The 2017 National Defense Authorization Act gives certain small subcontractors a new tool to request past performance ratings from the government,
If the pilot program works as intended, it may ultimately improve those subcontractors’ competitiveness for prime contract bids, for which a documented history of past performance is often critical.
For small contractors looking to break into the federal marketplace, a lack of past performance ratings can be a major problem. Without government past performance ratings, it can be difficult to prevail in a “best value” competition. Sure, FAR 15.305 provides that the government can consider past projects performed for non-governmental entities, and the same FAR section states than an offeror without a record of relevant past performance should receive a “neutral” rating. But ask most contractors, and they’ll tell you that their perception–for better or for worse–is that an offeror without government past performance references can be at a significant competitive disadvantage.
Perhaps Congress agrees. Section 1822 of the 2017 NDAA creates a pilot program that will allow a “first tier” subcontractor performing on a government contract, which required the prime contractor to develop a subcontracting plan, to submit an application to the appropriate official (agencies will designate a recipient) requesting a past performance rating. Interestingly, the subcontractor will be able to include a suggested rating, but will have to support the suggestion with written evidence, almost as if the subcontractor will have to plead its case. The application will then go to both the agency Office of Small and Disadvantaged Business Utilization and the prime contractor for review. Each will submit an official response within 30 days.
If the OSDBU and prime contractor agree with the suggested rating, the official simply will enter the rating into the government’s past performance system, and the subcontractor will be able to use the rating “to establish its past performance for a prime contract.”
However, if they disagree with the subcontractor’s suggested rating, the disagreeing party will submit a notice contesting the application, the official will provide the subcontractor with the notice, and the subcontractor will have 14 days to submit comments, rebuttals, and additional information. But, interestingly, the review will stop there. No decider will determine whether the subcontractor’s proposed rating was “right” or “wrong.” Instead, the official with then enter a neutral rating into the system along with the original application and any responses.
This pilot program may turn out to be a valuable tool for companies with excellent performance at the subcontract level but little or no prime contract experience. The program’s timing may be fortuitous, as well: it could dovetail nicely with the SBA’s new “All Small” mentor-protege program, as well as the existing SBA 8(a) and DoD mentor-protege programs. As a part of a mentor-protege agreement, a large mentor could subcontract work to the protege, then help the protege apply for (and hopefully receive) an excellent past performance rating for its work.
However, in practice, there would seem to be a few areas where things may go awry. First, since subcontractors are responsible for suggesting their own ratings, this introduces the obvious potential that a subcontractor could attempt to inflate its score–and put its prime contractor in the difficult position of disagreeing with its teaming partner. Also, on the flip side, the procedure allows for the prime contractor to potentially derail a future competitor by disagreeing with a reasonable suggested rating, and thereby ensure through simple disagreement, at best, a neutral rating. Because there is no adjudicative procedure, the subcontractor seems to have no recourse if the prime contractor doesn’t provide a fair response.
Then there is the question of why OSDBUs are expected to weigh in on the specific past performance scores assigned to small subcontractors. Agency OSDBUs are advocates for small businesses, and are involved in various ways throughout the acquisition cycle. That said, it seems unlikely that an OSDBU will, in the typical case, have sufficient knowledge of a particular small subcontractor’s quality of performance to pass independent judgment on what past performance score that subcontractor should receive. Involving agency OSDBUs ordinarily is a good thing, but requiring them to pass judgment on a subcontractor’s past performance might not be the best way to go about it.
Finally, there is the question of just what sort of weight the typical contracting officer will afford to these ratings. Although the rating comes from the contracting agency, the rating itself is established by the subcontractor, prime contractor, and OSDBU. It’s possible that some contracting officers will see these ratings as less persuasive than “ordinary” prime contractor ratings developed by government contracting officials.
Fortunately, Congress seems to have anticipated that the pilot program might need to be improved. The 2017 NDAA requires the GAO to assess the program one year after it is established and report various findings back to Congress, including “any suggestions or recommendation the Comptroller General has to improve the operation of the pilot program.”
The statute calls for the SBA to establish the pilot program, but doesn’t provide a specific deadline for the SBA to do so. Once the program is up and running, it will last for three years,, beginning on “the date on which the first applicant small business concern receives a past performance rating for performance as a first tier subcontractor.” At that point, it will be up to Congress whether to continue the pilot program.
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The number of 8(a) sole source contracts over $20 million awarded by the DoD has been “steadily declining since 2011,” when a new requirement was adopted requiring agencies to prepare written justifications of such awards.
According to a recent GAO report, such awards have dropped more than 86% compared to the period before the justification requirement took effect. The report states that much of the work that was previously awarded on a sole source basis has now been competed.
8(a) Program participants owned by Alaska Native Corporations or Indian Tribes (which the GAO collectively refers to as “tribal 8(a) firms”) are eligible to receive 8(a) sole source contracts for any dollar amount. In contrast, as the GAO writes, other 8(a) firms “generally must compete for contracts valued above certain thresholds: $4 million or $7 million, depending on what is being purchased.”
Section 811 of the 2010 National Defense Authorization Act did not eliminate the special sole source authority for tribal 8(a) firms, but required a contracting officer to issue a written justification and approval for any sole source 8(a) award over $20 million. This portion of the 2010 NDAA was incorporated in the FAR in March 2011. A regulatory update in late 2015 increased the threshold to $22 million, where it remains today.
In 2015, Congress directed the SBA to assess the impact of the justification requirement. The GAO’s recent report responds to that Congressional directive. The report demonstrates that large DoD 8(a) sole source awards have dropped dramatically since 2011. The GAO writes:
From fiscal years 2006 through 2015, the number of sole-source 8(a) contracts started to decline in 2011 and remained low through 2015, while the number of competitive contract awards over $20 million increased in recent years. Consistent with findings from our past reports, we found that sole-source contracts generally declined both number and value since 2011, when the 8(a) justification requirement went into effect. DOD awarded 22 of these contracts from fiscal years 2011 through 2015, compared to 163 such contracts in the prior 5-year period (fiscal years 2006 through 2010).
In my eyes, this isn’t just a decline–it’s a dramatic drop in 8(a) sole source awards of 86.5% from one five-year period to the next.
The GAO stated that there is a variety of reasons for the drop, including “a renewed agency-wide emphasis on competition” at DoD, as well as budget declines and declines in the sizes of requirements. DoD officials “had varying opinions about whether the 8(a) justification was a deterrent to awarding large sole-source 8(a) contracts.” Some of the officials GAO interviewed “noted that the 8(a) justification review process would deter them, while others said they would award a sole-source contract over $20 million if they found that only one vendor could meet the requirement.”
The report wasn’t all bad news for tribal 8(a) firms. The GAO wrote that competitive awards to tribal 8(a) firms have increased even as sole source awards have fallen:
Since 2011, tribal 8(a) firms have won an increasing number of competitively awarded 8(a) contracts over $20 million at DOD. Although these firms represent less than 10 percent of the overall pool of 8(a) contractors, the number of competitively awarded DOD contracts over $20 million to tribal 8(a) firms grew from 26 in fiscal year 2011–or 20 percent–to 48 contracts in fiscal year 2015–or 32 percent of the total. In addition, since 2011, tribal 8(a) firms have consistently won higher value awards than other 8(a) firms for competitive 8(a) contracts over $20 million. In fiscal year 2015, the average award size of a competed 8(a) contract to a tribal 8(a) firm was $98 million, while other 8(a) firms had an average award of $48 million.
Despite the good news on the competitive front, tribal advocates are likely to see the GAO report as confirmation of what many have already assumed: that Section 811 of the 2010 NDAA has had a significant negative effect on sole source awards to 8(a) firms owned by ANCs and Indian tribes. Alaska Congressman Don Young has included language in the 2017 NDAA to repeal Section 811. Congressman Young included similar language in the 2016 NDAA, but it was removed from the final bill. We’ll see what happens this year.
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The VA has released an Acquisition Policy Flash providing guidance to VA Contracting Officers on implementing the U.S. Supreme Court’s decision in Kingdomware Technologies, Inc. v. United States.
The Policy Flash suggests that the VA is, in fact, moving quickly to implement the Kingdomware decision–and if that’s the case, it is good news for SDVOSBs and VOSBs.
The Policy Flash begins by reiterating the Supreme Court’s major holdings: namely, that the Rule of Two applies to orders placed under the GSA Schedule, and applies even when the VA is meeting its SDVOSB and VOSB subcontracting goals. The Policy Flash states that the VA “will implement the Supreme Court’s ruling in every context where the law applies.”
As a general matter, the Policy Flash instructs Contracting Officers to conduct robust market research to ensure compliance with the Rule of Two. The Policy Flash continues:
If market research clearly demonstrates that offers are likely to be received from two or more qualified, capable and verified SDVOSBs or VOSBs and award will be made at a fair and reasonable price, the Rule of Two applies and the action should be appropriately set-aside in the contracting order of priority set forth in VAAR 819.7004. Contracting officers shall also ensure SDVOSBs or VOSBs have been verified in VIP before evaluating any offers or making awards on an SDVOSB or VOSB set-aside. Supporting documentation must be maintained in the contract file in the Electronic Contract Management System (eCMS).
With respect to acquisitions currently in the presolicitation phase, Contracting Officers are to continue with existing SDVOSB and VOSB set-asides. However, “f the original acquisition strategy was not to set-aside the acquisition to SDVOSBs or VOSBs, a review of the original market research should be accomplished to confirm whether or not the ‘Rule of Two’ was appropriately considered . . ..” If a review finds that the Rule of Two is met, “the action shall be set-aside for SDVOSBs or VOSBs, in accordance with the contracting order of priority set forth in VAAR 819.7004.”
Perhaps most intriguingly, the VA is instructing Contracting Officers to apply the Kingdomware decision to requirements that are in the solicitation or evaluation phase. For these requirements, “[a] review of the original market research and VA Form 2268 shall be accomplished to confirm whether or not the ‘Rule of Two’ was appropriately considered . . ..” If this review finds that ther are two or more SDVOSBs or VOSBs, “an amendment should be issued that cancels the solicitation.” However, the agency can continue with an existing acquisition if there are “urgent and compelling circumstances” and an appropriate written justification is prepared and approved.
The VA apparently will not, however, apply Kingdomware to requirements that have been awarded to non-veteran companies, even where a notice to proceed has not yet been issued. The Policy Flash sates that “Contracting officers shall coordinate with the HCA, OGC and OSDBU and be prepared to proceed with issuing the notice to proceed if issued within 30 days of this guidance.”
Overall, the Policy Flash seems like a positive step for veterans–both in terms of the speed with which it was issued, and in the decision to apply Kingdomware to existing solicitations, except where an award has already been made.
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Picture this scenario: the government hires your company to do a job; you assign one of your best employees to lead the effort. He or she does such a good job that the government hires your employee away. The government then drags its feet on approving your proposed replacement and refuses to pay you for the time when the position was not staffed–even though the contract was fixed-price.
The scenario is exactly what happened to a company called Financial & Realty Services (FRS), and according to the Civilian Board of Contract Appeals, FRS wasn’t entitled to its entire fixed-price contract amount.
