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Koprince Law LLC

An agency isn’t required to cancel a small business set-aside solicitation if the agency learns that one of the small businesses upon whom the set-aside decision rested is no longer small.

In a recent bid protest decision, the GAO confirmed that an agency need not redo its “rule of two” determination when a potential small business competitor outgrows its size standard–even if it could effectively convert a particular solicitation into a “rule of one.”

The GAO’s decision in Synchrogenix Information Strategies, LLC, B-414068.4 (Sept. 8, 2017) involved an FDA acquisition for software licenses, maintenance and support and related services.  Before issuing the solicitation, the agency issued a request for information on FedBizOpps, seeking information from businesses regarding their interest in the procurement.

The FDA received three responses to the RFI from small businesses.  After evaluating those responses, the FDA concluded that it was reasonably likely to receive at least two or more offers from responsible small businesses.  Accordingly, the FDA issued the solicitation as a total small business set-aside.

The agency received two proposals by the original closing date, August 10, 2016.  After evaluating those proposals, the FDA awarded the contract to Lorenz International.  The unsuccessful offeror, GlobalSummit, then filed a GAO bid protest challenging the award.

In response, the agency took voluntary corrective action.  It asked both offerors to submit “a new full proposal.”  New proposals were due on May 15, 2017.  The new proposals were to include “all certifications, technical and business information” required by the solicitation.

In March 2017, Synchrongenix Information Strategies, LLC “purchased substantially all of GlobalSummit’s assets.”  The purchase created an affiliation between GlobalSummit and Synchrogenix, a large business. As a result, GlobalSummit was no longer small.

GlobalSummit asked that the FDA remove the certification requirement.  It explained that, at the time of its original proposal in August 2016, it had qualified as a small business.  However, because of the affiliation with Synchrogenix, it would no longer qualify as small if forced to re-certify in May 2017.

The FDA declined to remove the requirement.

Synchrogenix (presumably acting as successor-in-interest to GlobalSummit) filed a GAO bid protest.  Synchrogenix argued that the FDA was required to cancel the small business set-aside and reissue the solicitation as unrestricted because there was no longer a reasonable expectation of receiving two or more offers from small businesses.  Instead, Synchrogenix contended, the agency could only expect to receive one offer–from Lorenz.  Synchrogenix argued that proceeding with the acquisition would be tantamount to a de facto sole source award to Lorenz.

The GAO sought the SBA’s opinion.  The SBA weighed in on the FDA’s side, stating:

There is no requirement in the Small Business Act, the FAR, or SBA regulations, that an agency must redo its market research regarding the “rule of two” prior to requesting revised or newly submitted proposals during the course of a procurement or altogether cancel the solicitation if it becomes aware that only one responsible small business offer will be received in response to an amended solicitation. 

The SBA further explained “it is not uncommon that an agency becomes aware, over the course of a procurement, that it will receive only one revised offer from a small business concern.”  The SBA pointed out that small businesses “may drop out of a competition for a variety of reasons . . . such that there is only one responsible small business offeror remaining.”  In such a case, “the agency may make award to that firm, provided award will be made at a fair market price.”

The GAO found the SBA’s reasoning persuasive.  “As SBA advised in response to this protest,” GAO wrote, “there is no requirement in law or regulation that an agency must revisit” its rule of two determination when it becomes aware that it will only receive one offer from an eligible small business.  GAO concluded: [t]he fact that, during the course of the procurement, one of the two small business offerors is no longer capable of submitting a revised proposal, does not mean the procurement should be viewed as a de facto sole source procurement.”

The GAO denied the protest.

The Synchrogenix case makes the point that if an agency’s market research is sufficient to justify a set-aside, the agency need not adjust its determination if it later comes to realize that it will only receive one offer from a qualified small business.  In other words, it can be permissible for a “rule of two” set-aside to effectively turn into a “rule of one” as the acquisition proceeds.

Interestingly, it’s not clear to me that Synchrogenix was ineligible for the FDA solicitation in the first place.  Under the SBA’s regulations, size ordinarily is determined as of the date of an initial offer; GlobalSummit met that requirement in August 2016.  While there used to be a provision in the regulations allowing contracting officers to require recertifications in connection with certain amendments, that rule was eliminated a few years ago.  And although SBA’s regulations do call for a company to recertify its size if it is acquired by another entity, the SBA Office of Hearings and Appeals held, in Size Appeal of W.I.N.N. Group, Inc., SBA No. SIZ-5360 (2012), that “[t]his provision does not deal with the date for determining size for contract award,” but instead merely addresses whether the agency can count the award toward its small business goals.

It’s a complex area of law, but Sychrogenix might have had better luck if it had protested the FDA’s authority to require a size recertification–or if Synchrogenix had simply submitted an offer and forced the Contracting Officer to go through the SBA size protest process to determine whether Synchrogenix was eligible.


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Koprince Law LLC

For small businesses, 8(a)s, SDVOSBs, HUBZones and WOSBs, few legal requirements in the world of government contracts are as important as those surrounding ownership and control.  I recently joined host Carroll Bernard of Govology for an in-depth podcast exploring these important requirements, including a discussion of common mistakes and misconceptions.

Follow this link to listen to or download the podcast.  And don’t stop there–check out Govology’s other great podcasts with government contracting thought leaders, too.


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Koprince Law LLC

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

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

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

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

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

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

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

The GAO denied Pond’s protest.

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

SBA, I hope you’re taking notes.


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Koprince Law LLC

A former owner and officer of a large business has pleaded guilty to conspiracy charges stemming from an illegal pass-through scheme.

According to a Department of Justice press release, Thomas Harper not only conspired to evade limitations on subcontracting, but obstructed justice during a SBA size protest investigation of his company’s relationship with a putative small businesses.

The DOJ press release states that Harper is the former owner and officer of MCC Construction Company.  Between 2008 and 2012, MCC entered into an arrangement with two 8(a) companies.  Under the arrangement, these companies were awarded set-aside contracts “with the understanding that MCC would, illegally, perform all of the work.”  The scheme was successful: MCC ultimately performed 27 government contracts worth $70 million.

During the relevant time period, the GSA filed a size protest with the SBA, arguing that one of the 8(a) companies was affiliated with MCC.  Then, Harper and others “took steps to corruptly influence, impede, and obstruct the SBA size determination protest by willfully and knowingly making false statements to the SBA about the extent and nature of the relationship between MCC and one of the companies.”

Earlier this year, MCC pleaded guilty to conspiracy charges and agreed to pay $1,769,924 in criminal penalties and forfeiture.  Now, as part of his guilty plea, Harper has personally agreed to pay $165,711 in restitution.  Harper also stands to serve 10 to 16 months in prison under current federal sentencing guidelines.

The limitations on subcontracting are a cornerstone of the government’s small business set-aside programs.  After all, there is no public good to be served if a small business essentially sells its certification and allows a large company like MCC to complete all of the work on a set-aside contract.  Cases like that of Harper and MCC show that the SBA and DOJ are serious about cracking down on illegal pass-throughs.  Hopefully, prosecutions like these will give second thoughts to others who might be tempted to break the law.


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Koprince Law LLC

Before deciding whether to set-aside a solicitation for small businesses under FAR 19.502-2, should the contracting officer first determine whether those small business will be able to provide the needed services while, at the same time, complying with the limitation on subcontracting?

No, according to a recent GAO bid protest decision. Instead, an agency’s determination whether a small business will comply with the limitation on subcontracting should be made as part of its award decision (following the evaluation of proposals), not during its initial set-aside determination.

Under FAR 19.502-2(b), a procurement with an anticipated dollar amount greater than $150,000 must be set-aside for small businesses where there is a reasonable expectation that offers will be received from at least two responsible small businesses and that award will be made at fair market prices. Though orders under FSS contracts (issued under FAR part 8.4) are exempt from these small business programs, a contracting officer nonetheless has discretion to set-aside FSS orders for small businesses.

In InfoReliance Corporation, B-413298 (Sept. 19, 2016), GAO considered a protest challenging the Federal Bureau of Prisons’ decision to set aside an FSS order for cloud computing services to small businesses. The contracting officer’s market research identified at least eight small businesses that were authorized re-sellers of the Amazon Web Services sought under the order.

InfoReliance, a large businesses, challenged the set-aside decision, arguing that no small businesses would be able to perform the solicited services while complying with the limitation on subcontracting. According to InfoReliance, the small businesses were thus not responsible, and the set-aside decision was unreasonable.

GAO disagreed with InfoReliance. It noted that contracting officers have discretion to set-aside FSS orders for small business concerns, and that InfoReliance did not show BOP violated any law or regulation in exercising its discretion under this solicitation.

GAO also denied InfoReliance’s argument that BOP was required to verify each small business’s responsibility before deciding to set-aside the solicitation. Before setting-aside a solicitation, an agency “need only make an informed business judgment that there are small businesses expected to submit offers that are capable of performing.” An agency need not conduct a formal responsibility analysis before setting-aside a procurement.

Neither was BOP required to analyze the offerors’ potential compliance with the limitation on subcontracting before setting-aside the solicitation. GAO bluntly said:

This argument, however, puts the cart before the proverbial horse: an agency’s determination whether a small business concern will comply with a solicitation’s subcontracting limitation is to be made as part of the award decision, and based on the particular quotation submitted.

GAO denied InfoReliance’s protest.

