on a “15-page OCI investigation memorandum . . . based on interviews with agency personnel involved in the project; a review of the IEPR report, IEPR task order scope of work, the underlying task order contract, and other relevant IEPR materials; as well as a review of the HBI-GF proposal, a review of the relevant FAR provisions and case law; and consultation with technical advisors and legal counsel.”
GAO noted that the Corps had taken multiple specific recommendations for the design of the project from a Gannett Fleming engineer, such as the size of core samples and personnel requirements. Because Gannett Fleming’s recommendations for design changes were accepted by the agency, Gannet Fleming was in a position “to skew the terms of the competition, intentionally or unintentionally, in its favor.”
GAO denied HBI-GF’s protest.
This decision is a vivid example of how OCIs can affect joint ventures. In HBI-GF, JV, the joint venture entity had no conflict–but one of its members did, based on its work for another joint venture. Given the FAR’s broad policy of avoiding, mitigating and neutralizing OCIs, that was enough to justify exclusion of the joint venture’s proposal. Joint venturers should be aware of these rules and plan accordingly.
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I am back in the office after a great time at the 2017 National Veterans Small Business Engagement in St. Louis. I was able to see many familiar faces and meet many new ones. A big thanks to everyone who attended my presentation on the nonmanufacturer rule and visited the Koprince Law booth–and most of all, thank you to all the veterans I met for your service and sacrifices.
In this edition of SmallGovCon Week In Review, we take a look at two separate cases where contractors conspired to defraud the government, the Census Bureau is finally able to move forward with preparations for the 2020 Census, the General Services Administration has named its new leader, and much more.
A government contractor has been convicted of major fraud for executing a scheme to defraud the United States on a construction contract valued at approximately $1.5 million. [United States Department of Justice]
Federal prosecutors sought the maximum allowed sentence for a defense contractor who bilked the government out of more than $15.4 million. [Pilot Online]
Federal agencies are beginning to catch up with the ever-evolving nature of cyber risk, but the scope and complexity of federal contracting cannot keep up with the challenges. [Forbes]
AT&T has withdrawn its protest of the Census Bureau contract to provide mobile devices for workers, allowing the agency o move forward after the $283 million procurement dispute. [Nextgov]
After continued efforts to change the federal procurement process by submitting bid protests, Latvian Connection has been handed a two-year suspension from the GAO, preventing it from filing further bid protests. [Federal News Radio] (and see my take here)
The GSA has a new leader in Emily Murphy, who received Senate approval on Tuesday to become the next administrator of the GSA. [fedscoop]
The GAO released a report describing potential improvements in the VA’s acquisition of medical and surgical supplies. [GAO]
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GAO typically affords agencies wide discretion to establish technical restrictions within solicitations.
In a recent decision, however, GAO confirmed that such discretion is not unbounded. When an agency’s technical restriction is unduly restrictive of competition, the GAO will sustain a bid protest.
Global SuperTanker Services, LLC, B-414987 et al., 2017 CPD ¶ 345 (Comp. Gen. Nov. 6, 2017) involved a Forest Service procurement for aerial firefighting aircraft to support the agency’s wildland firefighting objectives. Firefighting aircraft could be called to perform fire suppressant dispersal during either the initial attack or extended attack firefighting phases. The distinction between these two phases has to do with timing. Whereas “nitial attack refers to those actions taken by the first resources to arrive at a wildfire,” extended attack includes “those actions conducted when a fire cannot be controlled by initial attack resources within a reasonable period of time.”
The procurement was structured as a “call when needed” basic ordering agreement. Under this structure, the Forest Service would not incur any costs for days when there was no firefighting activity. Instead it would issue orders to the BOA holders when services were needed, but the BOA holders were under no obligation to fill the order request. Given the unpredictability of Forest Service’s firefighting needs, the agency believed that this arrangement provided the necessary flexibility without incurring costs for time when aircraft was not needed.
The Solicitation also included a technical limitation on tank size for firefighting suppressant. As the Solicitation explained:
The minimum required volume is 3000 gallons (dispensable) and 27,000 pounds of payload. The maximum allowed volume is 5000 gallons (dispensable) and 45,000 pounds of payload…. Aircraft with less than 3000–gallon dispensing capacity or greater than 5000–gallon dispensing capacity will not be considered.
This type of limitation on tank size had not appeared in prior solicitations for similar aerial firefighting services.
Global SuperTanker Services, Inc. owns and operates a heavily modified Boeing 747-400 jumbo jet capable of aerial firefighting (more information can be found here). Given its substantial size, it boasts some impressive specifications, including a dispersal tank that can discharge 19,200 gallons of fire suppressant. Other than its tank capacity, the aircraft could meet all of the Forest Service’s technical specifications.
Interested in competing under the Solicitation, Global SuperTanker sent a letter to the Forest Service requesting an explanation of the tank size limitation. The Forest Service did not respond. Global SuperTanker then filed an agency level protest of the Solicitation’s restriction on tank sizes over 5,000 gallons. The Forest Service denied the protest, citing the fact that the Solicitation was, in part, to support initial attack operations for which tank sizes over 5,000 gallons were ill-suited. The Forest Service also noted that it anticipated issuing a solicitation in 2018 for tankers exceeding 5,000 gallons.
Global SuperTanker then protested at GAO, arguing that the Solicitation’s tank size limitations were unduly restrictive of competition. In response, the Forest Service reiterated its argument that the Solicitation called for initial attack operations, for which large tanker aircraft were not ideal. Additionally, the Forest Service also cited on four studies on aerial firefighting from 1995 to 2012, which the Forest Service argued supported its decision to limit the dispersal tank size under the procurement.
In a lengthy opinion, GAO rejected the Forest Service’s arguments and found the 5,000 gallon tank capacity limitation was, in fact, unduly restrictive of competition.
The GAO wrote that “[t]he determination of the government’s needs and the best method of accommodating them is primarily the responsibility of the procuring agency, since its contracting officials are most familiar with the conditions under which supplies, equipment and services have been employed in the past and will be utilized in the future.” However, “n preparing a solicitation, a procuring agency is required to specify its needs in a manner designed to achieve full and open competition, and may include restrictive requirements only to the extent they are needed to satisfy its legitimate needs.” In this respect, “solicitations should be written in as non-restrictive a manner as possible in order to enhance competition.”