In Financial & Realty Services, LLC, CBCA No. 5354, 16-1 BCP ¶ 36472 (Aug. 18, 2016), FRS held a GSA Schedule contract for facilities maintenance and management services. The underlying Schedule contract included FAR 52.212-4 (Instructions to Offerors–Commercial Items).
In 2013, as part of that contract, GSA awarded FRS a task order to manage some federal buildings in the Dallas/Fort Worth [Texas] Service Center, Fort Worth Field Office. The task order, at its most basic, called for FRS to provide a property manager.
The task order was priced in firm fixed annual amounts, and GSA agreed that FRS could invoice in fixed monthly amounts.
Important to later events, the task order required that the property manager to be able to obtain a National Agency Check with Inquiries (NACI) clearance within three months of award and maintain it through the life of the contract. For the first year or so of performance, a FRS employee served in the property manager position. Then, in October 2014, the government solicited and hired the employee away, to do basically the same job he was doing for FRS.
A month later, FRS submitted a potential replacement to GSA, but that candidate took another job in the intervening time before the government gave FRS word that it had approved his/her NACI clearance. FRS then offered a second and a third option in January and February 2015. Finally, in March, the third potential replacement became the property manager.
FRS later submitted invoices for $49,280, seeking payment for the time between October 2014 and March 2015. GSA refused to pay, so FRS filed a claim with the contracting officer seeking payment of the disputed amount. The contracting officer denied the claim, so FRS appealed the denial to the CBCA, alleging that GSA “breached its contract with FRS by thwarting or precluding FRS' performance of the contract and by failing to pay the full contract price.”
GSA moved for the case to be dismissed. In its motion to dismiss, GSA argued there was no factual basis to determine that GSA had acted improperly.
FRS conceded that it did not actually provide a property manager during the relevant time frame. As one might expect, however, FRS argued that the task order was fixed-price (meaning, FRS said, that the government agreed to pay regardless of whether the position was staffed), and that the government actively prevented FRS from performing.
The CBCA disagreed. It pointed out that FAR 52.212-4(i) states that “[p]ayment shall be made for items accepted by the ordering activity that have been delivered to the delivery destinations set forth in this contract.” The CBCA continued:
Notwithstanding the task order’s “fixed price,” GSA was obligated to pay only for services that were delivered and accepted. Whether GSA could “supervise” the FRS employees who performed the services is immaterial. In light of the complaint’s allegations that FRS did not staff the task order during the months in dispute, the allegation that GSA “fail[ed] to pay the full Contract price” for that same period . . . does not state a claim on which the Board could grant relief.
As for the fact that the GSA hired FRS’s property manager, the CBCA wrote that FRS “identifies no factual basis to suspect that GSA did anything inconsistent with the normal federal hiring process.” The CBCA determined, “we do not see how an otherwise lawful recruiting or hiring action that an agency was not contractually barred from taking–which is all that has been plausibly alleged–could constitute undue interference entitling a contractor to be paid for work it did not perform.”
Finally, the Board held that GSA had not breached the contract by failing to timely approve a replacement property manager. The CBCA noted that the contract did not include “a contractual duty on GSA’s part to clear job candidates within a specified time . . . .” Under the circumstances, the CBCA found the delays in clearance to be reasonable.
The CBCA dismissed the appeal.
As an impartial observer, it is easy to have sympathy for FRS. It did nothing wrong. In fact, it seemingly did everything right. It staffed the position with someone so good that the government poached the worker away within a year. It suggested multiple replacements, at least one of which took a different job while the government was still in the process of authorizing clearance. It certainly would seem like FRS had reason to be upset, especially since the task order was fixed-price.
But let’s be real here. Fixed-price or not, the government isn’t too keen to pay for something it doesn’t receive from a contractor. As Financial & Realty Services demonstrates, that policy may apply even when the government itself causes the contractor to be unable to deliver.
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To encourage joint venturing, the SBA’s size regulations provide a limited exception from affiliation for certain joint venturers: a joint venture qualifies for award of a set-aside contract so long as each venturer, individually, is below the size standard associated with the contract (or one venturer is below the size standard and the other is an SBA-approved mentor, and they have a compliant joint venture agreement). In other words, the SBA ordinarily won’t “affiliate” the joint venturers—that is, add their sizes together—if the joint venture meets the affiliation exception.
Because of this special treatment, it can be easy for the venturers to assume that they are completely exempt from any kind of affiliation. But as the SBA Office of Hearings and Appeals recently confirmed, however, the exception isn’t nearly so broad.
The facts in Veterans Construction Coalition, SBA No. SIZ-5824 (Apr. 18, 2017) are relatively straightforward: AWA Business Corporation (an 8(a) company) and Megen Construction Company (a small business) formed a joint venture called Megen-AWA 2 (“MA2”), to bid on and perform various construction projects at Wright-Patterson Air Force Base, under an 8(a) set-aside solicitation. The solicitation in question was issued under NAICS code 236220 (Commercial and Institutional Building Construction), with a corresponding $36.5 million size standard.
After evaluating competitive proposals, the Air Force announced that MA2 was the apparent awardee. An unsuccessful competitor filed a size protest, arguing that AWA and Megan were affiliated in various ways, including identity of interest (as the companies were owned by brothers), common management (the brother who owned AWA used to be vice president of Megen), and totality of the circumstances (the companies had worked together under other joint ventures before).
In response to these allegations, MA2 argued, in part, that it qualified as a small business because AWA and Megen both fell below the solicitation’s $36.5 million size standard, as required by the joint venture exception from affiliation. The SBA Area Office agreed, but went a step farther: it held that because AWA and Megan were parties to a joint venture, they could not be affiliated on the “general affiliation” grounds of identity of interest, common management, or totality of the circumstances. The SBA Area Office issued a size determination finding MA2 to be an eligible small business.
On appeal, OHA asked the SBA Office of General Counsel to comment on the breadth of the joint venture exception from affiliation found in 13 C.F.R. § 121.103(h)(3). The SBA Office of General Counsel wrote that the provision “created an exception to affiliation on the basis of participation in a joint venture.” The provision does not create a general exemption to affiliation for joint ventures—“[t]hat is, firms exempted from joint venture affiliation . . . still could be found to be affiliates for reasons other than those set forth in § 121.103(h).”
OHA agreed with the Office of General Counsel. OHA wrote that the affiliation exemption at issue “applied to ‘affiliation under paragraph (h),’ which is affiliation based on joint ventures. Logically, then, the exception was confined to contract-specific affiliation based on joint ventures and did not extend to issues of general affiliation[.]” Because the Area Office did not consider the general affiliation allegations (like identity of interest, common management, and totality of the circumstances), OHA remanded to the Area Office for additional analysis.
Sometimes, small businesses think that their participation in a joint venture serves as a broad exemption from affiliation with their partner. Veterans Construction confirms this isn’t true—joint venture partners can still be deemed affiliated for reasons other than their participation in the joint venture. Knowing when such affiliation might be found—and taking steps to minimize any indicia of affiliation—just might save a contract award.
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A contractor’s performance of extra work outside the scope of the contract may go uncompensated if a contractor does not receive appropriate authorization in accordance with the contractual terms.
A Court of Federal Claims decision reinforced that a contractor should only perform work required under the terms of the federal contract or directed by an authorized government agent in accordance with the contractual terms. And importantly, a Contracting Officer’s Representative isn’t always authorized to order additional work–even if that person acts as though he or she has such authority.
The Court’s decision in Baistar Mechanical, Inc., v. United States, No. 15-1473C (2016) involved a ground maintenance and snow removal services contract for the Armed Forces Retirement Home’s property in Washington, D.C., which included 270-acre property providing residence to several hundred retired military members. Baistar successfully bid on and was awarded the contract, which was executed in December 2011. The contract contemplated a five-year period of performance beginning on December 16, 2011.
Baistar alleged that, while it was working on the site, two Contracting Officer’s Representatives requested Baistar’s assistance with the planning and design of the current boiler plant and future plants at the Retirement Home. Baistar provided the assistance, but was not selected as the contractor for the plant projects. (Although the issue wasn’t raised in the Court’s decision, it’s not entirely clear Baistar would have been eligible for those projects: its role in the planning and design sounds an awful lot like a “biased ground rules” organizational conflict of interest under FAR 9.505-2). Baistar wasn’t paid for its planning and design assistance.
Baistar also alleged that, throughout the period of performance, Baistar performed various other services at the behest of CORs, but wasn’t paid for those services. For example, Baistar contended that the CORs directed Baistar to perform various snow and ice removal services outside the contract.
In July 2015, the government terminated Baistar for default. Baistar then filed a series of claims seeking payment for the extra work Baister believed that it had been asked to perform. After the government denied Baistar’s claims, Baistar filed an appeal with the U.S. Court of Federal Claims.
The government moved to dismiss Baistar’s allegations related to work allegedly ordered by the CORs. The government argued that, under the terms of the contract, the CORs lacked authority to order additional work.
Specifically, the contract provided:
Any additional services or a change to work specified which may be performed by the contractor, either at its own volition or at the request of an individual other than a duly appointed [contracting officer], except as may be explicitly authorized in the contract, will be done at the financial risk of the contractor. Only a duly appointed [contracting officer] is authorized to bind the [g]overnment to a change in the specifications, terms, or conditions of this contract.
The contract added that the contracting officer’s representatives did “not have authority to issue technical direction that…[c]hanges any of the terms, conditions, or specification(s)/work statement of the contract.” (incorporating and quoting DFARS §1052.201-70(c)).
The Court of Federal Claims wrote that “a government agent can bind the government if the agent possesses express or implied actual authority.” No implied authority will exist “when the action taken by the government agent contravenes the explicit terms of the governing contract.” Further, when a contractor works with or enters into an agreement with a government agent, the contractor is responsible for determining whether that agent can effectively bind the government.”
In this case, “[t]he express provisions of the ground maintenance contract grant exclusive authority to the contracting officer, not the representatives, to make any changes regarding scope of worth.” The Court continued:
[T]he . . . contracting officer may have delegated management authority to its representatives, but that delegation was limited by the contract. The contract’s explicit terms gave the contracting officer exclusive authority to order out-of-scope work, and barred the representatives from implied authority to do the same. The fact that the representatives allegedly acted as if they had authority, or even believed they had authority, is insufficient.
The Court granted the government’s motion to dismiss several of Baistar’s causes of action.
When contractors are engaged in day-to-day performance of a government contractor, they often work closely with CORs, technical representatives, contracting specialists, and other agency officials who don’t hold the title “contracting officer.” In fact, it’s not uncommon for the contractor to have very little contact with the contracting officer, which apparently was the case for Baistar.
But even when the contracting officer isn’t involved in the day-to-day work, and even when a COR or other representative acts as though he or she has the authority to order new work or changed work, a contractor must tread carefully. As the Baistar case demonstrates, the government ordinarily isn’t liable for extra work or changed work performed at the behest of government officials who lack appropriate authority–and when it comes to who possesses appropriate authority, the terms of the contract govern.
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An agency’s decision to award a contract as an 8(a) sole source is a “business decision” for which the agency has broad discretion–and a potential protester challenging the agency’s use of that discretion will have an uphill battle.
