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Koprince Law LLC

SDVOSBs, rejoice! Kingdomware Technologies has unanimously won its Supreme Court battle against the VA.  The Court has held that the VA’s “rule of two” is mandatory and applies to all of the VA’s contracting determinations.

I’ll have much more analysis up on SmallGovCon in the coming hours.  For now, congratulations to Kingdomware–and all SDVOSBs and VOSBs!


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Koprince Law LLC

SDVOSBs and VOSBs are big winners today, as the Supreme Court unanimously ruled that the VA’s “rule of two” is mandatory, and applies to all VA procurements–including GSA Schedule orders.

The Supreme Court’s decision in Kingdomware Technologies, Inc. v. United States, No. 14-916 (2016) means that the VA will be required to truly put “Veterans First” in all of its procurement actions–which is what Kingdomware, and many veterans’ advocates, have fought for all along.

History of the Kingdomware Case

As followers of SmallGovCon and the Kingdomware case know, the battle over the VA’s “rule of two” began in 2006, when Congress passed the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the “VA Act”).  The VA Act included a provision requiring the VA to restrict competitions to veteran-owned firms so long as the “rule of two” is satisfied.  The VA Act states, at 38 U.S.C. 8127(d):

(d) Use of Restricted Competition.— Except as provided in subsections (b) and (c), for purposes of meeting the goals under subsection (a), and in accordance with this section, a contracting officer of the Department shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.

The two exceptions referenced in the statute (“subsections (b) and (c)”) allow the VA to make sole source awards to veteran-owned companies under certain circumstances.  Nothing in the statute provides an exception for orders off the GSA Schedule, or under any other government-wide acquisition contract.

Despite the absence of a statutory exception for GSA Schedule orders, the VA has long taken the position that it may order off the GSA Schedule without first applying the VA Act’s Rule of Two.

In 2011, the issue first came to a head at the GAO.  In Aldevra, B-405271; B-405524 (Oct. 11, 2011), the GAO sustained an SDVOSB’s bid protest and held that the VA had violated the law by ordering certain supplies through the GSA Schedule without first applying the Rule of Two.  The GAO subsequently sustained many other protests filed by Aldevra and others, including Kingdomware.

But there was one problem: the VA refused to abide by the GAO’s decisions.  GAO bid protest decisions are technically recommendations, and while agencies almost always follow the GAO’s recommendations, they are not legally required to do so.  The VA kept circumventing the Rule of Two notwithstanding the GAO’s decisions.

Finally, Kingdomware took the VA to federal court.  But in November 2012, the U.S. Court of Federal Claims reached a different conclusion than the GAO.  In Kingdomware Technologies, Inc. v. United States, 106 Fed. Cl. 226 (2012), the Court ruled in favor of the VA.  Relying on the phrase “for purposes of meeting the goals under subsection (a),” the Court determined that the VA Act was “goal setting in nature,” not mandatory.  The Court held that the VA need not follow the “rule of two,” so long as the VA had met its agency-wide goals for SDVOSB and VOSB contracting (which, to the VA’s credit, it had).

Kingdomware appealed to the U.S. Court of Appeals for the Federal Circuit.  In June 2014, a three-member panel upheld the Court of Federal Claims’ decision on a 2-1 vote.  Like the Court of Federal Claims, the Federal Circuit majority held that the VA Act’s “rule of two” was a goal-setting requirement, and that the VA need not apply the “rule of two” so long as its SDVOSB and VOSB goals are satisfied.  In a sharp dissent, Judge Jimmie Reyna noted that the statute uses the mandatory word “shall” and argued that the phrase “for purposes of meeting the goals under subsection (a)” was merely “prefatory language” that explained the general purpose of the statute, but did not vary the statute’s mandatory nature.

In June 2015, the Supreme Court agreed to hear Kingdomware’s appeal.  Kingdomware and the Government began filing briefs with the Supreme Court (as did a number of Kingdomware supporters, including yours truly).  But in a surprising twist, in September 2015, the Government abandoned the “goal setting” argument that had prevailed at two lower courts.  The Government conceded that the “rule of two” applies regardless of whether the VA has met its goals–but argued that the statute’s use of the term “contract” excludes GSA Schedule orders (as well as orders under other multiple-award vehicles).

The Supreme Court heard oral arguments on the morning of February 22, 2016.  At the Court, Kingdomware’s counsel focused primarily on the mandatory nature of the statutory language, while the VA’s counsel primarily made policy arguments, namely, that it would be difficult and cumbersome for the VA to apply the rule of two in every setting.

After February 22, SDVOSBs and VOSBs waited for the Court’s decision.  Now it’s here–and it’s a big, big win.

The Supreme Court’s Kingdomware Decision

The Supreme Court’s opinion, written for an 8-0 unanimous Court by Justice Clarence Thomas, begins by recounting the history of the VA Act, the “rule of two,” and the Kingdomware case itself.  The Court then examines whether it has jurisdiction to consider the case (a technical issue raised earlier in the process), and concludes that it does.

Turning to the merits, the Court gets right to business:

On the merits, we hold that [Section] 8127 is mandatory, not discretionary.  Its text requires the Department to apply the Rule of Two to all contracting determinations and to award contracts to veteran-owned small businesses.  The Act does not allow the Department to evade the Rule of Two on the ground that it has already met its contracting goals or on the ground that the Department has placed an order through the [Federal Supply Schedule].

The Court explains that any issue of statutory construction begins “with the language of the statute.”  If the language is unambiguous, and the “statutory scheme is coherent and consistent,” the Court’s review ends there.

The Court writes that “[Section] 8127 unambiguously requires the Department to use the Rule of Two” before applying other procedures.  The Court points out that the statute includes the word “shall,” and writes "nlike the word ‘may,’ which implies discretion, the word ‘shall’ usually connotes a requirement.” Accordingly, “the Department shall(or must) prefer veteran-owned small businesses when the Rule of Two is satisfied."

The Court then writes that other portions of the statute confirm that Congress “used the word ‘shall’ . . . as a command.”  Therefore, “before contracting with a non-veteran owned business, the Department must first apply the Rule of Two.”

Next, the Court turns to the Government’s shifting rationales for evading the “rule of two.”  The Court notes that the Government changed its theory of the case late in the process, but nonetheless addresses the Government’s original argument regarding the goal-setting nature of the statute.  The Court writes:

[T]he prefatory clause has no bearing on whether [Section] 8127(d)’s requirement is mandatory or discretionary.  The clause announces an objective that Congress hoped that the Department would achieve and charges the Secretary with setting annual benchmarks, but it does not change the plain meaning of the operative clause.

The Court next rejects the VA’s argument that the word “contracts” means that the VA Act doesn’t apply to FSS orders.  The Court writes that it would ordinarily not entertain an argument that the Government failed to raise at the lower courts, “ut the Department’s forfeited argument fails in any event.”

The Court explains that “[w]hen the Department places an FSS order, that order creates contractual obligations for each party and is a ‘contract’ within the ordinary meaning of that term.”  The Court also explains that an order is a contract “as defined by federal regulations,” particularly FAR 2.101.  The Court then goes into additional explanation about why FSS orders are types of contracts.

Finally, the Court rejects the Government’s argument that the Court should defer to the VA’s interpretation of the VA Act.  The Court simply writes that “we do not defer to the agency when the statute is unambiguous . . . [t]hus, we decline the Department’s invitation to defer to its interpretation.”

The Court concludes:

We hold that the Rule of Two contracting procedures in [Section] 8127(d) are not limited to those contracts necessary to fulfill the Secretary’s goals under [Section] 8127(a).  We also hold that [Section] 8127(d) applies to orders placed under the FSS.  The judgment of the Court of Appeals for the Federal Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

The Aftermath of the Kingdomware Decision

For SDVOSBs and VOSBs, the Supreme Court’s Kingdomware decision is a huge win.  Ever since the VA Act was adopted, the VA has taken the position that it may order off the GSA Schedule without prioritizing veteran-owned businesses.  That’s about to change.

I expect that the Kingdomware decision will prove a major boon to SDVOSBs and VOSBs, ultimately resulting in billions of extra dollars flowing to veteran-owned companies.  The long battle is over–and SDVOSBs and VOSBs have won.

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Koprince Law LLC

It’s been a wild week in the world of federal government contracting. Yesterday the Supreme Court issued two major decisions affecting contractors: Kingdomware Technologies, Inc. v. United States and Universal Health Services v. United States ex rel. Escobar If you’re a regular SmallGovCon reader, you know that I’ve been following Kingdomware closely for years, and we will have a separate post later today with reaction to Kingdomware from around the country.  But Escobar is an important decision too, so don’t miss out on the coverage of that case.

In addition to coverage of Escobar, this week’s SmallGovCon Week In Review features a major new rule prohibiting contractors from discriminating on the basis of sex, GSA adding a new category on IT Schedule 70,  the indictment of a former GSA director and many more.

