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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On Friday, Steven wrote about the framework of the new SBA small business mentor-protégé program. As part of this significant program addition, SBA’s final rule includes details about the requirements a small business joint venture must satisfy in order to be qualified to perform a small business set-aside. This post will briefly discuss those requirements.
A quick disclaimer: as we have detailed previously on SmallGovCon, the SBA will closely evaluate a joint venture agreement in the case of a size protest, and omitting even one piece of required information can render a joint venture ineligible for award. Any joint venture agreement should be prepared and reviewed carefully, to ensure its compliance with the new regulations.
With that admonition in mind, the small business mentor-protégé joint venture requirements (to be set forth at 13 C.F.R. § 125.8) are very similar to the existing 8(a) joint venture requirements (which apply both to 8(a) mentor-protege joint ventures and to “non-mentor-protege” joint ventures for 8(a) contracts).
The regulatory requirements are very different for a joint venture between two small businesses, on the one hand, and a joint venture under the small business mentor-protege program, on the other. In the case of a joint venture between two or more businesses that each qualify as small, the agreement “need not be in any specific form or contain any specific conditions in order for the joint venture to qualify as a small business.” But for a small business mentor-protégé joint venture, the agreement must include provisions that meet the following criteria:
Purpose. Set forth the purpose of the joint venture.
Managing Venturer/Project Manager. Designate a small business as the managing venturer, and an employee of the managing venturer as the project manager. The individual identified as the project manager “need not be an employee of the small business at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to being employed by the small business if the joint venture is the successful offeror.” Importantly, “the individual identified as the project manager cannot be employed by the mentor and become an employee of the small business for purposes of performance under the joint venture.”
Ownership. State that, if the joint venture is a separate legal entity, it is at least 51% owned by the small business.
Profits. Distribute profits from the joint venture commensurate with the work performed, or in the case of a separate legal entity, commensurate with the ownership interests in the joint venture.
Bank Account. Provide for a special bank account in the name of the joint venture. The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on a set-aside contract will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
Equipment, Facilities, and Other Resources. Itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. In a recent court decision, an 8(a) joint venture was penalized for providing insufficient details about these items—even though the contract in question was an IDIQ contract, making it difficult to provide a “detailed schedule” at the time the joint venture agreement was executed. Perhaps in response to that decision, the new regulations provide that “if a contract is indefinite in nature,” such as an IDIQ, the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
Parties’ Responsibilities. Specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture will meet the performance of work requirements. Again, if the contract is indefinite, a lesser amount of information will be permitted.
Guaranteed Performance. Obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer.
Records. State that accounting and other administrative records of the joint venture must be kept in the office of the small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the small business managing venturer upon completion of the contract. These provisions, which were lifted essentially word-for-word out of the current 8(a) regulations, seem dated in the assumption that records will be kept in paper form; it instead would have been nice for the SBA to allow for more modern record-keeping, like a cloud-based records system that enables documents to be available in real-time to both parties.
Statements. Provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. This language, which again was basically copied from the 8(a) regulations, doesn’t specify who might be a “joint venture principal” in a world in which populated joint ventures have been eliminated. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract.
As noted, these requirements closely mirror existing requirements for an 8(a) mentor-protégé joint venture agreement. But at least one key difference exists: for a small business mentor-protégé joint venture agreement, the small business partner must self-certify as to the agreement’s compliance. The regulation states:
Prior to the performance of any contract set aside or reserved for small business by a joint venture between a protégé small business and a mentor authorized by § 125.9, the small business partner to the joint venture must submit a written certification to the contracting officer and SBA, signed by an authorized official of each partner to the joint venture, stating as follows:
The parties have entered into a joint venture agreement that fully complies with [the joint venture agreement requirements];
The parties will perform the contract in compliance with the joint venture agreement and with the performance of work requirements [set forth in the regulation].
Much like an 8(a) joint venture, moreover, a small business mentor-protégé joint venture must meet the applicable performance of work percentage set out in the regulations (at 13 C.F.R. § 125.6). Additionally, the small business partner to the joint venture perform at least 40% of the work performed by the joint venture; this work must be more than administrative or ministerial, so that the protégé member can gain substantive experience.
The regulation further requires the small business partner to issue performance of work reports to the SBA. These reports must describe how the small business is meeting or has met the performance of work requirements for each small business set-aside performed by the joint venture. The small business partner must submit these reports annually and at the completion of any contract.
The SBA’s new final rule, issued only today, provides new opportunities to increase small business participation in federal contracting. And though businesses hoping to participate in the new small business mentor-protégé program can look to the SBA’s existing programs as a guide, key differences between the programs warrant a close review of the new requirements. Follow SmallGovCon for more updates on this important rule.
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I’m back in the office today after a great workshop with the Kansas PTAC where I spoke about Big Changes for Small Contractors–a presentation covering the major changes to the limitations on subcontracting, the SBA’s new small business mentor-protege program, and much more. If you didn’t catch the presentation, I’ll be giving an encore presentation next week in Overland Park.
And since it’s Friday, it must be time for our weekly dose of government contracting news and notes. In this week’s SmallGovCon Week In Review, we take a look at stories covering the anticipated increase in IT spending, the Contagious Diagnostics and Mitigation program is moving into phase 3, the GAO concludes the VA made errors in its contracting of medical exams and more.
The overall rate of IT spending will be above $98 billion each year for the next six federal fiscal years. [E-Commerce Times]
Tony Scott, U.S. Chief Information Officer, said he will allot time trying to improve how the federal government accepts unsolicited ideas from industry during what may be his last few months as the U.S. Chief Information Officer. [Nextgov]
The Enterprise Infrastructure Solutions contract will reshape how agencies procure telecommunications IT starting in 2020, but agencies need to prepare now. [FedTech]
The Homeland Security Department and the General Services Administration put two more key pieces in place under the Contagious Diagnostics and Mitigation program. [Federal News Radio]
The U.S. GAO is recommending the VA rebid its contracts for conducting medical exams for thousands of vets applying for disability payments after concluding the VA made several prejudicial errors in its process. [TRIB Live]
GSA launches a new special item number that will make it easier for agencies to find and buy the health IT services they need. [fedscoop]
The SBA has launched online tutorials for entities seeking SBIR funding. [SBA]
Three companies have agreed to pay $132,000 to resolve allegations of falsely self-certifying as small businesses in order to pay reduced nuclear material handling fees. [DOJ]
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SDVOSB joint venture agreements will be required to look quite different after August 24, 2016. That’s when a new SBA regulation takes effect–and the new regulation overhauls (and expands upon) the required provisions for SDVOSB joint venture agreements.
The changes made by this proposed rule will affect joint ventures’ eligibility for SDVOSB contracts. It will be imperative that SDVOSBs understand that their old “template” JV agreements will be non-compliant after August 24, and that SDVOSBs and their joint venture partners carefully ensure that their subsequent joint venture agreements comply with all of the new requirements.
If you’ve been following SmallGovCon lately (and I hope that you have), you know that we’ve been posting a number of updates related to the SBA’s recent major final rule, which is best known for establishing a universal small business mentor-protege program. But the final rule also includes many other important changes, including major updates to the requirements for SDVOSB joint ventures. For those familiar with the requirements for 8(a) joint ventures, most of the new requirements will look familiar; the SBA states that its changes were intended to ensure more uniformity between joint venture agreements under the various socioeconomic set-aside programs.
The SBA’s final rule moves the SDVOSB joint venture requirements from 13 C.F.R. 125.15 to 13 C.F.R. 125.18 (a change of note primarily to those of us in the legal profession). But the new regulation is substantively very different than the old. Below are the highlights of the major requirements under the new rule. Of course (and this should go without saying), this post is educational only; those interested in forming a SDVOSB joint venture should consult the new regulations themselves, or consult with experienced legal counsel, rather than using this post as a guide.
In order to form an SDVOSB joint venture, at least one of the participants must be an SDVOSB, and must also be a small business under the NAICS code assigned to the procurement in question. The other joint venturer can be another small business, or the partner can be the SDVOSB’s mentor under the new small business mentor-protege program or the 8(a) mentor-protege program:
A joint venture between a protege firm that qualifies as an SDVO SBC and its SBA-approved mentor (see [Sections] 125.9 and 124.520 of this chapter) will be deemed small provided the protege qualifies as small for the size standard corresponding to the NAICS code assigned to the SDVO procurement or sale.
This piece of the new regulation appears to overturn a recent SBA Office of Hearings and Appeals decision, in which OHA held that a mentor-protege joint venture was ineligible for an SDVOSB set-aside contract because the mentor firm was not a large business.
Required Joint Venture Agreement Provisions
Under the new regulations, an SDVOSB joint venture agreement must include the following provisions:
Purpose. The joint venture agreement must set forth the purpose of the joint venture. This is not a change from the old rules.
Managing Member. An SDVOSB must be named the managing member of the joint venture. This is not a change from the old rules.
Project Manager. An SDVOSB’s employee must be named the project manager responsible for performance of the contract. This, too, is not a change from the old rules. Curiously, unlike in the rules governing small business mentor-protege joint ventures, the SBA doesn’t specify whether the project manager can be a contingent hire, or instead must be a current employee of the SDVOSB. The new regulation also doesn’t address OHA case law holding that a specific individual must be named in the agreement (i.e., it’s insufficient to simply state that “an employee of the SDVOSB will be the project manager.”) It’s unfortunate that the SBA didn’t address that issue; if the SBA agrees with OHA’s rulings, it would have been nice to have the regulations reflect this requirement so that SDVOSBs understand that a specific name is required.
Ownership. If the joint venture is a separate legal entity (e.g., LLC), the SDVOSB must own at least 51%. This is a change from the old rules, which don’t address ownership.
Profits. The SDVOSB member must receive profits from the joint venture commensurate with the work performed by the SDVOSB, or in the case of a separate legal entity joint venture, commensurate with its ownership share. This is a change from the old rule, which applies the 51% threshold to all SDVOSBs. To me, there is no good reason to distinguish between “informal” and “separate legal entity” joint ventures, especially since the SBA (elsewhere in its final rule) concedes that “state law would recognize an ‘informal’ joint venture with a written document setting forth the responsibilities of the joint venture partners as some sort of partnership.” In other words, an informal joint venture is a legal entity too, just not one that has been formally organized with a state government. In any event, the long and short of this change is that we can expect to see many more informal SDVOSB joint ventures. That’s because, using the informal form, the non-SDVOSB will be able to perform up to 60% of the work and receive 60% of the profits (see the discussion of work split below); whereas in a separate legal entity joint venture, the non-SDVOSB will be limited to 49% of profits, no matter how much work the non-SDVOSB performs.
