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Koprince Law LLC

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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Koprince Law LLC

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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Koprince Law LLC

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

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

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

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

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

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

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

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

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Koprince Law LLC

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

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

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

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

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

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

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

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

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

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

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

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

Whether or not OHA agrees remains to be seen.

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Koprince Law LLC

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:

Social Disadvantage

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.

In Conclusion

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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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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Federal contractors frequently find themselves in the position of needing to establish their past performance credentials to secure future contracts – the government’s form of a reference check. The government often performs these reference checks by requesting completed past performance questionnaires, or PPQs, which the government uses as an indicator of the offeror’s ability to perform a future contract.

But what happens when a contractor’s government point of contact fails to return a completed PPQ? As a recent GAO decision demonstrates, if the solicitation requires offerors to return completed PPQs, the agency need not independently reach out to government officials who fail to complete those PPQs.

By way of background, FAR 15.304(c)(3)(i) requires a procuring agency to evaluate past performance in all source selections for negotiated competitive acquisitions expected to exceed the simplified acquisition threshold. The government has many means at its disposal to gather past performance information, such as by considering information provided by the offeror in its proposal, and checking the Contractor Performance Assessment Reports System, commonly known as CPARS.

PPQs are one popular means of obtaining past performance information. A PPQ is a form given to a contracting officer or other official familiar with a particular offeror’s performance on a prior project. The official in question is supposed to complete the PPQ and return it–either to the offeror (for inclusion in the proposal) or directly to the procuring agency. Among other advantages, completed PPQs can allow the agency to solicit candid feedback on aspects of the offeror’s performance that may not be covered in CPARS.

But the potential downside of PPQs is striking: the FAR contains no requirement that a contracting official respond to an offeror’s request for completion of a PPQ or similar document within a specific period (or at all). Contracting officials are busy people, and PPQ requests can easily fall to the bottom of a particular official’s “to-do” list. And procuring agencies sometimes contribute to the problem by developing lengthy PPQs that can be quite time-consuming to complete. For example, in a Google search for “past performance questionnaire,” the first result (as of the date of this blog post) is a NASA PPQ clocking in at 45 questions over 11 pages. A lengthy, complex PPQ like that one almost begs the busy recipient to ignore it.

That brings us to the recent GAO bid protest, Genesis Design and Development, Inc., B-414254 (Feb. 28, 2017). In Genesis Design, GAO denied a protest challenging the rejection of an offeror’s proposal where the offeror failed to adhere to the terms of the solicitation requiring offerors to submit three PPQs completed by previous customers.

The protest involved the National Park Service’s request for the design and construction of an accessible parking area and ramp at the Alamo Canyon Campground in Ajo, Arizona. The solicitation required offerors to provide three completed PPQs from previous customers to demonstrate that the offerors had successfully completed all tasks related to the solicitation requirements. The solicitation provided the Park Service with discretion to eliminate proposals lacking sufficient information for a meaningful review. The Park Service was to award the contract to the lowest-priced, technically acceptable offeror.

Genesis Design and Development, Inc. submitted a proposal. However, the PPQs Genesis provided with its proposal had not been completed by Genesis’ prior customers. Instead, the PPQs merely provided the contact information of the prior customers, so that the Park Service could contact those customers directly.

The Park Service found Genesis’ proposal was technically unacceptable, because Genesis failed to include completed PPQs. The Park Service eliminated Genesis from the competition and awarded the contract to a competitor.

Genesis filed a GAO bid protest challenging its elimination. Genesis conceded that the PPQs had not been completed by its past customers, but stated that it “reasonably anticipated that the agency would seek the required information directly from its clients.” Genesis contended that it “is often difficult to obtain such information from its clients because they are often too busy to respond in the absence of an inquiry directly from the acquiring activity.”

GAO wrote that “an offeror is responsible for submitting an adequately written proposal and bears the risk that the agency will find its proposal unacceptable where it fails to demonstrate compliance with all of a solicitation’s requirements.” Here, “the RFP specifically required offerors to submit completed PPQs,” but “Genesis did not comply with the solicitation’s express requirements.” Accordingly, “the agency reasonably rejected Genesis’ proposal.” GAO denied Genesis’ protest.

GAO’s decision in Genesis Design should serve as an important warning for offerors: where the terms of a solicitation require an offeror to return completed PPQs from its previous customers, the offeror cannot assume the procuring agency will contact the customers on the offeror’s behalf. Instead, it is up to the offeror to obtain completed PPQs.

In our view here at SmallGovCon, the Genesis Design decision, and other cases like it, reflect a need for a FAR update. After all, Genesis was exactly right: contracting officers are sometimes too busy to prioritize responding to PPQs. It doesn’t make good policy sense for the results of a competitive acquisition to hinge on whether a particular offeror is lucky enough to have its customers return its PPQs, instead of on the merits of that offeror’s underlying past performance.

Policymakers could address this problem in several ways, such as by imposing a regulatory requirement for contracting officials to respond to PPQ requests in a timely fashion, or by prohibiting procuring officials from requiring that offerors be responsible for obtaining completed PPQs. Hopefully cases like Genesis Design will spur a regulatory change sometime down the road. For now, offerors bidding on solicitations requiring the completion of PPQs must live with the uncertainty of whether the government will reject the offeror’s proposal as technically unacceptable due to the government’s failure to complete a PPQ in a timely manner.

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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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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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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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The nonmanufacturer rule will not apply to small business set-aside contracts valued between $3,000 and $150,000, according to the SBA.

In its recent major rulemaking, the SBA exempts these small business set-aside contracts from the nonmanufacturer rule, meaning that small businesses will be able to supply the products of large manufacturers for these contracts without violating the limitations on subcontracting.

In its rulemaking, the SBA explains its new exemption as a way to increase small business awards:

SBA believes that not applying the nonmanufacturer rule to small business set-asides valued between $3,500 and $150,000 will spur small business competition by making it more likely that a contracting officer will set aside an acquisition for small business concerns because the agency will not have to request a waiver from SBA where there are no small business manufacturers available.

The SBA points out that it can take “several weeks” for the SBA to process a nonmanufacturer rule waiver request, and suggests that contracting officers are unlikely to pursue waivers for lower-dollar procurements, choosing instead to simply release such solicitations as unrestricted.  The new rule will expand current authority, which allows an exemption for simplified acquisitions below $25,000.