In a recent bid protest decision, the GAO confirmed that government officials are presumed to act in good faith, and that the presumption extends to the decision to award an 8(a) sole source contract instead of competing the work in question.
The GAO’s decision in NTELX, Inc., B-413837 (Dec. 28, 2016) involved a Consumer Product Safety Commission procurement for the operation and maintenance of CPSC’s international trade data system risk assessment methodology (“RAM”) software system.
In 2010, the CPSC awarded an 8(a) sole source contract for the development of the initial RAM system. NTELX, Inc. was a subcontractor under the original contract, and developed the system using its proprietary software. The CPSC subsequently awarded a second contract, also as an 8(a) sole source, for the development of a “RAM 2.0” system. The second contract was awarded to TTW Solutions, Inc., an 8(a) Program participant. Unlike the first contract, the RAM 2.0 contract used open source software. NTELX served as a subcontractor to TTW.
In 2016, the CPSC awarded a new 8(a) sole source contract to TTW, this time for the continued operation and maintenance of the RAM 2.0 contract. Apparently the relationship between TTW and NTELX had soured, and NTELX was not offered a subcontract.
NTELX filed a GAO bid protest challenging the new 8(a) sole source award to TTW. NTELX argued that the CPSC acted in bad faith and violated the FAR’s competition requirements by making an 8(a) sole source award to TTW. NTELX argued that it was the only contractor that could successfully perform the work, and that an award to TTW was irrational.
The GAO noted that 8(a) contracts may be awarded “on either a sole source or competitive basis.” Further, “because of the broad discretion afforded the SBA and the contracting agencies under the applicable statute and regulations, our review of actions under the 8(a) program generally is limited to determining whether government officials have violated regulations or acted in fraud or bad faith.” Government officials “are presumed to act in good faith and a protester’s claim that contracting officials were motivated by bias or bad faith must be supported by convincing proof; our Office will not attribute unfair or prejudicial motives to procurement officials on the basis of inference or supposition.”
In this case, the CPSC stated that TTW was capable of performing the contract; the GAO declined to second-guess the CPSC’s determination in that regard. “Therefore,” the GAO wrote, “although NTELX may disagree with the agency’s business decision to award TTW an 8(a) sole source contract for RAM 2.0, it has failed to demonstrate that the agency has engaged in any fraud or bad faith.”
The GAO denied NTELX’s protest.
So long as a procuring agency abides by the inherent limitations of the 8(a) sole source program–most notably, the dollar limitations–the agency (with the SBA’s approval) has broad discretion to choose to award an 8(a) sole source contract. As the NTELX, Inc. decision demonstrates, a protester trying to make the case that the agency abused its discretion will face a difficult challenge.
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Joint ventures can be formally organized as limited liability companies–and that should come as no surprise, given how often joint ventures use the LLC form these days.
In a recent size appeal decision, the SBA Office of Hearings and Appeals rejected the argument that, because a company was formed as an LLC, its size should not be calculated using the special rule for joint ventures. Instead, OHA held, the LLC in question was clearly intended to be a joint venture, and the fact that it was an LLC didn’t preclude it from being treated as a joint venture.
OHA’s decision in Size Appeals of Insight Environmental Pacific, LLC, SBA No. SIZ-5756 (2016) involved a NAVFAC solicitation for environmental remediation at contaminated sites. The solicitation was issued under NAICS code 562910 (Environmental Remediation Services) with a corresponding size standard of 500 employees.
After reviewing competitive proposals, NAVFAC announced that Insight Environmental Pacific, LLC had been selected for award. Two unsuccessful competitors then filed size protests challenging Insight’s small business status.
The SBA Area Office determined that Insight had been established as an LLC in 2013. Insight’s majority owner was Insight Environmental, Engineering & Construction, Inc.; the minority owner was Environmental Chemical Construction. IEEC was designated as the “small business member” and “Managing Member” of the LLC.
Insight’s operating agreement included a number of provisions indicating that Insight had been formed for a limited purpose. The operating agreement stated, among other things, that Insight’s purpose was to pursue the specific NAVFAC solicitation at issue, and perform the resulting contract if awarded. The operating agreement also stated that the LLC would be terminated if NAVFAC announced that Insight would not be awarded the environmental remediation contract.
The SBA Area Office cited the SBA’s affiliation regulations, which define a joint venture as “an association of individuals and/or concerns with interests in any degree or proportion consorting to engage in and carry out no more than three specific or limited-purpose business ventures for joint profit over a two year period, for which purpose they combine their efforts, property, money, skill, or knowledge, but not on a continuing or permanent basis for conducting business generally.” The SBA Area Office wrote that the operating agreement indicated that Insight was a joint venture, and pointed out that Insight’s own proposal referred to it as a “joint venture” in three places. The SBA Area Office determined that Insight was a joint venture.
Under the SBA’s prior affiliation regulations, which applied to this procurement, the size of a joint venture ordinarily was determined by adding the sizes of the members of the joint venture. Applying this affiliation regulation, the SBA Area Office determined that Insight was ineligible for the NAVFAC contract. (As SmallGovCon readers know, the SBA recently updated its affiliation regulations to specify that a joint venture’s size is determined by comparing the size of each member, individually, to the relevant size standard. Even if this change had applied to Insight, it presumably wouldn’t have altered the SBA Area Office’s analysis, because ECC apparently was a large business).
Insight filed a size appeal with OHA. Insight argued that because it was an LLC, the SBA Area Office shouldn’t have treated it as a joint venture. Instead, Insight contended, the SBA Area Office should have applied the ordinary affiliation rules for other entities. Under these rules, Insight said, it would be treated as a small business because its minority member, ECC, couldn’t control the company.
OHA cited the regulatory definition of a joint venture, and then quoted another part of the SBA’s affiliation regulations, which states that a joint venture “may (but need not) be in the form of a separate legal entity . . ..” OHA wrote that Insight “falls squarely within this definition.” OHA pointed out that Insight was created for the “‘sole and limited purpose’ of competing for and performing the subject NAVFAC PAcific procurement” and that the LLC would terminate if Insight was not awarded the contract. “It is therefore clear,” OHA wrote, “that [Insight] is not a business operating on ‘a continuing or permanent basis for conducting business generally,’ but rather is a temporary association of concerns engaging in a limited-purpose business venture for joint profit.”
OHA explained that “the fact that [Insight] is organized as an LLC does not alter this conclusion.” OHA noted that the “regulation specifically states that a joint venture may or may not be organized as a separate legal entity,” and in commentary adopting the regulation, the SBA stated that a joint venture could use the LLC form. OHA also noted that its own prior case law “has recognized that entities structured as LLCs may still be joint ventures with the joint venture partners affiliated.” OHA denied Insight’s size appeal.
In the world of government contracting, joint ventures are commonly formed as LLCs. Insight Environmental Pacific confirms that when an entity meets the definition of a joint venture, it will be treated as a joint venture–even if the entity is an LLC.
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The 2017 National Defense Authorization Act, if signed into law, includes a few changes designed to help small business subcontractors. Among those changes, the bill, which has recently been approved by both the House and Senate, includes language designed to help ensure that large prime contractors comply with the Small Business Act’s “good faith” requirement to meet their small business subcontracting goals.
Section 1821 of the 2017 NDAA is called “Good Faith in Subcontracting,” and is another Congressional effort to put teeth into the subcontracting goals required of large prime contractors (Congress took a crack at this same subject in the 2013 NDAA). The 2017 NDAA makes a handful of additional changes to the law, all of which should help ensure small business subcontracting goals are met.
The 2017 NDAA strengthens the current statutory language by specifying that a large prime contractor is in breach of its prime contract is it fails to provide adequate assurances of its intent to comply with a subcontracting plan (including, as requested, by providing periodic reports and other documents). The statute also provides that agency Offices of Small and Disadvantaged Business Utilization (OSDBUs) will review each subcontracting plan “to ensure that the plan provides maximum practicable opportunity for small business concerns to participate in the performance of the contract to which the plan applies.”
Perhaps most important, the 2017 NDAA requires the SBA to provide a list of examples of failures to make good faith efforts to utilize subcontractors. Such a list should provide guidance to large primes to know specifically what sort of activities would run afoul of the good faith requirement of the Small Business Act. What’s more, such guidance should prevent large primes from pleading ignorance, at least with regards to the provided list of specific examples. The guidance, however, may not come for awhile. The 2017 NDAA gives the SBA 270 days from enactment to put the list of examples together.
The provisions of Section 1821 should be welcomed by small businesses subcontractors, some of whom have complained about a perceived lack of government emphasis on ensuring that primes make good faith efforts to achieve their subcontracting goals. And given the recent Congressional interest in subcontracting plans, it wouldn’t be surprising if additional enforcement mechanisms were proposed in the near future.
2017 NDAA: The National Defense Authorization Act for Fiscal Year 2017 has been approved by both House and Senate, and will likely be signed into law soon. It includes some massive changes as well as some small but nevertheless significant tweaks sure to impact Federal procurements in the coming year. For the next few days, SmallGovCon will delve into the minutia to provide context and analysis so that you do not have to. Visit smallgovcon.com for the latest on the government contracting provisions of the 2017 NDAA.
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When issues arise in performance of a federal contract, a contractor may seek redress from the government by filing a claim with the contracting officer. However, commencing such a claim may result in an exercise of patience and waiting by the contractor.
The Contract Disputes Act, as a jurisdictional hurdle for claims over $100,000, requires a contractor to submit a “certified claim” to the agency. The CDA also requires the contracting officer, within sixty days of receipt of a certified claim, to issue a decision on that claim or notify the contractor of the time within which the decision will be issued.
That second part of the equation can lead to some frustration on the part of contractors. As seen in a recent Civilian Board of Contract Appeals decision, a contracting officer may, in an appropriate case, extend the ordinary 60-day time frame by several months.
In Stobil Enterprise v. Department Veterans Affairs, CBCA No. 5616 (2017), the VA awarded Strobil a contract to provide housekeeping and dietary services for an inpatient living program at a VA facility. After encountering contractual issues, Stobil initially filed a claim in the amount of $166,000. The VA denied this claim, and Stobil appealed. The CBCA dismissed Stobil’s appeal because the underlying claim hadn’t included the required certification.
Stobil then went back to the drawing board and filed a certified claim, “based on the same contracts and similar issues as those presented” in the first claim. But the certified claim was in the amount of $321,288.20, plus a whopping $2.3 million in interest. Stobil filed its certified claim on November 28, 2016.
By way of a January 27, 2017 letter, the contracting officer notified Stobil that the contracting officer would issue a decision on the certified claim by March 31, 2017. According to the contracting officer, the decision would be issued about four months after Stobil had filed its claim–or about twice as long as the 60-day time frame set forth in the CDA.
Apparently frustrated with the delay, Stobil requested the CBCA direct the contracting officer to issue its decision sooner. The CBCA declined this request.
In its rationale, the CBCA noted that the CDA doesn’t require a contracting officer to issue a decision within 60 days, but instead provides the contracting officer the option of notifying the contractor of the time within which the decision will be issued. The CDA doesn’t provide an outer limit on the period in which the decision may be extended beyond 60 days. Instead, the question is whether the delay was reasonable in light of the specific facts and circumstances of the case.