Bank Account. The parties must establish a special bank account” in the name of the joint venture. This is a change from the old rule, which is silent regarding bank accounts. The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on an SDVOSB will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
Equipment, Facilities, and Other Resources. Itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. This is a change from the old rule, which doesn’t require this information to be set forth in an SDVOSB joint venture agreement. In a recent court decision, an 8(a) joint venture was penalized for providing insufficient details about these items—even though the contract in question was an IDIQ contract, making it difficult to provide a “detailed schedule” at the time the joint venture agreement was executed. Perhaps in response to that decision, the new regulations provide that “if a contract is indefinite in nature,” such as an IDIQ, the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
Parties’ Responsibilities. Specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture will meet the performance of work requirements set forth in the new rule. Again, if the contract is indefinite, a lesser amount of information will be permitted. This is an update from the old rule, which requires information on contract negotiation, source of labor, and contract performance, but does not require a discussion of how the SDVOSB joint venture will meet the performance of work requirements.
Ensured Performance. Obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer. This is not a change from the current rule.
Records. State that accounting and other administrative records of the joint venture must be kept in the office of the small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the small business managing venturer upon completion of the contract. These provisions, which are not included in the old rule, seem dated in the assumption that records will be kept in paper form; it instead would have been nice for the SBA to allow for more modern record-keeping, like a cloud-based records system that enables documents to be available in real-time to both parties.
Statements. Provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. This language, which was basically copied from the 8(a) program regulations, doesn’t specify who might be a “joint venture principal” in a world in which populated joint ventures have been eliminated. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract. I find these requirements a bit odd because, unlike for 8(a) joint ventures, the SBA doesn’t pre-approve SDVOSB joint ventures, nor does it seem that the SBA will review a particular SDVOSB joint venture agreement except in the case of a protest. So why the ongoing requirement for submitting financial records?
While I wish that every SDVOSB would call qualified legal counsel before setting up an SDVOSB joint venture, the reality is that many SDVOSBs attempt to cut costs by relying on joint venture agreement “templates” obtained from a teammate or even from questionable internet sources. Using SDVOSB joint venture agreement templates is risky enough under the old rules, but will be an even bigger problem after August 24, when all those old templates become severely outdated. I hope that all SDVOSBs become aware of the need to have updated joint venture agreements meeting the new regulatory requirements, but I won’t be surprised to see some SDVOSB joint ventures using outdated templates in the months to come–and losing out on SDVOSB set-asides as a result.
Performance of Work Requirements
In addition to setting forth many new and changed requirements for SDVOSB joint venture agreements, the new regulation also specifies that, for any SDVOSB contract, “the SDVO SBC partner(s) to the joint venture must perform at least 40% of the work performed by the joint venture.” That work “must be more than administrative or ministerial functions so that [the SDVOSBs] gain substantive experience.” The joint venture must also comply with the limitations on subcontracting set forth in 13 C.F.R. 125.6.
And that’s not all: the SDVOSB partner to the joint venture “must annually submit a report to the relevant contracting officer and to the SBA, signed by an authorized official of each partner to the joint venture, explaining how and certifying that the performance of work requirements are being met.” Additionally, at the completion of the SDVOSB contract, a final report must be submitted to the contracting office and the SBA, “explaining how and certifying that the performance of work requirements were met for the contract, and further certifying that the contract was performed in accordance with the provisions of the joint venture agreement that are required” under the new regulation.
Past Performance and Experience
Many SDVOSBs will groan at the new paperwork and reporting requirements established under the new regulation. But the SBA has inserted at least one provision that is a definite “win” for SDVOSBs and their joint venture partners: the new regulation requires contracting officers to consider the past performance and experience of both members of an SDVOSB joint venture. The regulation states:
When evaluating the past performance and experience of an entity submitting an offer for an SDVO contract as a joint venture established pursuant to this section, a procuring activity must consider work done by each partner to the joint venture as well as any work done by the joint venture itself previously.
Small businesses sometimes assume that agencies are required to consider the past performance and experience of the individual members of a joint venture–but until now, that wasn’t the case. True, many contracting officers considered such experience anyway, but there have been high-profile examples of agencies refusing to consider the past performance of a joint venture’s members. Of course, a joint venture is defined as a limited purpose arrangement, so it makes no sense to require the joint venture itself to demonstrate relevant past performance. This change to the SBA’s regulations is important and helpful.
The Road Ahead
After August 24, 2016, those old template SDVOSB joint venture agreements won’t be anywhere close to compliant, so SDVOSBs should act quickly to educate themselves about the new regulations and adjust any planned joint venture relationships accordingly. For SDVOSBs and their joint venture partners, the landscape is about to shift.
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The HUBZone program will see significant changes to its rules as a result of major SBA changes set to take effect in late August.
These changes apply generally to two aspects of the HUBZone program: that relating to the SBA’s processing of HUBZone applications, and a significant expansion of the HUBZone joint venture requirements.
Here at SmallGovCon, we have been writing about the many changes brought about by the SBA’s recently published final rule about Small Business Mentor-Protégé Programs. Among these major changes are the adoption of a small business mentor-protégé program and an overhaul of the rules governing SDVOSB joint ventures. HUBZone companies can also share in the fun, as the SBA has made significant changes to the HUBZone program regulations.
First, revising 13 C.F.R. § 126.306, SBA provides significant new details as to its processing of HUBZone applications. The new regulation will provide, in general:
The SBA’s Director Office of HUBZone (“D/HUB”) is authorized to approve or decline applications for certification. SBA will receive and review all applications and request supporting documents. Applications—including all required information, supporting documentation, and HUBZone representations—must be complete before processing; SBA will not process incomplete packages. SBA will make its determination within 90 calendar days after the complete package is received—this is a significantly longer than the period contemplated by the current regulations, which provide that “SBA will make its determination within 30 calendar days after receipt of a complete package whenever practicable.” In practice, SBA hasn’t met this aggressive 30-day deadline; a 2014 GAO report indicated that the average processing time was 116 days from the date of the initial application.
SBA may request additional or clarifying information about an application at any time.
The burden of proof for eligibility is now squarely placed on the applicant concern. “If a concern does not provide requested information within the allotted time provided by SBA, or if it submits incomplete information, SBA may presume that disclosure of the missing information would adversely affect the business concern or demonstrate lack of eligibility in the area or areas to which the information relates.”
The applicant must be eligible as of the date it submitted its application and up until the time the D/HUB issues a decision. The decision on the application will be based on the facts set forth in the application, any information submitted in response to a clarification request, and “any changed circumstances since the date of application.”
As to this last requirement, the new regulation states that “[a]ny changed circumstance occurring after an application will be considered and may constitute grounds for decline.” The entity applying for certification has a duty, moreover, to notify SBA of any changes that could affect its eligibility; “[t]he D/HUB may propose decertification for any HUBZone SBC that failed to inform SBA of any changed circumstances that affected its eligibility for the program during the processing of the application.”
In addition to expanding upon the HUBZone application process, the new regulation expands HUBZone joint ventures. 13 C.F.R. § 126.616 will soon provide as follows:
Though the existing HUBZone regulations only allow for a joint venture between two qualified HUBZone entities, the new regulation allows for a HUBZone small business to “enter into a joint venture agreement with one or more” small businesses, with an approved mentor (per the new mentor-protégé regulation), or, if also an 8(a) program participant, an approved 8(a) mentor, for the purposes of submitting an offer on a HUBZone contract. The joint venture itself need not be certified as a qualified HUBZone small business.
This portion of the regulation is a big win for HUBZone contractors. For years, participants in the 8(a), SDVOSB, and WOSB programs have been able to joint venture with non-certified small businesses; only HUBZones were restricted to joint venturing solely with one another. Although SBA’s likely hoped that the requirement would lead to more dollars flowing to eligible HUBZone companies, the policy appears to have backfired: in our experience, few HUBZones joint venture at all for HUBZone contracts. The new regulation will correct this problem and put HUBZones in a similar position as participants in the SBA’s other three major socioeconomic programs.
The new regulation adopts a two-pronged approach for determining the joint venture’s size. For a joint venture that includes at least one qualified HUBZone small business and one or more other business concerns, the joint venture “may submit an offer as a small business for any HUBZone procurement or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement.”
For a joint venture between a protégé and its approved mentor (under SBA’s new small business mentor-protégé regulation), the joint venture will be deemed small if the protégé qualifies as small under the solicitation’s operative size standard. Oddly, the portion of the regulation addressing size doesn’t mention the 8(a) mentor-protege program, even though the 8(a) mentor-protege program is discussed elsewhere in the same regulation. Therefore, while it seems likely that SBA intended allow 8(a) mentor-protege joint ventures to qualify for HUBZone contracts, that’s not clear from the regulations, and is something we hope SBA clarifies.
Required Joint Venture Agreement Provisions
Because the existing regulations only allows for joint ventures between qualified HUBZone entities, there are no specific joint venture agreement requirements. SBA (rightly) assumes that, because only qualified HUBZones entities can participate in a joint venture, there is no reason to adopt rules designed to ensure that HUBZones control and benefit from their joint ventures.
The new regulation departs from the limitation on joint venture participation, and allows a HUBZone to joint venture with any small business—whether a qualified HUBZone or not–as well as with large mentor firms. The presumption that the HUBZone will enjoy the benefits from the joint venture is thus negated; as a result, the new regulation includes strict requirements for a HUBZone joint venture agreement. These requirements—which mirror the joint venture agreement requirements for the new small business mentor-protégé program—are summarized below. But as with our other educational posts regarding the new joint venture rules, we must caution against relying on this post in an effort to comply with the new regulations; instead, HUBZone entities—and prospective joint venture partners of HUBZone entities—should consult the new regulations directly or call experienced legal counsel.
Purpose. The joint venture agreement must set forth the purpose of the joint venture.
Managing Venturer. The joint venture agreement must designate a HUBZone small business as the managing venturer, and an employee of the managing venturer as the project manager responsible for contract performance. The project manager “need not be an employee of the HUBZone SBC at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the HUBZone SBC if the joint venture is the successful offeror.” The project manager cannot, however, be employed by the mentor and become an employee of the HUBZone managing venturer for purposes of performance under the joint venture. The plain language of the regulation does not appear to prevent an employee from a non-mentor, non-HUBZone small business partner from becoming the project manager, but SBA’s intent in this regard is unclear. Hopefully, SBA will provide clarification on this point.
Ownership. The joint venture agreement must state that, with respect to a separate legal entity joint venture, the HUBZone small business owns at least 51% of the joint venture entity.
Profits. The agreement must also state that the HUBZone small business will receive profits from the joint venture commensurate with the work it performs or, in the case of a separate legal entity joint venture, commensurate with its ownership interest.