The SBA’s new rulemaking also includes several other important changes related to the nonmanufacturer rule:

  • The SBA clarifies that procurements for rental services should be classified as acquisitions for services, not acquisitions for supplies.  The SBA notes that “renting an item is not the same thing as buying a item.”  This clarification means that offerors for solicitations for rented products shouldn’t need to worry about the nonmanufacturer rule (although they will need to comply with the applicable limitation on subcontracting).
  • In some cases, a single procurement seeks multiple items, and only some of them are subject to nonmanfacturer rule waivers.  In such a case, the new rule provides, “more than 50% of the value of the products to be supplied by the nonmanufacturer that are not subject to a waiver must be the products of one or more domestic small business manufacturers or processors.”  The new regulations includes an example of how this concept should work in practice.
  • The SBA has adopted a requirement that a contracting officer notify potential offerors of any nonmanufacturer rule waivers (whether class waivers or contract-specific waivers) that will be applied to the procurement.  The SBA writes that “[w]ithout notification that a waiver is being applied by the contracting officer, potential offerors cannot reasonably anticipate what if any requirements they must meet in order to perform the procurement in accordance with SBA’s regulations.”  The notification “must be provided at the time a solicitation is issued.”
  • The SBA has expanded its authority to grant nonmanufacturer rule waivers.  Under current law, waivers must be granted before a solicitation is issued.  The new rule allows the SBA to grant waivers after a solicitation has been issued so long as “the contracting officer provides all potential offerors additional time to respond.”  In an even bigger change, the new rule allows the SBA to grant nonmanufacturer rule waivers after award, if the agency makes a modification for which a waiver is appropriate.
  • The SBA has clarified that the nonmanufacturer rule (including waivers) applies to certain types of software.  The SBA writes that “where the government buys certain types of unmodified software that is generally available to both the public and the government . . . the contracting officer should classify the requirement as a commodity or supply.”  However, “if the software being acquired requires any custom modifications in order to meet the needs of the government, it is not eligible for a waiver of the NMR because the contractor is performing a service, not providing a supply.”

The SBA’s changes to the nonmanufacturer rule take effect on June 30, 2016.

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If you’re a small business owner interested in government contracts, you’ve probably heard about the SBA’s 8(a) Business Development Program. The 8(a) Program itself is complex, but its potential benefits are tremendous. In this post, I’ll break down some of the very basics about the 8(a) Program, leaving some of its complexities for upcoming posts.

Let’s get to it: here are five things you should know about the 8(a) Program.

  1. What is the 8(a) Program?

Like SBA’s other contracting programs, the 8(a) Program is a business development program—its purpose is to assist eligible disadvantaged small businesses compete in the American economy through business development.

  1. What are the benefits to participating?

Participating in the 8(a) Program opens several doors to success. Each year, the federal government’s goal is to award at least 5% of all prime contracts to small disadvantaged businesses, which include 8(a) Program participants. To meet this goal, the government issues billions of dollars of awards annually to 8(a) Program participants through sole-source awards and set-asides. Participants are also allowed to join in mentor/protégé and joint venture relationships to further increase their ability to participate in the American economy. Additionally, the SBA provides targeted business development counseling to 8(a) participants.

  1. Is your business eligible to participate?

Given these incentives, the desire to participate in the 8(a) Program is obvious. But can your business participate?

SBA has laid out detailed eligibility requirements. A future post will discuss them in greater detail but, in general, a business typically must be small under its primary NAICS code, and be unconditionally owned and controlled by one or more socially- and economically-disadvantaged individuals who are of good character. (There are some separate requirements for businesses owned by Indian Tribes, Alaska Native Corporations, Native Hawaiian Organizations, and Community Development Corporations.) The business, moreover, must maintain its eligibility throughout the course of its participation.

One more thing: 8(a) Program participation is a one-time thing. So if your business has previously participated in the 8(a) Program, or if you’re a disadvantaged individual that has already participated, the SBA won’t allow you to participate again—although Tribes, ANCs, NHOs and CDCs have some different rules.

  1. How long can your business participate in the 8(a) Program?

The presumptive term is 9 years. But this term can be shortened by the participant or the SBA—if, for example, the concern is successful enough to graduate from the Program or fails to maintain its eligibility. The term cannot be lengthened, although it can be temporarily suspended in rare instances.

  1. How can your business apply?

Applications must be submitted electronically to the SBA and must include any supporting information requested by the SBA (like corporate organization documents and personal and business tax returns). Your local SBA office should be able to provide a list of all required documents.


Participating in the 8(a) Program can be a great way to grow your small business. Look for additional 5 Things posts discussing its requirements and benefits in greater detail. In the meantime, please call me if you have any questions about eligibility or applying for the Program.

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The GAO’s jurisdiction to hear most protests in connection with task and delivery order awards under civilian multiple award IDIQs has expired.

In a recent bid protest decision, the GAO confirmed that it no longer has jurisdiction to hear protests in connection with civilian task and delivery order awards valued over $10 million because the underlying statutory authority expired on September 30, 2016.

The Federal Acquisition Streamlining Act of 1994 established a bar on bid protests concerning military and civilian agency task and delivery orders under multiple-award IDIQs.  FASA, as it is known, allowed exceptions only where the protester alleged that an order improperly increased the scope, period, or maximum value of the underlying IDIQ.

The 2008 National Defense Authorization Act adopted another exception, which allowed the GAO to consider protests in connection with orders valued in excess of $10 million.  The 2008 authority was codified in two separate statutes–Title 10 of the U.S. Code for military agencies, and Title 41 of the U.S. Code for civilian agencies.

In 2011, the provision adopted by the 2008 NDAA expired.  However, because of the way that the sunset provision was drafted, the GAO held (and correctly so, based on the statutory language), that it had authority to consider all task order protests, regardless of the value of the order.

In the 2012 NDAA, Congress reinstated the GAO’s authority to hear bid protests over $10 million, and included a new sunset deadline–September 30, 2016.  This time, however, Congress changed the statutory language to ensure that if September 30 passed without reauthorization, the GAO would lose its authority to hear protests of orders valued over $10 million, rather than gaining authority to hear all task and delivery order protests.