InfoReliance serves as a reminder that, in deciding whether to issue a solicitation as a small business set-aside, an agency is not required to prospectively evaluate offerors’ potential proposals. This makes sense: because the rule of two analysis is conducted before a solicitation is issued, an agency cannot evaluate yet-to-be-submitted proposals for compliance with subcontracting limits. To do so would, in GAO’s words, put the cart before the horse.


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Koprince Law LLC

Last year, during consideration of the 2017 National Defense Authorization Act, the Senate proposed to “reform” the GAO bid protest process by forcing some unsuccessful protesters to pay the government’s costs, and (more controversially) by denying incumbent protesters profits on bridge contracts and extensions.

Congress ultimately chose not to implement these measures.  Instead, Congress called for an independent report on the effect of bid protests at DoD–a wise move, considering that major reforms to the protest process shouldn’t be undertaken without first seeing whether hard data shows that protests are harming the procurement process.

But now, six months before that report is due, the Senate has re-introduced its flawed bid protest proposals as part of the 2018 NDAA.

Earlier this month, the Senate Armed Services Committee issued its report on the 2018 NDAA.  The SASC report recommends that the 2018 NDAA include two major changes concerning GAO bid protests.

First, the bill states that when a “party with revenues in excess of $100.0 million during the previous year” files a GAO bid protest, that party will be required “to pay the Department of Defense costs incurred for processing [the] protest . . . where all elements of such protest are denied in an opinion” by the GAO.

Second, the bill would “require contractors who file a protest on a contract on which they are the incumbent to have all payments above incurred costs withheld on any bridge contracts or temporary contract extensions awarded to the contractor as a result of a delay in award resulting from the filing of such protest.”  The bill would, however, allow the protester to recover its profits under two circumstances: if the solicitation in question is cancelled, or if the GAO “issues an opinion that upholds any of the protest grounds filed under the protest.”

There have been some minor tweaks, but these changes are nearly identical to the provisions that the Senate proposed during consideration of the 2017 NDAA.  And in my opinion, the Senate has it wrong–again.

Presumably, the point of these “reforms” is to discourage losing offerors from filing bid protests, and in particular, to discourage frivolous bid protests by losing incumbents.  But are bid protests rampant?  Are frivolous bid protests rampant?  And are major DoD acquisitions being unduly delayed by protests?

These are the sorts of important questions that the independent report is likely to address.  Although the independent report isn’t due for a few more months, existing data casts doubt on the underlying presumption that protests are frequent, frivolous and causing undue delays.

On the frequency question, Dan Gordon–the former head of the OFPP–did the math, and concluded that, for the years he analyzed, “etween approximately 99.3 percent and 99.5 percent of procurements were not protested.”  This fits with the raw data: in Fiscal Year 2016, only 2,789 bid protests were filed with GAO.

On the frivolity side, even though protesters have the burden of proof, the success rate of GAO protests in FY 2016 was 46%.  This is not an anomaly: year after year, GAO protesters succeed more than 4 out of 10 times.  That’s not to say, of course, that there are no frivolous protests whatsoever, but when almost half of protests succeed, it’s hard to believe that frivolity is a rampant problem.

And what about delays?  Yes, when a GAO bid protest is filed within a certain time frame, it will initiate an automatic suspension of award or performance, as the case may be.  But a procuring agency can override the stay if there is an urgent and compelling need to award the contract.

Even when the agency doesn’t override, the GAO issues its decisions within 100 days after a protest is filed.  To GAO, the 100-day deadline is no mere guidepost–the GAO meets this deadline every single time (except in a few cases during the government shutdown of 2013). The agency can also request that the GAO resolve the protest even faster, using a 65-day express option or another accelerated schedule. The GAO bid protest process is designed to be relatively quick and efficient, and the GAO operates with that goal in mind.

But let’s put the statistics aside and assume for a moment that frequent frivolous protests are causing massive delays to DoD procurements.  I don’t think the Senate’s proposal solves this hypothetical problem.

The portion of the legislation dealing with protest costs may save the government a few bucks, but it’s very unlikely to make a dent in the number of protests.  The way I see it, companies generating $100 million or more in annual revenues already invest thousands upon thousands of dollars in legal fees and internal costs when they file protests.  These larger companies are very unlikely to be dissuaded by the potential of an additional “internal costs” charge if the protest is unsuccessful.

The second item–the one involving bridge contracts and extensions–is much more troubling.  Some (but not all) of my concerns:

  • Many GAO bid protests are resolved in the protester’s favor in ways other than a formal GAO “sustain” decision.  Most frequently, this involves voluntary agency corrective action–something that happened nearly 24% of the time in FY 2016.  As I read the Senate’s current version of the 2018 NDAA, the incumbent protester would still be required to forfeit all profits associated with any bridge contract or extension when the agency takes corrective action.  A corrective action essentially is a win for the protester–so why should the protester be penalized?
Sometimes, large procurements draw multiple protests.  If a losing incumbent is one of, say, five protesters, will the incumbent still be required to perform at cost?  The bill isn’t clear, but it doesn’t seem to make sense to penalize the incumbent in this situation. Many contracts are fixed-price; indeed, Congress recently affirmed its strong preference for DoD contracts to be awarded on a fixed-price basis.  The Senate 2018 NDAA seems to require that any bridge contract or extension to the incumbent be awarded on a cost-reimbursement basis instead.  Not only does this run against policy, but it’s likely to cause major headaches for contracting officials, who will be forced to fundamentally convert the contract type at the very moment the agency needs a quick and easy extension. Speaking of the apparent requirement that the bridge or extension be a cost reimbursement contract, what if the contractor’s accounting system isn’t adequate for cost reimbursement contracts?  Does everyone have to wait around for a DCAA audit?  Good luck with that. What if the underlying contract is for commercial items?  FAR 16.301-3(b) provides that “[t]he use of cost-reimbursement contracts is prohibited for the acquisition of commercial items . . ..” The GAO isn’t the only place a protest can be filed.  If an incumbent is concerned about potentially coughing up its profits on a bridge contract or extension, it can protest at the Court of Federal Claims.  There are no automatic stays at the Court, but a protester can seek a temporary injunction, and agencies sometimes voluntarily stay a procurement pending a Court protest.  Court protests don’t appear to be affected by the legislation.  So will the Senate bill just encourage forum shopping? Nothing requires an incumbent to sign a bridge contract.  Some incumbent protesters may simply say, “thanks, but no thanks,” to the possibility of performing work at cost.  If this happens, the agency may be in a bind, needing important work to continue immediately but without the ability to bridge the incumbent to meet that need.

Beyond all that, I’m skeptical that the second item will do much to reduce bid protests.  Sure, an incumbent takes the risk that it won’t profit from the bridge contract or extension if it loses the protest, but it won’t perform that work at a loss.  On the other hand, if the incumbent wins the protest, it may get its contract back-and might even be awarded its attorneys’ fees and costs.  Under these circumstances, it seems that the risk/reward analysis often will still favor a protest.

The Senate bill is a deeply flawed attempt to fix a problem that doesn’t necessarily exist.  Hopefully this premature and ill-conceived language will be removed in subsequent versions of the 2018 NDAA.  My colleagues and I will keep you posted.


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Koprince Law LLC

If you are a service-disabled veteran owned small business or veteran-owned small business, there’s no bigger event than the annual National Veterans Small Business Engagement.

This year’s NVSBE will be in Minneapolis, and is less than a week away.  I am excited to announce that I’ll be presenting four Learning Sessions at the 2016 NVSBE on a variety of legal topics important to SDVOSBs and VOSBs.

The NVSBE’s schedule is subject to change, so please check at the convention site for any adjustments, as well as for the location of each Learning Session.  But as of now, my presentation schedule is as follows:

  • The Ins and Outs of the Nonmanufacturer Rule.  Nov. 2, 9:00 a.m. to 9:45 a.m.
  • SDVOSB Joint Ventures: A Legal Primer.  Nov. 2, 11:10 a.m. to 11:55 a.m.
  • SBA Size and Socioeconomic Programs: Myths vs. Realities.  Nov. 3, 9:00 a.m. to 9:45 a.m.
  • Effective and Compliant Teaming Agreements. Nov. 3, 11:10 a.m. to 11:55 a.m.

If you will be attending the NVSBE, I hope to see you at my Learning Sessions.  And if you’d like the chance to chat about other issues (or just to share my amazement that my Chicago Cubs are actually in the World Series), please stop by the Koprince Law LLC booth on the trade show floor, where I’ll be spending most of my “non-Learning Session” time.

The NVSBE is a tremendous event every year, and the 2016 NVSBE should be no different.  See you there!


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Koprince Law LLC

In May 2017, SDVOSBs and VOSBs lodged another big win in their battle to enforce the statutory preferences for veteran-owned companies: the Court of Federal Claims held that the VA cannot buy products or services using the AbilityOne list without first applying the “rule of two” and determining whether qualified SDVOSBs or VOSBs are likely to bid.

But the AbilityOne vendor in question isn’t going down without a fight.  It’s taking the case to the United States Court of Appeals for the Federal Circuit–and the Court of Federal Claims just issued a ruling staying its May decision pending the results of the appeal.

The COFC’s decision in PDS Consultants, Inc. v. United States, No. 16-1063C (2017) was a major victory for SDVOSBs and VOSBs.  In that case, the COFC resolved an apparent conflict between the statutes underlying the AbilityOne program and the VA’s SDVOSB/VOSB preference program.  The COFC held that “the preference for veterans is the VA’s first priority” and trumps the requirement to use AbilityOne as a mandatory source.