Bank Account. The joint venture agreement must provide for a special bank account in the name of the joint venture. The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on a set-aside contract will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
Equipment, Facilities, and Other Resources. The koint venture agreement must itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. If the contract is indefinite in nature—like an IDIQ or multiple award contract might be—the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
Parties’ Responsibilities. The joint venture agreement must specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture and the HUBZone partner(s) to the joint venture will meet the performance of work requirements, “where practical.” Again, if the contract is indefinite in nature, “the joint venture must provide a general description of the anticipated responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, not including the ways that parties to the joint venture will ensure that the joint venture and the HUBZone partner(s) to the joint venture will meet the performance of work requirements . . . or, in the alternative, specify how the parties to the joint venture will define such responsibilities once a definite scope of work is made publicly available.”
Guaranteed Performance. The joint venture agreement must obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer.
Records. The joint venture agreement must state that accounting and other administrative records of the joint venture must be kept in the office of the HUBZone small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the HUBZone small business managing venturer upon completion of the contract.
Statements. The joint venture agreement must provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract.
Limitations on Subcontracting
The HUBZone joint venture program’s performance of work requirements are set forth in this new subsection (d). This regulation also applies a two-pronged approach for compliance.
For a joint venture that is comprised only of qualified HUBZone small businesses, “the aggregate of the qualified HUBZone small businesses to the joint venture—not each concern separately—must perform the applicable percentage of work required by 13 C.F.R. § 125.6. (As SmallGovCon readers know, these limits recently changed under a separate SBA final rule effective June 30, 2016).
For a joint venture between only one qualified HUBZone protégé and another (non-HUBZone) small business concern or its SBA-approved mentor, “the joint venture must perform the applicable percentage of work required by § 125.6 . . . and the HUBZone SBC partner to the joint venture must perform at least 40% of the work performed by the joint venture.” The work performed by the HUBZone small business must be more than ministerial or administrative, so that it gains substantive experience.
Certification of Compliance
As with the small business mentor-protégé program, the new HUBZone joint venture requirements mandate self-certification of the joint venture agreement’s contents: “Prior to the performance of any HUBZone contract as a joint venture, the HUBZone SBC “must submit written certification to the contracting officer that the parties “have entered a joint venture agreement that fully complies with” the requirements. The HUBZone small business must also certify that the parties will perform the contract in compliance with the joint venture agreement and with the performance of work (or limitation on subcontracting) requirements.
Past Performance and Experience
The new regulation also provides significant improvement in the evaluation of a joint venture’s past performance:
When evaluating the past performance and experience of an entity submitting an offer for a HUBZone contract as a joint venture established pursuant to this section, a procuring activity must consider the work done individually by each partner to the joint venture as well as any work done by the joint venture itself previously.
Steve recently wrote why this change makes sense—because a joint venture is a limited purpose arrangement, it is counter-intuitive to require the joint venture itself to demonstrate relevant past performance. Instead, it makes more sense to allow a procuring agency to consider whether the individual members to the joint venture have any relevant experience.
The Road Ahead
The new HUBZone regulations take effect on August 24, 2016. They represent a significant expansion of opportunities for HUBZone small businesses–but also represent compliance challenges, especially in ensuring that joint venture agreements met all of the requirements of the new rule.
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It’s been a very busy week in government contracting with the SBA issuing its final rule on the small business mentor-protege program. It has given us here at Koprince Law a lot to read over and blog about so that SmallGovCon readers can stay abreast of all of the changes packed inside this lengthy document.
But as important as the mentor-protege rule is for small and large contractors alike, it’s not the only government contracts news making headlines this week. In this week’s SmallGovCon Week in Review, you’ll find articles on proposed new whistleblower protections, opportunities for small businesses at the close of the fiscal year, significant pricing discrepancies under GSA Schedule contracts, and much more.
A new bipartisan measure would give subgrantees and personal services contractors the same whistleblower protections currently afforded contractors, grant recipients and subcontractors. [Government Executive]
An advocacy group for small businesses is once again claiming that giant corporations are reaping billions from federal small business contracts. [Mother Jones]
It’s not too late to get in on the fourth quarter government spending bonanza so long as you are a company that has some prospects in the pipeline. [Federal News Radio]
DoD’s new procurement evaluation process is moving toward objectivism and a more mathematical system of judgement, as part of an overall shift in favor of Lowest Price Technically Available evaluations. [Federal News Radio]
Officials at five Army components failed to fully comply with rules for evaluating contractors’ past performance when awarding those firms work. [Government Executive]
An audit report shows that Army officials did not consistently comply with requirements for assessing contractor performance. [Office of Inspector General]
IT reseller contracts present significant challenges for the GSA’s schedules program, according to a GSA IG report. [Office of Inspector General]
Nearly half of the Democratic House caucus asked defense authorization conferees to remove “harmful language” narrowing the application of the Fair Play and Safe Workplaces executive order. [Bloomberg BNA]
Small businesses can find plenty of opportunities as the curtain comes down on the federal fiscal year. [Government Product News]
An update to the Freedom of Information Act was signed into law earlier this month and mandates a presumption of openness, and adds new appeal rights for citizens whose requests are denied. [Federal News Radio]
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An agency’s spam filter prevented an offeror’s proposal from reaching the Contracting Officer in time to be considered for award–and the GAO denied the offeror’s protest of its exclusion.
A recent GAO bid protest decision demonstrates the importance of confirming that a procuring agency has received an electronically submitted proposal because even if the proposal is blocked by the agency’s own spam filter, the agency might not be required to consider it.
GAO’s decision in Blue Glacier Management Group, Inc., B-412897 (June 30, 2016) involved a Treasury Department RFQ for cybersecurity defense services. The RFQ was issued as a small business set-aside under GSA Schedule 70.
The RFQ required proposals to be submitted by email no later than 2:00 p.m. EST on November 9, 2015. The RFQ advised that the size limitation for electronic submissions was 25MB.
Blue Glacier Management Group, Inc. electronically submitted its proposal at 10:55 a.m. EST on the due date. The total size of BG’s attachments was below the 25MB limitation specified in the RFQ.
But unbeknownst to BG or the contracting officer, the email was captured in the agency’s spam filter. The contracting officer did not receive the proposal email or any type of quarantine/spam notification. Five other proposals were timely received from other offerors without incident.
BG sent a follow-up email to the contracting officer on January 29, 2016, over two months after it first submitted its proposal. But, because the contracting officer did not recognize BG as a recent offeror for the proposal, she did not respond.
Another month passed before BG followed up again by phone on February 26, 2016. The contracting officer indicated that, from her standpoint, it appeared that BG had not submitted a proposal. BG explained that it had submitted a proposal and thought it was being considered for the award.
BG re-submitted its proposal via email on February 26, 2016, just as it had done on November 9. The contracting officer again did not receive it. The contracting officer consulted with the agency’s IT department and discovered the February 26 email had been captured in the spam filter. However, the IT department was unable to recover the original November 9 email because the agency’s email network automatically deletes emails in the spam filter after 30 days.
At this point, Treasury was in the final stages of evaluating proposals. The contracting officer declined to evaluate BG’s re-submitted proposal.
BG filed a GAO bid protest challenging the agency’s decision. BG’s argued, in part, that BG was not to blame for the fact that its proposal (which complied with the 25MB size limit) had been blocked by the agency’s spam filter.
The GAO wrote that “it is the vendor’s responsibility, when transmitting its quotation electronically, to ensure the delivery of its quotation to the proper place at the proper time.” However, there is an exception where a proposal is under “government control” at the proper time. In order for the government control exception to apply, “a vendor must have relinquished custody of its quotation to the government so as to preclude any possibility that the vendor could alter, revise or otherwise modify its quotation after other vendors’ competing quotations have been submitted.”
In this case, “because Blue Glacier did not seek prompt confirmation of the agency’s receipt of its quotation, Blue Glacier’s November 9 email was automatically deleted from the agency’s system after 30 days.” The GAO continued:
Accordingly, the agency has no way to confirm the contents of the Blue Glacier email that entered the Treasury Fiscal Services network on November 9; that is, it has no way to confirm that the November 9 email included a quotation identical to the quotation furnished by the protester on February 26. Whether the protester actually altered its quotation is not the issue; rather, the issue is whether, under the circumstances, there is any possibility that the protester could have altered its quotation. This requirement precludes any possibility that a vendor could alter, revise or otherwise modify its quotation after other vendors’ competing quotations have been submitted. Because Blue Glacier was not precluded from altering its quotation here, the government control exception is inapplicable in this instance.
The GAO denied Blue Glacier’s protest.
Electronic proposal submission is increasingly common, and offers many advantages. But, as the Blue Glacier Management Group decision demonstrates, electronic submission can also carry unique risks–like agency spam filters. As shown by Blue Glacier Management Group, it’s a very good idea for offerors to confirm receipt of electronic proposals, just in case.
Note: Megan Carroll, a summer law clerk with Koprince Law LLC, was the primary author of this post.
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NAICS code appeals, while little known, can be an extraordinarily powerful tool when it comes to affecting the competitive landscape of government acquisitions.
Case in point: in a recent NAICS code appeal decision issued by the SBA Office of Hearings and Appeals, the appellant prevailed–and obtained an order requiring the contracting officer to change the solicitation’s size standard from 500 employees to $15 million.
OHA’s decision in NAICS Appeal of Hendall Inc., SBA No. NAICS-5762 (2016) involved an HHS solicitation for support for its public engineering platform. HHS issued the solicitation as a small business set-aside under NAICS code 511199 (All Other Publishers), with a corresponding 500 employee size standard.
Here’s where many small businesses would throw in the towel: “500 employees? I can’t compete with that. I’m moving on to the next solicitation.”
But Hendall Inc. understood that a prospective small business offeror has the right to file a NAICS code appeal directly with OHA. So Hendall filed a NAICS code appeal, arguing that the HHS had assigned an incorrect NAICS code. Hendall made the case that the appropriate NAICS code was 561422 (Telemarketing Bureaus and Other Contact Centers), with a corresponding $15 million size standard.
The incumbent contractor–which presumably was small under the 500-employee size standard, but not under the $15 million size standard–intervened in the case. The incumbent argued that HHS’s original NAICS code designation was correct.
OHA evaluates NAICS code appeals primarily by comparing the solicitation’s statement of work to the NAICS code definitions in the Census Bureau’s NAICS Manual. In this case, OHA noted that the NAICS Manual defines NAICS code 511199 as establishments “generally known as publishers,” who “may publish works in print or electronic form.” NAICS code 561422, in contrast, comprises “establishments engaged in operating call centers that initiate or receive communications for others via telephone, facsimile, email, or other communication modes . . ..”
After examining the statement of work, OHA wrote that “the Contractor will not be writing, editing, or in any other way producing publications for [HHS].” Because “the Contractor will not be engaged in activities which constitute publishing . . . the CO’s designation of a publishing NAICS code for this procurement is clear error.”