  • The ability to incorporate secretly in the U.S. has enabled criminals to carry out all sorts of crimes – from defrauding school districts to laundering drug money, all while carrying out government-awarded contracts. [The Hill]
  • Contractors are attempting to get on the presidential candidates’ radar well before our new Commander-in-Chief is even elected. [Government Executive]
  • Escobar: An important Supreme Court case involves the False Claims Act, the most important federal law that most people don’t know. [Pittsburgh Post-Gazette]
  • The inevitable amendments and extensions when a contract ends its period of performance can complicate the process for small businesses with limited resources; the General Services Administration is now trying to address small businesses’ expectations. [Government Executive]
  • The GSA is expected to publish a solicitation August 12 for a new category on IT Schedule 70 related to “Highly Adaptive Cybersecurity Services.” [fedscoop]
  • There is a growing recognition that the future of federal contracting may involve an “unpriced” schedule that involves evaluating vendors for their capabilities, past performance and overall skillsets, and not on their prices, and then allow price competition to happen at the task order level. [Federal News Radio]
  • A business opportunity specialist for the Small Business Administration explains what the 8(a) Business Development Program is and how government agencies should submit offer letters to get involved. [Washington Technology]
  • The Labor Department has come out with detailed guidance to help federal contractors comply with an executive order that prohibits companies from discriminating against LGBT employees. [Government Executive]
  • The Department of Labor has issued a final rule overhauling the sex discrimination rules governing contractors and subcontractors. [Federal Register]
  • A federal grand jury has indicted a former Director of a General Services Administration division and her husband for fraud and nepotism. [Office of Inspector General]
  • Escobar: The U.S. Supreme Court limited the reach of a whistleblower law designed to ferret out fraud, in a mixed ruling for health-care companies and other government contractors. [Bloomberg Politics]
  • Escobar: The U.S. Supreme Court made it a little harder for lawyers to press whistleblower lawsuits over minor violations of government contract terms. [Forbes]

Before we go we would also like to wish all of the dads out there a very happy Father’s Day!


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Koprince Law LLC

Yesterday was a huge victory for SDVOSBs and VOSBs, as the Supreme Court unanimously ruled that the VA’s “rule of two” is mandatory, and applies to all VA procurements – including GSA Schedule orders.

The Kingdomware decision has drawn news coverage and discussion from across the country.  This special Kingdomware edition of the SmallGovCon Week In Review collects some of the many articles on this important precedent. Enjoy!


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Koprince Law LLC

Ordinarily, whether an offeror’s proposed personnel actually perform under a contract is a non-protestable matter of contract administration. But GAO will consider the issue when an offeror proposes personnel that it did not have a reasonable basis to expect to provide during contract performance in order to obtain a more favorable evaluation. Such a “bait and switch” amounts to a material misrepresentation that undermines the integrity of the procurement and evaluation.

That’s exactly what happened in a recent protest, where the GAO disqualified the awardee from competition after determining that its proposal misrepresented the incumbent employees’ availability to continue working under the contract.

At issue in Patricio Enterprises, Inc., B-412738 et al. (May 26, 2016) was a task order solicitation to provide support for five product management teams for the Marine Corps’ Program Manager, Infantry Weapons Systems. Patricio and Knowledge Capital Associates (“KCA”) were each incumbents for some of these requirements under different existing task orders. The solicitation combined those services and contracts into one procurement.

The solicitation had three evaluation criteria: Management and Staffing Capability, Past Performance, and Price. The first (and most important) factor was comprised of two subfactors (Management and Staffing Capability). Under the Staffing Capability subfactor, offerors were required to provide a detailed approach to staffing that met the PWS requirements, and to provide detailed information (such as labor qualifications, proposed labor categories, and organizational structure) for its key personnel and other staff. The agency would then evaluate this subfactor by reviewing the “capabilities, qualifications, and experience of each offeror’s proposed key personnel” and the processes, resources, and organizational structure necessary to support the PWS tasks. The Government would also evaluate the offeror’s “approach to providing staffing necessary to achieve full performance by month five[.]”

Patricio and KCA timely submitted offerors, which were rated equally under the Management and Staffing Capability and Past Performance factors. Because KCA’s price was almost $5 million less than Patricio’s, KCA was named the awardee.

After Patricio’s attorneys obtained a copy of KCA’s proposal (probably as part of the Agency Report responding to Patricio’s initial protest), Patricio challenged KCA’s staffing approach. KCA, in short, touted its ability to begin work on “day one without missing a beat[.]” KCA further promised 100% staffing on “the very next day” following expiration of the existing support contracts.

KCA’s aggressive transition plan was based in part on KCA’s representations that it would employ incumbent personnel under its award. KCA went so far as to claim it had “signed contingent offers for select personnel” working for other companies (including Patricio) under incumbent contracts, and that these individuals “will be available at the immediate start of the Task Order.”

These representations, though, were (at best) misleading. Patricio produced sworn statements from its employees that were specifically named in KCA’s proposal, in which each person “stated that he or she had not been contacted by the awardee regarding potential employment for the PM IWS task order prior to the time for submission of proposals.”

In its own comments, KCA did not dispute these sworn declarations. Instead, KCA justified its proposal on the basis of discussions with Patricio employees, which led KCA to believe that the Patricio personnel identified in its proposal “would likely be willing to work for KCA in the event it was awarded the task order.” KCA claimed that its reference to “signed contingent offer letters” was misunderstood: according to KCA, this reference simply meant that the letters were prepared and signed by KCA’s president, not that the prospective personnel had signed them (or were even aware of them).

GAO found KCA’s reference to “signed contingent offers” and “signed contingent employment letters” to be an attempt to mislead the agency about KCA’s readiness to perform. GAO wrote that these references “appear[] purposefully crafted to convey that there had been communications with the individuals in question.” KCA’s apparent intent to later attempt to hire these individuals did not excuse this misrepresentation because “regardless of KCA’s intent to hire the individuals named in the proposal, the proposal misrepresented the commitment of the non-KCA employees to work for the awardee.”

KCA’s misrepresentation, moreover, impacted the Marine Corps’ evaluation. According to GAO, KCA earned a strength for its staffing approach and transition approach, which was based in part on KCA’s “approach to providing personnel, including key personnel, who would be capable of performing the work, and would be available at the start of performance.” Absent KCA’s pledge to provide incumbent staffing, it is unlikely that it would have been assessed such a strength.

GAO sustained Patricio’s protest. It also recommended that KCA be excluded from the competition:

[E]xclusion of an offeror from a competition is warranted where it made a material misrepresentation in its proposal and where the agency’s reliance on the misrepresentation had a material effect on the evaluation results. As our Office has stated, where an offeror’s material misrepresentation has a material effect on a competition, the integrity of the procurement system “demands no less” than the remedy of exclusion.

Patricio serves as a cautionary reminder: though offerors might want to increase their chances of award by hyping (or puffing) their abilities, going too far might amount to material misrepresentations. Here, the GAO found that KCA crossed the line–and deserved to be excluded.


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Koprince Law LLC

The VA will “immediately comply with the Court’s decision” in Kingdomware Technologies, Inc. v. United States, according to a top VA official.

In written testimony offered in advance of a Senate committee hearing tomorrow, the Executive Director of the VA’s Office of Small and Disadvantaged Business Utilization tells Congress that the VA will work to implement the Kingdomware decision, including by improving its market research processes.

In his testimony, Executive Director Thomas J. Leney states that his office has “already engaged VA’s acquisition workforce with new guidance, focusing most urgently on procurements currently in progress, but not yet awarded.”  Unfortunately, however, Mr. Leney doesn’t specify what guidance the acquisition workforce has been given regarding ongoing procurements; hopefully that’s something that the Committee members will be able to flesh out at the oral hearing.

Mr. Leney devotes much of his written testimony to pledges to strengthen the VA’s market research processes to identify qualified SDVOSBs and VOSBs.  “This means,” he writes, “market research must consist of more than merely finding firms in a particular industry code listed in the System for Award Management.”  Mr. Leney explains that VA Contracting Officers “can make better use of Requests of Information, or RFIs, for data-driven decision making.”  Additionally, Contracting Officers “need to meet with procurement-ready VOSBs to understand their capabilities and what they are already accomplishing.”

Mr. Leney concludes his written testimony by stating, “embracing the Court’s decision in Kingdomware . . . improves the Veteran experience, both as Veteran small business owners and as Veteran customers receiving the health care and benefits they have earned and deserve.”

Mr. Leney won’t be the only one testifying at tomorrow’s hearing.  LaTonya Barton of Kingdomware Technologies will also go before the Senate.  In her written testimony, Ms. Barton states:

We hope the VA takes the Supreme Court decision and Rule of Two mandate seriously and diligently works to implement it.  We have already lost almost ten years.  It is time for the VA to stop looking for loopholes and to redirect that energy into making the mandate work.

Hopefully, Mr. Leney’s comments reflect a genuine change of heart on the VA’s part, and a commitment to truly “embrace” Kingdomware, as Ms. Barton hopes.  Time will tell.


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Koprince Law LLC

An offeror’s proposal must conform to all technical requirements of an agency’s solicitation–even if the offeror believes those requirements to differ from standard industry practice.

In a recent bid protest decision, the GAO held that an agency appropriately rated an offeror’s proposal as technically unacceptable because the offeror failed to conform to certain material solicitation requirements; the offeror’s insistence that those requirements varied from standard industry practice was irrelevant.

In Wilson 5 Serv. Co., Inc., B-412861 (May 27, 2016), the VA issued a SDVOSB set-aside RFQ seeking facility maintenance support operations at the VA’s Capitol Region Readiness Center (CRRC). The CRRC operates on a 24-hour per day, 7-day per week, 365-days per year (24/7/365) basis and serves a mission-critical role in the VA National Data Center Network.