Turning to the Forest Service solicitation, GAO first addressed the Forest Service’s argument that the Solicitation was only seeking initial attack operations for which tank sizes over 5,000 gallons were ill-suited. Reviewing the solicitation, GAO noted that aerial tankers for both initial attack and extended attack operations were sought. As GAO explained:
[A]gency officials expressly indicated that the 5,000–gallon limitation was based upon the conclusion that [very large air tankers] were not suited to perform initial attack operations, omitting any discussion of extended attack operations. As a result, the agency’s argument represents a post hoc attempt to justify the 5,000–gallon restriction.
In other words, GAO concluded the solicitation did not support the Forest Service’s position because the solicitation expressly sought both initial attack and extended attack services and that the Forest Service’s argument to the contrary amounted to nothing more than litigation posturing with no basis in the factual record.
GAO then turned its attention to analyzing whether it was reasonable for the Forest Service to conclude that firefighting aircraft with tank capacities exceeding 5,000 gallons were ill-equipped for initial attack phase operations. In support of its position, the Forest Service cited four studies. During the briefing phase, Global SuperTanker vociferously challenged the applicability and validity of the studies cited by the Forest Service to support tank size limitation. As a result, the Forest Service abandoned its arguments on a number of the studies, choosing to rely principally on a 2012 study to support its arguments.
GAO highlighted two findings from the 2012 study in its decision. First, the 2012 study recommended that the “[m]inimum capacity [for firefighting aircraft] should be at least 2000 gallons of retardant, 3000 gallons or more would be preferred.” Second, the study noted that effectiveness of aerial application depended on the type of fire, and that larger tanks were better suited for particular situations, such as in forests with thick canopies. The 2012 study was further undermined by third party publications (including one from GAO) noting there was insufficient data being collected by the Forest Service to assess the effectiveness of various aerial firefighting aircraft.
GAO was unimpressed with the Forest Service’s studies. As it noted, “the 2012 study could be construed to support [Global SuperTanker’s] arguments,” rather than the Forest Service’s. Ultimately, GAO was unpersuaded by the studies because none provided rational support for the Forest Service’s position—that limiting tank size to 5,000 gallons was appropriate for initial attack operations—and a number of sources openly undermined the agency’s position.
Based in part on these findings, GAO wrote that “the agency has failed to provide reasonable justifications for the challenged specification, such that we are unable to conclude that the challenged specification is reasonably necessary for the agency to meet its needs.” GAO sustained Global SuperTanker’s protest. GAO recommended the Forest Service return to the drawing board and fully document its needs, then incorporate whatever technical specifications are reasonably necessary to effectuate those needs.
So, what can contractors take away from GAO’s decision in Global SuperTanker? The most important take away is that an agency must be able to demonstrate a clear, rational connection between the agency’s needs and the technical limitations imposed by a solicitation. Moreover, the thoroughness of GAO’s review in this case also suggests that GAO is willing to do more than merely take an agency at its word regarding its technical needs. Make no mistake: an agency has broad discretion to establish its minimum needs. But as the Global SuperTanker decision demonstrates, that discretion is not unlimited.
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As a general rule, the SBA is prohibited from accepting a solicitation into the 8(a) Business Development Program if the procuring agency previously expressed publicly a clear intent to award the contract as a small business set-aside.
On its face, this restriction seems clear. In practice, it can be anything but—the inquiry usually focuses on whether the agency’s prior intent was definitive enough to count.
In SKC, LLC, B-415151 (Nov. 20, 2017), GAO provided important clarity about this restriction.
In 2011, SKC was awarded a small-business set-aside contract by the Defense Intelligence Agency, for facility support services for DIA’s Directorate of Logistics Operations Center (“DLOC”). Before SKC’s contract ended in September 2016, DLA notified SKC that because of an anticipated change in acquisition strategy, DLA would issue SKC a bridge contract before recompeting the work. As SKC’s contract expired DLA, issued SKC a non-competitive bridge contract with a one-year base period and a single one-year option.
In early 2017, DLA held industry days with potential contractors to discuss upcoming competitions. At those industry days, DLA forecasted the follow-on DLOC award would be set-aside for small businesses. But DLA gave attendees an important caveat: its acquisition forecasts were tentative, and no final decision regarding the procurements had been made.
A couple of months later, however, DLA asked the SBA to accept the DLOC requirement as an 8(a) sole-source award to IKun, LLC. DLA identified the procurement as a new requirement, valued at over $20 million, which would be fulfilled under one base year and two one-year options. After the SBA accepted the requirement into the 8(a) Program, DLA advised SKC that it would not exercise the option under its bridge contract.
SKC then protested to GAO, challenging the validity of the sole-source award. According to SKC, DLA’s decision to procure the work under the 8(a) Program was contrary to its publicly-stated prior intent to award the contract to a small business.
Under the 8(a) Program’s prior intent restriction, the SBA is prohibited from accepting a procurement for an award as an 8(a) contract when
The procuring activity issued a solicitation for or otherwise expressed publicly a clear intent to award the contract as a small business set-aside [or to HUBZones, SDVOSBs, or WOSBs] prior to offering the requirement to SBA for award as an 8(a) Contract. However, the [SBA’s Associate Administrator/Business Development] may permit the acceptance of the requirement under extraordinary circumstances.
Because DLA told industry day attendees in early 2017 that the procurement might be issued as a small business set-aside, SKC asserted that the SBA and DLA violated this restriction.
GAO disagreed, based largely in part on the SBA’s feedback. That is, in response to the protest, GAO requested the SBA to weigh in on whether DLA had publicly expressed a clear intent to issue the solicitation to small businesses. The SBA said no, because DLA provided multiple disclaimers to industry day attendees that its acquisition plan was not final and was subject to change. Neither was there any pre-solicitation notice, synopsis, or solicitation issued for the work that indicated it would be set-aside for small businesses. In short, the SBA concluded that DLA’s statements were not definitive enough to count as a clear public intent.