That takes us to the GAO’s recent decision in Ryan Consulting Group, Inc., B-414014 (Nov. 7, 2016).  In that case, HUD awarded a task order valued over $10 million to 22nd Century Team, LLC, an IDIQ contract holder.  Ryan Consulting Group, Inc., another IDIQ holder, filed a GAO protest on October 14, 2016 challenging the award.

The GAO began its decision by walking through the statutory history, starting with FASA and ending with the  expiration of the 2012 NDAA protest authority.  GAO wrote that “our jurisdiction to resolve a protest in connection with a civilian task order, such as the one at issue, expired on September 30, 2016.”

In this case, GAO wrote, “it is clear that Ryan filed its protest after our specific authority to resolve protests in connection with civilian task and delivery orders in excess of $10 million had expired.”  While GAO retains the authority to consider a protest alleging that an order increases the scope, period, or maximum value of the underlying IDIQ contract, Ryan made no such allegations.  And although Ryan asked that the GAO “consider grandfathering” its protests, GAO wrote that “we have no authority to do so.”

GAO dismissed Ryan’s protest.

As my colleague Matt Schoonover recently discussed in depth, the expiration of GAO’s task order authority applies only to civilian agencies like HUD, and not to military agencies.  The GAO retains jurisdiction to consider protests of military task and delivery orders valued in excess of $10 million.

Matt also discussed a Congressional disagreement over whether, and to what extent, to reinstate GAO’s task and delivery order bid protest authority.  That issue will likely be resolved in the 2016 NDAA, which should be signed into law in the next couple months.  We’ll keep you posted.

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

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

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

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

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

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

Are all populated JVs eliminated? 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Conclusion

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

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A protester’s failure to be specific enough in an SDVOSB status protest will result in dismissal of the protest.

The decision of the SBA Office of Hearings and Appeals in Jamaica Bearings Company, SBA No. VET-257 (Aug. 9, 2016), reinforces the SBA’s rule concerning specificity in filing a service disabled veteran-owned status protest. The rule provides, “[p]rotests must be in writing and must specify all the grounds upon which the protest is based. A protest merely asserting that the protested concern is not an eligible SDVO SBC, without setting forth specific facts or allegations is insufficient.”

Jamaica Bearings involved a solicitation issued as an SDVOSB set-aside by the Defense Logistics Agency for 77 Parts Kits, Linear AC. Jamaica Bearings Company (JBC) was awarded the contract. JBL System Solutions, Inc. (JBL), an unsuccessful offeror, submitted a timely protest stating, “‘while [JBC] may or may not be owned and operated by a qualified Service Disabled Veteran, they do not meet the qualifications of the SBA to be a Small Business.’ (Protest, at 1),” and added that due to Jamaica Bearing Company’s size, the company should not pretend to be an SDVOSB.

Although the protester offered no evidence to support its claim that JBC “may” not be an eligible SDVOSB, the SBA’s Director of Government Contracting (D/GC) initiated a full investigation of JBC’s SDVOSB eligibility. JBC (for reasons unexplained in OHA’s decision) did not respond to the D/GC’s inquiries. Thus, the D/GC apparently applied an “adverse inference” and assumed that JBC’s response would demonstrate that it was not an eligible SDVOSB. The D/GC issued a decision finding JBC to be ineligible for the DLA contract.

JBC appealed the decision to OHA. JBC argued that it was an eligible SDVOSB and that another SBA office had previously confirmed JBC’s SDVOSB status.  The SBA’s legal counsel filed a response to the appeal, supporting the D/GC’s decision.

Although neither party had raised it in its initial filings, OHA–on its own initiative–asked the parties to address “whether the D/GC should have dismissed the initial status protest by JBL as nonspecific.” Unsurprisingly, JBC responded by stating that the protest was not specific and should have been dismissed; the SBA claimed that the protest was specific.

OHA wrote that, under its regulations, a viable SDVOSB protest must provide specific reasons why the protested SDVOSB is alleged to be ineligible. Insufficient protests must be dismissed. Further, OHA noted, the regulations provide the following example:

A protester submits a protest stating that the awardee’s owner is not a service-disabled veteran. The protest does not state any basis for this assertion. The protest allegation is insufficient.

In this case, OHA wrote, “the protest does not even rise to this level, as the protest simply states that [JBC] ‘may or may not’ be controlled by a service-disabled veteran.” The protest “does not directly allege that [JBC] is not owned and controlled by a service-disabled veteran, and gives no reason which would support such an assertion.”

OHA wrote that “the D/GC was required to dismiss JBL’s protest because it simply failed to be specific enough as to challenge [JBC’s] service-disabled status.” OHA granted JBC’s SDVOSB appeal and reversed the D/GC’s status determination.

As highlighted in Jamaica Bearings, SDVOSB status protest must be “specific.” However, the exact level specificity required under the regulations remains a bit fuzzy (although other OHA decision offer some guidance). Regardless of where the line is drawn in a particular case, Jamaica Bearings confirms that it is not enough for the protester to make an unsupported blanket allegation that an awardee is ineligible.

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The 8(a) Program has survived a major challenge to its constitutionality–but the legal battle over the 8(a) Program’s future may well continue.

On Friday, a two-judge majority of the U.S. Court of Appeals for the D.C. Circuit held that the statute that creates the 8(a) Program is not unconstitutional. While the D.C. Circuit’s decision is a big win for proponents of the 8(a) Program, the limited scope of the ruling–and a sharp dissent from that ruling–signal that the fight over the future of the 8(a) Program may not be over.

Rothe Development, Inc. v. U.S. Department of Defense, No. 1:12-cv-00744 (D.C. Cir. Sept. 9, 2016), involved the question of whether the Department of Defense could set aside certain procurements exclusively for 8(a) Program participants. Rothe Development, Inc., which is not an 8(a) participant, brought suit against the DoD, arguing that it had been improperly precluded from competing for these contracts.

Rothe challenged the constitutionality of the 8(a) Program itself. Rothe attacked the statutory provisions establishing the 8(a) Program, claiming that the underlying 8(a) Program statute “contains a racial classification that presumes that certain racial minorities are eligible for the program,” while denying such a presumption to those who are not members of those groups. Rothe argued that this classification system violated its right to equal protection under the Due Process Clause of the Fifth Amendment.