The RFQ’s PWS required offerors to “determine the appropriate onsite staffing levels to support a 24/7/365 operations.” In written responses to vendor questions, the VA confirmed that “t is a requirement for staff to work onsite in support of the CRRC 24/7/365.”

Wilson 5 Service Company, Inc. (“Wilson 5”) was one of three offerors to submit quotations. Wilson 5’s staffing plan included on-site staffing from 7am to 5pm and emergency “on-call” services after hours, with an ability to call back personnel to the facility if necessary.

The VA determined that Wilson 5’s “lack of off-hours onsite support represents a material failure to meet the Government’s requirement . . ..”  The VA rated Wilson 5’s quotation as unacceptable, and excluded Wilson 5 from the competitive range.

Wilson 5 filed a GAO bid protest. Wilson 5 acknowledged that its quotation did not provide for 24/7/365 onsite support. Wilson 5 argued, however, that the RFQ did not require vendors to provide onsite off-hours staffing. Wilson 5 noted that it is “standard industry practice for a contract to provide 24/7/365 coverage by calling back personnel to the facility for an emergency,” rather than staffing the facility onsite during off-hours.

GAO wrote that, when a protester and agency disagree over the meaning of a solicitation, GAO will read the solicitation “as a whole and in a manner that gives effect to all of its provisions.” In this case, GAO held, “the agency’s interpretation of the RFQ, when read as a whole, is reasonable, and the protester’s interpretation is not reasonable.” The GAO noted that various portions of the solicitation “advised vendors of the responsibility to provide onsite staffing to support the 24/7/365 operation.” GAO found that there was no indication that the solicitation could be interpreted to permit call back service as an alternative to the on-site staffing requirement. GAO denied Wilson 5’s protest.

This decision serves as a reminder that offerors must meet the Government’s technical requirements, even if those requirements appear to vary from standard industry practice. As Wilson 5 learned the hard way, the plain terms of a solicitation will trump standard industry practice.

Megan Connor, a summer law clerk with Koprince Law LLC, was the primary author of this post.


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Koprince Law LLC

It’s hard to top last week’s government contracting news, which included the major SDVOSB Supreme Court victory in Kingdomware.  But with the Fourth of July just a week and a half away, there is still plenty going on in the world of government contracts law.

In this week’s SmallGovCon Week in Review, an SDVOSB’s owner speaks out about his important GAO bid protest win, suspensions and debarments of government contractors dropped in 2015, major changes are coming to the GSA Schedule, HUBZone contract awards decline, and much more.

  • After winning a legal battle with the VA, Spur Design’s owner talks about what his company’s victory means for veteran-owned businesses. [Flatland]
  • The Office of Management and Budget has directed federal agencies to adopt practices that will simplify and streamline software acquisition. [E-Commerce Times]
  • Agencies’ budgets for extramural research are wavering amid increasing requirements to set aside funding for small business tech and innovation programs. [fedscoop]
  • A construction company executive has been found guilty of wrongfully winning $100 million in federal contracts that give preference to veteran-owned companies. [Boston Globe]
  • Defense Department procurement officials have agreed to expand their use of the General Services Administration’s single contract for complex professional services known as OASIS. [Government Executive]
  • Suspension and debarments of government contractors fell 3.7 percent in fiscal year 2015 over the previous year according to the annual report of the Interagency Suspension and Debarment Committee. [Government Executive]
  • The Department of Homeland Security will begin accepting video proposals in addition to written ones as part of a procurement innovation initiative. [Federal Times]
  • Vendors could save millions with the new General Services Administration reporting requirement that is being called the “most transformational change to GSA’s Federal Supply Schedules Program in more than two decades.” [Federal Times]
  • Plans to file a lawsuit against the Army are in the works based on claims that the military service has shown bias against off-the-shelf products in its solicitation for a $206 million intelligence IT contract. [Federal News Radio]
  • HUBZone contract awards have stalled again, after two years of modest increases, continuing a mostly downward trend that began six years ago. [Set-Aside Alert]
  • The Labor Department is investigating whether workers on Donald Trump’s renovation of Washington, D.C.’s Old Post Office are being paid less than federal law requires. [Politico]
  • Are Federal agencies overspending billions of dollars each year by allowing employees to make micropurchases on government charge cards instead of using the government’s buying power? [Government Executive]

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Koprince Law LLC

An agency’s solicitation was not unreasonably vague where the solicitation defined “relevant” past performance to include projects of “a similar dollar value and contract type.”

In a recent bid protest decision, the U.S. Court of Federal Claims rejected a protester’s assertion that the solicitation was required to identify a specific dollar value associated with relevant past performance, finding that the solicitation’s phrasing was sufficient to allow offerors to compete intelligently.

The Court’s decision in WorldWide Language Resources, LLC v. United States, No. 16-424 C (2016) involved an Army solicitation for the Department of Defense Language Interpretation and Translation Enterprise IID (DLITE II) contract, a multiple-award IDIQ contract for linguist services supporting military operations internationally.  The solicitation called for a best value evaluation considering four factors: Technical, Small Business Participation, Past Performance, and Price.

Under the Past Performance factor, the solicitation required offerors submit up to three “relevant and recent” contracts of a “similar size, scope and nature to the scope of the work” identified in the solicitation.  The solicitation originally defined relevant contracts as those “of comparable magnitude and complexity” to those described in the solicitation.  Amendment 7 to the solicitation defined relevant as contracts that are “of a similar dollar value and contract type, and include a similar degree of subcontract/teaming.”

WorldWide Language Resources, LLC filed a pre-award bid protest challenging the terms of the solicitation.  WorldWide argued, in part, that the past performance factor was unreasonably vague because the solicitation did not specify a dollar value for relevant past performance.  WorldWide contended that “it would be impossible to know whether past performance is relevant without a dollar value to which it could be compared.”

The Court wrote that a solicitation must provide “sufficient information to allow offerors to bid intelligently and to allow the agency to meaningfully evaluate competing proposals.” With respect to past performance, “the FAR entrusts the critical determination of what does or does not constitute relevant past performance to [the agency’s] considered discretion.”  An agency’s determination of relevance is especially worthy of deference because it is “among the minutiae of the procurement process which this court will not second guess.”

In this case, the Court held, the solicitation “has adequately described the method by which past performance will be evaluated.”  The information provided in the solicitation was “sufficient for offerors to bid intelligently,” and “[t]he Agency is not required to define relevant past performance with a dollar value.”  The Court denied WorldWide’s protest.

Government solicitations often define relevant past performance in broad terms like those used in the WorldWide Language Resources case.  Although some offerors might prefer a more specific definition, there is no requirement that an agency define relevance by reference to a dollar value.


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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

The VA has released an Acquisition Policy Flash providing guidance to VA Contracting Officers on implementing the U.S. Supreme Court’s decision in Kingdomware Technologies, Inc. v. United States.

The Policy Flash suggests that the VA is, in fact, moving quickly to implement the Kingdomware decision–and if that’s the case, it is good news for SDVOSBs and VOSBs.

The Policy Flash begins by reiterating the Supreme Court’s major holdings: namely, that the Rule of Two applies to orders placed under the GSA Schedule, and applies even when the VA is meeting its SDVOSB and VOSB subcontracting goals.  The Policy Flash states that the VA “will implement the Supreme Court’s ruling in every context where the law applies.”

As a general matter, the Policy Flash instructs Contracting Officers to conduct robust market research to ensure compliance with the Rule of Two.  The Policy Flash continues:

If market research clearly demonstrates that offers are likely to be received from two or more qualified, capable and verified SDVOSBs or VOSBs and award will be made at a fair and reasonable price, the Rule of Two applies and the action should be appropriately set-aside in the contracting order of priority set forth in VAAR 819.7004.  Contracting officers shall also ensure SDVOSBs or VOSBs have been verified in VIP before evaluating any offers or making awards on an SDVOSB or VOSB set-aside.  Supporting documentation must be maintained in the contract file in the Electronic Contract Management System (eCMS).

With respect to acquisitions currently in the presolicitation phase, Contracting Officers are to continue with existing SDVOSB and VOSB set-asides.  However, “f the original acquisition strategy was not to set-aside the acquisition to SDVOSBs or VOSBs, a review of the original market research should be accomplished to confirm whether or not the ‘Rule of Two’ was appropriately considered . . ..”  If a review finds that the Rule of Two is met, “the action shall be set-aside for SDVOSBs or VOSBs, in accordance with the contracting order of priority set forth in VAAR 819.7004.”

Perhaps most intriguingly, the VA is instructing Contracting Officers to apply the Kingdomware decision to requirements that are in the solicitation or evaluation phase.  For these requirements, “[a] review of the original market research and VA Form 2268 shall be accomplished to confirm whether or not the ‘Rule of Two’ was appropriately considered . . ..”  If this review finds that ther are two or more SDVOSBs or VOSBs, “an amendment should be issued that cancels the solicitation.”  However, the agency can continue with an existing acquisition if there are “urgent and compelling circumstances” and an appropriate written justification is prepared and approved.

The VA apparently will not, however, apply Kingdomware to requirements that have been awarded to non-veteran companies, even where a notice to proceed has not yet been issued.  The Policy Flash sates that “Contracting officers shall coordinate with the HCA, OGC and OSDBU and be prepared to proceed with issuing the notice to proceed if issued within 30 days of this guidance.”