But Winston Salem Industries for the Blind Inc., known as IFB Solutions, has appealed the COFC’s decision to the Federal Circuit.  And in a ruling issued on September 1, the COFC held that its original decision would be suspended pending the resolution of IFB’s appeal.

The COFC wrote that there are four factors it will consider when deciding whether to suspend a ruling pending an appeal: “(1) whether the movant has made a strong showing that it is likely to succeed on the merits; (2) whether the movant will be irreparably injured absent an injunction; (3) whether the issuance of the injunction will substantially injure the other interested parties; and (4) where the public interest lies.” These factors are “not necessarily entitled to equal weight,” and the court may be “flexible” in its application of the factors.

Here, all parties agreed that “whether the court properly interpreted the interplay between [the two statutes] is a question of first impression” that “has not been decided by any prior court.”  Thus, “while the court rejected IFB’s argument, it is not possible to determine the likelihood of success on appeal.”

Turning to the second factor, irreparable harm, IFB argued that, if the COFC decision stood, it would lose “62% of its revenue from optical services or 15.5% of its total revenue” by January 1, 2018.  The COFC wrote that “the loss of these contracts would have a severe impact on not only IFB’s optical business but also IFB’s mission as a nonprofit to provide employment, training, and services to persons who are blind.”  Therefore, the COFC found that IFB had established irreparable harm.

Under the third factor, balancing of the harms, PDS argued that a stay would substantially injure PDS and other SDVOSBs because they would not be able to compete for the contracts in question during the pendency of the appeal.  The COFC wasn’t persuaded, writing that the harm PDS identified “is hypothetical” because “t is based on the hope that it would be able to compete for the subject work . . ..”  The COFC “weighed the concrete harm IFB has identified against the hypothetical harm PDS has identified” and found that IFB’s harm outweighed PDS’s.

Finally, with respect to the public interest factor, the COFC wrote that both statutes (AbilityOne and the VA’s veteran preference rules) “serve important public purposes.”  But because IFB had identified concrete harm under the third factor, “the public interest tips in favor of allowing IFB to continue its work of employing blind and severely handicapped individuals under its contracts for VISNs 2 and 7 until the appeal is resolved.”

For these reasons, the COFC granted IFB’s motion for a stay pending appeal.  Under the stay, the VA will be permitted to continue procuring the products in question from IFB until the appeal is resolved.

Interestingly, the VA didn’t take a position on whether the COFC’s ruling should be stayed.  It’s not clear from the public documents why the VA stayed out of the fight, but perhaps the VA is having second thoughts about getting into another long-running legal (and P.R.) battle with veterans.

In any event, the COFC’s ruling is a big disappointment for SDVOSBs and VOSBs, many of whom hoped that the COFC’s May decision would put an end to the question about how the “rule of two” intersects with the AbilityOne program.  Stay tuned.


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It’s been a year of big changes in the government’s SDVOSB programs.  First came the Kingdomware Supreme Court decision, which was soon followed by the SBA’s final rule adopting a new “universal” mentor-protege program–and imposing many new requirements on SDVOSB joint ventures.

On Thursday, August 4, 2016 at 1:00 p.m. Central, I will host a free webinar to discuss these important changes.  To register, just follow this link and complete the brief electronic form, or call Jen Catloth of Koprince Law LLC at (785) 200-8919.

See you online on Thursday!


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Koprince Law LLC

If an SDVOSB was eligible at the time of its initial offer for a multiple-award contract, the SDVOSB ordinarily retains its eligibility for task and delivery orders issued under that contract, unless a contracting officer requests a new SDVOSB certification in connection with a particular order.

In a recent SDVOSB appeal decision, the SBA Office of Hearings and Appeals confirmed that regulatory changes adopted by the SBA in 2013 allow an SDVOSB to retain its eligibility for task and delivery orders issued under a multiple-award contract, absent a request for recertification.

OHA’s decision in Redhorse Corporation, SBA No. VET-261 (2017) involved a GSA RFQ for transition ordering assistance in support of the Network Services Program.  The RFQ contemplated the award of a task order against the GSA Professional Services Schedule multiple-award contract.  The RFQ was issued as an SDVOSB set-aside under NAICS code 541611 (Administrative Management and General Management Consulting Services).  The GSA contracting officer did not request that offerors recertify their SDVOSB eligibility in connection with the order.

After evaluating quotations, the GSA announced that Redhorse Corporation was the apparent awardee.  An unsuccessful competitor subsequently filed a protest challenging Redhorse’s SDVOSB status.  The SBA Director of Government Contracting sustained the protest and found Redhorse to be ineligible for the task order.

Redhorse filed an SDVOSB appeal with OHA.  Redhorse argued that regulations adopted by the SBA in 2013, and codified at 13 C.F.R. 125.18(e), specify that a company qualifies as an SDVOSB for each order issued against a multiple-award contract unless the contracting officer requests recertification in connection with the order.

OHA wrote that SBA’s SDVOSB regulations “make clear that a concern will retain its [SDVOSB] eligibility for all orders under a GSA Schedule or other ‘Multiple Award Contract’ unless the CO requests recertification for a particular order.”  OHA then quoted the relevant portions of 13 C.F.R. 125.18(e):

Recertification. (1) A concern that represents itself and qualifies as an SDVO SBC at the time of initial offer (or other formal response to a solicitation), which includes price, including a Multiple Award Contract, is considered an SDVO SBC throughout the life of that contract. This means that if an SDVO SBC is qualified at the time of initial offer for a Multiple Award Contract, then it will be considered an SDVO SBC for each order issued against the contract, unless a contracting officer requests a new SDVO SBC certification in connection with a specific order.
***

(5) Where the contracting officer explicitly requires concerns to recertify their status in response to a solicitation for an order, SBA will determine eligibility as of the date the concern submits its self-representation as part of its response to the solicitation for the order.

In this case, Redhorse “self-certified as an [SDVOSB] when it was initially awarded its Professional Services Schedule contract, and most recently recertified its status in 2014 when GSA exercised an option to extend the contract.”  As a result, “according to the plain language” of the regulation, Redhorse is considered an SDVOSB “for each order issued against the contract,” unless a recertification is requested.

OHA stated that “t is undisputed that the CO here did not request recertification of size or status for this task order.”  Accordingly, “the award of the instant task order was not an event that [the protester] could challenge through a status protest.”

OHA concluded that the initial SDVOSB protest “should have been dismissed.”  OHA granted the appeal and vacated the SBA’s decision.

Before the 2013 changes to 13 C.F.R. 125.18, the SBA’s regulations didn’t specifically address whether an SDVOSB’s eligibility could be challenged on an order-by-order basis.  But as the Redhorse Corporation appeal demonstrates, the SBA’s regulatory changes cleared up that potential confusion.  Under the current rules, if an SDVOSB qualifies at the time of its initial offer on the underlying multiple-award contract, the SDVOSB ordinarily will be eligible for orders issued under that contract, unless a Contracting Officer requires recertification in connection with an order.

One final note: the SBA’s decision applies to procurements falling under the SBA’s self-certification SDVOSB program.  But as SmallGovCon readers know, the government is currently operating two SDVOSB programs: the SBA’s self-certification and the VA’s formal verification program.  OHA’s decision doesn’t apply to VA SDVOSB procurements; it’s possible that the VA would reach a different conclusion for a procurement governed by the VAAR’s unique SDVOSB rules.


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Koprince Law LLC

The 2017 National Defense Authorization Act will essentially prevent the VA from developing its own regulations to determine whether a company is a veteran-owned small business.

Yes, you heard me right.  If the President signs the current version of the 2017 NDAA into law, the VA will be prohibited from issuing regulations regarding the ownership, control, and size status of an SDVOSB or VOSB–which are, of course, the key components of SDVOSB and VOSB status.  Instead, the VA will be required to use regulations developed by the SBA, which will apply to both federal SDVOSB programs: the SBA’s self-certification program and the VA’s verification program.

 

In my experience, the typical SDVOSB believes that VA verification applies government-wide, and relies on that VetBiz “seal” as proof of SDVOSB eligibility for all agencies’ SDVOSB procurements.  But contrary to this common misconception, there are two separate and distinct SDVOSB programs.  The SBA’s self-certification program (which is the “original” SDVOSB set-aside program) is authorized by the Small Business Act, which is codified in Title 15 of the U.S. Code and implemented by the SBA in its regulations in Title 13 of the Code of Federal Regulations.  The VA’s separate program is codified in Title 38 of the U.S. Code and implemented by the VA in its regulations in Title 38 of the Code of Federal Regulations.

There are some important differences between the two programs.  For example, the VA requires that the service-disabled veteran holding the highest officer position manage the company on a full-time basis; the SBA’s regulations do not.  Following a 2013 Court of Federal Claims decision, the VA allows certain restrictions of a veteran’s ability to transfer his or her ownership, but that decision doesn’t necessarily apply to the SBA, which has held that “unconditional means unconditional,” as applied to transfer restrictions.  And of course, the VA’s regulations require formal verification; the SBA’s call for self-certification.

Despite these important differences, the two programs are largely similar in terms of their requirements.  However, last year, the VA proposed a major overhaul to its SDVOSB and VOSB regulations.  The VA’s proposed changes would, among other things, allow non-veteran minority owners to exercise “veto” power over certain extraordinary corporate decisions, like the decision to dissolve the company.  The SBA has not proposed corresponding changes.  In other words, were the VA to finalize its proposed regulations, the substantive differences between the two SDVOSB programs would significantly increase, likely leading to many more cases in which VA-verified SDVOSBs were found ineligible for non-VA contracts.