The CBCA continued:
Typically, in evaluating undue delay and reasonableness [of the date proposed by the contracting officer for issuance of a decision on a claim], a tribunal considers a number of factors, including the underlying claim’s complexity, the adequacy of contractor-provided supporting information, the need for external technical analysis by experts, the desirability of an audit, and the size of and detail contained in the claim.
The CBCA explained that while the VA had previously issued a decision on Stobil’s claims involving similar matters,”Stobil nearly doubled the amount of its claim from its former appeal . . . and is also now seeking around $2.3 million in interest.” This is, the CBCA said, “by no means a slight up-tick in money sought, such that the contracting officer should be able to rely primarily on whatever documentation Stobil previously submitted” with its initial claim. The CBCA agreed with the VA that with the significantly increased monetary demand and possibility of new items requiring review, the contracting officer was not “unduly delayed” in issuing a decision. The CBCA concluded that the VA’s timeline for issuing a decision on the certified claim was “reasonable, constituting only a modest delay.”
It’s commonly understood that a claim filed pursuant to the Contract Disputes Act must be decided within 60 days. But as the Stobil Enterprise case demonstrates, agencies have the discretion to extend the 60-day period significantly, provided that the extension is deemed “reasonable.” Here, the contracting officer essentially doubled the underlying 60-day period, but was guilty of nothing more than a “modest delay.” Contractors availing themselves of the claims process should be prepared to play the waiting game.
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The SBA has published a list of active “All Small” mentor-protege agreements. The list, which is available on the SBA’s website, is dated April 5, 2017. It’s not clear how often the SBA intends to update the list.
The April 5 list reveals that there are approximately 90 active All Small mentor-protege agreements, covering a wide variety of primary industry classifications. All major socioeconomic categories (small business, 8(a), SDVOSB, HUBZone, EDWOSB and WOSB) are represented.
There’s no reason why mentor-protege pairings should be a secret. Kudos to the SBA for publishing the list, which will be useful to contracting officers and industry alike (as well as those of us who are simply curious by nature).
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Having been a part of the federal contracting community for close to 30 years, I’ve seen quite a few changes in policy and process that have both improved and degraded the ability of small business concerns to participate as contractors and subcontractors. I’m not referring solely to changes where the language targeted small business, I’m also including those intending to change how business is done based on a specific commodity, contract cost type, procurement method, agency mission or government-wide initiative.
In this, my first contribution to GovCon Voices, I’m taking a look back at recent proposed changes that resulted in lots of conversations with my friend Steve Koprince, a slew of articles and blogs and way too many anxious moments awaiting the outcomes. This is the first of a three part series I’m calling ‘The Good, the Bad and the Just Plain Ugly Changes That Almost Were!’
The Just Plain Ugly
The 2017 NDAA was chock full of changes that included:
DoD having the option to forego price or cost evaluation for certain multiple-award contracts;
GAO being mandated to provide Congress a list of the most common grounds for sustaining protests;
A pilot program for certain small subcontractors to receive past performance ratings;
Requiring justification for ‘Brand Name or Equivalent’ purchases, and;
Strengthening small business subcontracting plan enforcement, just to name a few.
One of the intended changes that died in conference was the provision introduced as Section 838 of the Senate version. Its name was “Counting of major defense acquisition program subcontracts toward small business goals.” and the very negative effects of this rule would be catastrophic to small business, if enacted.
Not familiar with Major Defense Acquisition Programs or MDAP? Think of program names like Global Hawk, the Presidential Helicopter, Arleigh Burke Class Destroyer, Littoral Combat Ship and more. Each of these and numerous other MDAP programs are critical to our Nation’s security. As a result, collectively thousands of small business subcontractors capturing tens of billions of dollars in revenues are engaged. Had this provision made it into the 2017 NDAA, the Department of Defense would be able to include 1st and 2nd tier subcontract dollars, reported by MDAP prime contractors, towards the Department’s overall small business set-aside goals. In short, DoD could reduce set-aside award dollars by replacing them with dollars that may have been awarded to small businesses via subcontracts.
The scenario represented potential lost dollars to small contractors starting in the area of $18,000,000,000 based on DoD’s FY16 OUSD Comptroller/CFO publication that indicated Major Defense Acquisition Programs (MDAPs) and Major Automated Information Systems (MAIS) accounted for 43% of the requested $177.7B. If we take 23% of $76B (the MDAP/MAIS portion of the OUSD FY16 request) what we end up with is the amount of set-aside obligations DoD would not have to issue in FY17 and beyond. The amount is effectively 1/3 of the dollars awarded to small business via set-aside or sole-source in FY2016. Let that sink in.
In the spaghetti western movie ‘The Good, the Bad and the Ugly’ there is a line I find very relevant to this legislative near-miss. It goes like this:
“In this world there’s two types of people my friend.
Those with loaded guns and those who dig. You dig.”
I’m beyond overjoyed this piece of legislation had to dig and I hope it stays buried.
Your comments and questions are always welcome! Stay tuned for ‘The Bad’ change that almost was.
Guy Timberlake, The Chief Visionary http://www.theasbc.org | @theasbcguy | @govconguy |@govconchannel
“The person who says it cannot be done should not interrupt the person doing it.”
Guy Timberlake, Chief Visionary Officer and Co-Founder,
The American Small Business Coalition, LLC
(410) 381-7378 x200 | firstname.lastname@example.org
‘Go-To’ Guy Timberlake is an accomplished veteran of federal contracting with nearly 30 years of experience, knowledge and relationships acquired in support of civilian, defense and intelligence agency programs since Operation Desert Storm. He’s called ‘Edutainer’ for his ability to make mundane discussions about business essential topics (like finding and winning federal contracts and subcontracts!) interesting, and presenting them so they are practical and sticky. Most important is that Guy is a devoted husband, a proud father and loves pizza night with his family and friends. ‘Go-To-Guy’ is the nickname given to him by his defense customers in the 1990’s.
GovCon Voices is a regular feature dedicated to providing SmallGovCon readers with candid news, insight and commentary from government contracting thought leaders. The opinions expressed in GovCon Voices are those of the individual authors, and do not necessarily reflect the opinions of Koprince Law LLC or its attorneys.
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In determining whether a prime contractor and subcontractor are affiliated under the ostensible subcontractor rule, the SBA is supposed to consider the totality of the relationship between the parties. But when it comes to determining whether the ostensible subcontractor rule has been violated, not all components of the prime/subcontractor relationship are created equal.
In a recent decision, the SBA Office of Hearings and Appeals confirmed that there are “four key factors” that are strongly suggestive of ostensible subcontractor affiliation–especially if the subcontractor will perform a large percentage of the overall contract work.
OHA’s decision in Size Appeal of Charitar Realty, SBA No. SIZ-5806 (2017) involved a GSA solicitation for custodial, landscaping and grounds maintenance at two federal courthouses. The solicitation was issued as an 8(a) set-aside under NAICS code 561720 (Janitorial Services), with a corresponding $18 million size standard. The solicitation required, among other things, that offerors provide at least three past performance references, completed over the last three years, for similar work.
After evaluating competitive proposals, the SBA announced that Charitar Realty was the apparent successful offeror. An unsuccessful competitor then filed a size protest. Although the size protest was found to be untimely, the SBA believed that the protest raised valid concerns. The Director of the SBA’s Fresno District Office initiated his own size protest against Charitar.
Charitar’s proposal identified itself as the prime contractor and Zero Waste Solutions, Inc. as its subcontractor. ZWS was the incumbent contractor, but had graduated from the 8(a) Program and was not eligible for the follow-on contract.
The proposal stated that “the allocation of financial risk, responsibility, and profit sharing will be 51% [Charitar] and 49% [ZWS].” The proposal included three past performance references: two for ZWS and one for Charitar. The project performed by Charitar was much smaller in scope and value.
The proposed Project Manager was a current employee of ZWS, who had agreed to move to Charitar’s payroll if Charitar won the prime contract. Additionally, the SBA Area Office found that Charitar’s “entire workforce” would be hired from ZWS.
The SBA Area Office determined that Charitar was unusually reliant upon ZWS. The SBA Area Offices deemed the firms affiliated under the ostensible subcontractor rule. The affiliation caused Charitar to be ineligible for award.
Charitar appealed to OHA. Charitar argued that the SBA Area Office had erred by finding a violation of the ostensible subcontractor rule.
OHA began its opinion by reiterating that the ostensible subcontractor rule “provides that when a subcontractor is performing the primary and vital requirements of the contract, or when the prime contractor is unusually reliant upon the subcontractor, the two firms are affiliated for purposes of the procurement at issue.” The rule is intended ” to prevent [large] firms from forming relationships with small firms to evade SBA’s size requirements.”
To determine whether a relationship violates the ostensible subcontractor rule, the SBA Area Office “must examine all aspects of the relationship, including the terms of the proposal and any agreements between the firms.” However, OHA’s prior case law has “identified ‘four key factors’ that have contributed to the findings of unusual reliance.” OHA explained that those four factors are:
(1) the proposed subcontractor is the incumbent contractor and is ineligible to compete for the procurement; (2) the prime contractor plans to hire the large majority of its workforce from the subcontractor; (3) the prime contractor’s proposed management previously served with the subcontractor on the incumbent contract; and (4) the prime contractor lacks relevant experience and must rely upon its more experienced subcontractor to win the contract.
When these four factors are present, “violation of the ostensible subcontractor rule is more likely to be found if the proposed subcontractor will perform 40% or more of the contract.”
In this case, all four of the “key factors” were present. ZWS was “ineligible to submit its own proposal” under the solicitation. Charitar “will staff its portion of the contract almost entirely with personnel hired from ZWS.” Charitar proposed “a ZWS employee to manage the contract” as Charitar’s Project Manager. And although Charitar had some experience in the industry, Charitar produced no evidence that it had “ever performed” a contract of the size defined as “Similar Work” in the solicitation. Finally, ZWS was proposed to perform 49% of the work, “a larger proportion than the 40%” that heightens the risk of ostensible subcontractor affiliation.
OHA affirmed the SBA Area Office’s size determination.
Ostensible subcontractor affiliation is intensely fact-specific, and the SBA will examine the totality of the relationship between the parties. But as the Charitar Realty case demonstrates, the risk of ostensible subcontractor affiliation increases significantly where the “four key factors” identified in the case are present–particularly where the subcontractor will perform more than 40% of the work.
Because ostensible subcontractor affiliation is so fact-specific, it’s difficult to be 100% sure that any specific relationship will pass muster. That said, avoiding the four key factors will likely go a long way toward showing the SBA that there has been no ostensible subcontractor violation.
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I am back in Lawrence after a great trip to Huntsville, Alabama, where I spoke at the Redstone Edge Conference. My presentation focused on the recent major developments in small business contracting, including the changes to the limitations on subcontracting and the new universal mentor-protege program.
Many thanks to Courtney Edmonson, Scott Butler, Michael Steen, and the rest of the team at Redstone Government Consulting for putting together this impressive event and inviting me to participate. A big “thank you” as well to everyone who attended the presentation, asked great questions, and followed up after the event.
Next on my travel agenda, I’ll be in Wichita this Friday for a comprehensive half-day session on joint venturing and teaming for federal government contracts, sponsored by the Kansas PTAC. Hope to see you there!