Overall, the Policy Flash seems like a positive step for veterans–both in terms of the speed with which it was issued, and in the decision to apply Kingdomware to existing solicitations, except where an award has already been made.


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Koprince Law LLC

Happy (early) 4th of July! I hope you have something fun planned for this long weekend–and all the better if those plans include sunshine, fireworks, and plenty of BBQ. Before the holiday festivities begin, it’s time for our weekly dose of government contracting news and notes.

This edition of SmallGovCon Week In Review includes articles about a DoD bribery scandal, the release of the solicitation for the major Alliant 2 IT contracts, a look a the top 100 rankings in federal IT spending and much more.

  • Fourteen people have been charged in connection with a contracting scheme that involved the acceptance of bribes in the form of cash, travel expenses and the services of prostitutes in exchange for steering government contracts. [The United  States Department of Justice]
  • Nearly a decade after a panel of experts recommended major changes to the way the government buys services, the General Services Administration is implementing two significant updates. [Federal News Radio]
  • Vendors now have two months to read through the Alliant 2 Unrestricted and Alliant 2 Small Business RFPs and put together proposals for submission by the Aug. 29 deadline. [Federal Times]
  • More Alliant 2: the biggest IT contract of the decade is about to hit the market with a total ceiling of $50 Billion. [The Daily Caller]
  • New top 100 rankings reveal which firms earn the most from federal IT spending. [fedscoop]
  • The Supreme Court’s Kingdomware decision could affect broader procurement regulations across government, according to the SBA. [Government Executive]

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Koprince Law LLC

Welcome back after a hopefully enjoyable long 4th of July weekend! Although this week is a shortened one, there was no shortage of news floating around the county.

This week’s SmallGovCon Week In Review looks at the number of suspensions and debarments of government contractors, a proposed penalty for Pentagon contractors trying to game the system, a case of fraud and much more.

  • Government contractors shouldn’t be celebrating that the number of suspensions and debarments dropped in fiscal 2015. [Federal News Radio]
  • The Federal Risk and Authorization Management Program rolled out the final version of the high impact baseline, a framework for authorizing third party vendors to host some of the government’s most sensitive data. [FederalTimes]
  • The National Labor Relations Board is preparing to report alleged labor law violations by government contractors. [Bloomberg BNA]
  • One of the biggest questions with the final Alliant 2 Unrestricted and Small Business RFPs is whether to team, but many contractors are finding the options presented in the final RFPs confusing. [Washington Technology]
  • One of the legislative proposals the Senate will debate this week would penalize Pentagon contractors that game the bid protest system. [FederalSmallBizSavvy.com]
  • The Strategic Sourceror explains what the Women-Owned Small Business Program is, and why businesses should become certified. [The StrategicSourceror]
  • A possible 20 year sentence could be handed down to a woman who accepted bribes in exchange for using her company as a “straw” contractor that allowed nonminority-owned firms to circumvent regulations for federally funded transportation projects. [MyCentralJersey.com]
  • A federal whistleblower lawsuit alleging that information technology companies duped the government in order to win money specifically set aside for small businesses has agreed to pay $5.8 million dollars. [Los Angeles Business Journal]

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Koprince Law LLC

An agency ordinarily is not required to perform calculations to determine whether an offeror’s proposal complies with a solicitation’s requirements, according to the GAO.

In a recent bid protest decision, the GAO rejected the protester’s argument that, in determining whether the proposal satisfied certain requirements, the agency should have used the information in the proposal to perform certain calculations.

The GAO’s decision in Mistral, Inc., B-411291.4 (Feb. 29, 2016) involved a DHS small business set-aside solicitation to obtain new mobile video surveillance systems.  The solicitation called for a best value evaluation considering three factors: technical, past performance, and price.

After taking corrective action in response to a bid protest, the DHS opened discussions with offerors in the competitive range, including Mistral, Inc.  In its written discussion questions for Mistral, the DHS asked Mistral to provide “an analysis and calculations” Mistral used to justify “the performance claims for Critical Failure Rate and Achieved Availability as prescribed in Section L of the solicitation.”  In response, Mistral’s final proposal revision directed the DHS to “the Excel spreadsheet (all formulas embedded)” submitted to the agency on a CD-ROM.

When the DHS examined the CD-ROM submitted by Mistral, it found only a PDF of the required information–not an Excel file.  Although Mistral provided a table with calculations, the DHS was unable to access the embedded calculations contained in the original Excel spreadsheet.  The DHS assigned Mistral a risk for failing to provide the formulas, and an overall “Satisfactory” rating for its technical proposal.  The DHS awarded the contract to a competitor, which also received a “Satisfactory” technical rating, but proposed a lower overall price.

Mistral filed a bid protest with the GAO.  Mistral argued, in part, that the agency could have derived the calculations and formulas from the information provided in the PDF, and therefore should not have assigned a risk for the supposed absence of this information.

The GAO wrote that Mistral “does not explain how this could or should be done.”  And, “[m]ore importantly . . . an agency is not required to perform calculations or adapt its evaluation to comply with an offeror’s submission in order to determine whether a proposal was compliant with stated solicitation requirements.”  The GAO continued:

Stated differently, the question is not what the agency could possibly do to cure a noncompliant submission, but rather, what it was required to do.  Based on our review of the record, we agree with the agency’s conclusions that without the substantiating evidence to support Mistral’s performance claims as required by the solicitation, and requested by the agency during discussions, it was reasonable to assign a medium risk to Mistral’s proposal in this area. 

The GAO denied Mistral’s protest.

The Mistral, Inc. protest is a good reminder that it is up to an offeror to prepare a thorough, well-written proposal, including all information required by the solicitation.  It is not the agency’s responsibility, in the ordinary course, to perform calculations using the information provided by the offeror to determine whether the proposal meets the solicitation’s requirements.

And of course, Mistral is also a warning to offerors to be sure that electronic proposals are submitted in the appropriate format.  Although PDFs are commonly used in the submission of electronic proposals, there are circumstances in which a PDF may not get the job done–such as in Mistral, where the underlying Excel calculations, which weren’t available in PDF format, were important to the evaluation.


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The U.S. Small Business Administration, Office of Hearings and Appeals recently affirmed–for now–its narrow reading of the so-called interaffiliate transactions exception.

In a recent size appeal decision, Newport Materials, LLC, SBA No. SIZ-5733 (Apr. 21, 2016), OHA upheld a 2015 decision in which OHA narrowly applied the exception, holding that interaffiliate transactions count against a challenged firm’s annual receipts unless three factors are met: 1) the concerns are eligible to file a consolidated tax return; 2) the transactions are between the challenged concern and its affiliate; and 3) the transactions are between a parent company and its subsidiary.

The Newport Materials size appeal involved an Air Force IFB for the repair/replacement of roadways, curbing and sidewalks. The Air Force issued the IFB as a small business set-aside under NAICS code 237310 (Highway, Street, and Bridge Construction), with a corresponding $36.5 million size standard.

After opening bids, the Air Force announced that Newport Materials, LLC was the apparent awardee. A competitor then filed a size protest challenging Newport Materials’ small business eligibility.

The SBA Area Office determined that Newport Materials was 100% owned by Richard DeFelice. Mr. DeFelice also owned several other companies, including Newport Construction Corporation. Mr. DeFelice had previously owned 100% of Four Acres Transportation, Inc. However in January 2015, Mr. DeFelice transferred his interest in Four Acres to Newport Construction. Therefore, Four Acres was a wholly-owned subsidiary of Newport Construction. Four Acres’ entire business apparently consisted of performing payroll activities for Newport Construction.

In evaluating Newport Materials’ size, the SBA Area Office added the revenues of Newport Construction, which was affiliated due to Mr. DeFelice’s common ownership. The SBA Area Office then considered whether to add the revenues of Four Acres, as well. Newport Materials argued that Four Acres’ revenues should be excluded under the interaffiliate transactions exception in order to prevent unfair “double counting” of the Newport Construction’s revenues.

The SBA Area Office disagreed. Citing the 2015 OHA decision, Size Appeals of G&C Fab-Con, LLC, SBA No. SIZ-5649 (2015), the Area Office held that Four Acres’ revenues could not be excluded under the interaffiliate transactions exception. The Area Office found that “Four Acres and Newport Construction are legally prohibited from filing a consolidated tax return because they are both S Corporations.” Additionally, “the exclusion applies only to transactions between the challenged firm and an affiliate, not to transactions among affiliates of the challenged firm, as is the case here because [Newport Materials] is not a party to the transactions.” And finally, because the transactions in question happened before January 2015, “Newport Construction and Four Acres were not parent and subsidiary when the transactions occurred . . ..”

Newport Materials filed an appeal with OHA, arguing that previous OHA decisions, including G&C Fab-Con, were distinguishable and should not govern the outcome in this case. Newport Materials also argued that OHA’s narrow interpretation of the interaffiliate transactions exception was bad public policy.

In a brief opinion, OHA disagreed, holding that there was “no basis to distinguish the instant case from OHA precedent.” It concluded by rejecting Newport Materials’ policy arguments as beyond OHA’s purview: “Arguments as to which policy objectives should, ideally, be reflected in SBA regulations are beyond the scope of the OHA’s review, and should instead be directed to SBA policy officials.”