That brings us back to the 2017 NDAA.  Instead of allowing the VA and SBA to separately define who is (and is not) an SDVOSB, the 2017 NDAA establishes a consolidated definition, which will be set forth in the Small Business Act, not the VA’s governing statutes.  (The new statutory definition itself contains some important changes, which I will be blogging about separately).

The 2017 NDAA then amends the VA’s statutory authority to specify that “[t]he term ‘small business concern owned and controlled by veterans’ has the meaning given that term under . . . the Small Business Act.”  A similar provision applies to the term “small business concern owned and controlled by veterans with service-connected disabilities.”

Congress doesn’t stop there.  The 2017 NDAA further amends the VA’s statute to specify that companies included in the VA’s VetBiz database must be “verified, using regulations issued by the Administrator of the Small Business Administration with respect to the status of the concern as a small business concern and the ownership and control of such concern.”  At present, the relevant statutory section merely says that companies included in the database must be “verified.”  Finally, the 2017 NDAA states that “The Secretary [of the VA] may not issue regulations related to the status of a concern as a small business concern and the ownership and control of such small business concern.”

So there you have it: the 2017 NDAA consolidates the statutory definitions of veteran-owned companies, and calls for the SBA–not the VA–to issue regulations implementing the statutory definition.  The 2017 NDAA requires the VA to use the SBA’s regulations, and expressly prohibits the VA from adopting regulations governing the ownership and control of SDVOSBs.  These prohibitions, presumably, will ultimately wipe out the two regulations with which many SDVOSBs and VOSBs are very familiar–38 C.F.R. 74.3 (the VA’s ownership regulation) and 38 C.F.R. 74.4 (the VA’s control regulation).

Because both agencies will be using the SBA’s rules, the SBA Office of Hearings and Appeals will have authority to hear appeals from any small business denied verification by the VA.  This is an important development: under current VA rules and practice, there is no option to appeal to an impartial administrative forum like OHA.  Intriguingly, the 2017 NDAA also mentions that OHA will have jurisdiction “of an interested party challenges the inclusion in the database” of an SDVOSB or VOSB.  It’s not clear whether this authority will be limited to appeals of SDVOSB protests filed in connection with specific procurements, or whether competitors will be granted a broader right to protest the mere verification of a veteran-owned company.

So when will these major changes occur?  Not immediately.  The 2017 NDAA states that these rules will take effect “on the date on which the Administrator of the Small Business Administration and the Secretary of Veterans Affairs jointly issue regulations implementing such sections.”  But Congress hasn’t left the effective date entirely open-ended.  The 2017 NDAA provides that the SBA and VA “shall issue guidance” pertaining to these matters within 180 days of the enactment of the 2017 NDAA.  From there, public comment will be accepted and final rules eventually announced.  Given the speed at which things like these ordinarily play out, my best guess is that these changes will take effect sometime in 2018, or perhaps even the following year.

The House approved the 2017 NDAA on December 2.  It now goes to the Senate, which is also expected to approve the measure, then send it to the President.  In a matter of weeks, the 180-day clock for the joint SBA and VA proposal may start ticking–and the curtain may start to close on the VA’s authority to determine who owns or controls a veteran-owned company.

 

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Koprince Law LLC

The 2017 National Defense Authorization Act makes some important adjustments to the criteria for ownership and control of a service-disabled veteran-owned small business.

The 2017 NDAA modifies how the ownership criteria are applied in the case of an ESOP, specifies that a veteran with a permanent and severe disability need not personally manage the company on a day-to-day basis, and, under limited circumstances, permits a surviving spouse to continue to operate the company as an SDVOSB.

As I discussed in a separate blog post last week, the SBA and VA currently operate separate SDVOSB programs, and each agency has its own definition of who qualifies as an SDVOSB.  The 2017 NDAA consolidates these definitions by requiring the VA to use the SBA’s criteria for ownership and control.

In addition to consolidating the statutory definitions, the 2017 NDAA makes three important changes to the ownership and control criteria themselves.

First, the 2017 NDAA specifies that stock owned by an employee stock ownership plan, or ESOP, is not considered when the SBA or VA determines whether service-connected veterans own at least 51 percent of the company’s stock.  This portion of the 2017 NDAA essentially overturns a 2015 decision by the SBA Office of Hearings and Appeals, which held that a company was not an eligible SDVOSB because the service-disabled veteran did not own at least 51% of the company’s ESOP class of stock. (The Court of Federal Claims ultimately upheld OHA’s decision later that year).

Second, the 2017 NDAA continues to provide that “the management and daily business operations” of an eligible SDVOSB ordinarily must be controlled by service-disabled veterans.  However, the 2017 NDAA states that if a veteran has a “permanent and severe disability,” the “spouse or permanent caregiver of such veteran” may run the company.  This provision is very similar to the one currently used by the SBA in its regulations; the VA does not currently have a provision whereby a spouse or permanent caregiver may operate an SDVOSB.

But Congress goes a step beyond the SBA’s current regulations.  In a separate paragraph, the 2017 NDAA states that a company may qualify as an SDVOSB if it is owned by a veteran “with a disability that is rated by the Secretary of Veterans Affairs as a permanent and total disability” and who is “unable to manage the daily business operations” of the company.  In such a case, the statute does not specify that the company must be run by the spouse or permanent caregiver.  In other words, for veterans with permanent and total disabilities, the statute appears to allow control by others, such as (perhaps) non-veteran minority owners.  Historically, the SBA and VA have been very skeptical of undue control by non-veteran minority owners, so it will be interesting to see how the agencies interpret and apply this new statutory provision.

Third, the 2017 NDAA states that a surviving spouse may continue to operate a company as an SDVOSB when a veteran dies, provided that: (1) the surviving spouse acquires the veteran’s ownership interest; (2) the veteran had a service connected disability “rated as 100 percent disabling” by the VA, or “died as a result of a service-connected disability” and (3) immediately prior to the veteran’s death, the company was verified in the VA’s VetBiz database.  When the three conditions apply, the surviving spouse may continue to operate the company as an SDVOSB for up to ten years, although SDVOSB status will be lost earlier if the surviving spouse remarries or relinquishes ownership in the company.

This provision is very similar to the one currently found in the VA’s regulations.  At present, the SBA does not have any provisions whereby a surviving spouse can continue to operate an SDVOSB.

That said, the statutory provision–just like the current VA regulation–is quite narrow.  In my experience, there is a common misconception that a surviving spouse is always entitled to continue running a company as an SDVOSB.  In fact, a surviving spouse is only able to do so when certain strict conditions are met.  In many cases, the veteran in question was not 100 percent disabled and didn’t die as a result of a service-connected disability (or the surviving spouse is unable to prove that the service-connected disability caused the veteran’s death).  And in those cases, the surviving spouse is unable to continue claiming SDVOSB status, both under the VA’s current rules and the 2017 NDAA.

2017 NDAA: The National Defense Authorization Act for Fiscal Year 2017 has been approved by both House and Senate, and will likely be signed into law soon. It includes some massive changes as well as some small but nevertheless significant tweaks sure to impact Federal procurements in the coming year. For the next few days, SmallGovCon will delve into the minutia to provide context and analysis so that you do not have to. Visit smallgovcon.com for the latest on the government contracting provisions of the 2017 NDAA.  


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Koprince Law LLC

SDVOSB joint venture agreements will be required to look quite different after August 24, 2016.  That’s when a new SBA regulation takes effect–and the new regulation overhauls (and expands upon) the required provisions for SDVOSB joint venture agreements.

The changes made by this proposed rule will affect joint ventures’ eligibility for SDVOSB contracts.  It will be imperative that SDVOSBs understand that their old “template” JV agreements will be non-compliant after August 24, and that SDVOSBs and their joint venture partners carefully ensure that their subsequent joint venture agreements comply with all of the new requirements.

If you’ve been following SmallGovCon lately (and I hope that you have), you know that we’ve been posting a number of updates related to the SBA’s recent major final rule, which is best known for establishing a universal small business mentor-protege program.  But the final rule also includes many other important changes, including major updates to the requirements for SDVOSB joint ventures.  For those familiar with the requirements for 8(a) joint ventures, most of the new requirements will look familiar; the SBA states that its changes were intended to ensure more uniformity between joint venture agreements under the various socioeconomic set-aside programs.

The SBA’s final rule moves the SDVOSB joint venture requirements from 13 C.F.R. 125.15 to 13 C.F.R. 125.18 (a change of note primarily to those of us in the legal profession).  But the new regulation is substantively very different than the old.  Below are the highlights of the major requirements under the new rule.  Of course (and this should go without saying), this post is educational only; those interested in forming a SDVOSB joint venture should consult the new regulations themselves, or consult with experienced legal counsel, rather than using this post as a guide.

Size Eligibility 

In order to form an SDVOSB joint venture, at least one of the participants must be an SDVOSB, and must also be a small business under the NAICS code assigned to the procurement in question. The other joint venturer can be another small business, or the partner can be the SDVOSB’s mentor under the new small business mentor-protege program or the 8(a) mentor-protege program:

A joint venture between a protege firm that qualifies as an SDVO SBC and its SBA-approved mentor (see [Sections] 125.9 and 124.520 of this chapter) will  be deemed small provided the protege qualifies as small for the size standard corresponding to the NAICS code assigned to the SDVO procurement or sale.

This piece of the new regulation appears to overturn a recent SBA Office of Hearings and Appeals decision, in which OHA held that a mentor-protege joint venture was ineligible for an SDVOSB set-aside contract because the mentor firm was not a large business.