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SDVOSB joint venture agreements will be required to look quite different after August 24, 2016. That’s when a new SBA regulation takes effect–and the new regulation overhauls (and expands upon) the required provisions for SDVOSB joint venture agreements.
The changes made by this proposed rule will affect joint ventures’ eligibility for SDVOSB contracts. It will be imperative that SDVOSBs understand that their old “template” JV agreements will be non-compliant after August 24, and that SDVOSBs and their joint venture partners carefully ensure that their subsequent joint venture agreements comply with all of the new requirements.
If you’ve been following SmallGovCon lately (and I hope that you have), you know that we’ve been posting a number of updates related to the SBA’s recent major final rule, which is best known for establishing a universal small business mentor-protege program. But the final rule also includes many other important changes, including major updates to the requirements for SDVOSB joint ventures. For those familiar with the requirements for 8(a) joint ventures, most of the new requirements will look familiar; the SBA states that its changes were intended to ensure more uniformity between joint venture agreements under the various socioeconomic set-aside programs.
The SBA’s final rule moves the SDVOSB joint venture requirements from 13 C.F.R. 125.15 to 13 C.F.R. 125.18 (a change of note primarily to those of us in the legal profession). But the new regulation is substantively very different than the old. Below are the highlights of the major requirements under the new rule. Of course (and this should go without saying), this post is educational only; those interested in forming a SDVOSB joint venture should consult the new regulations themselves, or consult with experienced legal counsel, rather than using this post as a guide.
In order to form an SDVOSB joint venture, at least one of the participants must be an SDVOSB, and must also be a small business under the NAICS code assigned to the procurement in question. The other joint venturer can be another small business, or the partner can be the SDVOSB’s mentor under the new small business mentor-protege program or the 8(a) mentor-protege program:
A joint venture between a protege firm that qualifies as an SDVO SBC and its SBA-approved mentor (see [Sections] 125.9 and 124.520 of this chapter) will be deemed small provided the protege qualifies as small for the size standard corresponding to the NAICS code assigned to the SDVO procurement or sale.
This piece of the new regulation appears to overturn a recent SBA Office of Hearings and Appeals decision, in which OHA held that a mentor-protege joint venture was ineligible for an SDVOSB set-aside contract because the mentor firm was not a large business.
Required Joint Venture Agreement Provisions
Under the new regulations, an SDVOSB joint venture agreement must include the following provisions:
Purpose. The joint venture agreement must set forth the purpose of the joint venture. This is not a change from the old rules.
Managing Member. An SDVOSB must be named the managing member of the joint venture. This is not a change from the old rules.
Project Manager. An SDVOSB’s employee must be named the project manager responsible for performance of the contract. This, too, is not a change from the old rules. Curiously, unlike in the rules governing small business mentor-protege joint ventures, the SBA doesn’t specify whether the project manager can be a contingent hire, or instead must be a current employee of the SDVOSB. The new regulation also doesn’t address OHA case law holding that a specific individual must be named in the agreement (i.e., it’s insufficient to simply state that “an employee of the SDVOSB will be the project manager.”) It’s unfortunate that the SBA didn’t address that issue; if the SBA agrees with OHA’s rulings, it would have been nice to have the regulations reflect this requirement so that SDVOSBs understand that a specific name is required.
Ownership. If the joint venture is a separate legal entity (e.g., LLC), the SDVOSB must own at least 51%. This is a change from the old rules, which don’t address ownership.
Profits. The SDVOSB member must receive profits from the joint venture commensurate with the work performed by the SDVOSB, or in the case of a separate legal entity joint venture, commensurate with its ownership share. This is a change from the old rule, which applies the 51% threshold to all SDVOSBs. To me, there is no good reason to distinguish between “informal” and “separate legal entity” joint ventures, especially since the SBA (elsewhere in its final rule) concedes that “state law would recognize an ‘informal’ joint venture with a written document setting forth the responsibilities of the joint venture partners as some sort of partnership.” In other words, an informal joint venture is a legal entity too, just not one that has been formally organized with a state government. In any event, the long and short of this change is that we can expect to see many more informal SDVOSB joint ventures. That’s because, using the informal form, the non-SDVOSB will be able to perform up to 60% of the work and receive 60% of the profits (see the discussion of work split below); whereas in a separate legal entity joint venture, the non-SDVOSB will be limited to 49% of profits, no matter how much work the non-SDVOSB performs.
Bank Account. The parties must establish a special bank account” in the name of the joint venture. This is a change from the old rule, which is silent regarding bank accounts. The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on an SDVOSB will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
Equipment, Facilities, and Other Resources. Itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. This is a change from the old rule, which doesn’t require this information to be set forth in an SDVOSB joint venture agreement. In a recent court decision, an 8(a) joint venture was penalized for providing insufficient details about these items—even though the contract in question was an IDIQ contract, making it difficult to provide a “detailed schedule” at the time the joint venture agreement was executed. Perhaps in response to that decision, the new regulations provide that “if a contract is indefinite in nature,” such as an IDIQ, the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
Parties’ Responsibilities. Specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture will meet the performance of work requirements set forth in the new rule. Again, if the contract is indefinite, a lesser amount of information will be permitted. This is an update from the old rule, which requires information on contract negotiation, source of labor, and contract performance, but does not require a discussion of how the SDVOSB joint venture will meet the performance of work requirements.
Ensured Performance. Obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer. This is not a change from the current rule.
Records. State that accounting and other administrative records of the joint venture must be kept in the office of the small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the small business managing venturer upon completion of the contract. These provisions, which are not included in the old rule, seem dated in the assumption that records will be kept in paper form; it instead would have been nice for the SBA to allow for more modern record-keeping, like a cloud-based records system that enables documents to be available in real-time to both parties.
Statements. Provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. This language, which was basically copied from the 8(a) program regulations, doesn’t specify who might be a “joint venture principal” in a world in which populated joint ventures have been eliminated. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract. I find these requirements a bit odd because, unlike for 8(a) joint ventures, the SBA doesn’t pre-approve SDVOSB joint ventures, nor does it seem that the SBA will review a particular SDVOSB joint venture agreement except in the case of a protest. So why the ongoing requirement for submitting financial records?
While I wish that every SDVOSB would call qualified legal counsel before setting up an SDVOSB joint venture, the reality is that many SDVOSBs attempt to cut costs by relying on joint venture agreement “templates” obtained from a teammate or even from questionable internet sources. Using SDVOSB joint venture agreement templates is risky enough under the old rules, but will be an even bigger problem after August 24, when all those old templates become severely outdated. I hope that all SDVOSBs become aware of the need to have updated joint venture agreements meeting the new regulatory requirements, but I won’t be surprised to see some SDVOSB joint ventures using outdated templates in the months to come–and losing out on SDVOSB set-asides as a result.
Performance of Work Requirements
In addition to setting forth many new and changed requirements for SDVOSB joint venture agreements, the new regulation also specifies that, for any SDVOSB contract, “the SDVO SBC partner(s) to the joint venture must perform at least 40% of the work performed by the joint venture.” That work “must be more than administrative or ministerial functions so that [the SDVOSBs] gain substantive experience.” The joint venture must also comply with the limitations on subcontracting set forth in 13 C.F.R. 125.6.
And that’s not all: the SDVOSB partner to the joint venture “must annually submit a report to the relevant contracting officer and to the SBA, signed by an authorized official of each partner to the joint venture, explaining how and certifying that the performance of work requirements are being met.” Additionally, at the completion of the SDVOSB contract, a final report must be submitted to the contracting office and the SBA, “explaining how and certifying that the performance of work requirements were met for the contract, and further certifying that the contract was performed in accordance with the provisions of the joint venture agreement that are required” under the new regulation.
Past Performance and Experience
Many SDVOSBs will groan at the new paperwork and reporting requirements established under the new regulation. But the SBA has inserted at least one provision that is a definite “win” for SDVOSBs and their joint venture partners: the new regulation requires contracting officers to consider the past performance and experience of both members of an SDVOSB joint venture. The regulation states:
When evaluating the past performance and experience of an entity submitting an offer for an SDVO contract as a joint venture established pursuant to this section, a procuring activity must consider work done by each partner to the joint venture as well as any work done by the joint venture itself previously.
Small businesses sometimes assume that agencies are required to consider the past performance and experience of the individual members of a joint venture–but until now, that wasn’t the case. True, many contracting officers considered such experience anyway, but there have been high-profile examples of agencies refusing to consider the past performance of a joint venture’s members. Of course, a joint venture is defined as a limited purpose arrangement, so it makes no sense to require the joint venture itself to demonstrate relevant past performance. This change to the SBA’s regulations is important and helpful.
The Road Ahead
After August 24, 2016, those old template SDVOSB joint venture agreements won’t be anywhere close to compliant, so SDVOSBs should act quickly to educate themselves about the new regulations and adjust any planned joint venture relationships accordingly. For SDVOSBs and their joint venture partners, the landscape is about to shift.
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Women-owned small businesses are increasingly seeking to become certified through one of four SBA-approved third-party WOSB certifiers. But which third-party certifier to use?
There doesn’t seem to be any single resource summarizing the basics about the four SBA-approved certifiers, such as the application fees, processing time, and documents required by each certifier. So here it is–a roundup of the key information for three of the four SBA-approved WOSB certifiers (as you’ll see, we’ve had some problems reaching the fourth).
First things first: why should WOSBs and EDWOSBs consider third-party certification?
As part of the 2015 National Defense Authorization Act, Congress eliminated self-certification for WOSB set-asides and sole sources. Despite the statutory change, the SBA continues to insist that WOSB remains a viable option indefinitely while the SBA figures out how to address Congress’s action. But can the SBA legally allow WOSBs to do the very thing that Congress specifically prohibited? I certainly have my doubts, particularly since the SBA has never explained the legal rationale for its position.
For WOSBs and EDWOSBs, third-party certification (which is still allowed following the 2015 NDAA) may be the safest option. There are currently four entities that the SBA has approved as third-party certifiers: the National Women’s Business Owners Corporation (NWBOC), Women’s Enterprise National Council (WBENC), the U.S. Women’s Chamber of Commerce (USWCC), and the El Paso Hispanic Chamber of Commerce (EPHCC). This post summarizes the cost, time, and application fees associated with three of those organizations.
After researching and speaking with three of the WOSB certifiers, we found that all three require a written application, and that the required supporting documents are largely similar. Anticipated processing times vary (and probably should be taken with a grain of salt, as no certifier wants to admit that it is slow). For all certifiers, the anticipated processing time from application to certification begins when a completed application is received. This point was reiterated time and again at each of the three certifiers we were able to reach. To facilitate the prompt consideration of an application, prospective WOSBs should make sure to submit all of the required documents and information the first time around; and to respond promptly if additional information is requested during the application process.
National Women’s Business Owners Corporation (NWBOC)
The NWBOC offers third-party certification to both WOSBs and EDWOSBs. All application information and documents needed are listed in the NWBOC’s application form, which is available on its website. The NWBOC also offer the option for potential WOSBs and EDWOSBs to purchase a tailored application kit to guide applicants through the process of applying. The fee to apply for certification is $400 at a minimum, and an applicant may be charged more if requests for more information are not met in a timely fashion. According to the NWBOC, the current processing time for certification is between 6-8 weeks. A completed application and all required documents must be mailed into the NWBOC before processing will begin.