Affording the SBA deference to interpret its own regulations, GAO agreed with the SBA’s analysis and denied the protest:
SKC has provided no basis for us to disagree with the SBA’s interpretation that 13 C.F.R. § 124.504(a) does not limit SBA’s ability to accept a procurement into the 8(a) program when a procuring agency does not issue a pre-solicitation notice, synopsis, or solicitation to procure the requirement as a small business set-aside, but simply states that the requirement will be issued as a set-aside as part of a forecast with multiple disclaimers that the information is subject to chain.
This decision provides important clarity to the 8(a) Program’s prior intent restriction. It’s not enough for the agency to tell offerors that a solicitation might be set-aside for small businesses; the agency’s intention must be more definitive.
Small businesses and 8(a) participants should take note of this decision given its potential impact to both programs. If you have any questions as to how it might impact your business, please give me a call.
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The VA is considering using so-called “tiered evaluations” to address concerns that SDVOSBs and VOSBs may not always offer “fair and reasonable” pricing, even when two or more veteran-owned companies compete for a contract.
In a session yesterday at the National Veterans Small Business Engagement, a panel of VA acquisition leaders described the potential tiered evaluation process. It’s hard to argue that the VA isn’t entitled to fair and reasonable pricing, but judging from the reaction in the room, some SDVOSBs and VOSBs may wonder whether tiered evaluations are an effort to circumvent Kingdomware.
The VA panel consisted of Thomas Leney, Executive Director of Small and Veteran Business Programs, Jan Frye, Deputy Assistant Secretary for Acquisition and Logistics, and Robert Fleck, Chief Counsel of the Office of General Counsel.
Mr. Leney, who spoke first, said that the Kingdomware decision has been “good for veterans and good for the VA,” and pointed out that the VA’s annual SDVOSB/VOSB spending rose significantly following Kingdomware. That’s good news, of course.
But Mr. Frye said that when Kingdomware was decided in June 2016, the the VA was worried that the decision could, in some cases, result in higher prices and lengthier procurement processes. The VA doesn’t currently have any hard data about whether that’s proven true on a macro level, but has commissioned a study to evaluate it.
In the meantime, Mr. Leney said, there is anecdotal evidence of cases where the VA has paid “excessive prices” to award to veteran-owned companies. The VA hopes that this is a “small problem in a few cases, not a widespread problem,” Mr. Leney said. But apparently anticipating the need for policy changes to address the issue, the VA is considering adopting a tiered evaluation system in some procurements.
Under a tiered evaluation, a solicitation would be set-aside for SDVOSBs or VOSBs, but other companies (including large businesses) would also be able to submit proposals. The agency would start by evaluating the proposals of the top tier–in most cases, likely SDVOSBs. If the VA didn’t receive “fair and reasonable” pricing at that tier, the VA would go down to the next tier (probably VOSBs) and continue down the chain until a “fair and reasonable” offer was available to accept.
The speakers said that using a tiered evaluation approach would prevent procurement delays. As it stands now, if an acquisition has been set aside for SDVOSBs but no SDVOSB offers a fair and reasonable price, the VA must cancel and resolicit. Mr. Leney said that there have been cases where the VA has solicited the same acquisition “two, three or four times” before receiving fair and reasonable pricing. A tiered evaluation would eliminate this problem by allowing the contracting officer to simply go to the next tier, instead of resoliciting.
The speakers indicated that tiered evaluations wouldn’t be used in all acquisitions. Mr. Leney said that the approach likely wouldn’t be used in acquisitions involving complex technical proposals because the VA would be unlikely to receive offers from companies whose proposals might never be considered. On the other hand, the VA seems to think that the approach could work well in less-complex acquisitions, particularly where price is a critical factor.
It’s hard to argue that the VA isn’t entitled to “fair and reasonable” pricing. Fair pricing is, of course, a bedrock principle of federal procurement. But, judging from the mood in the room, the VA is going to have some work to do to convince SDVOSBs and VOSBs that this initiative (if it comes to pass) isn’t an attempt to circumvent Kingdomware.
One key consideration: how is “fair and reasonable” determined? One speaker suggested that if the VA receives pricing that is lower than the prices submitted by SDVOSBs, the Contracting Officer might use that as evidence that the SDVOSB pricing wasn’t fair and reasonable.
Hopefully, that’s not how it would work: there’s a big difference between higher pricing and unreasonable pricing. As one audience member pointed out, if reasonableness is judged based on the pricing submitted by non-veteran offerors (including large businesses), many SDVOSBs and VOSBs would have a tough time competing.
I give the VA leadership credit for coming to a public forum to discuss issues like these. And I’m willing to wait and see the details before passing judgment on the proposal, should the VA decide to implement it.
But the VA must understand that the SDVOSB/VOSB community watched for years as the VA fought tooth-and-nail to evade the statutory preferences under 38 U.S.C. 8127. With that history, some veterans are understandably skeptical that efforts like these are anything other than an attempt to circumvent the Supreme Court’s ruling.
If the VA is going to implement tiered evaluations, or similar tools, the agency will have some convincing to do. Stay tuned.
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Under the SBA’s economic dependence affiliation rule, two companies can be deemed affiliated when one company is responsible for a large portion of the other company’s revenues over time. But must both companies count one another as affiliates—or does the rule only apply when the recipient’s size is challenged?
A recent SBA Office of Hearings and Appeals case answers these questions: when a company is economically dependent upon another company, it is affiliated with the company on which it depends, but the opposite is not true. In other words, economic dependence affiliation is a one-way street.
OHA held, in Lost Creek Holdings, LLC, SBA No. SIZ-5848 (Aug. 28, 2017), that economic dependence requires the revenue stream to flow from the alleged affiliate to the challenged concern. On the other hand, affiliation did not result when the challenged concern was providing revenue to a dependent business.
In Lost Creek, a protester challenged the size of a company called LifeHealth, LLC, alleging that it was affiliated with its subcontractor, Dentrust Dental International, Inc. More than 70 percent of the Dentrust’s revenues were generated by LifeHealth.
Based on this relationship, the SBA Area Office found the two affiliated through economic dependence, but nonetheless small for reasons that we need not delve into here. The protester appealed to OHA, where LifeHealth argued that it could not be affiliated with Dentrust, because it was the one sending Dentrust money, not the other way around.