Those policy officials’ ears must have been burning. As Steve Koprince wrote in this space recently, SBA issued a Policy Statement on May 24, 2016 indicating it intends to broadly apply the interaffiliate transactions exception moving forward and specifically will not require concerns to be eligible to file a consolidated tax return. The policy statement said that “effective immediately” the exception will apply “to interaffiliate transactions between a concern and a firm with which it is affiliated under the principles in [the SBA’s affiliation regulation].” Thus, Newport Materials may already be essentially overturned.

What is not clear is how OHA will interpret the new policy. Believe it or not, there may still be some wiggle room for interpretation. The Policy Statement only specifically addresses the first of the three factors discussed in Newport Materials, the eligibility to file a consolidated tax return. Consolidated tax returns were at the heart of the G&C Fab-Con decision; the SBA policy makers evidently thought OHA got it wrong in that case and issued the Policy Statement to overturn OHA’s decision. However, the Policy Statement does not specifically address whether the transactions have to be between the challenged firm and an affiliate instead of the transactions occurring between affiliates of the challenged firm (as was the case in Newport Materials). The Policy Statement also does not specifically address whether the transactions have to be between a parent company and its subsidiary in order to qualify for the interaffiliate transactions exception.

That said, the Policy Statement uses broad language that the SBA policy makers likely intended to overturn all three limitations described in Newport Materials: “SBA believes that the current regulatory language is clear on its face. It specifically excludes all proceeds from transactions between a concern and its affiliates, without limitation.”

Whether or not OHA agrees remains to be seen.


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An agency was entitled to cancel a solicitation when its needs changed–even though the anticipated changes in its needs “might be characterized as minimal.”

In a recent bid protest decision, the GAO confirmed that a procuring agency has broad discretion to cancel a solicitation when the agency’s anticipated needs change, and that discretion extends to cases in which the agency’s changed needs could be addressed by amending the existing solicitation.

The GAO’s decision in Social Impact, Inc., B-412655.3 (June 29, 2016) involved a USAID solicitation for support for the agency’s Monitoring, Evaluation, and Learning Program in Tanzania.  After evaluating competitive proposals, USAID initially selecting Management Systems International for award.  Social Impact, Inc. then filed a GAO bid protest, challenging the award to MSI.

In response to the protest, USAID notified the GAO that it intended to terminate the award to MSI and cancel the solicitation.  Explaining its decision to cancel the solicitation, the agency stated that “Changes in USAID/Tanzania Mission staffing, and its in-house capacity, as well as changes in Agency experience and best practices vis-a-vis monitoring, evaluation, and learning (MEL) activities, dictate that the Mission streamline its MEL activities by moving some of the underlying procurement’s related work, such as the learning component, in-house to maximize efficiency and cost-savings.”

Social Impact filed a GAO bid protest challenging the agency’s decision to cancel.  Social Impact argued, in part, that the cancellation was inconsistent with FAR 15.206(e), which states:

If, in the judgment of the contracting officer, based on market research or otherwise, an amendment proposed for issuance after offers have been received is so substantial as to exceed what prospective offerors reasonably could have anticipated, so that additional sources likely would have submitted offers had the substance of the amendment been known to them, the contracting officer shall cancel the original solicitation and issue a new one, regardless of the stage of the acquisition.

Social Impact contended that the changes in USAID’s needs were minimal, and not “so substantial as to exceed what prospective offerors reasonably could have anticipated.”  Therefore, Social Impact argued, USAID should have amended the existing solicitation rather than canceling it.

The GAO wrote that “Section 15.206(e) mandates that an agency cancel a solicitation and issue a new one” when the “so substantial” test is satisfied.  “There is nothing to suggest, however, that the converse is true, i.e., that an agency is is prohibited from canceling a solicitation when changes in the agency’s requirements do not rise to the level contemplated in Section 15.206(e).”  The GAO continued:

To the contrary, our Office has held that, even when the changes could be addressed by an amendment, “[t]he only pertinent inquiry is whether there existed a reasonable basis to cancel, since an agency may cancel at any time when such a basis is present.”  Where the record reflects a reasonable basis to cancel, and in the absence of the criteria described in section 15.206(e), the agency has broad discretion in determining whether to cancel or amend a solicitation.

The GAO concluded that “we find the agency’s decision to cancel the solicitation to be reasonable despite the fact that the anticipated changes to the solicitation might be characterized as minimal.”  The GAO denied Social Impact’s protest.

As the Social Impact case demonstrates, agencies enjoy broad discretion when it comes to canceling solicitations.  Even where an anticipated change in the agency’s needs could be satisfied by amending the existing solicitation, the agency may validly decide instead to cancel it.


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A group of companies has agreed to pay $5.8 million to resolve a False Claims Act case stemming from alleged affiliations among the companies.

According to a Department of Justice press release, the settlement resolves claims that En Pointe Gov Inc (now known as Modern Gov IT Inc.) falsely certified that it was a small business for purposes of federal set-aside contracts, despite alleged affiliations with four other companies–all of whom will also pay a portion of the settlement.

The government alleged that, between 2011 and 2014, En Pointe Gov Inc. falsely represented that it was a small business.  “In particular,” the press release states, “the government alleged that En Pointe Gov Inc.’s affiliation with the other defendants rendered it a non-small business, and, thus, ineligible for the small business set-aside contracts it obtained.”  The government also alleged that En Pointe under-reported sales made under its GSA Schedule contract, resulting in underpayment of the Industrial Funding Fee.

The issue came to light as the result of a lawsuit filed by an apparent competitor, Minburn Technology Group, and Minburn’s managing member.  Minburn filed the lawsuit under the False Claims Act’s whistleblower provisions, which allow private individuals to sue on behalf of the government.  Miburn and its managing member stand to receive approximately $1.4 million as their share of the settlement.


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I’m back in the office after a week-long family beach vacation around the 4th of July.  Kudos to my colleagues here at Koprince Law for putting out last week’s SmallGovCon Week In Review while I was out having some fun in the sun.

This week’s edition of our weekly government contracts news roundup includes a prison term for an 8(a) fraudster, a Congressional focus on full implementation of the Supreme Court’s Kingdomware decision, the release of an important new FAR provision regarding small business subcontracting, and more.

  • A businessman from Fairfax, Virginia has been sentenced to 15 months in prison for fraudulently obtaining contracts worth $6 million from a federal program created to help minority-owned small businesses. [IndiaWest]
  • A top Congressional Republican wants to make sure the Department of Veterans Affairs is fully implementing the Supreme Court’s unanimous Kingdomware decision. [The Hill]
  • A look ahead to next spring brings hope of contracting reform and a focus on having an effective cost-comparison system and effective contract management in place. [Federal News Radio]
  • Two former New Jersey construction executives have been sentenced for their roles in a scheme to secure government contracts by bribing foreign officials. [Reuters]
  • The FAR Council has issued a final rule amending the FAR to implement regulatory changes made by the SBA, which provide for a Governmentwide policy on small business subcontracting. [Federal Register]
  • Congress wants the DoD to shed more light on how it is using lowest-price, technically-acceptable contracts–and report back to Congress in the spring. [GovTech Works]

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Koprince Law LLC

An agency’s attempt to order under a Federal Supply Schedule blanket purchase agreement was improper because the order exceeded the scope of the underlying BPA.

In a recent bid protest decision, GAO held that the agency had erred by attempting to issue a sole-source delivery order for cloud-based email service when the underlying BPA did not envision cloud services.

The bid protest, Tempus Nova, Inc., B-412821, 2016 CPD ¶ 161 (Comp. Gen. June 14, 2016), pitted a Microsoft-authorized dealer against a Google-authorized dealer regarding the IRS’s email service.

In 2013, the IRS issued a BPA to Softchoice Corporation under Softchoice’s FSS contract for maintenance and software updates to the IRS’s existing inventory of Microsoft products and services. The BPA gave the IRS perpetual licenses for some specific listed Microsoft products and included “the right to install on, use, or access . . . the latest version of each product[.]” GAO described the BPA as a vehicle for the IRS to “keep its existing portfolio of software licenses up-to-date with the latest versions of Microsoft products.”

In the summer of 2014, the IRS issued a delivery order against the BPA to acquire an “Office Pro Plus” license, which GAO found included an Office 365 Cloud-based email service. Tempus Nova, Inc., an authorized seller of Google products and services, learned about the delivery order through an email exchange with the IRS and filed a GAO bid protest, complaining that the order was an improper sole-source acquisition of e-mail-as-a-service (EaaS). EaaS is a cloud-based subscription service or product that does not involve installing software. Tempus Nova therefore argued that it was outside of the scope of the BPA.

GAO noted that “FSS delivery orders that are outside the scope of the underlying BPA” are improper because they have not been appropriately competed. In determining whether a delivery order is outside the scope of an underlying contract or BPA, the GAO “considers whether there is a material difference between the delivery order and the underlying BPA.” GAO further explained:

Evidence of a material difference is found by reviewing the BPA as awarded, and the terms of the delivery order issued, and considering whether the original solicitation adequately advised offerors of the potential for the type of work contemplated by the delivery order. The overall inquiry is whether the delivery order is of such a nature that potential offerors reasonably would have anticipated competing for the goods or services being acquired through issuance of the delivery order.