Having found the original NAICS code to be erroneous, OHA then turned to the question of what NAICS code was appropriate. This second part of the analysis is as important as the first; OHA is under no obligation to accept the appellant’s proffered NAICS code even when OHA agrees that the original NAICS code was incorrect. In many cases, OHA has assigned a third code–one that neither the appellant nor the agency wanted.
In this case, however, OHA wrote that “the operating of the Contact Center appears to be the major part of this procurement.” The Contact Center, in turn, “responds to inquiries by telephone, email, fax and postal mail.” Thus, while Hendall’s suggested NAICS code might not be the “perfect fit,” OHA concluded that NAICS code 561422 “best describes the principal purpose of the instant acquisition . . ..”
OHA granted Hendall’s NAICS code appeal. OHA issued an order requiring HHS to “amend the solicitation to change the NAICS code designation from 511199 to 561422.” And just like that, the solicitation’s size standard changed from 500 employees to $15 million.
The Hendall NAICS code appeal, on its surface, is a fact-specific case about a particular HHS solicitation. But beyond that, the Hendall case is an example of the potential power of a NAICS code appeal. By successfully appealing the solicitation’s NAICS code, Hendall dramatically affected the competitive pool for the solicitation–including, potentially, excluding the incumbent as an eligible offeror.
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The 8(a) Program regulations will undergo some significant changes as part of the major final rule recently released by the SBA, and effective August 24, 2016.
Here at SmallGovCon, we’ve already covered big changes to the SDVOSB Program and HUBZone Program brought about by the new SBA rule. But the 8(a) program is affected by the new rule too, and important changes involving eligibility, the application process, sole source awards, NHOs, and more will kick in later this month.
The final rule implements the following major changes:
In order to be admitted to the 8(a) Program, a company must be controlled by one or more individuals who are considered socially disadvantaged. While members of certain groups are presumed socially disadvantaged, others (such as Caucasian women and disabled Caucasian veterans) must individually prove their social disadvantage by a preponderance of the evidence.
The SBA’s current regulations leave a lot to be desired when it comes to explaining how an applicant must prove his or her individual social disadvantage. This lack of clarity leads to confusion; many applicants, for example, incorrectly believe that the SBA is simply looking for a list of all of the bad things that have happened in their lives. This confusion, of course, causes many applications to be returned or denied.
The SBA’s new regulation attempts to provide some more clarity. The final rule specifies that “[a]n individual claiming social disadvantage must present facts and evidence that by themselves establish that the individual has suffered social disadvantage that has negatively impacted his or her entry into or the business world in order for it to constitute an instance of social disadvantage.” In that regard, “[e]ach instance of alleged discriminatory conduct must be accompanied by a negative impact on the individual’s entry into or advancement in the business world in order for it to constitute an instance of social disadvantage.” And SBA “may disregard a claim of social disadvantage where a legitimate alternative ground for an adverse employment action or other perceived adverse action exists and the individual has not presented evidence that would render his/her claim any more likely than the alternative ground.”
Importantly, the SBA includes two examples demonstrating how the analysis works. For instance, one of those examples provides:
A woman who is not a member of a designated group attempts to establish her individual social disadvantage based on gender. She certifies that while working for company Y, she was not permitted to attend a professional development conference, even though male employees were allowed to attend similar conferences in the past. Without additional facts, that claim is insufficient to establish an incident of gender bias that could lead to a finding of social disadvantage. It is no more likely that she was not permitted to attend the conference based on gender bias than based on non-discriminatory reasons. She must identify that she was in the same professional position and level as the male employees who were permitted to attend similar conferences in the past, and she must identify that funding for training or professional development was available at the time she requested to attend the conference.
When SBA released its proposal to implement these changes to the social disadvantage rules, some people familiar with the 8(a) Program were concerned that these changes were being proposed in order to make it more difficult for individuals to prove social disadvantage. But I don’t view it that way. To my eyes, the change merely attempts to better explain how the SBA already evaluates social disadvantage, and doesn’t seem to impose any new burdens on applicants. Hopefully my optimistic view will be borne out in practice.
Experience of Disadvantaged Individual
The current 8(a) Program regulations don’t require that a disadvantaged individual possess managerial experience in the specific industry in which the 8(a) applicant is doing business. Instead, the regulations state that the disadvantaged individual “must have managerial experience of the extent and complexity needed to run the concern.” Nevertheless, in my experience, the 8(a) application analysts have often focused on the industry-specific experience of the disadvantaged individual, rather than the individual’s overall managerial experience.
The SBA’s new regulations should ease the burden on 8(a) applicants to demonstrate industry-specific experience. The new rule states that “[m]anagement experience need not be related to the same or similar industry as the primary industry classification of the applicant or Participant.” In the preamble to its new rule, the SBA writes that it “did not intend to require in all instances that a disadvantaged individual must have managerial experience in the same or similar line of work as the applicant or Participant.” The SBA explains:
For example, an individual who has been a middle manager of a large aviation firm for 20 years and can demonstrate overseeing the work of a substantial number of employees may be deemed to have managerial experience of the extent and complexity needed to run a five-employee applicant firm whose primary industry category was in emergency management consulting even though that individual had no technical knowledge relating to the emergency management consulting field.
But the rule change doesn’t mean that industry-specific experience will never be considered. In the preamble, the SBA states that more specific industry-related experience may be required in “appropriate circumstances,” such as “where a non-disadvantaged owner (or former owner) who has experience related to the industry is actively involved in the day-to-day management of the firm.”
8(a) Application Processing
As I discussed in a blog post in April 2016, 8(a) Program participation is down 34% since 2010, and the SBA is attempting to reverse the decline by–in part–streamlining and improving the application process. The new rule includes some baby steps in that direction, including:
The SBA will no longer require that all 8(a) applicants submit IRS Form 4506T (Request for Transcript of Tax Return).
The SBA will require all applications to be submitted electronically, instead of allowing hard copy applications (for which processing times are often very slow).
The SBA has deleted the requirement for “wet” signatures and will allow application documents to be electronically signed.
In cases where an applicant has a criminal record, the SBA has always referred the application to its Office of Inspector General, delaying the process. The SBA now will exercise reasonable discretion in determining whether such a referral is appropriate. For example, “an application evidencing a 20 year old disorderly conduct offense for an individual claiming disadvantaged status when that individual was in college should not be referred to OIG where that is the only instance of anything concerning the individual’s good character.”
Perhaps most importantly for most applicants, the SBA will no longer require a narrative statement of each applicant’s economic disadvantage. These statements have served little practical purpose, as the SBA has long evaluated economic disadvantage by reference to an individual’s income and net worth. The final rule acknowledges that economic disadvantage is based on “objective financial data,” rendering the narratives unnecessary.
8(a) Program Suspensions
The new regulation allows an 8(a) Program participant to voluntarily suspend its nine-year term when one of two things happen: (1) the participant’s principal office is located in an area declared a major disaster area; or (2) there is a lapse in federal appropriations. The SBA explains that these changes were “intended to allow a firm to suspend its term of participation in the 8(a) BD program in order to not miss out on contract opportunities that the firm might otherwise have lost due to a disaster or a lapse in federal funding.”
If a firm elects to suspend its term, the participant “would not be eligible for 8(a) BD program benefits, including set-asides . . . but would not ‘lose time’ in its program term due to the extenuating circumstances” caused by the disaster or lapse in federal funding.
Management of Tribally-Owned 8(a) Participants
The final rule adopts new language specifying that “[t]he individuals responsible for the management and daily operations of a tribally-owned concern cannot manage more than two Program Participants at the same time.” The SBA clarifies:
An individual’s officer position, membership on the board of directors or position as a tribal leader does not necessarily imply that the individual is responsible for the management and daily operations of a given concern. SBA looks beyond these corporate formalities and examines the totality of the information submitted by the applicant to determine which individual(s) manage the actual day-to-day operations of the applicant concern.
The new rule further clarifies that “Officers, board members, and/or tribal leaders may control a holding company overseeing several tribally-owned or ANC-owned companies, provided they do not actually control the day-to-day management of more than two current 8(a) BD Program participant firms.”
Native Hawaiian Organizations
Under the current rule governing participation in the 8(a) Program by companies owned by Native Hawaiian Organizations, “SBA considers the individual economic status of the NHO’s members,” and a majority of the individual members must qualify as economically disadvantaged. The individual members of the NHO are held to the same income and net worth requirements as other socially disadvantaged individuals under 13 C.F.R. 121.104.
After receiving a great deal of feedback from the Native Hawaiian community, the SBA changed its perspective, writing in the preamble to the final rule that “basing the economic disadvantage status of an NHO on individual Native Hawaiians who control the NHO does not seem to be the most appropriate way to do so.” The preamble continues:
The crucial point is that an NHO must be a community service organization that benefits Native Hawaiians. It is certainly understood that an NHO must serve economically disadvantaged Native Hawaiians, but nowhere is there any hint that economically disadvantaged Native Hawaiians must control the NHO. The statutory language merely requires that an NHO must be controlled by Native Hawaiians. In order to maximize benefits to the Native Hawaiian community, SBA believes that it makes sense that an NHO should be able to attract the most qualified Native Hawaiians to run and control the NHO. If the most qualified Native Hawaiians cannot be part of the team that controls an NHO because they may not qualify individually as economically disadvantaged, SBA believes that is a disservice to the Native Hawaiian community.
To implement this changed policy, the final rule adopts a system much like that already used by the SBA in evaluating applications from companies owned and controlled by Indian tribes. The final rule states that “n order to establish than an NHO is economically disadvantaged, it must demonstrate that it will principally benefit economically disadvantaged Native Hawaiians.” To do this, the NHO must provide economic data on the condition of the Native Hawaiian community it intends to serve, including things like the unemployment rate, poverty level, and per capita income. Once a particular NHO establishes its economic disadvantage in connection with the application of one firm owned and controlled by the NHO, it ordinarily need not reestablish its economic disadvantage in connection with a second 8(a) firm.
The final rule also clarifies that the individual members or directors of an NHO need not have the technical expertise or possess a required license in order for the NHO to be found to control an 8(a) company. Rather, as with “regular” 8(a) companies, the individual members or directors ordinarily need only possess the managerial experience of the extent and complexity necessary to run the company. But as with those “regular” 8(a) companies, the SBA may examine industry-specific experience “in appropriate circumstances,” such as where a non-disadvantaged owner (or former owner) who has experience related to the industry is involved in the day-to-day management of the firm.
Sole Source 8(a) Awards
Earlier this summer, I blogged about an SBA Office of Inspector General report, which found that DoD 8(a) sole source awards over $20 million to companies owned by Indian tribes and ANCs has dropped by more than 86% since 2011, when Congress adopted a requirement that a Contracting Officer issue a written justification and approval for any sole source award over $20 million (a regulatory update in 2015 increased the threshold to $22 million).