When a court reviews an equal protection challenge, the court will apply a certain “standard of review.”  The standard of review sets forth the burden that the government must meet in order to demonstrate that the challenged law is constitutional. For equal protection purposes, the Supreme Court has established three standards of review: rational basis, intermediate scrutiny and strict scrutiny. Think of these as low, medium, and high scrutiny (or tall, grande, and venti, if you prefer Starbucks terminology).

Rational basis is the lowest threshold, and applies to the review of most laws. To survive a rational basis review, a statute merely must be bear some reasonable relation to some legitimate government interest.

Strict scrutiny, on the other hand, is the highest level of review. A court must apply strict scrutiny in certain circumstances, such as where a statute, on its face, is not race-neutral. To pass strict scrutiny, the government must show the statute is narrowly tailored to meet a compelling government interest. That, of course, can be a very difficult burden for the government to meet; when strict scrutiny is applied, the court often rules against the government.

Turning back to the case at hand, the two-judge majority, after closely reviewing the 8(a) Program’s underlying statute, determined that “the provisions of the Small Business Act that Rothe challenges do not on their face classify individuals by race.” The majority continued:

Section 8(a) uses facially race-neutral terms of eligibility to identify individual victims of discrimination, prejudice, or bias, without presuming that members of certain racial, ethnic, or cultural groups qualify as such. That makes it different from other statutes that either expressly limit participation in contracting programs to racial or ethnic minorities or specifically direct third parties to presume that members of certain racial or ethnic groups, or minorities generally, are eligible. Congress intentionally took a different tack with section 8(a), opting for inclusive terms of eligibility that focus on an individual’s experience of bias and aim to promote equal opportunity for entrepreneurs of all racial backgrounds.

The majority noted that “in contrast to the statute, the SBA’s regulation implementing the 8(a) program does contain a racial classification in the form of a presumption that an individual who is a member of one of five designated racial groups (and within them, 37 subgroups, is socially disadvantaged.” Importantly, however, Rothe “elected to challenge only the statute,” not the regulation. Therefore, the court determined, “[t]his case does not permit us to decide whether the race-based regulatory presumption is constitutionally sound.”

Having determined that the statute was race-neutral on its face, the D.C. Circuit majority applied the rational basis test, not strict scrutiny. The majority found that “[c]ounteracting discrimination is a legitimate interest,” and that “the statutory scheme is rationally related to that end.” The D.C. Circuit held that the 8(a) Program’s statutory provisions did not violate the Fifth Amendment.

Judge Karen Lecraft Henderson dissented in part from the majority’s ruling. Judge Henderson pointed out that just about everyone who had looked at the issue previously–Rothe, the government’s counsel, and the lower court–had concluded that the statute did, in fact, contain a racial classification.

Judge Henderson wrote that that “section 8(a) contains a paradigmatic racial classification,” and that the court “should apply strict scrutiny in determining whether the section 8(a) program violates Rothe’s right to equal protection of the laws.” Judge Henderson did not say, however, whether she would find the 8(a) Program to be unconstitutional under a strict scrutiny test.

There is no doubt that the D.C. Circuit’s decision is a big win for proponents of the 8(a) Program. Not only was the 8(a) program found to pass constitutional muster, the applicable standard of review was determined to be rational basis—the easiest test for a statute to pass.

But some of the coverage I’ve seen of the D.C. Circuit’s decision makes it sound like the issue of the 8(a) Program’s constitutionality has been fully and finally resolved. I’m not so sure.

As the majority noted, Rothe specifically disclaimed any challenge to 13 C.F.R. 124.103, the SBA regulation establishing who is–and is not–deemed “socially disadvantaged” for 8(a) Program purposes. The majority was very clear that it believes that the regulations themselves are not race-neutral, meaning that any future challenge to the regulations would likely be decided under the much-higher strict scrutiny standard.

Additionally, there is no guarantee that the Rothe case itself is over and done. While the Supreme Court doesn’t take many government contracting cases, the recent Kingdomware decision demonstrates that the Court is willing to take on an important contracting case. And in Rothe, the D.C. Circuit’s internal disagreement over what level of scrutiny to apply, coupled with the Court’s willingness to tackle cases involving alleged race-based classifications>, might mean that Rothe ends up on the Supreme Court’s docket.

For 8(a) Program proponents, there is good reason to cheer the D.C. Circuit’s Rothe decision, but don’t break out the champagne just yet.

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


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We have been hard a work all week long here at Koprince Law and are ready to take advantage of the Labor Day weekend. Not only is it a long weekend, but it is also the start of the college football season. There is nothing better than football, tailgating and cooler weather to get you in the mood for fall (although our local Kansas Jayhawks haven’t exactly been tearing up the gridiron in recent years).

Before you head out the door to enjoy the holiday weekend, it’s time for the SmallGovCon Week In Review. This week’s edition includes articles on the recent implementation of the Fair Pay and Safe Workplaces final rule, a look at the large amount of money spent of professional services and how that spending is (or isn’t) tracked, a proposed rule for streamlining awards for innovative technology projects and much more.

  • Business in government-wide acquisition contracts is booming, with agency buyers turning to the large-scale vehicles for price breaks and convenience. [Washington Technology]
  • Bloomberg BNA has an interesting Q&A session involving the recently released Fair Pay and Safe Workplaces regulations. [Bloomberg BNA]
  • According to one commentator, government contracting is being hurt by the lack of transparency and secrecy with the amount of money flowing through all the contract vehicles across government. [Washington Technology]
  • The Obama administration has finalized plans to bring more scrutiny to potential federal contractors’ histories of violating labor laws, releasing twin final regulations that will implement a 2014 executive order. [Government Executive]
  • A government contractor is required to pay $142,500 to settle civil fraud allegations that their employees engaged in labor mischarging. [Department of Justice]
  • Agencies spend almost $63 billion a year on professional services and there is a new plan to help the government improve how it buys and manages these contracts. [Federal News Radio]
  • A proposed rule has been issued to amend the DFARS to implement a section of the National Defense Authorization Act for Fiscal Year 2016 that provides exceptions from the certified cost and pricing data requirements and from the records examination requirement for certain awards to small businesses or nontraditional defense contractors. [Federal Register]

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When an agency performs a cost realism evaluation under a solicitation involving significant labor costs, the agency must evaluate offerors’ proposed rates of employee compensation, not just offerors’ fully burdened labor rates.