In this case, the IRS argued that Office 365 is merely the “latest and greatest” version of Office Pro Plus (which was specifically identified in the BPA).  GAO disagreed. It wrote that Office Pro Plus “is, in fact, an Office 365 cloud-based product, which is distinct from the ‘Office Professional Plus’ licenses owned by the agency.” Therefore, GAO concluded, “[t]he record demonstrates that under the delivery order, the agency acquired ‘Office Pro Plus’ subscriptions–a cloud-based Microsoft Office 365 product–even though the portfolio of software assets identified in the BPA did not include any cloud-based products.”

GAO found that “the delivery order at issue in the protest amounts to an improper, out-of-scope, sole source award.” GAO sustained the protest.

Agencies have rather broad flexibility to use vehicles like BPAs to obtain goods and services. But as the Tempus Nova case demonstrates, that flexibility is not unlimited: an order that exceeds the scope of an underlying BPA is improper.


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The analysis of an offeror’s past performance is sometimes a crucial part of an agency’s evaluation of proposals. And an agency’s evaluation of past performance is ordinarily a matter of agency discretion.

Though broad, this discretion is not unlimited. An agency’s past performance evaluation must be consistent with the solicitation’s evaluation criteria. GAO recently reaffirmed this rule, by sustaining a protest challenging an agency’s departure from its own definition of relevant past performance.

 

At issue in Delfasco, LLC, B-409514.3 (Mar. 2, 2015), was an Army solicitation that sought the production of two types of practice bombs and a suspension lug, used for attaching the bombs to aircraft. Offerors would be graded under a best value evaluation scheme, which had three factors: technical ability, past performance (which included subfactors for quality program problems and on-time delivery), and price. An offeror’s technical ability was significantly more important than its past performance and price; past performance and price were equally weighted.

The past performance evaluation was to consider the relevancy of the offeror’s prior work. Relevant past performance was defined “as having previously produced like or similar items . . . as items that have been produced using similar manufacturing processes, including experience with casting, machining, forging, metal forming, welding, essential skills and unique technologies required to produce the MK-76 with MK-14, BDU-33 and the 25lb Suspension Lug.” The solicitation’s evaluation criteria further explained that relevant past performance is that which “involved similar scope and magnitude of effort and complexities this solicitation requires,” while somewhat relevant past performance “involved some of the scope and magnitude of effort and complexities this solicitation requires.”

Three companies submitted offers under the solicitation. Delfasco—a previous producer of the two bombs and the lug—was one of the offerors. Delfasco’s proposal noted that it had previously produced “millions” of the practice bombs and “thousands” of the suspension lug sought by the Army. It also contemplated using existing practices, technology, personnel, and equipment to continue this production. Nevertheless, the Army gave Delfasco a somewhat relevant past performance rating.

GTI Systems also submitted a proposal. The Army’s evaluation of GTI’s past performance indicated that GTI had much more limited experience than Delfasco. The Army noted that GTI “lacked relevant past performance with respect to two necessary skills identified in the RFP, and only somewhat relevant experience with respect to another skill.” But even though the Army’s evaluation concluded that GTI “does not appear to have relevant experience i[n] all aspects that will be required on this solicitation,” it nonetheless found that GTI’s “past performance does involve a similar scope and magnitude of effort and complexities this solicitation requires giving the offeror an overall relevancy rating of ‘Relevant[.]’”

In sum, then, Delfasco was given a somewhat relevant past performance rating. GTI Systems (“GTI”)—who had never produced these same practice bombs or the suspension lug—was found to have relevant past performance. In part because of this rating difference, GTI was named the awardee.

Delfasco filed a GAO bid protest challenging the Army’s award decision. In the course of the protest, the Army admitted that Delfasco should have received a relevant past performance rating. Nevertheless, the Army argued, the award result would have been the same even if Delfasco had been assigned a relevant past performance rating.

Delfasco contended, however, that the Army’s errors went beyond the somewhat relevant past performance rating initially assigned to Delfasco. Additionally, Delfasco contended, the Army had erred by finding GTI’s past performance to be relevant instead of somewhat relevant.

GAO wrote that an agency’s evaluation of past performance is ordinarily “a matter of agency discretion.” However, that discretion is not unlimited. An agency’s past performance review must be “reasonable and consistent with the solicitation’s evaluation criteria and with the procurement statutes and regulations, [and] adequately documented.”

In this case, GAO found that the Army had not properly exercised its discretion. GAO referred back to the solicitation’s definition of relevant past performance, and noted that the Army found that GTI “had not demonstrated ‘any’ relevant experience” in casting or forging, and only somewhat relevant experience in machining. Thus, GAO found that “GTI has only demonstrated ‘some’ of the skills necessary to produce the bomb bodies.” Given “limited relevant experience,” GTI’s relevant past performance rating was not justified. GAO sustained Delfasco’s protest.

A disappointed offeror protesting a past performance evaluation often faces an uphill battle, given the discretion agencies typically enjoy in conducting their evaluations. But Delfasco affirms that this discretion is not unlimited—where an agency fails to follow its own past performance evaluation criteria, GAO will sustain a protest.

 

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Joint ventures can be formally organized as limited liability companies–and that should come as no surprise, given how often joint ventures use the LLC form these days.

In a recent size appeal decision, the SBA Office of Hearings and Appeals rejected the argument that, because a company was formed as an LLC, its size should not be calculated using the special rule for joint ventures.  Instead, OHA held, the LLC in question was clearly intended to be a joint venture, and the fact that it was an LLC didn’t preclude it from being treated as a joint venture.

OHA’s decision in Size Appeals of Insight Environmental Pacific, LLC, SBA No. SIZ-5756 (2016) involved a NAVFAC solicitation for environmental remediation at contaminated sites.  The solicitation was issued under NAICS code 562910 (Environmental Remediation Services) with a corresponding size standard of 500 employees.

After reviewing competitive proposals, NAVFAC announced that Insight Environmental Pacific, LLC had been selected for award.  Two unsuccessful competitors then filed size protests challenging Insight’s small business status.

The SBA Area Office determined that Insight had been established as an LLC in 2013.  Insight’s majority owner was Insight Environmental, Engineering & Construction, Inc.; the minority owner was Environmental Chemical Construction.  IEEC was designated as the “small business member” and “Managing Member” of the LLC.

Insight’s operating agreement included a number of provisions indicating that Insight had been formed for a limited purpose.  The operating agreement stated, among other things, that Insight’s purpose was to pursue the specific NAVFAC solicitation at issue, and perform the resulting contract if awarded.  The operating agreement also stated that the LLC would be terminated if NAVFAC announced that Insight would not be awarded the environmental remediation contract.

The SBA Area Office cited the SBA’s affiliation regulations, which define a joint venture as “an association of individuals and/or concerns with interests in any degree or proportion consorting to engage in and carry out no more than three specific or limited-purpose business ventures for joint profit over a two year period, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally.”  The SBA Area Office wrote that the operating agreement indicated that Insight was a joint venture, and pointed out that Insight’s own proposal referred to it as a “joint venture” in three places.  The SBA Area Office determined that Insight was a joint venture.

Under the SBA’s prior affiliation regulations, which applied to this procurement, the size of a joint venture ordinarily was determined by adding the sizes of the members of the joint venture.  Applying this affiliation regulation, the SBA Area Office determined that Insight was ineligible for the NAVFAC contract.  (As SmallGovCon readers know, the SBA recently updated its affiliation regulations to specify that a joint venture’s size is determined by comparing the size of each member, individually, to the relevant size standard.  Even if this change had applied to Insight, it presumably wouldn’t have altered the SBA Area Office’s analysis, because ECC apparently was a large business).

Insight filed a size appeal with OHA.  Insight argued that because it was an LLC, the SBA Area Office shouldn’t have treated it as a joint venture.  Instead, Insight contended, the SBA Area Office should have applied the ordinary affiliation rules for other entities.  Under these rules, Insight said, it would be treated as a small business because its minority member, ECC, couldn’t control the company.

OHA cited the regulatory definition of a joint venture, and then quoted another part of the SBA’s affiliation regulations, which states that a joint venture “may (but need not) be in the form of a separate legal entity . . ..”  OHA wrote that Insight “falls squarely within this definition.”  OHA pointed out that Insight was created for the “‘sole and limited purpose’ of competing for and performing the subject NAVFAC PAcific procurement” and that the LLC would terminate if Insight was not awarded the contract.  “It is therefore clear,” OHA wrote, “that [Insight] is not a business operating on ‘a continuing or permanent basis for conducting business generally,’ but rather is a temporary association of concerns engaging in a limited-purpose business venture for joint profit.”

OHA explained that “the fact that [Insight] is organized as an LLC does not alter this conclusion.”  OHA noted that the “regulation specifically states that a joint venture may or may not be organized as a separate legal entity,” and in commentary adopting the regulation, the SBA stated that a joint venture could use the LLC form.  OHA also noted that its own prior case law “has recognized that entities structured as LLCs may still be joint ventures with the joint venture partners affiliated.”  OHA denied Insight’s size appeal.

In the world of government contracting, joint ventures are commonly formed as LLCs.  Insight Environmental Pacific confirms that when an entity meets the definition of a joint venture, it will be treated as a joint venture–even if the entity is an LLC.


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I am very pleased to announce that Candace Shields is joining our team of government contracts bloggers here at SmallGovCon.

Candace comes to us from the Social Security Administration, where she was an Attorney Advisor for several years.  As an associate attorney at Koprince Law LLC, Candace’s practice focuses on federal government contracts law.