Required Joint Venture Agreement Provisions

Under the new regulations, an SDVOSB joint venture agreement must include the following provisions:

  • Purpose.  The joint venture agreement must set forth the purpose of the joint venture.  This is not a change from the old rules.
  • Managing Member.   An SDVOSB must be named the managing member of the joint venture.  This is not a change from the old rules.
  • Project Manager.  An SDVOSB’s employee must be named the project manager responsible for performance of the contract.  This, too, is not a change from the old rules.  Curiously, unlike in the rules governing small business mentor-protege joint ventures, the SBA doesn’t specify whether the project manager can be a contingent hire, or instead must  be a current employee of the SDVOSB.  The new regulation also doesn’t address OHA case law holding that a specific individual must be named in the agreement (i.e., it’s insufficient to simply state that “an employee of the SDVOSB will be the project manager.”)  It’s unfortunate that the SBA didn’t address that issue; if the SBA agrees with OHA’s rulings, it would have been nice to have the regulations reflect this requirement so that SDVOSBs understand that a specific name is required.
  • Ownership. If the joint venture is a separate legal entity (e.g., LLC), the SDVOSB must own at least 51%.  This is a change from the old rules, which don’t address ownership.
  • Profits. The SDVOSB member must receive profits from the joint venture commensurate with the work performed by the SDVOSB, or in the case of a separate legal entity joint venture, commensurate with its ownership share. This is a change from the old rule, which applies the 51% threshold to all SDVOSBs.  To me, there is no good reason to distinguish between “informal” and “separate legal entity” joint ventures, especially since the SBA (elsewhere in its final rule) concedes that “state law would recognize an ‘informal’ joint venture with a written document setting forth the responsibilities of the joint venture partners as some sort of partnership.”  In other words, an informal joint venture is a legal entity too, just not one that has been formally organized with a state government.  In any event, the long and short of this change is that we can expect to see many more informal SDVOSB joint ventures.  That’s because, using the informal form, the non-SDVOSB will be able to perform up to 60% of the work and receive 60% of the profits (see the discussion of work split below); whereas in a separate legal entity joint venture, the non-SDVOSB will be limited to 49% of profits, no matter how much work the non-SDVOSB performs.
  • Bank Account.  The parties must establish a special bank account” in the name of the joint venture.  This is a change from the old rule, which is silent regarding bank accounts.  The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on an SDVOSB will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
  • Equipment, Facilities, and Other Resources. Itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. This is a change from the old rule, which doesn’t require this information to be set forth in an SDVOSB joint venture agreement.  In a recent court decision, an 8(a) joint venture was penalized for providing insufficient details about these items—even though the contract in question was an IDIQ contract, making it difficult to provide a “detailed schedule” at the time the joint venture agreement was executed. Perhaps in response to that decision, the new regulations provide that “if a contract is indefinite in nature,” such as an IDIQ, the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
  • Parties’ Responsibilities.  Specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture will meet the performance of work requirements set forth in the new rule.  Again, if the contract is indefinite, a lesser amount of information will be permitted.  This is an update from the old rule, which requires information on contract negotiation, source of labor, and contract performance, but does not require a discussion of how the SDVOSB joint venture will meet the performance of work requirements.
  • Ensured Performance. Obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer. This is not a change from the current rule.
  • Records. State that accounting and other administrative records of the joint venture must be kept in the office of the small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the small business managing venturer upon completion of the contract. These provisions, which are not included in the old rule, seem dated in the assumption that records will be kept in paper form; it instead would have been nice for the SBA to allow for more modern record-keeping, like a cloud-based records system that enables documents to be available in real-time to both parties.
  • Statements. Provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. This language, which was basically copied from the 8(a) program regulations, doesn’t specify who might be a “joint venture principal” in a world in which populated joint ventures have been eliminated. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract.  I find these requirements a bit odd because, unlike for 8(a) joint ventures, the SBA doesn’t pre-approve SDVOSB joint ventures, nor does it seem that the SBA will review a particular SDVOSB joint venture agreement except in the case of a protest.  So why the ongoing requirement for submitting financial records?

While I wish that every SDVOSB would call qualified legal counsel before setting up an SDVOSB joint venture, the reality is that many SDVOSBs attempt to cut costs by relying on joint venture agreement “templates” obtained from a teammate or even from questionable internet sources.  Using SDVOSB joint venture agreement templates is risky enough under the old rules, but will be an even bigger problem after August 24, when all those old templates become severely outdated.  I hope that all SDVOSBs become aware of the need to have updated joint venture agreements meeting the new regulatory requirements, but I won’t be surprised to see some SDVOSB joint ventures using outdated templates in the months to come–and losing out on SDVOSB set-asides as a result.

Performance of Work Requirements

In addition to setting forth many new and changed requirements for SDVOSB joint venture agreements, the new regulation also specifies that, for any SDVOSB contract, “the SDVO SBC partner(s) to the joint venture must perform at least 40% of the work performed by the joint venture.”  That work “must be more than administrative or ministerial functions so that [the SDVOSBs] gain substantive experience.”  The joint venture must also comply with the limitations on subcontracting set forth in 13 C.F.R. 125.6.

And that’s not all: the SDVOSB partner to the joint venture “must annually submit a report to the relevant contracting officer and to the SBA, signed by an authorized official of each partner to the joint venture, explaining how and certifying that the performance of work requirements are being met.”  Additionally, at the completion of the SDVOSB contract, a final report must be submitted to the contracting office and the SBA, “explaining how and certifying that the performance of work requirements were met for the contract, and further certifying that the contract was performed in accordance with the provisions of the joint venture agreement that are required” under the new regulation.

Past Performance and Experience 

Many SDVOSBs will groan at the new paperwork and reporting requirements established under the new regulation.  But the SBA has inserted at least one provision that is a definite “win” for SDVOSBs and their joint venture partners: the new regulation requires contracting officers to consider the past performance and experience of both members of an SDVOSB joint venture.  The regulation states:

When evaluating the past performance and experience of an entity submitting an offer for an SDVO contract as a joint venture established pursuant to this section, a procuring activity must consider work done by each partner to the joint venture as well as any work done by the joint venture itself previously.

Small businesses sometimes assume that agencies are required to consider the past performance and experience of the individual members of a joint venture–but until now, that wasn’t the case.  True, many contracting officers considered such experience anyway, but there have been high-profile examples of agencies refusing to consider the past performance of a joint venture’s members.  Of course, a joint venture is defined as a limited purpose arrangement, so it makes no sense to require the joint venture itself to demonstrate relevant past performance.  This change to the SBA’s regulations is important and helpful.

The Road Ahead

After August 24, 2016, those old template SDVOSB joint venture agreements won’t be anywhere close to compliant, so SDVOSBs should act quickly to educate themselves about the new regulations and adjust any planned joint venture relationships accordingly.  For SDVOSBs and their joint venture partners, the landscape is about to shift.


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Koprince Law LLC

Two Missouri men have been indicted for allegedly perpetrating an SDVOSB “rent-a-vet” scheme to fraudulently obtain 20 contracts totaling more than $13.8 million.

According to a Department of Justice press release, the veteran in question nominally served as the company’s President, but did not control the company’s strategic decisions or day-to-day management–in fact, the veteran apparently was working full-time for the DoD instead of managing the SDVOSB.

The indictment contends that Jeffrey Wilson, who is not a service-disabled veteran, owned a Missouri-based construction company.  According to the DOJ, Wilson conspired with Paul Salavtich, a service-disabled veteran, to obtain SDVOSB set-aside contracts with the VA and Army.

Salavitch was nominally the President of his company, Patriot Company, Inc.  However, the DOJ contends, Mr. Salavitch did not actually manage Patriot’s long-term decisions or day-to-day operations, nor did he work full-time for Patriot.  Instead, Salavitch was a full-time employee with the DoD, based in Leavenworth, Kansas.  The indictment suggests that Mr. Wilson, not Mr. Salavitch, actually controlled the company.

The indictment is rife with examples of conduct that appear to suggest that the conspirators knew that what they were doing was wrong–and were taking steps to try to hide it.  For example, when Patriot was leasing new space, Mr. Wilson stated in an email that he wanted a “thing or two” from Mr. Salavitch “to put in that office that is personal.”  Mr. Wilson stated that the purpose of obtaining these personal items was so “if one stepped into [the office], it would look and feel like Patriot.”

It will be up to a judge or jury to decide why Mr. Wilson made statements like these, but here’s one guess: Mr. Wilson was aware that the VA Center for Verification and Evaluation performs unannounced on-site visits, and, for the benefit of potential VA inspectors, was attempting to create the impression that Mr. Salavitch actually worked out of the Patriot office.

The indictment alleges that Patriot was awarded 20 SDVOSB and VOSB set-aside contracts with the VA and Army, totaling $13,819,522.  The contracts included construction projects across the Midwest; the largest contract was $4.3 million.

Mr. Wilson, Mr. Salavitch and Patriot are charged with conspiracy and four counts of major government contract fraud.  Mr. Wilson is also charged with one count of wire fraud and two counts of money laundering.  The indictment contains forfeiture obligations, which would require Mr. Wilson and Mr. Salavitch to forfeit any property derived from the proceeds of the fraud scheme.  Law enforcement has already seized over $2 million from various financial accounts.

As with any indictment, the defendants are entitled to a presumption of innocence.  But if Mr. Wilson and Mr. Salavitch are found guilty, perhaps they will find themselves better acquainted with Leavenworth than they would have hoped.  I’ll keep you posted.