To date, the the 2011 statutory requirements have been implemented only in the FAR. The final rule updates the SBA’s regulations to require that a procuring agency that is offering a sole source requirement that exceeds $22 million to confirm that the justification and approval has occurred. However, “SBA will not question and does not need to obtain a copy of the justification and approval, but merely ensure that it has been done.”
In its preamble, the SBA explains that the J&A requirement appears to have caused confusion:
SBA believes that there is some confusion in the 8(a) and procurement communities regarding the requirements of section 811. There is a misconception by some that there can be no 8(a) sole source awards that exceed $22 million. That is not true. Nothing in either section 811 or the FAR prohibits 8(a) sole source awards to Program Participants owned by Indian tribes and ANCs above $22 million. All that is required is that a contracting officer justify the award and have that justification approved at the proper level. In addition, there is no statutory or regulatory requirement that would support prohibiting 8(a) sole source awards above any specific dollar amount, higher or lower than $22 million.
Perhaps the SBA’s commentary will help clarify for Contracting Officers that sole source authority remains for contracts over $22 million; the 2011 statute and corresponding regulations merely require a J&A.
Changes in Primary Industry Classification
The final rule allows the SBA to change an 8(a) Program participant’s primary industry classification “where the greatest portion of the Participant’s total revenues during the Participant’s last three completed fiscal years has evolved from one NAICS code to another.” The SBA will, as part of its annual 8(a) Program review, “consider whether the primary NAICS code contained in a participant’s business plan continues to be appropriate.”
If the SBA believes that a change is warranted, the SBA will notify the 8(a) Program participant and give the participant the opportunity to oppose the SBA’s plan. And, “[a]s long as the Participant provides a reasonable explanation as to why the identified primary NAICS code continues to be its primary NAICS code, SBA will not change the Participant’s primary NAICS code.”
The SBA’s preamble notes that the portion of its proposal dealing with changes in primary NAICS codes received the most comments of any portion of the proposed rule–apparently even more so than comments on the universal mentor-protege program, which was established under the same final rule. While NAICS codes aren’t always the most exciting things in the world, it’s easy to see why this proposal caused so much concern.
For “regular” 8(a) companies owned by socially and economically disadvantaged individuals, a change in NAICS code can affect ongoing 8(a) eligibility. That’s because, under 13 C.F.R. 124.102, an 8(a) company must qualify as small in its primary NAICS code. If the SBA reassigns an 8(a) company from a NAICS code designated with a higher size standard to one designated with a lower standard, it could put the company at risk of early graduation.
For example, consider an 8(a) company with $20 million in average annual receipts, admitted to the 8(a) Program under NAICS code 236220 (Industrial Building Construction), which carries a $36.5 million size standard under the current SBA size standards table. Now let’s say that same company has earned almost all of its revenues performing plumbing work. If the SBA reassigns the company to NAICS code 238220 (Plumbing, Heating, and Air-Conditioning Contractors), with an associated $15.0 million size standard, the company is suddenly no longer small in its primary industry, threatening its ongoing 8(a) Program status.
But the preamble makes clear that much of the angst over the SBA’s proposal came from individuals representing tribal and/or ANC interests. Under 13 C.F.R. 124.109, a tribe or ANC “may not own 51% or more of another firm which, either at the time of application or within the previous two years, has been operating in the 8(a) Program under the same primary NAICS code as the applicant.” While the rule permits such firms to operate in secondary, related NAICS codes, a reassignment to the same NAICS code as another 8(a) Program participant owned by the same tribe or ANC would cause major problems.
In its final rule, the SBA acknowledges these concerns, but doesn’t back off its position. The final rule provides:
Where an SBA change in the primary NAICS code of an entity-owned firm results in the entity having two Participants with the same primary NAICS code, the second, newer Participant will not be able to receive any 8(a) contracts in the six-digit NAICS code that is the primary NAICS code of the first, older Participant for a period of time equal to two years after the first Participant leaves the 8(a) BD program.
It remains to be seen how the SBA will implement the new policy on primary NAICS codes, but there can be little doubt that the new regulation will put some ANCs and tribes at risk.
The SBA’s final rule takes effect on August 24, 2016. And while the new small business mentor-protege program will generate most of the headlines, it’s essential for 8(a) Program participants (and potential applicants) to be aware of the major 8(a) Program changes established under the same final rule.
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It’s been a year of big changes in the government’s SDVOSB programs. First came the Kingdomware Supreme Court decision, which was soon followed by the SBA’s final rule adopting a new “universal” mentor-protege program–and imposing many new requirements on SDVOSB joint ventures.
On Thursday, August 4, 2016 at 1:00 p.m. Central, I will host a free webinar to discuss these important changes. To register, just follow this link and complete the brief electronic form, or call Jen Catloth of Koprince Law LLC at (785) 200-8919.
See you online on Thursday!
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The recently-finalized SBA small business mentor-protege program will change the landscape of set-aside contracting–for large businesses and small contractors alike.
I am excited to announce that Koprince Law LLC has partnered with GOVOLOGY to offer a live electronic training on this important new program. Please join us on August 11, 2016 at 12:00 p.m. Central for this 90 minute training. The training is open to the public, so please follow this link to register. If you’re a Koprince Law LLC client or SmallGovCon newsletter subscriber, check your email for a special discount code.
See you online on August 11!
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It’s the day after you submitted an offer for a big government contract, when one of your key personnel walks into your office. “Thanks for everything you’ve done for me,” she says, “but I’ve decided to take an opportunity elsewhere.”
Employee turnover is a part of doing business. But for prospective government contractors, it can be a nightmare. As highlighted in a recent GAO bid protest, a offeror was excluded from the award simply because one of its proposed key personnel resigned after the proposal was submitted.
It’s a harsh result, but it highlights that contractors must not only attract key personnel—they must also retain them.
At issue in URS Federal Services, B-413034 et al. (July 25, 2016), was a solicitation issued under the Navy’s SeaPort-e multiple-award IDIQ contract vehicle, which sought engineering and technical services at the Naval Surface Warfare Center in Dahlgren, Virginia. Proposals would be evaluated on a best value basis, under three factors: technical, past performance, and cost. The technical factor—the most important factor under the evaluation criteria—had three subfactors, relating to an offeror’s technical understanding/capability/approach, workforce, and management plan.
The workforce subfactor consisted of two elements. Under the staffing plan element, the Navy would evaluate “the degree to which the Offeror’s [sic] plan to support all areas of the [statement of work] with qualified people based on the staffing plan/matrix, as well as the availability of those individuals.” Though the RFP required offerors to propose 35 full-time equivalent personnel, it did permit offerors to propose “pending hire” personnel where the contractor had not yet identified a firm candidate for a position. The key personnel résumés element, then, was to be evaluated to assess the degree to which résumés of key personnel meet the pertinent qualifications. The RFP, moreover, required résumés to be provided that best demonstrated offeror’s ability to successfully meet the task order requirements.
URS Federal Services, Inc. submitted a proposal. URS submitted the resume of a certain individual (who was not identified by name) to fulfill a key role as a senior software engineer. The individual in question was proposed to work only half as much as a full-time employee, or “0.5 FTE” in human resources lingo.
After URS submitted its proposal, the proposed senior software engineer resigned. URS’s proposal was evaluated as being technically unacceptable, due to an unacceptable rating under the workforce subfactor. Specifically, the Navy faulted URS because, in part, it proposed to fulfill 0.5 FTE of the senior software engineer key personnel requirement with the individual who had resigned from URS after its proposal was submitted.
URS protested this finding of unacceptability, arguing that this person’s departure was not URS’s fault. It further said that this personnel substitution was simply a “ministerial action” under the contract, and should not have been assigned a deficiency.
GAO explained that when an agency learns that a key person is no longer available, “the agency has two options: either evaluate the proposal as submitted, where the proposal would be rejected as technically unacceptable for failing to meet a material requirement, or reopen discussions to permit the offeror to correct this deficiency.” Therefore, GAO wrote, “URS’ submission of a key person who was not, in fact, available reasonably supported the assignment of an unacceptable rating to the firm’s proposal.”
GAO also rejected URS’s argument that the substitution of its personnel was a “ministerial act” under the contract:
t is apparent from the RFP that the replacement of key personnel was within the discretion of, and subject to the approval of, the contracting officer. More importantly, as discussed above, the submission of key personnel résumés was a material requirement of the RFP, and the unavailability of the identified key personnel reasonably formed the basis of an unacceptable rating. Likewise, and contrary to URS’s contention, the record reasonably supports the assignment of a deficiency to URS’s proposal.
GAO held that the unavailability of one of its proposed key personnel was a material failure by URS to meet one of the RFP’s requirements. The Navy reasonably assigned URS a deficiency and found its proposal to be unacceptable. GAO denied URS’ protest.
Losing a key employee can be disruptive to a government contractor’s mission and its morale. But as URS Federal Services shows, losing a key employee can also cost a contractor an award. Where a solicitation requires the identification of key personnel, offerors should do their very best to propose personnel who can—and will—be available to perform the work.
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It’s hard to believe that August is already here. Before we know it, the end of the government fiscal year will be here–and if tradition holds, a slew of bid protests related to those inevitable last-minute contract awards.
In our first SmallGovCon Week In Review for August, two big-wig executives who previously plead guilty to charges of conspiracy now face civil claims, some helpful tips on how to prepare for the year-end contracting frenzy, Schedule 70 looks to be improved, a major roadblock for the ENCORE III IT service contract, and much more.
A False Claims Act complaint has been filed by the U.S. Justice Department against two former New Jersey executives accused of defrauding the military. [nj.com]
A federal judge said that the U.S. Department of Health and Human Services showed a “cavalier disregard” for the truth and favoritism during the evaluation of bid proposals for its financial management. [Modern Healthcare]
A watchdog found that a five-year contract originally valued at a fixed price of nearly $182 million ballooned to $423 million. [Government Executive]
A GSA top acquisition official has promised an improved Schedule 70 following an audit that found price discrepancies for identical products and some offered at higher prices than they were commercially available. [Nextgov]
Washington Technology offers eight tips to help contractors prepare for the last month of the government fiscal year. [Washington Technology]
A growing legion of small businesses are trying make federal contracting a bigger part of their revenue as federal small business awards stay above $90 billion for the past two fiscal years. [Bloomberg]
A group of men, women and corporations have been indicted for illegally winning government contracts worth some $350 million by misrepresenting themselves as straw companies controlled by either low-income individuals or disabled veterans. [The State]
The final “blacklisting” rule to prevent businesses that had broken labor laws from working with the federal government is expected soon, and the National Labor Relations Board is preparing to follow the proposal. [Society for Human Resource Management]
The growing number of bid protests appears unavoidable, regardless of the efforts to engage industry before, during and after the bidding process. [Nextgov]
The GAO has sustained protests challenging the terms of the major ENCORE III IT services contract. [Federal News Radio]
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Native Hawaiian Organizations soon will be able to own HUBZone companies under a new SBA direct final rule published yesterday in the Federal Register.