Women’s Business Enterprise National Council (WBENC)
WOSB Certification through WBENC is free and very quick—for WBENC members. For companies that are already members of WBENC—especially those that are already certified as Women’s Business Enterprises (WBEs)—this option could be both the quickest and cheapest. For companies that are not members of WBENC, the cost for WBENC Membership starts at $350, and can go up based off of the applying company’s revenue. And although WBENC says that WOSB certification for its members is “virtually instant,” the process of becoming a member can take up to 90 days—which means that if a non-member elects to use WBENC, the application process could take 90 days or more. WBENC offers a WOSB application checklist on its website to aid in document production, as well as a guide to completing the application. WBENC suggests that the application be completed after document production, as it is done online and has a 90-day deadline from start to finish—and once it is submitted, no changes can be made. All documents required for the application, including the fee, must be provided before the application will be processed. WBENC only offers WOSB certification, not EDWOSB certification. Prospective EDWOSBs will need to look at another option.
The U.S. Women’s Chamber of Commerce
The USWCC offers WOSB and EDWOSB third-party certification, to both its members and non-members. According to the USCWCC’s website, certification takes between 15-30 days and costs $275 for Business and Supplier members and $350 for non-members. A possible bonus (or deterrent, for some) is that the entire application and document submission is completed online. The USWCC offers both a certification and document checklist and sample application on its website to aid applicants in document production and prepare them to answer the questions on the application, but it cannot be submitted in lieu of the online form. The USWCC also requires the application be completed in one sitting—it cannot be completed partially and saved to be completed later. This means that the applicant should be completely ready to apply prior to starting, or else risk getting almost done and being interrupted and then having to restart from the beginning.
The El Paso Hispanic Chamber of Commerce (EPHCC)
Unfortunately, we found that the EPHCC was difficult to contact, and we were unable to speak with any staffer regarding the EPHCC’s WOSB certification process. If we obtain information about the EPHCC, we will update this post to include it.
These four entities are currently the only ones approved by the SBA for third-party WOSB/EDWOB certification. While the SBA remains adamant that third-party certification remains viable indefinitely, women-owned businesses should decide for themselves whether they are comfortable with the SBA’s position. For women-owned businesses that decide to play it safe while the SBA addresses the 2015 NDAA, third-party certification is the way to go.
Molly Schemm of Koprince Law LLC was the primary author of this post.
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Greetings from Oklahoma, where I am wrapping up a busy week of travel that has included speaking engagements both at the Iowa Vendor Conference and The Indian Country Business Summit.
While I’ve been on the road, it has also been a noteworthy week in government contracting news. This week, SmallGovCon Week In Review takes a look at stories about the year end spending frenzy, the Freedom of Information Act may undergo major changes, DoD is barely exceeding 50% when it comes to meaningful competitions, and much more.
The projected federal contract spending is on a decidedly upward slant with two issues affecting the year-end spending frenzy. [American City & County]
What impact will the outcome of the presidential election have on the government contracting landscape? [GovBizConnect]
Federal agencies could soon face a new governmentwide guidance on how they respond to Freedom of Information Act requests, following an upcoming meeting in September. [Federal news Radio]
The Office of Federal Procurement Policy has launched a dashboard to hold agencies accountable to meet the goals in the category management memos. [Federal News Radio]
With worry that only 56.5 percent of the DoD’s contracted dollars involved a meaningful competition between two or more vendors, they have issued a series of corrective actions to reverse a downward slide that has been ongoing for nearly a decade. [Federal News Radio]
Several speculative conclusions can be made based on fiscal 2015 government contracting data and, according to one commentator, the outlook is not positive. [Federal News Radio]
The FAR Council published the final rule regarding the Fair Pay and Safe Workplaces Executive Order, which imposes a host of new obligations on government contractors, including an obligation to report various labor law violations during the bid and proposal process. [The Hill]
A former MCC Construction Company officer and owner pleads guilty to conspiring to defraud the government. [The United States Department of Justice]
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Earlier this year, the United States Supreme Court issued its decision in Kingdomware Technologies v. United States. As we’ve noted, this case was a monumental win for veteran-owned small businesses—it requires the Department of Veterans Affairs to set-aside solicitations for SDVOSBs or VOSBs where two or more such offerors will submit a proposal at a fair and reasonable price, even if that solicitation is issued under the Federal Supply Schedule.
A recent GAO decision suggests, however, that Kingdomware’s impact could be felt beyond the world of VA procurements. Indeed, the Supreme Court’s rationale in Kingdomware might compel every agency to set aside any FSS order (or any other order, for that matter) valued between $3,000 and $150,000.
In Aldevra, B-411752.2—Reconsideration (Oct. 5, 2016), the protester relied on Kingdomware to challenge a prior GAO decision that an agency is not required to set-aside an FSS order for small businesses. At issue in the initial protest was an Army National Guard Bureau solicitation under the FSS, seeking an ice machine/water dispenser (valued at $4300). According to Aldevra, the Small Business Act required the solicitation to be set aside for small businesses.
Under the Small Business Act,
Each contract for the purchase of goods and services that has an anticipated value greater than [$3,000] but not greater than [$150,000] shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and are competitive with regard to the quality and delivery of the goods or services being purchased.
15 U.S.C. § 644(j); 80 Fed. Reg. 38294 (July 2, 2015) (increasing dollar amounts).
Because the solicitation was valued at more than $3,000 but less than $150,000, Aldevra argued that the Small Business Act required the Army to apply the “rule of two” under the Small Business Act.
GAO disagreed, and denied Aldevra’s initial protest. In doing so, it relied on Section 644(r) of the Small Business Act—that section, according to GAO, makes an agency’s use of set-aside procedures for FSS contracts discretionary. GAO further explained that the SBA’s regulations give contracting officers discretion—but do not command them—to set aside orders under multiple-award contracts.
Some eight months after GAO’s initial decision, the Supreme Court issued its Kingdomware decision, interpreting the effect of the Veterans Benefits, Healthcare, and Information Technology Act of 2006’s Rule of Two. According to the Act:
[A] contracting officer of the Department shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.
38 U.S.C. § 8127(d).
The mandatory phrasing of the statute was crucial: the Court held that “Congress’ use of the word ‘shall’ demonstrates that [the Act] mandates the use of the Rule of Two in all contracting before using competitive procedures.” The Court, moreover, specifically found that FSS orders are contracts.
Aldevra jumped on the Kingdomware decision and sought to apply its logic to the Small Business Act. It asked GAO to reconsider its initial decision, arguing that the Supreme Court’s decision compels GAO to find that Section 644(j) similarly required the Army National Guard’s solicitation to be set aside for small businesses.
GAO denied the request. But it did so on a technicality—it ruled that Kingdomware was not made retroactive by the Court, so it could not be applied to the prior decision in Aldevra’s protest. Thus, the issue of whether Section 644(j) requires all solicitations valued between $3,000 and $150,000 be reserved for small businesses is yet to be decided.
Aldevra has successfully advanced the interests of small businesses at GAO before—it was the first to challenge the VA’s failure to follow the Rule of Two, which ultimately led to the Kingdomware decision. Aldevra’s argument here could have the same reach: under Kingdomware’s logic, the Small Business Act might compel all solicitations valued between $3,000 and $150,000 be reserved for small businesses.
Aldevra isn’t alone in its belief that the FAR’s “rule of two” must be applied to orders under the FSS and other acquisition vehicles. The SBA agreed with Aldevra’s interpretation during both its initial protest and request for reconsideration. The support of the SBA–which has considerable discretion to interpret the Small Business Act–could be crucial in the future.
Because Aldevra was decided on a technicality, the important question Aldevra raised remains to be answered. But there is little doubt that before long, Aldevra or another protester will revisit this issue, in connection with a post-Kingdomware acquisition. What happens then could be every bit as important to small businesses as Kingdomware was for SDVOSBs and VOSBs.
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Good news for small business looking to break into Department of Defense contracting: the 2017 NDAA establishes a new prototyping pilot program for small businesses and nontraditional defense contractors to develop new and innovative technologies.
The DoD is putting its money where its mouth is: the new pilot program is funded with $250 million from the rapid prototyping fund established by last year’s NDAA.
The new pilot program is officially called the “Nontraditional and Small Contractor Innovation Prototyping Program.” Under the program, the authorized funds are to be used to “design, develop, and demonstrate innovative prototype military platforms of significant scope for the purpose of demonstrating new capabilities that could provide alternatives to existing acquisition programs and assets.”
Congress is relying on the DoD to develop many of the program’s parameters. The 2017 NDAA calls for the Secretary of Defense to submit, with its budget request for Fiscal Year 2018, “a plan to fund and carry out the pilot program in future years.”
In the meantime, Congress has authorized $50 million to be made available for the following projects in FY 2017:
(1) Swarming of multiple unmanned air vehicles.
(2) Unmanned, modular fixed-wing aircraft that can be rapidly adapted to multiple missions and serve as a fifth generation weapons augmentation platform.
(3) Vertical takeoff and landing tiltrotor aircraft.
(4) Integration of a directed energy weapon on an air, sea, or ground platform.
(5) Swarming of multiple unmanned underwater vehicles.
(6) Commercial small synthetic aperture radar (SAR) satellites with on-board machine learning for automated, real-time feature extraction and predictive analytics.
(7) Active protection system to defend against rocket-propelled grenades and anti-tank missiles.
(8) Defense against hypersonic weapons, including sensors.
(9) Other systems as designated by the Secretary.
In addition to sounding like something out of a science fiction movie, these categories provide insight into some of Congress’s (and DoD’s) prototyping priorities–particularly those in which small and nontraditional contractors are expected to be able to play an important role.
The 2017 NDAA authorizes the prototyping program through September 30, 2026. As the Secretary of Defense will not submit its implementation plan for the pilot program until its next budget request, it may take some time before the program hits full stride. In the interim, interested contractors can start positioning themselves to take advantage of this new opportunity.
2017 NDAA: The National Defense Authorization Act for Fiscal Year 2017 appears poised beneath the president’s pen for signing. It includes some massive changes as well as some small but nevertheless significant tweaks sure to impact Federal procurements in the coming year. For the next few days, SmallGovCon will delve into the minutia to provide context and analysis so that you do not have to. Visit smallgovcon.com for the latest on the government contracting provisions of the 2017 NDAA.
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The HUBZone program will see significant changes to its rules as a result of major SBA changes set to take effect in late August.
These changes apply generally to two aspects of the HUBZone program: that relating to the SBA’s processing of HUBZone applications, and a significant expansion of the HUBZone joint venture requirements.
Here at SmallGovCon, we have been writing about the many changes brought about by the SBA’s recently published final rule about Small Business Mentor-Protégé Programs. Among these major changes are the adoption of a small business mentor-protégé program and an overhaul of the rules governing SDVOSB joint ventures. HUBZone companies can also share in the fun, as the SBA has made significant changes to the HUBZone program regulations.