To rule on the case, OHA had to interpret the SBA’s economic dependence regulation, 13 C.F.R. § 121.103(f)(2), which was updated in 2016 to adopt the longstanding case law standard that 70-percent of revenues, over time, ordinarily causes economic dependence. The updated regulation says, “SBA may presume an identity of interest based upon economic dependence if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years.”
In Lost Creek, OHA said:
By stating that the new regulation clearly requires the revenue stream to flow from alleged affiliate to the challenged concern, OHA held in no uncertain terms that economic dependence affiliation is a one-way street. It’s a little bit like gravity. The earth holds the moon in orbit, so the moon is connected to the earth (i.e., affiliated). But the earth is not similarly pulled in to the moon’s orbit. (Astronomers, don’t @ me.)
Believe it or not, this question had been up in the air for at least a decade. The legal concept of affiliation is fluid, to say the least, with companies being affiliated one day and and not the next. In some ways, it is simple: when two companies have the same owner, they are affiliated. But, in other ways it is tremendously complicated—three people who have never met can become affiliated with each other if they all have similar investment portfolios. Affiliation through economic dependence had historically been more murky than not. But beginning in 2007, OHA and the SBA regulations began to narrow the issue into focus.
A decade ago, in Faison Office Products, LLC, SBA No. SIZ-4834 (Jan. 26, 2007), OHA drew a line in the sand holding, “as a matter of law, that when one concern depends on another for 70% or more of its revenue, that the concern is economically dependent on the other.” Although the case went on to explain that smaller percentages might also reach economic dependence, the line was drawn and 70 percent has been the bright-line rule ever since—although OHA has recognized a few narrow exceptions to the rule.
The 70 percent metric added guidance, but did not answer the question of whether both companies would be affiliated, or whether economic dependence created just one affiliate. The general rule, again, is that they would be. To a certain extent, Faison supported such a finding: “if an area office finds a concern depends on another concern for a high percentage of its revenue, then the area office can reasonably determine the two concerns are affiliated because of economic dependence[.]”
Logic, however, did not support making economic dependence affiliation bilateral. Affiliation is all about control. How can a company that is dependent on another company be said to exert control over it?
Complicating the analysis was the fact that economic dependence affiliation is a sub-category of identity of interest affiliation. The policy behind identity of interest affiliation is that two entities have such shared interests that they “act in concert” to help each other. The other types of identity of interest affiliation are close relatives (a husband and wife are presumed to act in each other’s interest) and those with significant common investments (i.e., they both want their side business to do well, so they therefore must have the same economic interest). Thus, the other types of identity of interest affiliation are, by design, bilateral.
In the intervening years, Logmet, LLC, SBA No. SIZ-5155 (Oct. 6, 2010) may have come the closest to answering the question. But in Logmet, OHA specifically said it was not holding that economic dependence only flows one way: “I do not hold here that an identity of interest can never be found on the basis of contracts awarded from a challenged firm to an alleged affiliate. It is possible that such contracts could rise to the level of economic dependency.” OHA did not say how such affiliation was possible, though. Thus, the mystery remained.
That is until now. The updated regulation combined with the holding in Lost Creek seems to settle the issue. Economic dependence only results in affiliation if the dependent company is the one challenged and that affiliation only applies to the dependent company.
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While being fashionably late to a party may give the impression that one is a busy and popular person that was held up with other business, being fashionably late in federal contracting will typically have dire consequences.
However, a recent GAO bid protest decision demonstrates that when providing completed past performance questionnaires, or PPQs, being fashionably late may be acceptable – at least when the references were submitted directly by government officials, rather than the offeror.
In a prolonged GAO bid protest, The Arcanum Group, Inc., B-413682.4, B-413682.5 (Aug. 14, 2017), GAO denied a protest challenging, in part, the agency’s acceptance and evaluation of PPQs received after the due date for receipt of proposals.
The protest involved the GSA’s award of a contract to MIRACORP, Inc., to provide administrative and technical support services. The Arcanum Group, Inc., an unsuccessful competitor, filed two prior GAO bid protests, both of which were resolved in TAG’s favor. When the agency affirmed MIRACORP as the awardee once again, TAG filed a third protest. Unfortunately for TAG, the third time was not the charm.
In its third protest, TAG argued, in part, the agency’s new evaluation of proposals under the past performance evaluation factor was flawed for many reasons, including that MIRACORP’s PPQs were received late and the agency improperly considered them in evaluating proposals. Specifically, MIRACORP’s references submitted its PPQs one day and four days after proposals were due, respectively. TAG argued that the solicitation required offerors to submit PPQs by the due date for proposals, and that the agency had erred by considering the late PPQs.
By way of background, FAR 15.304(c)(3)(i) requires a procuring agency to evaluate past performance in all source selections for negotiated competitive acquisitions expected to exceed the simplified acquisition threshold. PPQs are one popular means of obtaining past performance information. A PPQ is a form given to a contracting officer or other official familiar with a particular offeror’s performance on a prior project. The reference in question is supposed to complete the PPQ and return it–either to the offeror (for inclusion in the proposal) or directly to the procuring agency.
In this case, GAO drew a distinction between an offeror submitting PPQs late and an outside reference responding late with PPQs. “[W]e note this is not an instance where an offeror has submitted its proposal (or some part thereof) after the closing time for receipt of proposals,” GAO wrote. Had the late PPQs come from MIRACORP, it would have been “improper” for the agency to consider them. But here, “the agency received the PPQs, not from MIRACORP, but from the references that were included in MIRACORP’s proposal, and the PPQs were received prior to the start of proposal evaluation.”
GAO noted that the solicitation “did not specifically state that the agency would not consider PPQs received after the closing date.” However, the solicitation allowed the government to contact references to obtain past performance information during the course of the evaluation. “Given that the agency could have sought out this information,” GAO wrote, “we find the agency’s decision to consider this information was within its discretion, and we find nothing improper with the agency’s evaluation.”
We have previously written about the need for a FAR update to prohibit procuring officials from requiring that offerors be responsible for obtaining completed PPQs. Such a requirement can be very unfair to offerors who have no ability to force references to timely complete those forms.