In a recent bid protest decision, the GAO held that an agency erred by basing its realism evaluation on offerors’ fully burdened labor rates, without considering whether the direct rates of compensation were sufficient to recruit and retain qualified personnel.

The GAO’s decision in CALNET, Inc., B-413386.2, B-413386.3 (Oct. 28, 2016) involved a Navy task order solicitation for a range of technical services to be provided to the Naval Sea Systems Command Pacific Enterprise Data Center.  The solicitation was issued to holders of the Navy’s Seaport-e IDIQ contract, and contemplated the award of a cost-plus-fixed-fee task order.

Under the solicitation, offerors were to propose personnel in 13 labor categories.  For each labor category, offerors were to provide information on their direct labor rates, as well as the indirect rates to be applied to those direct rates.

In its cost evaluation, the Navy collected information about identical labor categories under 22 other contracts, including the incumbent contract.  Using this information, the Navy created a “range” of realistic fully-burdened hourly rates.  These ranges were, in some cases, quite broad.  For example, the Program Manager category ranged from a low of $69.44 per hour to a high of $228.93 per hour.

The Navy only found a rate to be unrealistic if it fell below the established ranges.  Of the 186 rates examined by the agency, only three fell below the ranges.  Unsurprisingly, the Navy made few cost adjustments to offerors’ proposals.  The Navy awarded the task order to Universal Consulting Services, Inc., which had the lowest evaluated cost.

CALNET, Inc., an unsuccessful competitor, filed a GAO bid protest.  CALNET argued, in part, that the Navy’s cost realism evaluation was inadequate.

The GAO wrote that “[w]here, as here, an agency evaluates proposals for the award of a cost-reimbursement type contract, the agency is required to perform a cost realism evaluation to determine the extent to which each offeror’s proposed costs represent what the contract costs are likely to be.”  Such an evaluation ordinarily involves consideration of “the realism of the various elements of each offeror’s proposed cost,” as well as whether each offeror’s proposal “reflects a clear understanding of the requirements to be performed.”

In this case, although “the cost of the contract is driven almost entirely by the cost of labor,” the Navy’s cost evaluation “was confined entirely to consideration of fully burdened hourly rates.”  However, “where, as here, a cost-reimbursement contract’s cost is driven in significant measure by labor costs, agencies are required to evaluate the offerors’ direct labor rates to ensure that they are realistic. ”  The policy behind this requirement is logical: “unless an agency evaluates the realism of the offerors’ proposed direct rates of compensation (as opposed to its fully-burdened rates), the agency has no basis to determine whether or not those rates are realistic to attract and retain the types of personnel to be hired.”

The GAO found that the Navy “has no basis to conclude whether or not the offerors’ proposed direct rates of compensation are realistic because no analysis of those rates was ever performed.”  The GAO sustained CALNET’s protest.

The underlying purpose of a cost realism evaluation is–as its name suggests–to determine whether an offeror’s proposed costs are realistic in light of the solicitation’s requirements.  As the CALNET protest demonstrates, where a cost-reimbursement solicitation includes significant labor costs, it is insufficient for an agency to limit its cost evaluation to fully-burdened labor rates.  Instead, the agency must evaluate each offeror’s direct rates of compensation for realism.

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

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


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

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

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

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

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

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

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

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

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

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


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In evaluating a WOSB joint venture’s past performance, the procuring agency considered each joint venture member’s contemplated percentage of effort for the solicitation’s scope of work, and assigned the joint venture past performance ratings based on which member was responsible for particular past performance.

The GAO held that the agency had the discretion to evaluate joint venture past performance in this manner–although it is unclear whether a relatively new SBA regulation (which apparently didn’t apply to the solicitation) would have affected the outcome.

The GAO’s decision in TA Services of South Carolina, LLC, B-412036.4 (Jan. 31, 2017) involved an Air Force solicitation seeking services supporting Air Force Information Network operations.  The solicitation was issued on March 13, 2015 and was set aside for WOSBs.

The solicitation called for the award of a fixed-price contract (with a few cost reimbursable line items) for a 12-month base period and four potential option years.  The Air Force was to evaluate proposals on a best value basis, considering technical, past performance, and price factors.

The successful offeror was to perform work in five Mission Areas.  Under a “staffing/management” technical subfactor, offerors apparently were required to provide information regarding the anticipated breakdown of work between teaming partners (or joint venture partners) for each Mission Area.

With respect to past performance, the solicitation stated that offerors should submit past performance information on up to eight recent, relevant contracts performed by the offeror, its subcontractors, teaming partners, and/or joint venture partners.  The solicitation stated that “past performance of either party in a joint venture counts for the past performance of the entity.”

TA Services of South Carolina, LLC was an 8(a) mentor-protege joint venture between Technica, LLC, a woman-owned small business, and AECOM, its large mentor.  TAS submitted a proposal in response to the Air Force solicitation.  TAS provided three past performance contracts performed by AECOM, but none by Technica.

TAS proposed that Technica would provide the majority of the staffing (between 55% and 70%) on four of the five Mission Areas.  AECOM would provide the majority of the staffing on the fifth Mission Area.

In the course of its evaluation, the Air Force independently identified a fourth AECOM contract, but no Technica contracts.  The Air Force concluded that the four AECOM contracts “provided meaningful past performance to enable a confidence level to be determined for the Joint Venture.”  However, “while Technica proposed the majority of staffing in all areas except [one], they demonstrated no past performance.”  The Air Force assigned TAS a “Satisfactory Confidence” past performance rating.  The Air Force awarded the contract to a competitor, which proposed a higher price but received a “Substantial Confidence” past performance score.

TAS filed a GAO bid protest challenging the evaluation.  TAS argued, in part, that the Air Force’s past performance evaluation was inconsistent with the terms of the solicitation.  TAS contended that the solicitation required AECOM’s experience to be treated as the joint venture’s experience, and did not allow the Air Force to assign a lower confidence rating merely because Technica, the lead joint venture member, had not demonstrated relevant experience.