First, revising 13 C.F.R. § 126.306, SBA provides significant new details as to its processing of HUBZone applications. The new regulation will provide, in general:
The SBA’s Director Office of HUBZone (“D/HUB”) is authorized to approve or decline applications for certification. SBA will receive and review all applications and request supporting documents. Applications—including all required information, supporting documentation, and HUBZone representations—must be complete before processing; SBA will not process incomplete packages. SBA will make its determination within 90 calendar days after the complete package is received—this is a significantly longer than the period contemplated by the current regulations, which provide that “SBA will make its determination within 30 calendar days after receipt of a complete package whenever practicable.” In practice, SBA hasn’t met this aggressive 30-day deadline; a 2014 GAO report indicated that the average processing time was 116 days from the date of the initial application.
SBA may request additional or clarifying information about an application at any time.
The burden of proof for eligibility is now squarely placed on the applicant concern. “If a concern does not provide requested information within the allotted time provided by SBA, or if it submits incomplete information, SBA may presume that disclosure of the missing information would adversely affect the business concern or demonstrate lack of eligibility in the area or areas to which the information relates.”
The applicant must be eligible as of the date it submitted its application and up until the time the D/HUB issues a decision. The decision on the application will be based on the facts set forth in the application, any information submitted in response to a clarification request, and “any changed circumstances since the date of application.”
As to this last requirement, the new regulation states that “[a]ny changed circumstance occurring after an application will be considered and may constitute grounds for decline.” The entity applying for certification has a duty, moreover, to notify SBA of any changes that could affect its eligibility; “[t]he D/HUB may propose decertification for any HUBZone SBC that failed to inform SBA of any changed circumstances that affected its eligibility for the program during the processing of the application.”
In addition to expanding upon the HUBZone application process, the new regulation expands HUBZone joint ventures. 13 C.F.R. § 126.616 will soon provide as follows:
Though the existing HUBZone regulations only allow for a joint venture between two qualified HUBZone entities, the new regulation allows for a HUBZone small business to “enter into a joint venture agreement with one or more” small businesses, with an approved mentor (per the new mentor-protégé regulation), or, if also an 8(a) program participant, an approved 8(a) mentor, for the purposes of submitting an offer on a HUBZone contract. The joint venture itself need not be certified as a qualified HUBZone small business.
This portion of the regulation is a big win for HUBZone contractors. For years, participants in the 8(a), SDVOSB, and WOSB programs have been able to joint venture with non-certified small businesses; only HUBZones were restricted to joint venturing solely with one another. Although SBA’s likely hoped that the requirement would lead to more dollars flowing to eligible HUBZone companies, the policy appears to have backfired: in our experience, few HUBZones joint venture at all for HUBZone contracts. The new regulation will correct this problem and put HUBZones in a similar position as participants in the SBA’s other three major socioeconomic programs.
The new regulation adopts a two-pronged approach for determining the joint venture’s size. For a joint venture that includes at least one qualified HUBZone small business and one or more other business concerns, the joint venture “may submit an offer as a small business for any HUBZone procurement or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the procurement.”
For a joint venture between a protégé and its approved mentor (under SBA’s new small business mentor-protégé regulation), the joint venture will be deemed small if the protégé qualifies as small under the solicitation’s operative size standard. Oddly, the portion of the regulation addressing size doesn’t mention the 8(a) mentor-protege program, even though the 8(a) mentor-protege program is discussed elsewhere in the same regulation. Therefore, while it seems likely that SBA intended allow 8(a) mentor-protege joint ventures to qualify for HUBZone contracts, that’s not clear from the regulations, and is something we hope SBA clarifies.
Required Joint Venture Agreement Provisions
Because the existing regulations only allows for joint ventures between qualified HUBZone entities, there are no specific joint venture agreement requirements. SBA (rightly) assumes that, because only qualified HUBZones entities can participate in a joint venture, there is no reason to adopt rules designed to ensure that HUBZones control and benefit from their joint ventures.
The new regulation departs from the limitation on joint venture participation, and allows a HUBZone to joint venture with any small business—whether a qualified HUBZone or not–as well as with large mentor firms. The presumption that the HUBZone will enjoy the benefits from the joint venture is thus negated; as a result, the new regulation includes strict requirements for a HUBZone joint venture agreement. These requirements—which mirror the joint venture agreement requirements for the new small business mentor-protégé program—are summarized below. But as with our other educational posts regarding the new joint venture rules, we must caution against relying on this post in an effort to comply with the new regulations; instead, HUBZone entities—and prospective joint venture partners of HUBZone entities—should consult the new regulations directly or call experienced legal counsel.
Purpose. The joint venture agreement must set forth the purpose of the joint venture.
Managing Venturer. The joint venture agreement must designate a HUBZone small business as the managing venturer, and an employee of the managing venturer as the project manager responsible for contract performance. The project manager “need not be an employee of the HUBZone SBC at the time the joint venture submits an offer, but, if he or she is not, there must be a signed letter of intent that the individual commits to be employed by the HUBZone SBC if the joint venture is the successful offeror.” The project manager cannot, however, be employed by the mentor and become an employee of the HUBZone managing venturer for purposes of performance under the joint venture. The plain language of the regulation does not appear to prevent an employee from a non-mentor, non-HUBZone small business partner from becoming the project manager, but SBA’s intent in this regard is unclear. Hopefully, SBA will provide clarification on this point.
Ownership. The joint venture agreement must state that, with respect to a separate legal entity joint venture, the HUBZone small business owns at least 51% of the joint venture entity.
Profits. The agreement must also state that the HUBZone small business will receive profits from the joint venture commensurate with the work it performs or, in the case of a separate legal entity joint venture, commensurate with its ownership interest.
Bank Account. The joint venture agreement must provide for a special bank account in the name of the joint venture. The account “must require the signature of all parties to the joint venture or designees for withdrawal purposes.” All payments to the joint venture for performance on a set-aside contract will be deposited in the special bank account; all expenses incurred under the contract will be paid from the account.
Equipment, Facilities, and Other Resources. The koint venture agreement must itemize all major equipment, facilities, and other resources to be furnished by each venturer, along with a detailed schedule of the cost or value of such items. If the contract is indefinite in nature—like an IDIQ or multiple award contract might be—the joint venture “must provide a general description of the anticipated major equipment, facilities, and other resources to be furnished by each party to the joint venture, without a detailed schedule of cost or value of each, or in the alternative, specify how the parties to the joint venture will furnish such resources to the joint venture once a definite scope of work is made publicly available.”
Parties’ Responsibilities. The joint venture agreement must specify the responsibilities of the venturers with regard to contract negotiation, source of labor, and contract performance, including ways that the parties will ensure that the joint venture and the HUBZone partner(s) to the joint venture will meet the performance of work requirements, “where practical.” Again, if the contract is indefinite in nature, “the joint venture must provide a general description of the anticipated responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, not including the ways that parties to the joint venture will ensure that the joint venture and the HUBZone partner(s) to the joint venture will meet the performance of work requirements . . . or, in the alternative, specify how the parties to the joint venture will define such responsibilities once a definite scope of work is made publicly available.”
Guaranteed Performance. The joint venture agreement must obligate all parties to the joint venture to ensure complete performance despite the withdrawal of any venturer.
Records. The joint venture agreement must state that accounting and other administrative records of the joint venture must be kept in the office of the HUBZone small business managing venturer, unless the SBA gives permission to keep them elsewhere. Additionally, the joint venture’s final original records must be retained by the HUBZone small business managing venturer upon completion of the contract.
Statements. The joint venture agreement must provide that quarterly financial statements showing cumulative contract receipts and expenditures (including salaries of the joint venture’s principals) must be submitted to the SBA not later than 45 days after each operating quarter of the joint venture. The joint venture agreement must also state that the parties will submit a project-end profit-and-loss statement, including a statement of final profit distribution, to the SBA no later than 90 days after completion of the contract.
Limitations on Subcontracting
The HUBZone joint venture program’s performance of work requirements are set forth in this new subsection (d). This regulation also applies a two-pronged approach for compliance.
For a joint venture that is comprised only of qualified HUBZone small businesses, “the aggregate of the qualified HUBZone small businesses to the joint venture—not each concern separately—must perform the applicable percentage of work required by 13 C.F.R. § 125.6. (As SmallGovCon readers know, these limits recently changed under a separate SBA final rule effective June 30, 2016).
For a joint venture between only one qualified HUBZone protégé and another (non-HUBZone) small business concern or its SBA-approved mentor, “the joint venture must perform the applicable percentage of work required by § 125.6 . . . and the HUBZone SBC partner to the joint venture must perform at least 40% of the work performed by the joint venture.” The work performed by the HUBZone small business must be more than ministerial or administrative, so that it gains substantive experience.
Certification of Compliance
As with the small business mentor-protégé program, the new HUBZone joint venture requirements mandate self-certification of the joint venture agreement’s contents: “Prior to the performance of any HUBZone contract as a joint venture, the HUBZone SBC “must submit written certification to the contracting officer that the parties “have entered a joint venture agreement that fully complies with” the requirements. The HUBZone small business must also certify that the parties will perform the contract in compliance with the joint venture agreement and with the performance of work (or limitation on subcontracting) requirements.
Past Performance and Experience
The new regulation also provides significant improvement in the evaluation of a joint venture’s past performance:
When evaluating the past performance and experience of an entity submitting an offer for a HUBZone contract as a joint venture established pursuant to this section, a procuring activity must consider the work done individually by each partner to the joint venture as well as any work done by the joint venture itself previously.
Steve recently wrote why this change makes sense—because a joint venture is a limited purpose arrangement, it is counter-intuitive to require the joint venture itself to demonstrate relevant past performance. Instead, it makes more sense to allow a procuring agency to consider whether the individual members to the joint venture have any relevant experience.
The Road Ahead
The new HUBZone regulations take effect on August 24, 2016. They represent a significant expansion of opportunities for HUBZone small businesses–but also represent compliance challenges, especially in ensuring that joint venture agreements met all of the requirements of the new rule.
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They say that two things in life are guaranteed – death and taxes – and status as a federal contractor may not exempt one from the latter, according to a recent Armed Services Board of Contract Appeals decision.
In Presentation Products, Inc. dba Spinitar, ASBCA No. 61066 (2017), the ASBCA held the contractor was liable to pay a state tax, and the government had no duty to reimburse the contractor. The problem arose from the fact that the contractor did not incorporate state tax costs into its proposed price, despite being required to pay the taxes under the terms of the contract and applicable state law.
Under the terms of the firm fixed-price contract, Presentation Products Inc. (doing business as Spinitar) was to provide the Army with installation of a video conferencing system in Fort Shafter Flats, Hawaii. The solicitation included FAR 52.212-4 (Instructions to Offerors–Commercial Items), which provides, in paragraph (k): “Taxes. The contract price includes all applicable Federal, State, and local taxes and duties.”
Hawaii places a general excise tax (or GET) on businesses rather than a sales tax on customers, which is not automatically waived when the customer is the federal government. The GET is an excise tax imposed on the gross revenues of businesses “derived from the privilege of doing business in Hawaii.” Under Hawaii’s GET, businesses are not required to collect GET from their customers, but may pass it on to customers upon agreement by the customer.