The Arcanum Group provides a little potential relief for offerors, in that it affords the agency the discretion to not penalize an offeror whose outside references submit PPQs late. It’s important, though, not to read too much into GAO’s decision. GAO didn’t hold that agencies must consider late PPQs from outside sources, only that–in appropriate circumstances–an agency may consider such PPQs. And, of course, GAO confirmed that if the solicitation instructions call for the offeror to include PPQs in the proposal, an offeror who receives those PPQs late is probably out of luck.
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As we step into December, I am looking forward the 2017 National Veterans Small Business Engagement conference next week. The NVSBE is one of my favorite annual government contracting events. If you’ll be in St. Louis next week, please stop by the Koprince Law LLC booth to say hello.
SmallGovCon Week in Review took a break last week for the Thanksgiving holiday, so today’s edition covers government contracting news and notes from the past two weeks. In this edition, several companies have protested the GSA’s recent Alliant 2 awards, two whistleblowers receive a big payout after uncovering procurement fraud, GAO bid protests declined in 2017 (while the effectiveness rate of protests went up), and much more.
Illegal kickbacks totaling $300,000 from an Afghan subcontractor have resulted in a 21-month prison sentence. [Stars and Stripes]
Two whistleblowers get a big payout after they uncovered substantial fraud being committed by a Japanese company against the U.S. military. [Pacific Daily News]
According to one commentator, a low-ball bid on a military support contract has led to wage cuts and mass resignations that are devastating National Guard employees. [The Salt Lake Tribune]
The number of GAO bid protests declined in Fiscal Year 2017, while the effectiveness rate of protests rose. [Nextgov] (and see my take here).
An Army Reserve officer has been sentenced to 4 years in prison and ordered to forfeit $4.4 million for fraudulently supplying hundreds of thousands of Chinese produced baseball caps and backpacks and passing them off as American-made. [Stars and Stripes]
Several companies are protesting the Alliant 2 contract awards made earlier this month by the GSA. [Nextgov]
Four men have been charged for defrauding the federal government of millions of dollars for falsely presenting themselves as a minority-owned small business over a five-year period. [AlbuquerqueJornal]
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The GAO has suspended a protester for “abusive litigation practices,” for the second time.
Last year, the GAO suspended Latvian Connection LLC from participating in the GAO bid protest process for one year, after the firm filed 150 protests in the course of a single fiscal year. Now, citing “derogatory and abusive allegations,” among many other concerns, the GAO has re-imposed its suspension–this time, for two years.
The GAO’s decision in Latvian Connection LLC–Reconsideration, B-415043.3 (Nov. 29, 2017) arose from an Air Force solicitation for the construction of relocatable building facilities in Kuwait. Latvian Connection LLC filed a GAO bid protest, arguing that the Air Force improperly awarded the contract to a foreign entity that is not a U.S. small business and improperly failed to post the solicitation on FedBizOpps.
Latvian Connection filed its protest on August 28, 2017. As SmallGovCon readers will recall, on August 18, 2016, the GAO took the unusual step of suspending Latvian Connection from filing bid protests for a period of one year, citing the company’s “abusive” protest practices. Latvian Connection’s protest of the Air Force award was filed just days after the one-year ban expired.
The Air Force filed a request for dismissal, arguing, among other things, that the protest was untimely because it was filed more than a month after Latvian Connection learned of the basis of protest. The GAO suspended the requirement for the agency to file a formal response to the protest, pending GAO’s decision on the motion to dismiss. (GAO often suspends the requirement for a formal agency report when it intends to dismiss a protest, to prevent the agency from unnecessarily investing time and resources preparing a formal response.)
The suspension of the agency report didn’t sit well with Latvian Connection. The company asserted that the suspension of the agency report was “prejudicial,” and threatened that if the GAO attorney did not recuse himself, Latvian Connection would file a complaint with the GAO’s Office of Inspector General. The GAO attorney did not recuse himself, and Latvian Connection followed through with its threat, filing an OIG complaint requesting that the GAO attorney be investigated.
Shortly thereafter, the GAO dismissed Latvian Connection’s protest as untimely. Latvian Connection then filed a request for reconsideration of the dismissal decision.
GAO wrote that Latvian Connection’s request for reconsideration, “includes no new information, evidence, or legal argument addressing the timeliness of the protest.” Instead, “the request only repeats the arguments that Latvian Connection made during the protest, and expresses disagreement with our decision to dismiss the protest as untimely.” Under the GAO’s bid protest rules, “imply repeating arguments made during our consideration of the original protest and disagreeing with our prior decision does not meet our standard for reversing or modifying that decision.” The GAO dismissed the request for reconsideration for these reasons.
But the GAO didn’t stop there. It wrote, “[w]e also dismiss the request for reconsideration for continuing abuse of GAO’s bid protest process.” GAO explained that it had previously banned Latvian Connection from filing bid protests for a period of one year, and revealed that when the one-year suspension period was nearing its end “our Office wrote Latvian Connection to remind the firm of a number of important legal requirements for filing and pursuing protests.”
But “[d]espite the prior suspension, and despite our August 18 letter, Latvian Connection’s request for reconsideration, as well as its underlying protest and other recent filings, exhibit the same abusive litigation practices that previously led our Office to suspend Latvian Connection.” Not mincing words, the GAO said: “Latvian Connection’s pleadings are incoherent, irrelevant, derogatory, and abusive.”
By way of example, GAO wrote that “in its response to the request for dismissal of the underlying protest, Latvian Connection alleged that by suspending the requirement for the agency report pending resolution of the dismissal request, the GAO attorney assigned to the case was covering up for agency and GAO wrongdoings, and aiding and abetting DOD discrimination of agency veteran-owned small businesses.” Similarly, “in the instant request for reconsideration, Latvian Connection alleged, without any substantiation, that GAO is covering up white collar criminal activity by DOD and the Air Force.”
GAO wrote that in another protest filed on November 3, “there were several links to internet videos published by Latvian Connection’s CEO.” The GAO continued:
These videos are profane, inappropriate, and threatening. In fact, Latvian Connection routinely threatens to publish videos disparaging agency and GAO officials, or threatens to file complaints against them to state bar officials or agency inspectors general, whenever the protester disagrees with a potential procedural or final decision. Despite Latvian Connection’s apparent belief, such threats will not result in a different answer from our Office. Our forum is not required to tolerate threats, profanity, and such baseless and abusive accusations.