The new rule implements provisions of the 2016 National Defense Authorization Act, in which Congress instructed the SBA to open the HUBZone program to NHOs.
Under current law, NHOs are unable to majority-own HUBZone companies, even though Indian tribes and Alaska Native Corporations can be HUBZone owners. The new rule, which will amend the SBA’s HUBZone regulations in 13 C.F.R. 126.103, defines a HUBZone entity to include an entity that is:
(8) Wholly owned by one or more Native Hawaiian Organizations, or by a corporation that is wholly owned by one or more Native Hawaiian Organizations; or
(9) Owned in part by one or more Native Hawaiian Organizations or by a corporation that is wholly owned by one or more Native Hawaiian Organizations, if all other owners are either United States citizens or small business concerns.
The new regulation defines a Native Hawaiian Organization as “any community service organization serving Native Hawaiians in the State of Hawaii which is a not-for-profit organization chartered by the State of Hawaii, is controlled by Native Hawaiians, and whose business activities will principally benefit such Native Hawaiians.”
In addition to adding NHOs to the HUBZone program, the new final rule treats certain “major disaster areas” as HUBZones for a period of five years, treats certain “catastrophic incident areas” as HUBZones for a period of 10 years, and extends HUBZone eligibility for Base Closure Areas and contiguous areas.
The SBA’s direct final rule will take effect on October 3, 2016 unless the SBA receives significant adverse comment from the public. If that happens (and it’s not expected), the SBA would withdraw and republish the rule to address the adverse comments.
NHOs have long asked that they should be treated like Indian tribes and ANCs for purposes of the HUBZone program. Soon, that’s exactly what will happen.
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With the finalization of the new SBA Small Business Mentor Protégé Program, other agencies without statutorily-authorized mentor-protege programs must seek SBA approval of their mentor-protege programs within one year, if they wish those programs to continue.
In a final rule scheduled to be effective August 24, 2016, the SBA questioned the need for other agencies (except the Department of Defense) to continue to operate their own mentor-protege programs, but provided a road map for agencies to preserve their separate mentor-protege programs if they wish.
As we have discussed in detail on SmallGovCon, the new “universal” small business mentor-protégé program establishes a government-wide program open to all small businesses, consistent with the SBA’s mentor-protégé program for participants in SBA’s 8(a) Program. But the final rule doesn’t just add a new SBA mentor-protege program–it may also signal the end of many other Federal mentor-protege programs.
Under the final rule, a Federal department or agency can no longer operate its own mentor-protégé program, unless: 1) the agency submits a program plan to the SBA, and 2) receives the SBA Administrator’s approval of the plan within one year of the SBA’s mentor-protégé regulations finalization. The requirement for SBA approval does not apply to DoD, which has special statutory authority to operate its own mentor-protege program. However, the SBA approval requirement does apply to most other Federal mentor-protege programs, including those operated by the VA, NASA, DHS, State Department, and so on.
The SBA “received only a few comments” regarding the proposal to require most agencies to obtain SBA approval to continue independent mentor-protege programs. These commenters “agreed with the statutory provisions in questioning the utility of other Federal mentor-protege programs” now that the SBA has established a mentor-protege program open to all small businesses. However, commenters raised two specific concerns about the potential phase-out of other agencies’ mentor-protege programs: 1) Would the new regulations be a disincentive for mentors to utilize their protégés as subcontractors? And, 2) would the SBA have the necessary resources to handle mentor-protégé applications for the entire government?
Many of the other agency-specific mentor-protégé programs incentivize mentors to utilize their protégés as subcontractors. For example, some agencies provide additional evaluation points to a large business submitting an offer on an unrestricted procurement where the large business is using its protege as its subcontractor. Other agencies give a large prime contractor additional credit toward its subcontracting plan goals where the large prime contractor uses its protege as a subcontractor.
The SBA acknowledged that the new small business mentor-protege program “assume more of a prime contractor role for proteges, but would also encourage subcontracts from mentors to proteges as part of the developmental assistance that proteges receive from their mentors.” The SBA declined to adopt specific subcontracting incentives as part of its final rule, but will allow individual procuring agencies the flexibility to do so. The SBA writes:
SBA believes that it is up to individual procuring agencies whether to provide subcontracting incentives for any specific procurement, SBA also believes that these incentives should be authorized and used, where appropriate. As such, this final rule identifies subcontracting incentives as a possible benefit to be provided by procuring activities in appropriate circumstances. The final rule authorizes procuring activities to provide incentives in the contract evaluation process to a firm that will provide significant subcontracting work to its SBA-approved protégé firm.
With respect to the processing of mentor-protege applications, the SBA writes that it is “working to adequately process mentor-protege applications,” but if it is unable to handle the volume of applications and agreements, the SBA may institute “open” and “closed” periods wherein the SBA would only accept mentor-protégé applications in the “open” periods. Since the SBA itself is unable to predict whether it will have the resources to process mentor-protege applications year-round, other agencies will have to decide for themselves whether this uncertainty is a reason to maintain separate mentor-protege programs.
The government’s mentor-protege programs have been in a state of flux since early 2013, when Congressfirst directed the SBAto adopt rules governing other agencies’ mentor-protege programs. In 2017, we should finally get some long-awaited clarity as to whether other agencies’ mentor-protege programs will continue.
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The SBA Office of Hearings and Appeals lacks jurisdiction to consider whether an entity owned by an Indian tribe or Alaska Native Corporation has obtained a substantial unfair competitive advantage within an industry.
In a recent size appeal case, OHA acknowledged that an unfair competitive advantage is an exception to the special affiliation rules that tribally-owned companies ordinarily enjoy–but held that only the SBA Administrator has the power to determine that an Indian tribe or ANC has obtained, or will obtain, such an unfair advantage.
OHA’s decision in Size Appeal of The Emergence Group, SBA No. SIZ-5766 (2016) involved a State Department solicitation for professional, administrative, and support services. The solicitation was issued as a small business set-aside under NAICS code 561990 (All Other Support Services), with a corresponding $11 million size standard.
After evaluating competitive proposals, the agency announced that Olgoonik Federal, LLC (“OF”) was the apparent successful offeror. The Emergence Group, an unsuccessful competitor, then filed an SBA size protest, alleging that OF was part of the Olgoonik family of companies, which received a combined $200 million in federal contract dollars in 2015.
The SBA Area Office found that OF’s highest-level owner was Olgoonik Corporation, an ANC. Because Olgoonik Corporation was an ANC, the SBA Area Office found that the firms owned by that ANC–including OF–were not affiliated based on common ownership or management. Because OF qualified as a small business as a stand-alone entity, the SBA Area Office issued a size determination denying the size protest.
Emergence appealed to OHA. Emergence argued that the exception from affiliation should not apply to OF because Olgoonik had gained (or would gain) an unfair competitive advantage through the use of the exception. Emergence cited the Small Business Act, which states, at 15 U.S.C. 636(j)(10)(J)(ii)(II):
In determining the size of a small business concern owned by a socially and economically disadvantaged Indian tribe (or a wholly owned business entity of such tribe), each firm’s size shall be independently determined without regard to its affiliation with the tribe, any entity of the tribal government, or any other business enterprise owned by the tribe, unless the [SBA] Administrator determines that one or more such tribally owned business concerns have obtained, or are likely to obtain, a substantial unfair competitive advantage within an industry category.
OHA wrote that the statute “explicitly states that the Administrator must determine whether an ANC has obtained an unfair competitive advantage,” and OHA “has no delegation from the Administrator to decide” whether an unfair competitive advantage exists. OHA held that it “lacks jurisdiction to determine whether the exception to affiliation creates an unfair competitive advantage in OF’s case.” OHA dismissed Emergence’s size appeal.
Entities owned by tribes and ANCs ordinarily enjoy broad exceptions from affiliation. As The Emergence Group demonstrates, those broad exceptions can be overcome by a finding of an unfair competitive advantage–but only the SBA Administrator has the power to make such a finding.
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Circle October 1, 2o16 on your calendar: that’s when the SBA will begin accepting applications for its new universal small business mentor-protege program.
According to the SBA’s new website for the small business mentor-protege program, applications will only be accepted through the SBA’s new certify.sba.gov portal. The SBA’s new website also has an overview on the small business mentor-protege program itself and a discussion of the eligibility requirements for the program.
For prospective mentors and proteges alike, there’s no time to waste in order to take immediate advantage of the new mentor-protege program. Watch this space for additional information as the SBA makes it available.
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An offeror submitting a proposal for a set-aside solicitation ordinarily need not affirmatively demonstrate its intent to comply with the applicable limitation on subcontracting.
In a recent bid protest decision, the GAO confirmed that an offeror’s compliance with the limitations on subcontracting is presumed, unless the offeror’s proposal includes provisions that negate that presumption.
The GAO’s decision in NEIE Medical Waste Services, LLC, B-412793.2 (Aug. 5, 2016) involved a VA RFQ for the pick-up and disposal of medical waste. The RFQ was issued as a SDVOSB set-aside. Award was to to be made to the lowest-priced, technically-acceptable offeror.
The RFQ included FAR 52.219-14 (Limitations on Subcontracting), which requires the contractor to agree that, in the performance of a contract for services (except construction), at least 50 percent of the cost of the contract performance incurred for personnel shall be expended on the employees of the prime contractor. (Note: because the RFQ was a VA SDVOSB set-aside, the limitations on subcontracting probably should have been governed by VAAR 852.219-10 (VA Notice of Total Service-Disabled Veteran-Owned Small Business Set-Aside), which permits a SDVOSB prime contractor to satisfy its own performance obligations by subcontracting to other SDVOSBs. For purposes of this protest, however, the differences between FAR 52.219-14 and VAAR 852.219-10 aren’t important).
The VA received three quotations. After evaluating quotations, the VA announced that award would be made to REG Products, LLC. An unsuccessful competitor, NEIE Medical Waste Services, LLC, subsequently filed a GAO bid protest. NEIE contended, in part, that REG could not comply with the limitation on subcontracting because the VA’s Vendor Information Pages database indicated that REG had only one employee, and lacked sufficient experience or expertise to perform the requirement without relying on subcontractors.
The GAO wrote that “[a]n agency’s judgment as to whether a small business offeror can comply with a limitation on subcontracting provision is generally a matter of responsibility and the contractor’s actual compliance with the provision is a matter of contract administration.” Although the GAO ordinarily will not review such issues, “where a quotation, on its face, should lead an agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitations, the matter is one of the quotation’s acceptability,” and is subject to review by the GAO.
However, the GAO explained, “[a]n offeror need not affirmatively demonstrate compliance with the subcontracting limitations in its proposal.” Rather, “such compliance is presumed unless specifically negated by other language in the proposal.” The protester “bears the burden of demonstrating that the awardee’s proposal should have led the agency to conclude that the awardee did not comply with the limitations.”