Please check out Candace’s online biography and great first blog post, and be sure to visit SmallGovCon regularly for the latest legal news and notes for small government contractors.


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The ongoing federal movement to prevent fraud waste, and abuse in the contracting process continues. And as demonstrated in a recent federal court decision, the government retains its ability to refuse to pay a procurement contract tainted by fraud.

In the recent decision of Laguna Construction Company, Inc. v. Ashton Carter, Appeal Number 15-1291, the U.S. Court of Appeals for the Federal Circuit affirmed that a procurement contract tainted by violations of the Anti-Kickback Act is voidable under the doctrine of prior material breach.

In 2003, the government awarded Laguna Construction Company a contract to perform work in Iraq. Under the contract, Laguna received 16 cost-reimbursable task orders to perform the work, and awarded subcontracts to a number of subcontractors.

In 2008, the government began investigating allegations that Laguna’s employees were engaged in kickback schemes with its subcontractors. In October 2010, Laguna’s project manager pleaded guilty to conspiracy to pay or receive kickbacks, conspiracy to defraud the United States, and violations of the Anti-Kickback Act, which broadly prohibits prime contractors from soliciting or accepting kickbacks in exchange for awarding subcontracts. The project manager admitted that, for approximately three years, he allowed subcontractors to submit inflated invoices to Laguna, and profited from the difference.

In February 2012, three principal officers of Laguna were charged with receiving kickbacks for awarding subcontracts. The company’s Executive Vice President and Chief Operating Officer also was charged with conspiring to defraud the United States by participating in a kickback scheme from December 2004 to February 2009, which he pleaded guilty to in July 2013.

After performing work until 2015, Laguna sought payment of past costs. The government refused a portion of these costs alleging that it was not liable because Laguna had committed a prior material breach by accepting subcontractor kickbacks under the contract. The Armed Services Board of Contract Appeals agreed, stating that Laguna “committed the first material breach under this contract, which provided the government with a legal excuse not to pay [Laguna’s] invoices.”

Laguna appealed to the Federal Circuit.  Laguna argued, in part, that any alleged breach was not material because the Government may audit and reconcile costs, thereby “assur[ing] that the Government will incur no damages.”

The Federal Circuit explained that, the prior material breach doctrine, a contractor’s claim against the government may be barred when the contractor breaches the contract through “fraud-based” contract.”  The court further explained that its decision comported with the Supreme Court’s instruction “that the government must be able to ‘rid itself’ of contracts that are ‘tainted’ by fraud, including kickbacks and violation of conflict-of-interest statutes,” citing to the Supreme Court’s prior rationale that:

[E]ven if the Government could isolate and recover the inflation attributable to the kickback, it would still be saddled with a subcontractor who, having obtained the job other than on merit, is perhaps entirely unreliable in other ways. This unreliability in turn undermines the security of the prime contractor’s performance–a result which the public cannot tolerate, especially where, as here, important defense contracts are involved.

In this case, the court wrote that Laguna “committed the first material breach” by agreeing to accept kickbacks from its subcontractors. The court held that “[t]he Board properly determined that these criminal acts constituted material breach that may be imputed to Laguna, since both employees were operating under the contract and within the scope of their employment when they ‘manipulated the contracting process.'”  The court denied Laguna’s appeal, and affirmed the ASBCA’s decision.

This decision provides a cautionary example of one of the many risks involved in accepting kickbacks for awarding subcontracts. The Anti-Kickback Act continues to provide for criminal, civil, and administrative penalties–and some of those penalties were assessed against Laguna’s employees. But the Laguna case demonstrates that violations of the Anti-Kickback Act (and other fraud-based breaches of a government contract) also may excuse the government from paying a contractor’s claim for additional contract costs.


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Koprince Law LLC

The SBA has finalized its “universal” mentor-protege program for all small businesses.

In a final rule scheduled to be published in the Federal Register on July 25, 2016, the SBA provides the framework for what may be one of the most important small business programs of the last decade–one that will allow all small businesses to obtain developmental assistance from larger mentors, and form joint ventures with those mentors to pursue set-aside contracts.

First things first: while I’ve been using the term “universal” mentor-protege program for the last year and a half, the SBA apparently has had a change of heart when it comes to terminology.  The SBA now calls its new program the “small business mentor-protege program,” so that’s what I’ll call it, too, from now on.

The SBA’s final rule creates a new regulation, 13 C.F.R. 125.9, entitled “What are the rules governing SBA’s small business mentor-protege program?”  The new regulation sets forth the framework of the small business mentor-protege program.

Program Purpose

The SBA broadly explains the purpose of the new program in this way:

The small business mentor-protege program is designed to enhance the capabilities of protege firms by requiring approved mentors to provide business development assistance to protege firms and to improve the protege firms’ ability to successfully compete for federal contracts.  This assistance may include technical and/or management assistance; financial assistance in the form of equity investments and/or loans; subcontracts (either from the mentor to the protege or from the protege to the mentor); trade education; and/or assistance in performing prime contracts with the Government through joint venture arrangements.  Mentors are encouraged to provide assistance relating to the performance of contracts set aside or reserved for small business so that protege firms may more fully develop their capabilities.

Just like the longstanding and popular 8(a) mentor-protege program, the new small business mentor-protege program creates a framework under which mentor firms will provide a wide variety of potential benefits to their proteges.

Qualification as Mentor

As a general matter, “[a]ny concern that demonstrates a commitment and the ability to assist small business concerns may act as a mentor and receive benefits ” from the mentor-protege program.  Mentors may be large or small businesses.

In order to qualify, a prospective mentor must demonstrate that it is capable of meeting its commitments to the protege.  The SBA will evaluate a prospective mentor’s financial health, such as by reviewing the mentor’s tax returns, audited financial statements, and/or SEC filings (for publicly traded companies).  A mentor must “[p]ossess good character” and cannot appear on the government’s list of debarred or suspended contractors.  Once approved, a mentor must “annually certify that it continues to possess good character and a favorable financial position.”

A mentor “generally” will have only one protege at a time.  However, “SBA may authorize a concern to mentor more than one protege at a time where it can demonstrate that the additional mentor-protege relationship will not adversely affect the development of either protege (e.g., the second firm may not be a competitor of the first firm).  While mentors may, with SBA permission, have more than one protege, “Under no circumstances will a mentor be permitted to have more than three proteges at one time . . ..”  In its commentary, the SBA explains:

SBA continues to believe that there must be a limit on the number of firms that one business, particularly one that is other than small, can mentor.  Although SBA believes that the small business mentor-protege program will certainly afford business development to many small businesses, SBA remains concerned about large businesses benefiting disproportionately.  If one firm could be a mentor for an unlimited number (or even a larger number) of proteges, that firm would receive benefits from the mentor-protege program through joint ventures and possible stock ownership far beyond the benefits to be derived by any individual protege.

Importantly, the “three-protege limit” is an aggregate of proteges under the small business mentor-protege program and the separate 8(a) mentor-protege program.  In other words, if a mentor already has two proteges under the 8(a) mentor-protege program, the mentor would be limited to a single additional protege under the small business mentor-protege program.

If control of a mentor changes (such as through a stock sale), the mentor-protege agreement can continue under the new ownership.  However, after the change in control, the mentor must “express[] in writing to SBA that it acknowledges the mentor-protege agreement and [certify] that it will continue to abide by its terms.”

Finally, in its proposed rule, the SBA suggested that a firm could not be both a mentor and a protege at the same time.  In my public speaking on the mentor-protege program, I questioned this proposal, noting that a firm may be well-established in one line of work, but require mentoring in a secondary line of work.  For instance, a company may be a longstanding, well-established plumbing contractor, and well-positioned to mentor a firm in that industry–while at the same time requiring mentoring to break into electrical work.

Perhaps the SBA was listening, because the final rule deletes that restriction.  The final rule provides that “SBA may authorize a small business to be both a protege and a mentor at the same time where the firm can demonstrate that the second relationship will not compete with or otherwise conflict with the first mentor-protege relationship.”

Qualification as Protege

To qualify as a protege, a company “must qualify as small for the size standard corresponding to its primary NAICS code or identify that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code.”  However, if the prospective protege is not a small business in its primary NAICS code, “the firm must demonstrate how the mentor-protege relationship is a logical business progression for the firm and will further develop or expand current capabilities.”  Further, “SBA will not approve a mentor-protege relationship in a secondary NAICS code in which the firm has no prior experience.”

The portion of the final regulation involving secondary NAICS codes is an important change from the SBA’s proposed rule.  The SBA initially proposed that a protege would be required to qualify as small in its primary NAICS code, and could not obtain a mentor if that standard wasn’t met.  The final rule appropriately recognizes that a small business may desire mentorship to develop in a new or secondary line of work carrying a larger NAICS code (think of a plumbing contractor that wants to expand to general contracting, for example).

A protege ordinarily will have no more than one mentor at a time, although the SBA may approve a second mentor where certain conditions are met.  In no case will the SBA approve more than two concurrent mentors for any single protege.

Written Mentor-Protege Agreement Required

In order to participate in the mentor-protege program, “[t]he mentor and protege firms must enter into a written agreement setting forth an assessment of the protege’s needs and providing a detailed description and timeline for the delivery of the assistance the mentor commits to provide to address those needs . . ..”