GAO said that Latvian Connection’s protests, “continue to place a burden on GAO, the agencies whose procurements were challenged, and the taxpayers, who ultimately bear the costs of the government’s protest-related activities.” The GAO concluded that “Latvian Connection’s protests and litigation practices undermine the effectiveness and integrity of GAO’s bid protest process and constitute an abuse of process.”
For these reasons, the GAO suspended Latvian Connection and its CEO “from filing bid protests at GAO for a period of 2 years from the date of this decision.” Additionally, GAO wrote, “if Latvian Connection continues its abusive litigation practices after the end of this new suspension period, our Office may impose additional sanctions, including permanently barring the firm and its principal from filing protests at GAO.”
As I wrote last year, it’s fair to note that the GAO previously sustained at least three of Latvian Connection’s many protests, including two protests establishing (at least in my eyes) important precedent involving agencies’ responsibilities when using FedBid. Not all of Latvian Connection’s protests have been frivolous.
That said, there should be no place in the protest process for the sort of tactics the GAO describes in its recent decision. Like any adversarial process, the protest process demands that litigants treat each other with basic courtesy and decency. Unwarranted threats, unsupported allegations of malfeasance, and abusive and profane language should have no place in the protest system, even where a protester (like Latvian Connection) isn’t represented by counsel.
Beyond that, GAO is exactly right when it points to the burden on GAO, agency attorneys, and ultimately the taxpayers in responding to frivolous protests. The American taxpayer, and the public servants who represent them, shouldn’t have to expend resources and time responding to hundreds of protests that never should have been filed in the first place. Allowing such protests to continue undermines the integrity of the protest system–a system which itself is under attack by those who (incorrectly) assume that most protests are frivolous.
The GAO’s suspension of Latvian Connection demonstrates that statutory changes aren’t required to prevent abuse of the bid protest system. The GAO can, and will, take matters into its own hands in a rare, but appropriate, circumstance.
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A “similarly situated entity” cannot be an ostensible subcontractor under the SBA’s affiliation rules.
In a recent size appeal decision, the SBA Office of Hearings and Appeals confirmed that changes made to the SBA’s size regulations in 2016 exempt similarly situated entities from ostensible subcontractor affiliation.
OHA’s decision in Size Appeal of The Frontline Group, SBA No. SIZ-5860 (2017) involved an Air Force solicitation for the alteration and fitting of uniforms. The solicitation was issued as a small business set-aside under NAICS code 811490 (Other Personal and Household Goods Repair and Maintenance), with a corresponding $7.5 million size standard.
After evaluating proposals, the Air Force announced that DAK Resources, Inc. was the apparent successful offeror. An unsuccessful competitor, The Frontline Group, then filed a size protest. Frontline contended that DAK was affiliated with its subcontractor, Tech Systems Inc., under the SBA’s ostensible subcontractor affiliation rule.
The ostensible subcontractor affiliation rule provides that a prime contractor is affiliated with its subcontractor where the subcontractor is performing the “primary and vital” portions of the work, or where the prime is “unusually reliant” on the subcontractor. However, in June 2016, the SBA amended the ostensible subcontractor regulation, 13 C.F.R. 121.103(h)(4), to specify that “[a]n ostensible subcontractor is a subcontractor that is not a similarly situated entity,” as that term is defined in 13 C.F.R. 125.1.
The SBA Area Office determined that the subcontractor, TSI, was a small business under NAICS code 811490. Accordingly, the SBA Area Office found that TSI was a similarly situated entity, and exempt from being considered an ostensible subcontractor. The SBA Area Office issued a size determination finding DAK to be an eligible small business.
Frontline filed a size appeal with OHA, challenging the SBA Area Office’s determination.
OHA noted that the SBA had amended the ostensible subcontractor affiliation rule in 2016 to exempt similarly situated entities. OHA then wrote that “there is no dispute that DAK, the prime contractor, is small, and no dispute that the subject procurement was set aside for small businesses.” Further, “DAK and TSI will perform the same type of work on this procurement, and no party contends that the subcontract would be governed by a different NAICS code or size standard than the prime contract.”
OHA determined that the SBA Area Office had correctly found TSI to be a similarly situated entity, exempt from consideration as an ostensible subcontractor. OHA denied Frontline’s size appeal.
The Frontline Group confirms that the SBA’s regulatory exemption for similarly situated entities is now in effect. When a subcontractor qualifies as a similarly situated entity, it is not an ostensible subcontractor.
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When an agency requests that offerors provide past performance references, the agency ordinarily is not precluded from considering outside past performance information.
In a recent bid protest decision, the GAO confirmed that an agency’s past performance evaluation may include information outside the past performance references submitted by the offeror–and the agency can use any negative past performance information to downgrade the offeror’s score.
The GAO’s decision in Fattani Offset Printers, B-415308 (Nov. 20, 2017) involved a USAID solicitation for printing services. The solicitation called for award to be made on a “best value” basis. In its evaluation, the agency was to consider several factors and subfactors, including past performance. The solicitation asked offerors to provide at least five past performance references.
Fattani Offset Printers submitted a proposal. Fattani’s proposal included five past performance reference letters. All five reference letters gave Fattani positive reviews.
In its evaluation, USAID reviewed Fattani’s five letters, and contacted three of those references. USAID also contacted references outside of the five Fattani had provided. Some of those sources gave Fattani negative reviews. Based partly on this concern, USAID gave Fattani only 5 out of a possible fifteen points for past performance. USAID awarded the contract to a competitor at a higher price.
Fattani filed a GAO bid protest, raising several issues. Among its allegations, Fattani contended that it was improper for the agency to contact additional past performance references because the solicitation did not expressly allow it.
The GAO disagreed. “Contrary to Fattani’s view,” the GAO wrote, “an agency is generally not precluded from considering any relevant past performance information, regardless of its source.” Accordingly, “the agency acted reasonably when it solicited additional past performance references beyond those listed in Fattani’s proposal, notwithstanding the fact that the solicitation did not specify that the agency could seek alternate past performance references.”
The GAO denied the protest.