In this case, the GAO held, “NEIE has not met its burden.” In that regard, NEIE “has identified nothing on the face of the awardee’s quotation that indicates that REG Products does not intend to comply with the subcontracting limitation.” Instead, NEIE “expressly states that the RFQ’s terms and conditions were acceptable, without modification, deletion, or addition.” In the absence of any language in the proposal negating the intent to comply with the limitation on subcontracting, “we find no basis to sustain this protest ground.” The GAO denied NEIE’s protest.
The limitations on subcontracting are an essential component of the government’s set-aside programs, and violations can lead to severe consequences. But as the NEIE Medical Waste Services case demonstrates, protesting an awardee’s intent to comply with the limitations on subcontracting requires more than speculation–it requires demonstrating that the awardee’s proposal, on its face, takes exception to the subcontracting limitations.
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This week I had the pleasure of speaking at the 20th Annual Government Procurement Conference in Arlington, Texas. It was a great event and I was glad to see so many familiar faces. Next up, I’ll be in Des Moines on August 23rd for the Iowa Vendor Conference, where I’ll be joined by my friend Guy Timberlake for a great day of networking and information sessions.
But even as I log miles on the air and on the highways, there’s no mistaking the fact that we’re in the last days of the government fiscal year–and that means a busy week of government contracting news. This week, SmallGovCon Week In Review takes a look at stories involving an update to CAGE codes, some Milwaukee businesses under investigation for wrongly portraying themselves as veteran-owned and minority-owned, a lack of oversight allowed contractors to overbill a government customer, a look at the uptick in government spending as the fourth quarter winds down, and much more.
The Defense Logistics Agency will, for the first time in 44 years, allow CAGE codes to expire. [Defense Logistics Agency]
Has the Homeland Security Department and it’s components gone overboard with agile? [Federal News Radio]
Several Milwaukee-area businesses are under investigation for falsely claiming they were owned by minorities and military veterans in order to win government contracts. [Daily Progress]
The Defense Information Systems Agency said it will amend the ENCORE III RFP to fix some of the problems pointed out by protesters that were upheld by the GAO last week. [Federal News Radio]
The U.S. Fish and Wildlife Service allowed contractors to overbill the government for more than $130,000 because the agency didn’t “always review contractor invoices to ensure costs claimed were allowable and adequately supported.” [The Daily Caller]
A proposed rule from the SBA would update the regulations governing the delivery and oversight of its business lending programs. [Federal Register]
The SBA is asking a judge to throw out a lawsuit claiming it uses “creative accounting” for federal contracting benchmarks. [Federal News Radio]
The procurement policy world is heating up as summer begins to wind down and we jump into the final stretch of the fiscal year. [Federal News Radio]
Companies fraudulently got $268 million in contracts, according to a recent affidavit. [BizTimes]
A trifecta of companies protested the Department of Defense TRICARE contract awards, including the winner of the contract. [Federal News Radio]
The SBA has launched a new website that helps women-owned small businesses more easily manage eligibility and certification documents for the WOSB Federal Contract Program. [GCN]
An increasingly sluggish security review process is forcing some recruiters, contractors and agencies to change the way they enlist new qualified, cleared candidates. [Federal News Radio]
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Each party to a GSA Schedule Contractor Teaming Arrangement must hold the Federal Supply Schedule contract in question.
As demonstrated by a recent GAO bid protest decision, if one of the parties to the GSA CTA doesn’t hold the relevant FSS contract, the CTA may be found ineligible for award of an order under that contract.
The GAO’s decision in M Inc., d/b/a Minc Interior Design, B-413166.2 (Aug. 1, 2016) involved a VA RFQ for healthcare facility furniture and related services. The VA issued the RFQ using the GSA’s eBuy system, and intended to award multiple Blanket Purchase Agreements to successful vendors holding GSA Schedules 71 or 71 II K.
The RFQ allowed vendors to submit quotations using GSA CTAs. If a vendor elected to use a CTA, the lead vendor was required to submit all CTA agreements, identify each CTA vendor and its respective GSA Schedule contract numbers, and specify each CTA vendor’s responsibilities under the BPAs.
M Inc. d/b/a Minc Interior Design submitted a quotation as the lead vendor of a team that included Penco Products, Inc. Minc’s quotation did not identify a current FSS contract number for Penco, nor did Minc identify any services that Penco was currently performing under an FSS contract.
In its evaluation of Minc’s proposal, the VA determined that Penco did not hold an FSS contract. As a result, the VA determined that Minc’s quotation was unacceptable.
Minc filed a GAO bid protest challenging the VA’s decision. Minc argued, among other things, that it had been unreasonable for the VA to rate its quotation as unacceptable based on Penco’s lack of an FSS contract.
The GAO wrote that “an agency may not use schedule contracting procedures to purchase items that are not listed on a vendor’s GSA schedule.” Furthermore, “the GSA considers each vendor competing through a CTA to be a prime contractor with respect to the items it would provide in support of the team’s quotation, and thus must hold an FSS contract.”
In this case, “issuance of a BPA under Minc’s quotation would thus have impermissibly used FSS contracting procedures to enter into a BPA with Penco despite its not having a current FSS contract.” The GAO denied Minc’s protest, holding, “[t]he VA reasonably determined that Minc’s quotation was unacceptable due to the inclusion of a CTA with a firm that lack an FSS contract.”
GSA Contractor Teaming Arrangements can be a highly effective way for two or more Schedule contractors to combine their resources, capabilities, and experience. But as the M, Inc. bid protest demonstrates, the members of a GSA CTA must all hold the relevant Schedule contract–or risk exclusion from the competition.
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An agency acted improperly by inviting the ultimate contract awardee to revise its pricing, but not affording that same opportunity to a competitor–even though the awardee didn’t amend its pricing in response to the agency’s invitation.
According to a recent GAO bid protest decision, merely providing the awardee the opportunity to amend its pricing was erroneous, regardless of whether the awardee took advantage of that opportunity.
The GAO’s decision in Rotech Healthcare, Inc., B-413024 et al. (Aug. 17, 2016) involved a VA solicitation for home oxygen and durable medical equipment. The solicitation contemplated award to the offeror providing the best value to the government, including consideration of four non-price factors and price.
After evaluating initial proposals, the VA opened discussions with Rotech Healthcare, Inc. and Lincare, Inc. on July 28, 2015. The VA’s discussions letter asked both offerors to submit final revised price proposals no later than July 30, 2015.
Rotech responded by submitting a revised price proposal on July 29, 2015. Lincare responded by stating that it stood by its original price.
On March 7, 2016, the VA contracting specialist sent an email only to Lincare. The VA’s email stated:
The subject solicitation closed more than 6 months ago, therefore the VA would like your company to verify its offer pricing before a final award decision is made for this contract. Attached is Lincare’s price proposal for quick reference. Please respond either confirming the original price offer, or provide alternate price information by 6:00 pm EST on March 9th, 2016.
Lincare responded to the VA’s email by stating that it (again) chose not to revise its price proposal.
The VA assigned similar non-price scores to the proposals of Lincare and Rotech. However, Lincare’s proposal was lower-priced. The VA awarded the contract to Lincare.
Rotech filed a GAO bid protest challenging the award. Rotech argued, among other things, that the VA had improperly opened discussions only with Lintech. Rotech contended that, had it been provided a similar opportunity, it “reasonably could have submitted lower pricing,” thereby enhancing its chances of award.
In response, the VA pointed out that Lincare did not alter its price proposal. The VA also contended that Rotech was not prejudiced by any error committed by the VA, because Lincare was already the lower-priced offeror.
The GAO wrote that “the acid test of whether discussions have occurred is whether the offeror has been afforded an opportunity to revise or modify its proposal.” And where “an agency conducts discussions with one offeror, it must conduct discussions with all offerors in the competitive range.”
In this case, “ecause Lincare was given the opportunity of revising its price, we think that the agency’s invitation constituted discussions,” and “Rotech was improperly excluded” from those discussions. Rotech’s statement that it “reasonably could have submitted lower pricing” had it been given the opportunity was sufficient to demonstrate that Rotech may have been prejudiced by the VA’s error. The GAO sustained Rotech’s protest.
Agencies have a great deal of discretion in many aspects of the procurement process, but not when it comes to discussions. As the Rotech Healthcare case demonstrates, when an agency invites one offeror to revise its proposal, that same opportunity must be extended to every other offeror in the competitive range.
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With the Olympics coming to a close this Sunday, we can look forward to getting back to our usual sleeping patterns without the lure of athletes seeking gold in Rio. So while preparations are ongoing for the closing ceremony and the eventual torch hand off to Tokyo, we continue to work to bring you the top government contracting news and notes for the week.
In this week’s SmallGovCon Week in Review, a businessman will serve prison time after stealing a veteran’s identity and using it to obtain SDVOSB contracts, the first protest of the Alliant 2 solicitation has been filed, faulty military helmets manufactured at a Texas prison under a government contract have been recalled, and much more.
A six-year prison sentence was handed down to a businessman stealing a disabled veteran’s identity and using the information to seek $2.7 million in government contracts. [CBS DFW]
Has the VA acted too hastily when it quickly complied with the U.S. Supreme Court’s “rule of two” decision in the Kingdomware Case? [Federal News Radio]
A $2.25 million fine will be paid out by a research and development company, financed largely by federal government funding, to resolve allegations that they violated the False Claims Act by seeking disbursements from federal agencies for falsified labor costs. [United States Department of Justice]
The first protest has come just six weeks after the GSA released the request for proposals for the massive IT services multiple award contract known as Alliant 2. [Federal News Radio]
Government marketing expert Michelle Hermelee, CSCM, discusses two of the new GSA initiatives and what they mean for federal contractors. [Government Product News]
Small businesses that contract with the federal government fear proposed changes to regulations will push them out of the bidding process. [The Hill]
Mid-tier companies of smaller size are finding it impossible to compete on Alliant 2 Unrestricted and are voicing complaints that could result in a pre-award protest. [Washington Technology]
More than 126,000 helmets manufactured at a Texas prison under a government contract were recalled after inspectors found major defects, including serious ballistic failures. [The Washington Times]
Industry now has another two weeks to submit bids for Alliant 2, the largest IT contract released in the past decade, after an extension by the General Services Administration. [Nextgov]
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Citing an abuse of the protest process, the GAO has suspended a company’s right to file bid protests for a period of one year.
The GAO’s unusual action was taken after the contractor in question filed 150 bid protests in the ongoing fiscal year alone, most of which have been dismissed for technical reasons. The GAO’s decision also cites “baseless accusations” made by the protester, including accusing GAO officials of being “white collar criminals” and asserting that “various federal officials have engaged in treason.”