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SDVOSB fraud allegations, stemming from a “secret side agreement” between two joint venture partners, have resulted in a grand jury indictment against the companies and their owners.

According to a Department of Justice press release, an SDVOSB and non-SDVOSB executed a joint venture agreement that appeared to meet the SBA’s requirements, but later undermined the JV agreement with a secret agreement that provided that the non-SDVOSB would run the jobs–and receive 98% of the revenues.

The DOJ press release states that Action Telecom, Inc. and A&D General Contracting, Inc. formed a joint venture named Action-A&D, A Joint Venture.  The parties signed a joint venture agreement specifying that Action (which supposedly was an SDVOSB) would be the managing venturer, employ a project manager for each SDVOSB contract, and receive a majority of the JV’s profits.

But six months later, the owners of the two companies “signed a secret side agreement that made clear the JV was ineligible under the SDVOSB program.”  For instance, the side agreement stated that A&D (apparently a non-SDVOSB) would run the joint venture’s jobs and retain 98% of all government payments.  Additionally, consistent with the side agreement, A&D–not Action–appointed the joint venture’s project manager.  The side agreement specified that it superseded the original joint venture agreement, and that its purpose was to allow A&D to “use the Disabled Veteran Status of Action Telecom” to bid on contracts.

The DOJ says that twice, the government asked the joint venture for information about itself.  Both times the joint venture provided the original JV agreement, but not the secret side agreement.

Over time, the joint venture was awarded approximately $11 million in government contracts.

On April 7, a grand jury returned a 14-count indictment against the companies and their owners.  The charges include wire fraud, conspiracy, and major government contract fraud, among others.  The defendants were arraigned on April 21.  The same defendants also face civil charges in a False Claims Act lawsuit pending in California federal court.

As is the case with all criminal defendants, Action, A&D and their owners are presumed innocent.  But if they are found guilty, they deserve some tough penalties.  After all, an SDVOSB joint venture agreement is worthless if the parties develop a secret side agreement to circumvent and undermine the requirements for SDVOSB management and control.  If it turns out that the the government’s allegations are true, the defendants not only defrauded the government (and honest SDVOSBs) but actually thought it was a good ideal to document their fraud in writing.  There used to be a TV show about crooks like that.


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Koprince Law LLC

An SDVOSB set-aside contract was void–and unenforceable against the government–because the prime contractor had entered into an illegal “pass-through” arrangement with a non-SDVOSB subcontractor.

In a recent decision, the Civilian Board of Contract Appeals held that a SDVOSB set-aside contract obtained by misrepresenting the concern’s SDVOSB status was invalid from its inception; therefore, the prime contractor had no recourse against the government when the contract was later terminated for default.

Bryan Concrete & Excavation, Inc., CBCA 2882, 2016 WL 4533096 involved a U.S Marine Corps veteran with a 100% disability rating, Jerry Bryan. Mr. Bryan owned and operated a construction company, Bryan Concrete & Excavation, Inc., which he started in 1999. In 2006, BCE was hired as a subcontractor on a number of projects overseen by Arthur Wayne Singleton.

After learning of Mr. Bryan’s service disabled status, Mr. Singleton urged BCE to start bidding on SDVOSB set-aside contracts. Mr. Singleton offered to assist BCE in getting qualified as an SDVOSB, bidding on federal projects, and managing those projects. During this time, Mr. Bryan and Mr. Singleton entered into a teaming agreement, which stipulated Mr. Singleton would perform all of work on the set-aside contracts for BCE and BCE would pay Singleton for the direct costs and overhead plus 90 percent of the anticipated gross profit. Despite the impermissible pass-through arrangement, BCE self-certified in the VA’s SDVOSB database (this was before the formal verification process required today).

In 2010, the VA issued an SDVOSB set-aside solicitation for chiller and air handling equipment upgrades. BCE submitted a bid, which was alleged to contain a forgery of Mr. Bryan’s signature by Mr. Singleton.  Further complicating matters, Mr. Singleton misrepresented himself to the VA as Mr. Bryan, during discussions of the proposal. BCE was the awarded the contract.

A number of performance issues hampered the of the contract and the VA ultimately terminated the contract default. BCE filed an appeal with the CBCA, seeking to overturn the termination.

During the course of the appeal, the VA learned for the first time that the teaming agreement between Mr. Singleton and Mr. Bryan compromised BCE’s eligibility as an SDVOSB. The VA subsequently moved for the CBCA to grant summary relief for the VA on the ground that BCE’s contract was void from the start and therefore unenforceable because it was obtained by misrepresenting BCE’s SDVOSB eligibility status to the VA.

As the CBCA explained, for the VA to prevail on its motion, it had to demonstrate that BCE had obtained the contract by knowingly making a false statement. The CBCA concluded the VA had met its burden because BCE had received a VA contract by misrepresenting its SDVOSB status. Since the misrepresentation occurred before the contract was awarded, the entire award was tainted from the beginning and thus void ab initio—from the beginning.

BCE countered that even if the contract was void from the start, subsequent dealings with the VA had created implied contracts that BCE had rights under. The CBCA was not impressed by these arguments and concluded:

While BCE may believe that it has the right to enforce a new agreement that ‘adopts the terms of the agreement that has been deemed void,’ whether through equitable estoppel, promissory estoppel, or other legal theories, the law does not work that way. ‘No tribunal of law will lend its assistance to carry out the terms of an illegally obtained contract.’

BCE’s case highlights just how little tolerance there is for concerns who misrepresent themselves to gain SDVOSB set-aside contracts. Not only can the government impose fines, jail terms, and other penalties, but the underlying contract can be considered void from the outset.

Oh, and speaking of jail time–Mr. Singleton was sentenced to two years in prison back in 2013.

Ian Patterson, a law clerk with Koprince Law LLC, was the primary author of this post.


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After receiving “numerous” public comments, the VA has confirmed today that the extended three-year SDVOSB and VOSB verification term–originally adopted in February 2017–will remain in effect indefinitely. Before February, SDVOSBs and VOSBs were required to be reverified every two years.

When the VA originally adopted its SDVOSB and VOSB program regulations in 2010, the VA required participants to be reverified annually.  Needless to say, many early participants in the program weren’t happy with the requirement for reverification every year.  (VA might not have been too happy, either, since this undoubtedly created a lot of extra work for it, too).

In 2012, the VA extended the eligibility period to two years.  Then, in February 2017, the VA issued an “interim final rule,” further extending the period to three years.  At the time, the VA said that it would accept public comment on the interim final rule, then issue a final rule responding to those comments.

Now, the final rule is here, and the VA is sticking with the three-year eligibility period.

In the final rule, the VA reiterates that it is confident that “the integrity of the verification program will not be compromised by establishing a three year eligibility period.”  The VA points out that in Fiscal Year 2016, “from a total of 1,109 reverification applications, only 11 were denied,” or less than one percent.  And, the VA writes, there are other means of discovering ineligible participants, including “random, unannounced inspections” and “status protests” by VA contracting officers and other SDVOSBs and VOSBs.  Therefore, the “risk of extending the period from two to three years is very low.”

The VA says that “[n]umerous commenters expressed support for the extension of the eligibility period, asserting that it allows veterans more time to focus on the success of their business, and reduces the administrative burden of gathering and submitting the required documentation.”  Amen to that.

The VA has adopted its original interim rule without change, meaning that the three-year verification period is now in place indefinitely.


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A North Carolina couple is heading to prison after being convicted of defrauding the SDVOSB and 8(a) Programs.

According to a Department of Justice press release, Ricky Lanier was sentenced to 48 months in federal prison and his wife, Katrina Lanier, was sentenced to 30 months for their roles in a long-running scheme to defraud two of the government’s cornerstone socioeconomic contracting programs.

According to the DOJ press release, Ricky Lanier was the former owner of an 8(a) company.  When his company graduated, Ricky Lanier apparently wasn’t satisfied with the ordinary routes that former 8(a) firms use to remain relevant in the 8(a) world, such as subcontracting to current 8(a) firms and/or becoming a mentor to an 8(a) firm under the SBA’s 8(a) mentor-protege program.

Instead, Mr. Lanier helped form a new company, Kylee Construction, which supposedly was owned and managed by a service-disabled veteran.  In fact, the veteran (a friend of Ricky Lanier) was working for a government contractor in Afghanistan, and wasn’t involved in Kylee’s daily management and business operations.

The Laniers also used JMR Investments, a business owned by Ricky Lanier’s college roommate, to obtain 8(a) set-aside contracts.  As was the case with Kylee, the Laniers misrepresented the former roommate’s level of involvement in the daily management and business operations of JMR.

If that wasn’t enough, “[t]he scheme also involved sub-contracting out all or almost all of the work on the contracts in violation of program requirements.”  In other words, not only were Kylee and JML fraudulently obtaining set-aside contracts, they were also serving as illegal “pass-throughs.”

Over the years, Kylee Construction was awarded $5 million in government contracts and JMR was awarded $9 million.  The Laniers themselves received almost $2 million in financial benefits from their fraudulent scheme.

People like the Laniers undermine the integrity of the set-aside programs and steal contracts from deserving SDVOSBs and 8(a) companies.  Here’s hoping that the prison sentences handed down in this case will not only punish the Laniers for their fraud, but help convince other potential fraudsters that the risk just isn’t worth it.