When an agency asks for past performance references, it’s a great opportunity for an offeror to put its best foot forward. But, as the Fattani Offset Printers case demonstrates, just because an agency requests references doesn’t mean that the agency can’t consider other past performance information. If the agency wishes, it ordinarily can consider past performance information from other sources, so long as that information is relevant.
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The Court of Federal Claims recently issued an opinion that defines “unconditional ownership” of an SDVOSB in a more relaxed manner than the SBA, creating a split of authority on the issue.
The Court, rejecting SBA precedent, held that certain restrictions on ownership of an SDVOSB by a service-disabled veteran are acceptable under the SBA’s unconditional ownership regulations. In particular, the SDVOSB company can retain a right of first refusal that would allow it to purchase the shares of the veteran upon death, incompetency, or insolvency, and that right does not result in a violation of the unconditional ownership requirement.
With the Court and the SBA’s administrative judges staking out different positions, what should SDVOSBs do?
In Veterans Contracting Group, Inc. v. United States, No. 17-1015C, (Fed. Cl. Aug. 22, 2017), the Court examined the same facts that the SBA Office of Hearings and Appeals did in a recent decision addressed in our blog post of September 19, 2017. And, examining the very same facts, the Court reached the opposite conclusion.
Veterans Contracting Group had a shareholder agreement which included a clause that arguably restricted ownership by the veteran. This clause provided that “if a shareholder dies, is found to be incompetent, or becomes insolvent, that shareholder ‘shall be deemed to have offered all the hares of the [c]orporation owned by such hareholder at the time of occurrence of any of the events specified above to the[c]orporation and the [c]orporation shall purchase such hares at the Certificate Value and upon the terms and conditions hereinafter set forth.'”
The Court described this clause as one “that provides the company with the first opportunity to purchase the shareholder’s shares when death, incompetency, or insolvency arises.” In other words, a right of first refusal in favor of the company should any shareholder (including the veteran) die, become incapacitated, or become insolvent.
VCG bid upon a Corps of Engineers IFB for the removal of hazardous materials and demolition of buildings at the St. Albans Community Living Center in New York. The IFB was set aside for SDVOSBs under NAICS code 238910 (Site Preparation Contractors).
After opening bids, the Corps announced that VCG was the lowest bidder. An unsuccessful competitor subsequently filed a protest challenging VCG’s SDVOSB eligibility.
Because this was a non-VA job, jurisdiction over the protest rested with the SBA. The SBA’s Director of Government Contracting held that the restrictions in VCG’s shareholders agreement deprived the veteran “of his ability to dispose of his shares as he sees fit, and at the full value of his ownership interest.” The SBA determined that the restrictions were contrary to the requirement that a veteran “unconditionally own” his or her interest. The SBA issued a decision finding VCG to be ineligible for the Corps set-aside contract.
As is its policy when it issues an adverse SDVOSB decision, the SBA forwarded its findings to the VA Center for Verification and Evaluation. Relying on the SBA’s adverse determination, the VA CVE decertified VCG from the VetBiz VIP database.
VCG then took two separate, but concurrent, legal actions. It filed an appeal with OHA, arguing that the SBA’s decision was improper. Again, because this was a non-VA job, the SBA had ultimate authority to determine whether VCG qualified as an SDVOSB. Around the same time, VCG filed a bid protest with the Court. VCG’s bid protest didn’t directly challenge the SBA’s determination. Instead, the protest challenged the VA’s decision to remove VCG from the VetBiz VIP database. Of course, resolving the question of whether the removal was appropriate required the Court to evaluate the propriety of the SBA’s underlying decision. Thus, both OHA and the Court were, in effect, examining the same question: that is, whether the restrictions in VCG’s shareholders agreement were contrary to the SBA’s SDVOSB regulations.
As we discussed in our September post, OHA upheld the underlying SBA decision. OHA found that the restrictions in the shareholders agreement were contrary to the SBA’s SDVOSB regulations, which OHA said require “that the SDV’s ownership be unconditional, without condition or limitation upon the individual’s right to exercise full ownership and control of the concern.”
The Court noted that the definition of “unconditional” used “by the SBA in its decision addressing [VCG’s] eligibility is based upon a dictionary definition of ‘unconditional,’” but use of a dictionary definition is “both unnecessary and inappropriate” when there is a perfectly good definition in the 8(a) regulations under 13 C.F.R. § 124.105. Although the 8(a) Program regulations don’t directly apply to the SDVOSB program, “uch regulatory guidance relates to eligibility for a business development program, and it provides insight into the scope of unconditional ownership for SDVOSB–eligibility.”
Because the SBA ignored the definitions in the 8(a) program regulations, including 13 C.F.R. § 124.105(e) stating that “SBA will disregard any unexercised stock options or similar agreements held by disadvantaged individuals,” its ruling was unreasonable. The Court cited with approval both AmBuild Co., LLC v. United States, 119 Fed. Cl. 10 (2014) and Miles Construction, LLC v. United States, 108 Fed. Cl. 792 (2013), agreeing with these cases that a restriction on ownership that is not executory (meaning not taking effect until a future event occurs) does not result in unconditional ownership. The Court also pointed out that the restrictions at issue in those cases (and, by implication, in VCG’s case) were “customary business provision.”
The Court held that VCG was likely to succeed on the merits of its protest. The Court issued a preliminary injunction ordering the VA to “restore [VCG] to the VIP database of approved SDVOSB entities.”
It’s important to note that the Court didn’t overrule OHA’s decision. OHA was considering one aspect of the case (the set-aside award); the Court was considering another (the de-listing of VCG from the VA’s VetBiz VIP database). For now, OHA’s contrary decision is still, officially, good law. That said, there doesn’t seem to be a way to reconcile the two decisions. Should VCG, or another SDVOSB, take an OHA decision to the Court, it seems very likely that the Court would directly overrule OHA. One wonders, then, whether OHA might reconsider its position, on its own volition, the next time this issue arises. Time will tell.
In the meantime, SDVOSBs must be aware that this is still an area of the law very much in flux. Caution is warranted.
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You’ve served your country with pride. Now, as a government contractor, it’s only fair that you get your piece of the pie. Here are five things you should know about the government’s contracting programs for veteran-owned small businesses and service-disabled veteran-owned small businesses:
What is a veteran-owned small business?