Seemingly under the belief the contract would not be subject to Hawaii’s GET, Spinitar’s proposal stated “[t]he above prices do not include any applicable sales taxes. Hawaii’s GET tax reimbursement policy implemented for federal purchases will be utilized.” The contract incorporated the terms of the solicitation, including FAR 52.212-4(k).
Upon commencing performance of the contract, Spinitar learned the goods and installation services being provided were subject to Hawaii’s GET of 4.5 percent, amounting to $7,624.14. Spinitar submitted a claim to the contracting officer, arguing that it should be reimbursed by the federal government. The contracting officer denied Spinitar’s claim.
In appealing its case to the ASBCA, Spinitar relied on the fact that it expressly noted in its price proposal that it had not included the GET in its price and that “Hawaii’s GET tax reimbursement policy implemented for federal purchases will be utilized.” Therefore, Spinitar argued, the government should reimburse Spinitar for the GET payment.
The ASBCA wrote that Spinitar “appeared to be surprised to learn from conversations with the Hawaii Department of Taxation that the GET exemption for goods sold to the federal government would not apply” to its contract. Spinitar was wrong, and “[t]he government is not liable for Spinitar’s mistake.” The ASBCA denied Spinitar’s appeal.
Government contractors often assume that all goods and services provided to the federal government are exempt from state taxes. Not so.
While this is a very complex area of law, Spinitar demonstrates that there is no blanket “federal contractor exemption” from state taxes. Accordingly, prior to submitting a proposal, federal contractors should do their homework and learn whether the contract they are bidding on will be subject to applicable state taxes. Failure to do so could leave the contractor responsible for taxes not included within the contractor’s proposed pricing–and the government won’t be liable for the contractor’s mistake.
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An agency failed to meet its obligations to properly publicize a simplified acquisition valued between $15,000 and $25,000 where the agency placed the solicitation in a three-ring binder at the reception desk in a government office–and that office was closed during most of the relevant time.
In a recent decision, the GAO affirmed that principle that even when the dollar value of a simplified acquisition doesn’t meet the requirement for electronic posting on FedBizOpps, the agency still must take reasonable steps to maximize competition.
GAO’s decision in Bluehorse Corp., B-413533 (Oct. 28, 2016) involved a Bureau of Indian Affairs solicitation for diesel fuel for a school district served by the BIA in New Mexico.
After identifying an emergency need for the diesel fuel, the BIA prepared an RFQ on Saturday, July 30. The RFQ was prepared under the procedures for the streamlined acquisition of commercial items under FAR 12.6, and called for a performance period of delivery from August 2, 2016 through April 30, 2017.
The RFQ stated that because it was an “emergency requirement,” the deadline for receipt of quotations would be August 1, 2016. Since the contracting officer did not expect the award to meet the FAR’s threshold for electronic posting on FedBizOpps ($25,000), she instead sent the RFQ by email to three firms she had identified as eligible Indian Economic Enterprises.
In addition to sending the RFQ to the three IEEs, the contracting officer placed a copy of the RFQ in a three-ring binder kept at a reception desk of the BIA Navajo Region Contracting Office in Gallup, New Mexico. That office was closed on Saturday, July 30 and Sunday, July 31.
The BIA received two quotations by August 1. Both quotations were from vendors who had received the RFQ by email. The BIA awarded the contract to one of those vendors at a price of $20,800.
After learning of the award, Bluehorse Corporation filed a GAO bid protest. Bluehorse (which was not one of the three firms that had been sent the RFQ by email) argued that it was eligible to compete for the contract and capable of supplying the diesel fuel, but had been denied a fair opportunity to compete. In particular, Bluehorse contended that the BIA failed to publicize the requirement properly, which effectively precluded Bluehorse from submitting a quotation.
The GAO wrote that when a procurement is expected to be valued between $15,000 and $25,000, the contracting officer must “display . . . in a public place, or by any appropriate electronic means, an unclassified notice of the solicitation or a copy of the solicitation,” and that the solicitation “must remain posted for at least 10 days or until after quotations have been opened, whichever is later.”
In this case, the GAO held, the BIA did not properly publicize the RFQ:
The BIA’s actions here fell short of the minimum standards for obtaining maximum practicable competition when using simplified acquisition procedures with respect to both publication of the requirement and soliciting sources. We do not regard the Saturday placement of the solicitation in a binder, in an office that was effectively closed to the public on a weekend, for quotations that were due by 2 p.m. on Monday, as meeting the requirement for public posting.
The GAO held that “the BIA’s actions fail to show appropriate concern for fair and equitable competition,” and sustained Bluehorse’s protest.
Competition is the cornerstone of the government contracting process, even for most simplified acquisitions. As the Bluehorse protest demonstrates, even simplified acquisitions between $15,000 and $25,000 must be reasonably publicized to allow for competition.
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As a general rule, an agency is only required to evaluate a fixed-price offer for reasonableness (that is, whether the price is too high). Agencies are not required to evaluate fixed-price offers for realism (that is, whether the price is too low) and, in fact, cannot do so unless the solicitation advises offerors that a realism evaluation will be conducted.
GAO recently reaffirmed this principle when it denied a protest challenging an agency’s refusal to consider the realism of offerors’ fixed prices as part of a corrective action, even though the agency suspected that at least one offeror’s price was unrealistically low.
Under FAR 15.404-1(d)(3), an agency may evaluate fixed-price contracts for realism “in exceptional cases,” but it is not required to do so. Ripple Effect Communications, B-413722.2 (Jan. 17, 2017), confirmed the breadth of an agency’s discretion to evaluate—or not—fixed price offers for realism.
Ripple Effect involved a challenge to the terms of a corrective action following Venesco, LLC’s protest challenging an award made to Ripple. Venesco argued in its protest that the Army improperly declared its price to be unrealistic, in part because the solicitation was ambiguous as to whether offerors’ fixed prices would be evaluated for realism. The Army then announced that the procurement would be resolicited, and made clear that price realism would not be evaluated.
Ripple then protested the scope of this corrective action, arguing that the Army should be required to evaluate offerors’ prices for realism. Ripple noted that the Army’s evaluation of Venesco’s proposal already revealed concerns with Venesco’s labor rates, “which were far below the average of all evaluated proposals in all but one labor category.” Thus, “it would be unreasonable for the agency not to consider the risk posed by Venesco’s prices.”
In response to these arguments, the Army noted that it never intended to evaluate offerors’ proposed prices for realism. And although Venesco’s debriefing noted concern with unrealistic prices, the Army called this a “conclusory finding” that was not actually based on a completed price realism evaluation. In any event, offerors’ ability to submit revised proposals (including prices) mitigated any need for a price realism evaluation.
GAO agreed with the agency and denied the challenge to the corrective action. In doing so, it relied on an agency’s broad discretion to evaluate (or not) price realism under fixed-price solicitations:
Because the solicitation contemplates the award of a fixed-price contract, the agency’s intended evaluation approach is consistent with the Federal Acquisition Regulation (FAR), which establishes that an agency “may . . . in exceptional cases,” provide for a price realism evaluation when awarding a fixed-price contract, but is not required to do so. Given the agency’s broad discretion to decide whether to include a price realism evaluation in this instance, we have no basis to conclude that the agency’s decision was unreasonable.
Denying Ripple’s protest, GAO reaffirmed the principle that agencies have broad discretion to evaluate fixed-price offers for realism. Ripple Effect shows the breadth of this discretion—even where an agency has reason to suspect an offeror’s fixed-price might be unrealistically low, it is not required to evaluate that price for realism unless the solicitation specifically says otherwise.
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GAO’s jurisdiction to hear protests of certain civilian task and delivery orders has been restored.
On December 15, 2016, the President signed the 2016 GAO Civilian Task and Delivery Order Protest Authority Act (the “ 2016 Act”) into law. The 2016 Act restores GAO’s recently-expired jurisdiction to hear protests of civilian task and delivery orders valued in excess of $10 million.
As we recently blogged about here at SmallGovCon, the 2017 National Defense Authorization Act also restores GAO’s jurisdiction over task and delivery orders. But even while the 2017 NDAA awaits the President’s signature (or potential veto), Congress and the President have enacted separate legislation to permit GAO to resume hearing bid protests of civilian task and delivery orders.
This Act makes permanent the GAO’s authority to hear protests on civilian task or delivery contracts valued in excess of $10 million. It does so by deleting the sunset provision relating to the authorized protest of a task or delivery order under 41 U.S.C. § 4106(f).
While the 2016 Act permanently restores GAO’s jurisdiction over protests involving civilian task and delivery orders valued above $10 million, as noted in a prior blog, the 2017 NDAA will increase the threshold for challenging DoD task and delivery orders to $25 million. For now, however, DoD orders meeting the $10 million threshold, including those issued under civilian contract vehicles, are once again subject to GAO oversight.
The enactment of the 2016 Act reinforces the importance of bid protests in the procurement process, as evidenced by the fact that 46% of protests in Fiscal Year 2016 resulted in relief for the protester (either a “sustain” decision or voluntary agency corrective action). Congress made the right call in restoring GAO’s jurisdiction, and did so even faster than the 2017 NDAA would have allowed.
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President Obama signed the 2017 National Defense Authorization Act into law on December 23, 2016. As is often the case, the NDAA included many changes affecting government contractors.
Here at SmallGovCon, my colleagues and I have been following the 2017 NDAA closely. Here’s a roundup of all 16 posts we’ve written about the government contracting provisions of the 2017 NDAA.
SDVOSB Programs: 2017 NDAA Sharply Curtails VA’s Authority. (Dec. 5, 2016).
2017 NDAA Restricts DoD’s Use of LPTA Procedures. (Dec. 7, 2016).
2017 NDAA Extends SBIR & STTR Programs For Five Years. (Dec. 8, 2016).
2017 NDAA Authorizes $250 Million For New Small Business Prototyping Program. (Dec. 8, 2016).
2017 NDAA Increases DoD’s Micro-Purchase Threshold To $5,000. (Dec. 9, 2016).
SDVOSB Programs: 2017 NDAA Modifies Ownership & Control Criteria. (Dec. 12, 2016).
2017 NDAA Strengthens Subcontracting Plan Enforcement. (Dec. 13, 2016).
2017 NDAA Requires GAO Report On Minority And WOSB Contract Awards. (Dec. 13, 2016).
2017 NDAA Requires Report On Bid Protest Impact At DoD. (Dec. 14, 2016).
2017 NDAA Restores GAO’s Task Order Jurisdiction – But Ups DoD Threshold. (Dec. 14, 2016).
2017 NDAA Requires “Brand Name Or Equivalent” Justifications. (Dec. 19, 2016).
2017 NDAA Establishes Preference For DoD Fixed-Price Contracts. (Dec. 21, 2016).
2017 NDAA Creates Pilot Program For Subcontractors To Receive Past Performance Ratings. (Dec. 21, 2016).
2017 NDAA Reiterates GAO Bid Protest Reporting Requirements. (Dec. 30, 2016).
2017 NDAA Requires Report on Indefinite Delivery Contracts. (Jan. 4, 2017).
That’s a wrap of our coverage for now, but we’ll keep you posted as various provisions of the 2017 NDAA begin to be implemented. And of course, it won’t be long until we start covering the upcoming 2018 NDAA.
Happy New Year!
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