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With the finalization of the new SBA Small Business Mentor Protégé Program, other agencies without statutorily-authorized mentor-protege programs must seek SBA approval of their mentor-protege programs within one year, if they wish those programs to continue.

In a final rule scheduled to be effective August 24, 2016, the SBA questioned the need for other agencies (except the Department of Defense) to continue to operate their own mentor-protege programs, but provided a road map for agencies to preserve their separate mentor-protege programs if they wish.

 

As we have discussed in detail on SmallGovCon, the new “universal” small business mentor-protégé program establishes a government-wide program open to all small businesses, consistent with the SBA’s mentor-protégé program for participants in SBA’s 8(a) Program. But the final rule doesn’t just add a new SBA mentor-protege program–it may also signal the end of many other Federal mentor-protege programs.

Under the final rule, a Federal department or agency can no longer operate its own mentor-protégé program, unless: 1) the agency submits a program plan to the SBA, and 2) receives the SBA Administrator’s approval of the plan within one year of the SBA’s mentor-protégé regulations finalization. The requirement for SBA approval does not apply to DoD, which has special statutory authority to operate its own mentor-protege program. However, the SBA approval requirement does apply to most other Federal mentor-protege programs, including those operated by the VA, NASA, DHS, State Department, and so on.

The SBA “received only a few comments” regarding the proposal to require most agencies to obtain SBA approval to continue independent mentor-protege programs. These commenters “agreed with the statutory provisions in questioning the utility of other Federal mentor-protege programs” now that the SBA has established a mentor-protege program open to all small businesses. However, commenters raised two specific concerns about the potential phase-out of other agencies’ mentor-protege programs: 1) Would the new regulations be a disincentive for mentors to utilize their protégés as subcontractors? And, 2) would the SBA have the necessary resources to handle mentor-protégé applications for the entire government?

Many of the other agency-specific mentor-protégé programs incentivize mentors to utilize their protégés as subcontractors. For example, some agencies provide additional evaluation points to a large business submitting an offer on an unrestricted procurement where the large business is using its protege as its subcontractor. Other agencies give a large prime contractor additional credit toward its subcontracting plan goals where the large prime contractor uses its protege as a subcontractor.

The SBA acknowledged that the new small business mentor-protege program “assume more of a prime contractor role for proteges, but would also encourage subcontracts from mentors to proteges as part of the developmental assistance that proteges receive from their mentors.” The SBA declined to adopt specific subcontracting incentives as part of its final rule, but will allow individual procuring agencies the flexibility to do so. The SBA writes:

SBA believes that it is up to individual procuring agencies whether to provide subcontracting incentives for any specific procurement, SBA also believes that these incentives should be authorized and used, where appropriate. As such, this final rule identifies subcontracting incentives as a possible benefit to be provided by procuring activities in appropriate circumstances. The final rule authorizes procuring activities to provide incentives in the contract evaluation process to a firm that will provide significant subcontracting work to its SBA-approved protégé firm.

With respect to the processing of mentor-protege applications, the SBA writes that it is “working to adequately process mentor-protege applications,” but if it is unable to handle the volume of applications and agreements, the SBA may institute “open” and “closed” periods wherein the SBA would only accept mentor-protégé applications in the “open” periods. Since the SBA itself is unable to predict whether it will have the resources to process mentor-protege applications year-round, other agencies will have to decide for themselves whether this uncertainty is a reason to maintain separate mentor-protege programs.

The government’s mentor-protege programs have been in a state of flux since early 2013, when Congressfirst directed the SBAto adopt rules governing other agencies’ mentor-protege programs. In 2017, we should finally get some long-awaited clarity as to whether other agencies’ mentor-protege programs will continue.

 

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By the middle of this year, the U.S. Small Business Administration should have a strategy in place to assist small businesses with cybersecurity.

The 2017 National Defense Authorization Act is chock full of interesting legal changes for government contractors, and although we have chronicled it in depth, that does not mean there is not necessarily more to be mined from the whopping 1,587-page legislation.

Buried in section 1841, the 2017 NDAA contains an interesting directive for the new head of the SBA–who, pending Senate confirmation, will be former CEO of the professional wrestling franchise WWE, Linda McMahon. Section 1841 instructs the SBA head to work with the Department of Homeland Security to develop a cybersecurity strategy for small businesses.

Cybersecurity–especially the lack of it–has been in the news quite a bit lately. But cybersecurity is not only a concern for government agencies and massive global conglomerates. Cybersecurity should be a concern for all businesses, no matter how small. Indeed, the hack that led to the release of millions of personal information belonging to government workers has reportedly been linked to a government contractor. And, although popular culture depicts hackers cracking the firewall and breaking the encrypted code, the truth is that many hackers are mostly adept at taking advantage of carelessness and human error.

In order to help small businesses deal with this threat, the 2017 NDAA instructs the new SBA Administrator and the Secretary of Homeland Security to work together to create a strategy for small businesses development centers that will seek to protect small businesses from cybersecurity threats. The content of the strategy, according to the NDAA, must include plans to allow Small Business Development Centers access to existing DHS and other federal agency services, as well as methods for providing counsel and assistance to small businesses, including training, assistance with implementation, information sharing agreements, and referrals to specialists when necessary.

The strategy also must include an analysis of how SBDCs can rely on existing government programs to benefit small businesses, identify additional resources that may be needed, and explain how SBDCs can leverage partnerships with Federal, State, and local government entities to enhance cybersecurity.

The SBA Administrator must collaborate with with the DHS Secretary no later than 180 days after enactment of the bill (President Obama signed the 2017 NDAA on December 23) and submit the strategy to the Committees on Homeland Security and Small Business of the House of Representatives and the Committees on Homeland Security and Governmental Affairs and Small Business and Entrepreneurship of the Senate.

For small contractors, the new policy comes at a good time.  Last summer, the FAR Council issued a final rule titled “Basic Safeguarding of Contractor Information Systems.”  The rule created two new FAR provisions (FAR 4.19 and FAR 52.204-21); together, these FAR provisions impose fifteen specific requirements for safeguarding “covered contractor information systems.”  The new FAR requirements supplement DFARS 252.204-7012 (Safeguarding Covered Defense Information and Cyber Incident Reporting), which imposes several more requirements on covered DoD contractors.  Clearly, policymakers are focusing on ensuring that contractors appropriately protect electronic information.

Many small contractors could use help understanding and complying with the FAR and DFARS cybersecurity requirements and adopting best practices for cybersecurity. Thus, by the middle of this year, the SBA should have a strategy in place to assist small businesses stave off the threat of cyber attack. Only time will tell whether this strategy will prove effective, but the notion of assisting small businesses in this arena is certainly a positive step.


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The recently-finalized SBA small business mentor-protege program will change the landscape of set-aside contracting–for large businesses and small contractors alike.

I am excited to announce that Koprince Law LLC has partnered with GOVOLOGY to offer a live electronic training on this important new program.  Please join us on August 11, 2016 at 12:00 p.m. Central for this 90 minute training.  The training is open to the public, so please follow this link to register.  If you’re a Koprince Law LLC client or SmallGovCon newsletter subscriber, check your email for a special discount code.

See you online on August 11!


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Circle October 1, 2o16 on your calendar: that’s when the SBA will begin accepting applications for its new universal small business mentor-protege program.

According to the SBA’s new website for the small business mentor-protege program, applications will only be accepted through the SBA’s new certify.sba.gov portal.  The SBA’s new website also has an overview on the small business mentor-protege program itself and a discussion of the eligibility requirements for the program.

For prospective mentors and proteges alike, there’s no time to waste in order to take immediate advantage of the new mentor-protege program.  Watch this space for additional information as the SBA makes it available.


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A small business cannot file a viable SBA size protest if the small business has been excluded from the competitive range, or if its proposal has otherwise found to be non-responsive or technically unacceptable.

In its recent final rule addressing the limitations on subcontracting, the SBA also clarifies when small businesses can–and cannot–file viable size protests.

Under the SBA’s current regulation, a size protest may be filed by “[a]ny offeror whom the contracting officer has not eliminated for reasons unrelated to size.”  Many small businesses and contracting officers have found this regulation confusing, both because it contains a double negative and because it is unclear when an offeror has (or has not) been “eliminated” from a competition.

In its new final rule, the SBA states that its intent “is to provide standing to any offeror that is in line or [under] consideration for award, but not to provide standing for an offeror that has been found to be non-responsive, technically unacceptable, or outside of the competitive range.”  The SBA points out that, while such offerors cannot file viable size protests of their own, “SBA and the contracting officer may file a size protest at any time, so any firm, including those that do not have standing, may bring information pertaining to the size of the apparent successful offeror to the attention of SBA and/or the contracting officer for their consideration.”

The new rule provides that a size protest can be filed  by “[a]ny offeror that the contracting officer has not eliminated from consideration for any procurement-related reason, such as non-responsiveness, technical unacceptability or outside of the competitive range.”  The rule takes effect June 30, 2016.


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When the SBA evaluates a size protest, it is not required to investigate issues outside of those raised in the size protest itself.

A recent decision of the SBA Office of Hearings and Appeals demonstrates the importance of submitting a thorough initial size protest–and confirms that the SBA need not investigate issues outside of the allegations raised in the protest.

OHA’s decision in Size Appeal of K4 Solutions, Inc., SBA No. SIZ-5775 (2016) involved a TSA procurement.  The TSA acquisition in question contemplated the award of a single BPA to a business holding a GSA Schedule 70 contract.  The RFQ was issued as a total small business set-aside.