As its name implies, a veteran-owned small business (or VOSB, in government-contracting speak) is a small business that is at least 51% unconditionally owned and controlled by a veteran. A service-disabled veteran-owned small business (SDVOSB) is a small business that is 51% unconditionally owned and controlled by a service-disabled veteran. These definitions sound relatively simple at first blush, but there are many nuances in the law. Just because a small is 51% owned by a veteran doesn’t necessarily make it an SDVOSB or VOSB in the eyes of the government.
Notably, the the government currently runs two separate SDVOSB programs: one operating under the SBA’s regulations; the other under the VA’s regulations. Although the programs’ requirements are largely similar, they’re not identical. It’s important for small businesses to understand which set of rules apply to them, and what those rules entail.
Who “controls” the business?
Control can be a subjective concept. But to control the business, the veteran (or service-disabled veteran, as the case may be) must exercise unconditional authority over the company’s day-to-day affairs and long-term strategic decision-making. Again, it’s important to be aware of regulatory nuances. For example, the VA’s regulations generally require the veteran to work full-time for the company to meet the unconditional control requirement.
The SBA and VA have interpreted unconditional control quite strictly: they require the veteran to essentially be the end-all and be-all within the company, with unfettered discretion over even the most consequential decisions (like amending the company’s governing documents or dissolving the company) notwithstanding the input or beliefs of non-veteran owners. This narrow reading obviously raises significant concerns for any potential investors or partners, so the VA considered (but ultimately didn’t implement) a slightly scaled-back approach. But in 2017, Congress required the VA and SBA to implement a consolidated set of regulations, with the SBA taking the lead. It remains to be seen how strictly the unconditional control requirement will be under these forthcoming rules.
What’s the benefit?
SDVOSBs and VOSBs are given some important preferences in government contracting. The most significant of these preferences is at the Department of Veterans Affairs: the VA must, in some cases, set aside work for either SDVOSBs or VOSBs. In other cases, the VA can award SDVOSBs or VOSBs sole source contracts. For non-VA agencies, only SDVOSBs (not VOSBs) are entitled to a contracting preference, although VOSB status can be helpful in more limited cases, like helping large prime contractors reach their subcontracting goals. Non-VA agencies, however, can set aside solicitations for SDVOSBs, and issue sole source awards to SDVOSBs in limited circumstances.
Overall, the government aims to award at least 3% of prime contract dollars annually to SDVOSBs. The government surpassed that goal in Fiscal Year 2016, awarding SDVOSBs contracts worth more than $16 billion.
Can a business challenge my status?
Yes. If an SDVOSB or VOSB is given a contract under a contracting preference, a disappointed offeror can challenge the awardee’s status as a veteran-owned small business. Losing a challenge means that your business will lose its award.
These challenges are a double-edged sword. Not only does this mean that a competitor might dispute your eligibility, but you can also dispute that of a competitor that wins a contract. So if a business challenges your status—or if you believe that one of your competitors might not be eligible—make sure you can navigate the regulations to help protect your interests.
How can your business apply?
Here’s where this socio-economic program gets a little tricky. For non-VA projects, a service-disabled veteran-owned small business simply has to self-certify as to its status in the government’s SAM database. It’s essential to do your due diligence before self-certifying. Incorrectly self-certifying can carry significant penalties—ranging from losing the award to being debarred.
For VA projects, however, SDVOSBs and VOSBs must be verified by the VA’s Center for Verification and Evaluation before the bid date. Joint ventures seeking SDVOSB awards also have to be verified. This verification process can take several weeks and involve some back-and-forth—in fact, we’ve seen cases where the VA relies on outdated regulations to question a joint venture’s eligibility, when the joint venture agreement was fully compliant with current regulations. If you’re considering seeking verification for your small business (or joint venture), act fast—and get help.
Veterans deserve our respect and gratitude for the selfless service. The SDVOSB and VOSB contracting preferences are but one small way our country can begin to repay this debt.
If you’re interested in seeing if you qualify for SDVOSB or VOSB status or would like to learn more, please give me a call.
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It’s the Friday before Thanksgiving, which means if you haven’t gone shopping yet, you may be facing the chaos of the grocery stores this weekend in preparation. Or, perhaps, you’re skipping the extensive meal preparation and going for something very simple (as a college student in North Carolina, I once classed it up by having Bojangles for Thanksgiving. Fantastic sweet tea, special seasoning, and no dishes!)
Even around the holidays, the world of government contracting doesn’t slow down that much. In this pre-Thanksgiving edition of SmallGovCon Week in Review, we take a look at two men facing five years in prison for fraudulently obtaining $20 million in contracts at Fort Gordon, the 2018 NDAA’s effect on GAO bid protests, new legislation intended to give equal consideration to VOSBs for contract awards, and much more.
Two people admitted their involvement in a conspiracy to fraudulently obtain $20 million in contracts at Fort Gordon. [The Augusta Chronicle]
Two trucking companies found guilty of Service Contract Act violations are still working at America’s largest ports. [USA Today]
The 2018 National Defense Authorization bill includes a compromise on disputed language aimed at reducing the number of bid protests. [Government Executive] (See my take on the issue here).
Government sources say OFPP wants agencies to set goals for using “best-in-class contracts” and implement demand management by analyzing procurement data and making decisions on how and who to buy from. [Federal News Radio]
U.S. Rep. Brian Fitzpatrick introduced legislation aimed at giving veteran-owned small businesses equal consideration for contract awards that companies in other ownership-preference categories currently enjoy as part of various set-aside programs. [The Ripon Advance]
A former procurement officer employed at a nuclear research and development facility of the U.S. Department of Energy was indicted for orchestrating a scheme to obtain a $2.3 million contract through fraudulent means. [U.S. Dept. of Justice]
The American Small Business League has argued that large federal contractors mislead agencies and the public by overstating their use of small businesses as subcontractors to meet statutory goals. In U.S. District Court in San Francisco last Friday, attorneys for the advocacy group successfully pried out the previously non-public names of suppliers and other subcontractors used by Sikorsky Aircraft Corp. [Government Executive]
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