The GAO’s decision in Latvian Connection LLC, B-413442 (Aug. 18, 2016) arose under a task order issued by DISA to ManTech Advanced Information Systems, Inc. for engineering services. The task order in question was issued in 2013, and ManTech completed full performance on January 31, 2016.
After ManTech had completed full performance, Latvian Connection LLC filed a bid protest challenging the task order award. Latvian Connection alleged that DISA had erred by failing to issue the task order solicitation as a small business set-aside and by failing to publish the solicitation on the FedBizOpps website.
Apparently, this particular protest was the proverbial straw that broke the camel’s back. While the GAO’s decision addressed the particular task order in question, the GAO focused in large part on Latvian Connection’s widespread use of the protest process.
The GAO started by explaining that “our records show that, thus far this fiscal year, Latvian Connection has filed 150 protests with our Office.” Of those protests, 131 have been decided: one was denied on the merits, and “[t]he remaining protests were dismissed, the most common reason being that Latvian Connection was not an interested party.” Further, “[a] number of Latvian Connection’s most recent protests, like the instant protest, have been attempts to challenge acquisitions where the contract in question was awarded years ago.”
But it wasn’t just the number and nature of Latvian Connection’s many protests that drew the GAO’s ire; the GAO also found the content of those protests troubling. The GAO wrote that “Latvian Connection’s protests are typically a collection of excerpts cut and pasted from a wide range of documents having varying degrees of relevance to the procurements at issue, interspersed with remarks from the protester. The tone of the filings is derogatory and abusive towards both agency officials and GAO attorneys.” The GAO continued:
While its protests typically revolve around the two central issues noted above, Latvian Connection also routinely makes baseless accusations. In recent months, Latvian Connection has claimed that agency and GAO officials are white collar criminals; that the actions of agency procurement officials have violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968; that various federal agency officials have engaged in treason; that GAO has violated the Equal Access to Justice Act, 5 U.S.C.§ 504; and that agency and GAO officials have engaged in activities that amount either to engaging in, or covering up, human trafficking and slavery.
The GAO dismissed the protest against the ManTech contract award both for lack of standing and lack of jurisdiction. The GAO then turned again to Latvian Connection’s protest history. The GAO noted that, although Latvian Connection had protested hundreds of acquisitions under which the government has sought a wide variety of goods and services, “[p]ublicly available information provides no evidence that Latvian Connection has successfully performed even a single government contract, and there is no evidence in the many cases presented to our Office to suggest that Latvian Connection engages in any government business activity whatsoever beyond the filing of protests.” The GAO then stated:
The wasted effort related to Latvian Connection’s filings is highlighted by its latest series of protests (including the current protest) challenging acquisitions that were conducted years ago, where performance is complete and there is no possible remedy available. These protests have placed a burden on GAO, the agencies whose procurements have been challenged, and the taxpayers, who ultimately bear the costs of the government’s protest-related activities. When presented with evidence, as here, that Latvian Connection does not hold the umbrella ID/IQ contract under which the order was issued, or that the order involves an amount lower than the statutory threshold for GAO’s task order jurisdiction, Latvian repeatedly fails to engage with the issues. Instead, the company simply files a lengthy, often unrelated, harangue that does not address the threshold issues that must be answered by any forum as part of its review.
We conclude that the above-described litigation practices by Latvian Connection constitute an abuse of our process, and we dismiss the protest on this basis. Although dismissal for abuse of process or other improper behavior before our Office should be employed only in the rarest of cases, it is appropriate here where we find that Latvian Connection’s abusive litigation practices undermine the integrity and effectiveness of our process.
In addition, the GAO wrote, “because of these abusive litigation practices, and to protect the integrity of our bid protest forum and provide for the orderly and expedited resolution of protests, we are suspending Latvian Connection from protesting to our Office for a period of one year as of the date of this decision.” The GAO remarked that it does “not take these actions lightly,” but “[n]onetheless, on balance, suspending for one year Latvian Connection’s eligibility to file protests with our Office may incentivize the firm to focus on pursuing legitimate grievances in connection with acquisitions for which there is evidence that Latvian Connection actually is interested in competing.”
The GAO concluded:
Our bid protest process does not provide, and was never intended to provide, a platform for the complaints of businesses or individuals that, to all outward appearances, have no actual interest in, or capability to perform, the government contracting opportunities to which they have objected. Nor, as a forum for the expeditious and inexpensive resolution of bid protests, are we required to endure baseless and abusive accusations.
A reader of the GAO’s decision might conclude that all of Latvian Connection’s protests have been frivolous. Not so. SmallGovCon readers will recall that last year, the GAO actually sustained two of Latvian Connection’s protests, involving FedBid reverse auctions and these decisions established (at least in my eyes) important precedent concerning agencies’ responsibilities when using FedBid. The GAO also sustained a third Latvian Connection protest in a case confirming that offerors are not presumed to be “on notice” of agency postings on websites other than FedBizOpps.
In fairness to Latvian Connection, then, it is clear that at least a handful of its many protests have been meritorious. That said, I can’t begin to imagine why a single company would feel the need to file 150 protests in the span of one not-yet-completed fiscal year. And while I haven’t had the opportunity to review the contents of Latvian Connection’s protest filings myself, I believe that the protest system works best where the litigants (even though adversarial) treat each other with basic norms of courtesy and respect. If Latvian Connection failed to meet this standard–as suggested by the various “baseless accusations” referenced in the GAO decision–then that failure alone is detrimental to the protest process.
The Latvian Connection case may become known for the effect it will have on a single company, but I think it’s broader than that: the GAO knows that allowing abuse of the protest system harms those who use the system in the way it was intended, and risks political intervention that might harm all contractors’ ability to file good faith protests. And in a world where 45% of GAO protests result in a favorable outcome for the protester, there can be little doubt that the good faith use of the protest system serves an important public purpose. Contractors can ill afford a Congressional rollback of their protest rights. As the Latvian Connection case demonstrates, the GAO itself possesses the inherent authority to sanction what it believes to be abuse of the protest system, and will exercise that authority in an appropriate (and rare) case.
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An 8(a) joint venture failed to obtain SBA’s approval of an addendum to its joint venture agreement—and the lack of SBA approval cost the joint venture an 8(a) contract.
In Alutiiq-Banner Joint Venture, B-412952 et al. (July 15, 2016), GAO sustained a protest challenging an 8(a) joint venture’s eligibility for award where that joint venture had not previously sought (or received) SBA’s approval for an addendum to its joint venture agreement.
At the big picture level, SBA’s 8(a) Business Development Program Regulations contain strict requirements that an 8(a) entity must satisfy before joint venturing with another entity for an 8(a) contract. For instance, the 8(a) joint venture must have a detailed joint venture agreement that, among other things, sets forth the specific purpose of the joint venture (usually relating to the performance of a specific solicitation). Where the joint venture seeks to modify its joint venture agreement (even to allow for the performance of another 8(a) contract), the Regulations require prior approval of any such amendment or addendum by the SBA. 13 C.F.R. § 124.513(e).
At issue in Alutiiq-Banner was a NASA 8(a) set-aside solicitation that sought to issue a single-award IDIQ contract for human resources and professional services. In late March 2016, CTRM-GAPSI JV, LLC (“CGJV”), an 8(a) joint venture between GAP Solutions and CTR Management Group, was named the contract awardee. As part of this award, the contracting officer made a responsibility determination that included an undated letter from the SBA stating that “CTRMG/GAPSI JV” was an eligible 8(a) joint venture under the solicitation.
Alutiiq-Banner Joint Venture protested this evaluation and award decision on various grounds, including that CGJV was not an eligible 8(a) entity and, thus, should not have received the award.
According to Alutiiq-Banner, CTRM-/GAPSI JV (the entity that submitted the proposal) and CTRM-GAPSI JV, LLC (the awardee) were different entities. The awardee-entity did not exist until an official corporate registration was filed for the joint venture until April 2016; NASA, however, completed its evaluation and made its award the month prior. Because CGJV did not exist until after the award, it was not the firm that submitted the proposal—it was a newly-created and legally-distinct entity that was not approved by the SBA for this 8(a) award.
NASA, in response, characterized Alutiiq-Banner’s arguments as trying to make a mountain out of a molehill. That is, NASA said the protest challenged the awardee’s name, and that any differences were “insignificant clerical issues.” Because NASA identified the entities that prepared the proposal and that was awarded the contract under the same DUNS number and CAGE code, there was “no material doubt of the awardee’s identity.”
GAO sought SBA’s input as to whether the awardee was a different entity than the SBA had approved for award as a joint venture. According to the SBA, they were the same entities. But apparently, the SBA’s approval of CGJV’s joint venture agreement upon which the contracting officer relied in finding CGJV a responsible entity was outdated; it did not relate to the addendum that allowed CGJV to perform under this particular solicitation. Thus, the SBA said that CGJV’s failure to obtain approval for this addendum to its joint venture agreement violated the SBA’s regulations. As a result, the SBA said that it would rescind its approval of CGJV’s award eligibility, and recommended that the award be terminated.
In response to the SBA’s recommendation, both CGJV and NASA instead requested that GAO stay its decision on Alutiiq-Banner’s protest pending approval of CGJV’s joint venture agreement addendum. GAO refused to do so, noting its statutory obligation to decide protests within 100 days.
GAO sustained Alutiiq-Banner’s protest, agreeing with the SBA that the award to CGJV was improper. It wrote:
[T]here appears to be no significant dispute that CGJV did not seek the approval for this award as required under the 8(a) program, and the SBA did not have a basis to approve the award—both of which are required by the SBA’s regulations as a precondition of awarding the set-aside contract to a joint venture.
GAO thus recommended the award to CGJV be terminated and, as part of NASA’s re-evaluation, that NASA and the SBA confirm that the selected awardee is an eligible 8(a) participant before making the award decision.
It’s a common misconception that 8(a) joint ventures are approved “in general,” that is, that once SBA approves a joint venture for one contract, the joint venture “is 8(a)” and can pursue other 8(a) contracts without SBA approval. Not so. As Alutiiq Banner demonstrates, an 8(a) joint venture must obtain SBA’s separate approval for each 8(a) contract it wishes to pursue. Failing to get that approval may cost a joint venture the contract—something CGJV learned the hard way.
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I recently had the pleasure to discuss important government contracting legal updates and their effects on small businesses, at the 11th Annual Veterans Business Conference at Fort Bliss (in El Paso). The Contract Opportunities Center did a fantastic job organizing the conference, which brought together small businesses and government agencies for a wide-ranging discussion on government contracting. My presentation discussed many of the topics we’ve been following at SmallGovCon, including the SBA’s new small business mentor-protégé program, changes to the limitation on subcontracting, and, of course, the Supreme Court’s Kingdomware decision.
I also enjoyed meeting many of the small business owners and government representatives who attended the event. If you attended the conference, it would be great to hear from you.
Thanks to the COC for a great event—I hope to see you again next year!
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