After evaluating quotations, the TSA announced that Systems Integration, Inc. was the apparent successful offeror.  K4 Solutions, Inc., an unsuccessful competitor, then filed a size protest.  K4 alleged that SII had been acquired by Rimhub Holdings, Inc. in 2014, and thus was affiliated with Rimhub.  The size protest did not address the question of whether SII had been required to recertify its size under its Schedule 70 contract upon the acquisition by Rimhub.

The SBA Area Office dismissed the size protest as untimely.  The Area Office stated that, for a long-term contract like Schedule 70, a size protest may be challenged at three points in time: (1) when the long-term contract itself is initially awarded; (2) when an option is exercised; or (3) upon the award of an order, if the Contracting Officer specifically requests size recertification in conjunction with the order. (OHA has held in an earlier case that merely bidding on a set-aside order does not constitute a recertification under this rule).

In this case, the TSA had not requested a recertification in connection with the order, and there was no option at issue.  Therefore, the Area Office determined, “size was determined from the date of SII’s self-certification for the GSA Schedule Contract,” and there was “no available mechanism for [K4] to challenge SII’s size in connection with” the TSA RFQ.

K4 filed a size appeal with OHA. K4 argued that, under 13 C.F.R. 124.404(g)(2), SII had been required to recertify its size within 30 days of being acquired by Rimhub. K4 argued that its protest was timely because it was filed within five business days of when K4 learned that SII had continued to represent itself as a small business following the acquisition.

OHA wrote that an Area Office “has no obligation to investigate issues beyond those raised in the protest.”  In this case, the recertification issue raised by K4 on appeal “was not raised in [K4’s] underlying size protest.”  Accordingly, “given that [K4’s] protest did not allege that SII was required to recertify its size . . . the Area Office could reasonably choose not to explore this issue n the size determination, and [K4] has not demonstrated that the Area Office committed any error in its review.”

OHA denied K4’s size appeal.

An unsuccessful offeror doesn’t have much time to file a size protest–just five business days from receiving notice of the prospective awardee, in most cases.  But even with such a short time frame, a size protester must submit the most thorough protest possible.  As the K4 Solutions case demonstrates, the SBA has no obligation to investigate an issue that the protester didn’t raise.


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Stating that populated joint ventures have now been eliminated, the SBA has revised its 8(a) joint venture regulations to reflect that change.

In a technical correction published today in the Federal Register, the SBA flatly states that an earlier major rulemaking eliminated populated joint venture, and tweaks the profit-sharing piece of its 8(a) joint venture regulation to remove an outdated reference to populated joint ventures.  But even following this technical correction, there are three important points of potential confusion that remain (at least in my mind) regarding the SBA’s new joint venture regulations.

If you’re a SmallGovCon reader (and I’m assuming you are, since you’re here), you know that the SBA made some major adjustments to its rules regarding joint ventures earlier this year.  Among those changes, the SBA amended the definition of a joint venture to state that, among other things, a joint venture “may be in the form of a formal or informal partnership or exist as a separate legal entity.”  If the joint venture is a separate legal entity, it “may not be populated with individuals intended to perform contracts,” although the joint venture may still be populated with one or more administrative personnel.

When the SBA made this change, it apparently forgot to adjust its 8(a) joint venture regulation to reflect the elimination of “separate legal entity” populated joint ventures.  The 8(a) joint venture regulation, 13 C.F.R. 124.513, continued to provide that each 8(a) joint venture agreement must contain a provision “Stating that the 8(a) Participant(s) must receive profits from the joint venture commensurate with the work performed by the 8(a) Participant(s), or in the case of a populated separate legal entity joint venture, commensurate with their ownership interests in the joint venture.”

In today’s technical correction, the SBA writes that “because SBA eliminated populated joint ventures,” the reference to a populated separate legal entity joint venture in 13 C.F.R. 124.513 “is now superfluous and needs to be deleted.”  The SBA has amended 13 C.F.R. 124.513 to provide that an 8(a) joint venture agreement must contain a provision “Stating that the 8(a) Participant(s) must receive profits from the joint venture commensurate with the work performed by the 8(a) Participant(s).”

So far, so good.  But even after this technical correction, I have three important points of confusion regarding the SBA’s new joint venture regulations.

Are all populated JVs eliminated? 

In today’s technical correction, the SBA states that populated joint ventures have been eliminated.  But the regulation itself only prohibits populated joint ventures when the joint venture is a “separate legal entity,” such as a limited liability company.  The SBA may believe that the employees of the joint venture partners are themselves employees of the joint venture when the joint venture is an informal partnership–but that’s unclear from the regulations and the SBA’s accompanying commentary.

Could two companies form an informal partnership-style joint venture, and then populate the partnership with employees who aren’t on either partner’s individual payroll?  That might not be advisable for various reasons, but the possibility appears to be left open in the SBA’s revised joint venture regulations.

Which regulation do 8(a) M/P JVs follow for small business set-asides?  

When an 8(a) mentor-protege joint venture will pursue a small business set-aside contract, the revised regulations suggest that the joint venture agreement must conform with two separate regulations.  And, in the case of the profit-splitting provision that I discussed earlier, the regulations appear to conflict with one another.

Bear with me here, because this involves following a regulatory bouncing ball.  Under the SBA’s size regulations at 13 C.F.R. 121.103(h), in order for an 8(a) mentor-protege joint venture to avail itself of the regulatory exception from affiliation (the exception that allows a joint venture to be awarded a set-aside contract without regard to the mentor’s size), the joint venture “must meet the requirements of 13 C.F.R. 124.513(c) and (d) . . ..”  This requirement applies “for any Federal government prime contract or subcontract,” including non-8(a) contracts.

Turning to 13 C.F.R. 124.513(c), the SBA’s 8(a) joint venture regulation, we see a list of mandatory provisions that the joint venture agreement must contain.  Among those mandatory provisions, as I mentioned previously, is a requirement that the parties divide profits commensurate with work share.  The 8(a) firm’s work share can be as low as 40% of the joint venture’s work, meaning that the 8(a) firm could receive a 40% profit share.

So far, so good.  But let’s say that the joint venture will pursue a small business set-aside contract, not an 8(a) contract.  The SBA’s new regulation governing joint ventures for small business set-aside contracts, 13 C.F.R. 125.8, provides that “every joint venture agreement to perform a contract set aside or reserved for small business between a protege small business and its SBA approved mentor authorized by [13 C.F.R.] 125.9 or 124.520 must contain” a list of required provisions set forth in 13 C.F.R. 125.8(b).  13 C.F.R. 124.520 is the regulation establishing the 8(a) mentor-protege program, which means that the list of required provisions under 13 C.F.R. 125.8 applies to 8(a) mentor-protege joint ventures seeking small business set-aside contracts.

While the list of required provisions in 13 C.F.R. 125.8 is very similar to that of 13 C.F.R. 124.513, there is one major difference.  Under 13 C.F.R. 125.8, the joint venture agreement must contain a provision “stating that the small business must receive profits from the joint venture commensurate with the work performed by the small business, or in the case of a separate legal entity joint venture, commensurate with their ownership interests in the joint venture.”  The 8(a) protege must hold a minimum 51% ownership interest, meaning that the 8(a) must receive at least a 51% profit share.

So let’s say that an 8(a) protege and its large mentor form a limited liability company joint venture to pursue a small business set-aside.  In order to avail themselves of the mentor-protege exception from affiliation, the mentor and protege are required to adopt a joint venture agreement pledging to split profits based on work share, with a potential minimum share of 40% for the 8(a) protege.  But in order to comply with 13 C.F.R. 125.8, the joint venture agreement must pledge to split profits based on each party’s respective ownership interest in the joint venture, with a potential minimum share of 51% for the 8(a) protege.  These provisions are inconsistent, and it’s not clear how a joint venture could readily comply with both.

Can SDVOSB Joint Ventures Use “Contingent Hire” Project Managers?

For mentor-protege joint ventures pursuing small business set-aside contracts, as well as all joint ventures pursuing 8(a), SDVOSB, HUBZone, and WOSB contracts, the SBA’s regulations require that an employee of the Managing Venturer be named the Project Manager responsible for contract performance.  In its revised regulations for small business, 8(a), HUBZone, and WOSB set-asides, the SBA added a new provision stating that “the individual identified as the project manager of the joint venture need not be an employee of the small business at the time the joint venture submits an offer, but if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the small business if the joint venture is the successful offeror.”

This provision makes a lot of sense, because small businesses don’t often have under-employed Project Managers (who are often rather highly compensated) on payroll, just sitting around waiting for potential contracts to be awarded.  Instead, a Project Manager is often formally hired only when a contract award is made.

Strangely, though, unlike for the rest of its small business programs, the SBA did not adopt this “contingent hiring” language in its revised regulation for SDVOSB joint ventures.  That regulation, 13 C.F.R. 125.18, simply states that the joint venture must designate “an employee of the SDVO SBC managing venturer as the project manager responsible for performance of the contract.”

Did the SBA intend to prohibit SDVOSB joint ventures from using contingent hire project managers?  My best guess is that this was an oversight; I don’t see any good reason to differentiate SDVOSB joint ventures from other joint ventures in this regard.  But unless and until the SBA clarifies the matter, it may be risky business for SDVOSB joint ventures to rely on contingent hires to satisfy the Project Manager requirement.

In Conclusion

Almost any major rulemaking ultimately requires some clarifications and corrections, and I’m glad that the SBA is working to clarify the rule it adopted this summer.  That said, some confusion seems to remain, and I hope that further clarification is coming.


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