The GAO wrote that, “[a]s a general matter, the evaluation of an offeror’s past performance, including the agency’s determination of the relevance and scope of an offeror’s performance history to be considered, is a matter within the discretion of the contracting agency.”  In this case, “the RFP’s reference to the past performance of a JV partner counting for the mast performance of the JV does not mean the agency could not consider which JV partner was responsible for past performance.”  The GAO continued:

In the case of the protester, despite the fact that one JV partner had relevant past performance of exceptional quality in all mission areas, it remains the case that the other JV partner, which was proposed to perform the majority of staffing in four of the five mission areas, had no relevant past performance.  Given the latter circumstance, we fail to see that satisfactory confidence was an unreasonable performance confidence rating for the JV.

The GAO denied the protest.

The evaluation of a joint venture’s past performance is something I’m asked about frequently–and an area where the FAR provides little guidance.  However, is worth noting that last summer, the SBA overhauled its joint venture regulations, including those applicable to the WOSB program.  The WOSB regulations now provide, at 13 C.F.R. 127.506(f):

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

Nearly-identical language was added to the SBA’s regulations governing joint ventures for small business, 8(a), SDVOSB and HUBZone contracts.

The new regulation took effect more than a year after the solicitation was issued in March 2015, and wasn’t discussed in GAO’s decision.  But had it been effective, would it have changed the outcome?  That’s not entirely clear (and won’t be until a case comes along interpreting the new rule), but my best guess is “no.”

The regulation, by its plain language, specifies that the procuring agency must consider the past performance of individual joint venture members.  The SBA’s Federal Register commentary indicates that the reason SBA adopted this regulation was to prevent agencies from outright ignoring the past performance of joint venture members, and assigning undeserved “neutral” ratings to JVs comprised of experienced members.

In TA Services, of course, the agency did consider AECOM’s past performance, and didn’t assign TAS a “neutral” rating.  The new regulation doesn’t directly require any more than that, although I imagine there will be bid protests in the future about whether the underlying policy prohibits the sort of weighing that occurred here (i.e., is it fair to “penalize” a mentor-protege JV simply because the protege has little relevant experience?)

We’ll have to wait to see how the GAO and Court of Federal Claims resolve these issues in the future.  For now, TA Services of South Carolina seems clear: at least prior to the adoption of the new SBA regulations, and absent a solicitation provision to the contrary, there is nothing wrong with the agency considering each JV partner’s level of effort as part of the past performance evaluation.

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Koprince Law LLC

An offeror’s failure to provide the type of past performance information mandated by a solicitation led to the offeror’s elimination from consideration for a  major GSA contract.

A recent GAO bid protest decision highlights the importance of fully reading and adhering to a solicitation’s requirements–including those involving the type of past performance or experience information required.

GAO’s decision in Dougherty & Associates, Inc., B-413155.9 (Sept. 1, 2016) involved the GSA “HCaTS” solicitation, which contemplated the award of multiple IDIQ contracts to provide Human Capital and Training Solutions across the federal government. The solicitation was divided into two Pools based on the offeror’s small business size status. The GSA established a target of 40 awards for each Pool.

The solicitation provided for award based on best-value, and included a requirement for past experience, which stated:

For an Offeror to be eligible for consideration under a given Pool, the Offeror shall have performed six Relevant Experience Projects [REP], with four of those Relevant Experience Projects under a NAICS Code that corresponds directly to a NAICS Code in the Pool being applied for… Each Relevant Experience Project shall meet the minimum requirements prescribed in Section L.5.2.2.

The solicitation also warned potential offerors that their experience “must be substantiated by ‘evidence within a verifiable contractual document,’ adding that an offeror ‘shall only receive credit…if the Government can validate the information,’” and that failure to meet the experience requirements “may result in the proposal being rejected.” Under the terms of the solicitation, an offeror could meet the experience requirements by “submitting for each relevant experience project: a single contract; a single task or purchase order, or a ‘collection of task orders’ that had been placed under a ‘master contract vehicle.”  Finally, the solicitation required for each project that an offeror submit either a single contract/task order/purchase order, or a combination of task orders, “but not both.” The solicitation stated that “if the Offeror submits the single contract and the task order(s)/purchase order(s) awarded against it, the single contract and the task order(s)/purchase order(s) shall not be considered.”

The GSA received 115 proposals. Dougherty & Associates, Inc. was one of the offerors; it submitted a proposal for both Pools. In supporting one of its required experience projects, DAI reference a subcontract between DAI and a prime contractor under an Office of Personnel Management contract. DAI also submitted three purchase orders that had been issued under the subcontract.

The GSA sought clarification from DAI regarding this experience project. The GSA noted that the project contained three separate purchase orders and “was not identified as a ‘collection of task orders’ … It’s unclear how these 3 orders are linked.”

DAI responded by stating that “[w]e did not submit this relevant project as a collection of task orders.” DAI explained that the prime contractor had used purchase orders throughout the period of the subcontract and that “[t]he purchase orders were submitted, as required by the RFP proposal submission instructions, as contractual documents to substantiate … DAI’s scope of work, [key service areas], relevancy, period of performance and project value.”

The GSA subsequently notified DAI that its proposal had been eliminated from consideration. GSA explained that the experience project in question “contains three separate purchase orders and was not identified as a ‘collection of task orders.'”

DAI filed a GAO bid protest. DAI argued that the GSA had improperly eliminated DAI based on an unreasonable reading of DAI’s proposal.

GAO explained that the solicitation required that for each of the six relevant projects “an offeror must submit either a single contract/task order/purchase order, or a collection of task orders–but not both.” GAO continued:

Here, notwithstanding these provisions, DAI submitted its OPM subcontract–along with purchase orders issued under that subcontract. Further, DAI acknowledges that the subcontract, itself, does not substantiate the various experience requirements . . .. Finally, DAI declined to comply with the solicitation requirements regarding a collection of task orders/purchase orders–despite the agency’s notification that it was unclear that the purchase orders DAI submitted were sufficiently related.

GAO denied DAI’s protest.

Dougherty & Associates, Inc. serves as a reminder to fully read and follow the specific requirements of a solicitation to a T–including those involving experience or past performance. While this is true in any solicitation, it is especially so in the case of a large multiple-award IDIQ like HCaTS with dozens (or hundreds) of offerors. In these cases, agencies may be trying to more easily whittle down the playing field, and may be all the more inclined to reject proposals for what seem like minor variances from the terms of the solicitation.


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The government can terminate a contract when the Department of Labor has made a preliminary finding of non-compliance with the Service Contract Act, even if the contractor has not exhausted its remedies fighting or appealing the finding.