Interestingly, as in the 8(a) program, the parties must “[a]ddress how the assistance to be provided through the agreement will help the protege firm meet its goals as defined in its business plan.”  I say “interestingly” because 8(a) program participants are required to submit 8(a)-specific business plans to the SBA; other small businesses are not.  It’s unclear, then, whether this regulation implicitly requires prospective proteges to have written business plans (which of course is a best practice, and often required for various types of financing–but still, not all small businesses have written business plans).

The mentor-protege agreement must provide that the mentor will provide assistance to the protege for at least one year.  However, the agreement must also provide “that either the protege or the mentor may terminate the agreement with 30 days advance notice to the other party . . . and to SBA.”

The written mentor-protege agreement must be approved by the SBA before it takes effect.  Additionally, the SBA “must approve all changes to a mentor-protege agreement in advance, and any changes made to the agreement must be provided in writing.”  If changes are made to the mentor-protege agreement without the SBA’s permission “SBA shall terminate the mentor-protege relationship and may also propose suspension or debarment of one or both firms . . ..”

The SBA states that it will “establish a separate unit within the Office of Business Development whose sole function would be to process mentor-protege applications and review MPAs and the assistance provided under them once approved.”  If this office becomes overwhelmed with applications (a concern a number of commenters raised in response to the proposed rule), SBA could consider using “open enrollment periods” in which mentor-protege applications would be accepted.  The final rule does not establish any open enrollment periods at this time, however.

Term of Mentor-Protege Agreement

A single mentor-protege agreement “may not exceed three years, but may be extended for a second three years.”  The SBA’s apparent intent is to cap, at six years, the length of time that two companies can be involved in a small business mentor-protege relationship.

In its commentary, the SBA explains:

The mentor-protege program should be a boost to a small business’s development that enables the small business to independently perform larger and more complex contracts in the future.  It should not be a crutch that prevents small businesses from seeking and performing those larger and more complex contracts on their own.  

Annual Reporting

Small business proteges must make annual reports to the SBA.  Within 30 days of the anniversary of the SBA’s approval of the mentor-protege agreement, the protege must make a report concerning the previous year, including a detailed list of assistance provided by the mentor, federal contracts awarded to the mentor-protege as joint venturers, and so on.  The protege must also submit a narrative “describing the success each assistance has had in addressing the developmental needs of the protege and addressing any problems encountered.”

The SBA will review the protege’s annual report to determine whether to reauthorize the mentor-protege agreement (provided that it has not expired).  However, no news is good news: “nless rescinded in writing as a result of the review, the mentor-protege relationship will automatically renew without additional written notice or continuation or extension to the protege firm.”

If the SBA determines that the mentor has not provided the promised assistance, the SBA will give the mentor the opportunity to respond.  If the SBA is unconvinced by that explanation (or if the mentor offers no explanation), the SBA will terminate the mentor-protege agreement and bar the mentor from acting as a mentor for two years.  The SBA may also take other actions to penalize the mentor.

After the mentor-protege relationship has concluded, the SBA will require the protege to submit a final report to the SBA about “whether it believed the mentor-protege relationship was beneficial and describe any lasting benefits to the protege.”  If the protege fails to submit the report, the SBA will not approve a second mentor-protege relationship, either under the small business mentor-protege program or the 8(a) mentor-protege program.

Joint Venturing

The small business mentor-protege program allows the mentor and protege to form joint ventures and compete for set-aside contracts based solely on the protege’s size:

A mentor and protege may joint venture as a small business for any government prime contract or subcontract, provided the protege qualifies as small for the procurement.  Such a joint venture may seek any type of small business contract (i.e., small business set-aside, 8(a), HUBZone, SDVOS, or WOSB) for which the protege firm qualifies (e.g., a protege firm that qualifies as a WOSB could seek a WOSB set-aside as a joint venture with its SBA-approved mentor).

The SBA must approve the joint venture agreement before a mentor-protege joint venture may avail itself of the special exception from affiliation provided by the small business mentor-protege program.  The joint venture agreement, in turn, must satisfy the requirements of another new regulation the SBA has finalized, which will be codified at 13 C.F.R. 125.8.  And because this blog post is already approaching “War and Peace” length, we’ll discuss those new joint venturing requirements in a separate post.

According to the final regulation, “[o]nce a protege firm no longer qualifies as a small business for the size standard corresponding to its primary NAICS code, it will not be eligible for any further contracting benefits from its mentor-protege relationship.”  In my mind, though, this prohibition is inconsistent with the SBA’s decision to allow proteges to qualify for the small business mentor-protege program based on secondary NAICS codes.  If outgrowing the primary NAICS code precludes joint venturing for set-aside contracts carrying NAICS codes with higher size standards, the value of mentorship in a secondary NAICS code is greatly diminished.  Perhaps the SBA will clarify this piece of the rule moving forward.

The final rule provides that “a change in the protege’s size status generally does not affect contracts previously awarded to a joint venture between the protege and its mentor.”  The SBA specifies that “[e]xcept for contracts with durations of more than five years (including options), a contract awarded to a joint venture between a protege and mentor as a small business continues to qualify as an award to small business for the life of that contract and the joint venture remains obligated to continue performance on that contract.”  For contracts with durations of more than five years, recertification will be required as provided for in 13 C.F.R. 124.404(g)(3)

Affiliation Exception

As is the case under the 8(a) mentor-protege program, the small business mentor-protege program provides a broad “shield” from affiliation.  The SBA’s new regulation states that “[n]o determination of affiliation or control may be found between a protege firm and its mentor based solely on the mentor-protege agreement or any assistance provided pursuant to the agreement.”  The affiliation exception is not unlimited, however.  The new regulation provides that “affiliation may be found for other reasons set forth” in the SBA’s affiliation regulation, 13 C.F.R. 121.103.

Transfer of 8(a) Mentor-Protege Agreements

The final rule provides that when a protege graduates or otherwise leaves the 8(a) Program, but continue to qualify as small, that protege “may transfer its 8(a) mentor-protege relationship to a small business mentor-protege relationship.”  The mentor-and protege do not need to reapply, but must “merely inform SBA” of the intent to transfer the mentor-protege relationship to the small business mentor-protege program.

The Road Ahead

The SBA’s new small business mentor-protege program will become effective 30 days after the final rule is officially published on July 25.  Whether the SBA will begin accepting applications in late August, however, remains to be seen.

The small business mentor-protege program will be a game-changer in the world of small business contracting.  For small and large contractors alike, now is the time to get working to take advantage of this extraordinary new opportunity.

 

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Koprince Law LLC

Populated joint ventures will no longer be permitted in the SBA’s small business programs, under a new regulation set to take effect on August 24, 2016.

The SBA’s major new rule, officially issued today in the Federal Register, will be best known for implementing the long-awaited small business mentor-protege program.  But the rule also makes many other important changes to the SBA’s small business programs, including the elimination of populated joint ventures.

Under current law, a joint venture can be either populated or unpopulated.  A populated joint venture acts like an actual operating company: it brings employees onto its payroll, and performs contract using its own employees.  An unpopulated joint venture, on the other hand, does not use its own employees to perform contracts.  Instead, an unpopulated joint venture serves as a vehicle by which the joint venture’s members can collectively serve as the prime contractor, with each joint venture member performing work with its own employees.

The SBA’s new regulation changes the definition of a joint venture to exclude populated entities.  The revised regulation, which will appear in 13 C.F.R. 121.1o3(h), defines a joint venture, in relevant part, as follows:

For purposes of this provision and in order to facilitate tracking of the number of contract awards made to a joint venture, a joint venture: must be in writing and must do business under its own name; must be identified as a joint venture in the System for Award Management (SAM); may be in the form of a formal or informal partnership or exist as a separate limited liability company or other separate legal entity; and, if it exists as a formal separate legal entity, may not be populated with individuals intended to perform contracts awarded to the joint venture (i.e., the joint venture may have its own separate employees to perform administrative functions, but may not have its own separate employees to perform contracts awarded to the joint venture).

In its commentary explaining the change, the SBA focused on joint ventures between mentors and proteges, both in the 8(a) mentor-protege program and the SBA’s new small business mentor-protege program.  The SBA stated that “a small protege firm does not adequately enhance its expertise or ability to perform larger and more complex contracts on its own in the future when all the work through a joint venture is performed by a populated separate legal entity.”  SBA further explained:

If the individuals hired by the joint venture to perform the work under the contract did not come from the protege firm, there is no guarantee that they would ultimately end up working for the protege firm after the contract is completed.  In such a case, the protege firm would have gained nothing out of that contract.  The company itself did not perform work under the contract and the individual employees who performed work did not at any point work for the protege firm.

Although the SBA’s commentary focused almost exclusively on mentor-protege joint ventures, the regulatory change appears in the SBA’s size regulations, which apply both inside and outside of the new small business mentor-protege program.  It appears, therefore, that populated joint ventures will not only be impermissible for mentor-protege joint ventures, but will also be impermissible for joint ventures between multiple small businesses.

In my experience, most small government contractors already prefer unpopulated joint ventures, largely because of the administrative inconveniences associated with populating a limited-purpose entity like a joint venture.  Nevertheless, a not-insignificant minority has long preferred the populated joint venture form.  Come August 24, 2016, those contractors will have to say goodbye to the possibility of forming new populated joint ventures for set-aside contracts.


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