The 3-0 (unanimous) decision by the Armed Services Board of Contract Appeals in Puget Sound Environmental Corp., ASBCA No. 58828 (July 12, 2016) is troubling because it could result in other contractors losing their contracts based on preliminary DOL findings–perhaps even if those preliminary findings are later overturned.

The Puget Sound decision involved two contracts under which Puget Sound Environmental Corporation was to provide qualified personnel to accomplish general labor tasks aboard Navy vessels or at naval shore leave facilities. Both contracts included the FAR’s Service Contract Act clauses.

Under that first contract, PSE ran into SCA issues. DOL investigated and PSE entered into a payment plan to remedy the alleged violations.

The Navy, knowing about the payment plan, nevertheless entered into another contract with PSE to provide similar services. The second contract, like the first, was subject to the SCA.

Early into the performance of the second contract (referred to as Task Order 9) during the summer of 2011, DOL began a new investigation into PSE. DOL’s investigation ultimately concluded that PSE owed its workers over $1.4 million on both contracts for failure to pay prevailing wage rates, and failing to provide appropriate health and welfare benefits and holidays to its covered employees. DOL made some harsh claims, including that PSE had classified skilled maintenance and environmental technicians as laborers and had issued health insurance cards to employees who were stuck with large medical bills after they found the cards were not valid.

During the investigation, on September 1, 2011, DOL wrote to the Navy contracting officer and informed the contracting officer of DOL’s preliminary findings. A week later, the contracting officer emailed PSE and told it that the Navy “no longer has need for the firewatch/laborer services provided under task order” 9, and that the Navy was terminating the contract for convenience. That same day, as would eventually come out in discovery, the contracting officer had written an internal email stating that he was concerned about awarding PSE another task order because of the supposed likelihood that PSE would “commit Fraud against [its] employees[.]”

Five days later, PSE agreed to allow the Navy to transfer funds due on Task Order 9 to DOL to be disbursed as back wages. Shortly thereafter, on September 15, PSE and the Navy mutually agreed to terminate the contract for convenience. The Navy issued no further task orders, but awarded a bridge contract for the same services to another contractor in October of that year.

Just under two years later, on May 17, 2013, PSE submitted a certified claim under the Contract Disputes Act, claiming lost revenue of $82.4 million (based on five years worth of revenue on the contract) and asked for 4% of that number, or $3.3 million in damages. The contracting officer never issued a final decision on the claim, so PSE treated this as a deemed denial and on August 9, 2013, appealed the decision to the ASBCA.

On May 12, 2014, DOL’s Office of Administrative Law Judges reviewed the findings of the DOL investigation and concluded that DOL was right to assess the $1.4 million in back pay. The Office of Administrative Law Judges determined that PSE should be debarred for three years. PSE appealed the decision to the Administrative Review Board, which affirmed the ALJ. PSE indicated that it would appeal the ruling in federal court, although it had not done so by the time the ASBCA ruled on PSE’s appeal.

At the ASBCA, both PSE and the Navy moved for summary judgment. PSE primarily argued that the Navy terminated the contract in bad faith. PSE said that the contracting officer rushed to judgment and that the termination for convenience was effectively a termination for default, relying on the use of the word “fraud” in the contracting officer’s internal email as evidence of animus.

The ASBCA said: “Whether fraud was the best word choice is not the issue before us; the undisputed facts show that the contracting officer had a good faith basis for concluding that PSE failed to pay its employees in accordance with the contracts and that it had deceived those employees by leading them to believe that they had health insurance when, in fact, they did not.” The ASBCA denied PSE’s motion for summary judgment, and granted the Navy’s motion.

While the facts of the case are interesting, they’re not all that unique; DOL investigates and prosecutes alleged SCA violations with some frequency. What’s troubling about the Puget Sound case is that the Navy unceremoniously terminated a contractor well before any of the new allegations were fully adjudicated and before PSE had the opportunity to contest DOL’s preliminary findings.

Although PSE could still prevail in federal court, the preliminary findings were confirmed by DOL’s ALJ and Administrative Review Board. But preliminary findings are just that–preliminary–and sometimes are overturned. The ASBCA’s decision therefore begs the question: what if a future contractor is terminated based on a preliminary DOL finding that is later overturned? Does Puget Sound Environmental mean that that contractor would have no remedy?

It’s certainly a possibility. That said, some there may be ways for other contractors to distinguish Puget Sound Environmental.

For one thing, PSE had already agreed to pay back wages on an earlier contract, of which the contracting officer was aware. That earlier settlement likely influenced the contracting officer’s decision; had the DOL’s preliminary findings on task order 9 stood in a vacuum, the contracting officer might have allowed things to play out.

Additionally, in reaching its conclusion, the ASBCA wrote that “PSE has not provided us with any evidence that DOL is wrong (and that the contracting officer’s reliance on DOL is actionable.” For example, the ASBCA said, “with respect to the allegation that PSE failed to pay health and welfare benefits, if DOL was wrong and PSE had paid for those benefits, it would have been relatively simple to establish this. But, PSE has failed to provide any such evidence.” In a case where DOL’s preliminary findings were overturned, the contractor would have strong evidence that those preliminary findings were wrong–and hopefully, that it was unreasonable for the contracting officer to rely on those findings.

There is an old legal adage that “hard cases make bad law,” which means that when judges allow themselves to be persuaded by sympathy, they make bad decisions. The same can be true when the parties involved elicit little sympathy, as may have been the case here–by not providing evidence that it had actually complied with the SCA, PSE wasn’t likely to win many points with the ASBCA’s judges.

That said, the next appellant who comes before the ASBCA with a similar issue may be able to demonstrate that it did, in fact, comply with the SCA, and that DOL’s preliminary findings were wrong. If so, it remains to be seen how the ASBCA will view the termination of that appellant’s contract.

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An incumbent contractor won a protest at GAO recently where it argued that the awardee’s labor rates were too low, because they were lower than the rates the incumbent itself was paying the same people.

GAO faulted the agency for concluding that the awardee’s price was realistic without checking the proposed rates against the incumbent rates. In other words, GAO told the agency to start at the obvious place—the compensation of the current employees.

The decision in SURVICE Engineering Company, LLC, B-414519 (July 5, 2017) involved a price realism analysis of rates proposed for workers to provide engineering, program management, and administrative services at Eglin Air Force Base. (Steve Koprince blogged about the unequal evaluation component of this case here.)

The solicitation called for a fixed-price labor-hour contract and required offerors to submit a professional compensation plan. The Air Force said it would evaluate the plan pursuant to FAR 52.222-46, which includes a price realism component.

Price realism, for the uninitiated, is an evaluation of whether an offeror’s price is too low. In the context of a fixed-price labor hour contract like the Air Force solicitation, “this FAR provision anticipates an evaluation of whether an awardee understands the contract requirements, and has proposed a compensation plan appropriate for those requirements.”

The Air Force initially concluded that the price proposed by Engineering Research and Consulting Inc., or ERC, was too low, comparing the price to “Government estimates.” But after discussions and revisions, the agency decided that the revised salary ranges were acceptable. The Air Force awarded the contract to ERC.

The protester, SURVICE Engineering Company, LLC, as the incumbent, obviously knew what it was currently paying the employees who were doing the work. SURVICE figured that the only way ERC could have proposed such a low price was to slash compensation. In fact, ERC had proposed exactly that, but still said it would retain many of the incumbent personnel. (GAO has previously noted that proposing to capture incumbents but pay lower rates brings up obvious price realism concerns.)

SURVICE argued that the evaluation was unreasonable because the agency did not evaluate the complete plan, did not compare the plan to incumbent rates, and still found ERC’s proposal acceptable.

GAO agreed, stating that “the record is silent as to whether, in the end, any of ERC’s rates were lower than incumbent rates but nevertheless acceptable to the Air Force.”

It concluded, “the Air Force did not reasonably compare ERC’s salaries to incumbent salaries, a necessary step to determine whether the proposed salaries are lower than incumbent salaries. Accordingly, we find that the agency failed to reasonably evaluate whether ERC offered ‘lowered compensation for essentially the same professional work,’ as envisioned by FAR provision 52.222-46. We therefore sustain this aspect of [SURVICE]’s protest.”

SURVICE won this aspect of the protest because GAO faulted the Air Force for not taking an obvious step, but it is also a good reminder that seeking to underbid the competition by slashing incumbent pay rates can raise significant price realism concerns.

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A self-certified woman-owned small business was ineligible for a WOSB set-aside contract because the woman owner’s husband held the company’s highest officer position and appeared to manage its day-to-day operations.

A recent SBA Office of Hearings and Appeals decision highlights the importance of ensuring that a woman be responsible for managing the day-to-day business of a WOSB–and that the woman’s role be reflected both in the corporate paperwork and in practice.

OHA’s decision in Yard Masters, Inc., SBA No. WOSB-109 (2017) involved an Army solicitation for grounds maintenance services.  The solicitation was issued as a WOSB set-aside under NAICS code 561730 (Landscaping Services), with a corresponding $7 million size standard.

After evaluating competitive proposals, the Army awarded the contract to Yard Masters, Inc.  A competitor then filed a WOSB protest, alleging that Yard Masters was ineligible.  The protester contended that a man, Bryce Wade, was Yard Masters’ majority owner and President until recently and that he still exercised control over the company.

In response to the protest, Yard Masters admitted that Bryce Wade had previously been the majority owner, but that he had recently sold stock to his wife, Sally Wade, making her the 51% owner.  Yard Masters also produced Sally Wade’s resume and meeting minutes, showing that Sally Wade was the Chief Executive Officer.

The SBA Area Office examined Yard Masters’ bylaws, and determined that the bylaws “do not create a CEO position” or assign any duties to the CEO.  Instead, the bylaws identified the President (a position held by Bryce Wade) as the “chief executive and administrative officer of the corporation.”  The SBA Area Office also noted that “Bryce Wade signed [Yard Masters’] proposal and its contract documents for the instant procurement,” as well as the company’s tax returns.  The tax returns “identify Bryce, and not Sally, Wade as a compensated officer.”

The SBA Area Office found that Sally Wade did not control Yard Masters, and issued a determination finding the company ineligible for the Army WOSB set-aside contract.

Yard Masters appealed to OHA.  Yard Masters argued, in part, that the corporation’s meeting minutes made clear that Sally Wade had ultimate direction and control of the company.

Yard Masters “argues that Sally Wade is its CEO,” OHA wrote.  “The problem is that the Board did not formally create a position of CEO.”  OHA continued, “[t]he Bylaws were never changed to add the position of CEO.  The Bylaws clearly state that the President is the corporation’s ‘chief administrative and executive officer.’  Bryce Wade holds that position.”  OHA concluded that Yard Masters’ “highest officer position is President, and Bryce Wade, not Sally Wade, holds it.”

OHA also noted that “all actions taken on [Yard Masters’] behalf were taken by Bryce Wade.”  Even after Sally Wade “supposedly had taken control” of the company, “Bryce Wade signed [Yard Masters’] offer” and was listed as the point of contact.  And incredibly, after the WOSB protest was filed, “t was Bryce Wade, not Ms. Sally Wade, who communicated with SBA on [Yard Masters’] behalf.”

OHA denied the appeal and upheld the SBA Area Office’s decision.

The Yard Masters case offers at least three important lessons for WOSBs.

First, corporate paperwork matters.  I can’t count how many times, in my practice, I’ve seen a situation like Yard Masters’, where a company officer is using a title that isn’t established in the governing documents.  In order for a woman to hold the highest officer position in the company, the governing documents need to establish that her role is, in fact, the highest.  Even small, family-owned companies like Yard Masters need to ensure that their corporate documents are up to snuff.

Second, perception matters.  Although there’s not necessarily anything inherently wrong with a man signing contracts and other documents on behalf of a WOSB, it does tend to suggest that the man has outsize influence within the company.  WOSBs ought to be careful about who signs contracts, checks and other corporate documents–as well as who is listed as points of contact in SAM and in proposals.

And third, as a corollary to the previous item, if you’re getting protested for WOSB eligibility, don’t have a man be in charge of communicating with the SBA.  Talk about not sending the right signals.

The SBA is still working in the long-awaited rules that will require all WOSBs to be formally certified.  But in the meantime, Yard Masters is a good reminder self-certified WOSBs need to do their due diligence to ensure that they comply with all WOSB requirements.

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