Ordinarily, whether an offeror’s proposed personnel actually perform under a contract is a non-protestable matter of contract administration. But GAO will consider the issue when an offeror proposes personnel that it did not have a reasonable basis to expect to provide during contract performance in order to obtain a more favorable evaluation. Such a “bait and switch” amounts to a material misrepresentation that undermines the integrity of the procurement and evaluation.
That’s exactly what happened in a recent protest, where the GAO disqualified the awardee from competition after determining that its proposal misrepresented the incumbent employees’ availability to continue working under the contract.
At issue in Patricio Enterprises, Inc., B-412738 et al. (May 26, 2016) was a task order solicitation to provide support for five product management teams for the Marine Corps’ Program Manager, Infantry Weapons Systems. Patricio and Knowledge Capital Associates (“KCA”) were each incumbents for some of these requirements under different existing task orders. The solicitation combined those services and contracts into one procurement.
The solicitation had three evaluation criteria: Management and Staffing Capability, Past Performance, and Price. The first (and most important) factor was comprised of two subfactors (Management and Staffing Capability). Under the Staffing Capability subfactor, offerors were required to provide a detailed approach to staffing that met the PWS requirements, and to provide detailed information (such as labor qualifications, proposed labor categories, and organizational structure) for its key personnel and other staff. The agency would then evaluate this subfactor by reviewing the “capabilities, qualifications, and experience of each offeror’s proposed key personnel” and the processes, resources, and organizational structure necessary to support the PWS tasks. The Government would also evaluate the offeror’s “approach to providing staffing necessary to achieve full performance by month five[.]”
Patricio and KCA timely submitted offerors, which were rated equally under the Management and Staffing Capability and Past Performance factors. Because KCA’s price was almost $5 million less than Patricio’s, KCA was named the awardee.
After Patricio’s attorneys obtained a copy of KCA’s proposal (probably as part of the Agency Report responding to Patricio’s initial protest), Patricio challenged KCA’s staffing approach. KCA, in short, touted its ability to begin work on “day one without missing a beat[.]” KCA further promised 100% staffing on “the very next day” following expiration of the existing support contracts.
KCA’s aggressive transition plan was based in part on KCA’s representations that it would employ incumbent personnel under its award. KCA went so far as to claim it had “signed contingent offers for select personnel” working for other companies (including Patricio) under incumbent contracts, and that these individuals “will be available at the immediate start of the Task Order.”
These representations, though, were (at best) misleading. Patricio produced sworn statements from its employees that were specifically named in KCA’s proposal, in which each person “stated that he or she had not been contacted by the awardee regarding potential employment for the PM IWS task order prior to the time for submission of proposals.”
In its own comments, KCA did not dispute these sworn declarations. Instead, KCA justified its proposal on the basis of discussions with Patricio employees, which led KCA to believe that the Patricio personnel identified in its proposal “would likely be willing to work for KCA in the event it was awarded the task order.” KCA claimed that its reference to “signed contingent offer letters” was misunderstood: according to KCA, this reference simply meant that the letters were prepared and signed by KCA’s president, not that the prospective personnel had signed them (or were even aware of them).
GAO found KCA’s reference to “signed contingent offers” and “signed contingent employment letters” to be an attempt to mislead the agency about KCA’s readiness to perform. GAO wrote that these references “appear purposefully crafted to convey that there had been communications with the individuals in question.” KCA’s apparent intent to later attempt to hire these individuals did not excuse this misrepresentation because “regardless of KCA’s intent to hire the individuals named in the proposal, the proposal misrepresented the commitment of the non-KCA employees to work for the awardee.”
KCA’s misrepresentation, moreover, impacted the Marine Corps’ evaluation. According to GAO, KCA earned a strength for its staffing approach and transition approach, which was based in part on KCA’s “approach to providing personnel, including key personnel, who would be capable of performing the work, and would be available at the start of performance.” Absent KCA’s pledge to provide incumbent staffing, it is unlikely that it would have been assessed such a strength.
GAO sustained Patricio’s protest. It also recommended that KCA be excluded from the competition:
[E]xclusion of an offeror from a competition is warranted where it made a material misrepresentation in its proposal and where the agency’s reliance on the misrepresentation had a material effect on the evaluation results. As our Office has stated, where an offeror’s material misrepresentation has a material effect on a competition, the integrity of the procurement system “demands no less” than the remedy of exclusion.
Patricio serves as a cautionary reminder: though offerors might want to increase their chances of award by hyping (or puffing) their abilities, going too far might amount to material misrepresentations. Here, the GAO found that KCA crossed the line–and deserved to be excluded.
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An offeror’s proposal must conform to all technical requirements of an agency’s solicitation–even if the offeror believes those requirements to differ from standard industry practice.
In a recent bid protest decision, the GAO held that an agency appropriately rated an offeror’s proposal as technically unacceptable because the offeror failed to conform to certain material solicitation requirements; the offeror’s insistence that those requirements varied from standard industry practice was irrelevant.
In Wilson 5 Serv. Co., Inc., B-412861 (May 27, 2016), the VA issued a SDVOSB set-aside RFQ seeking facility maintenance support operations at the VA’s Capitol Region Readiness Center (CRRC). The CRRC operates on a 24-hour per day, 7-day per week, 365-days per year (24/7/365) basis and serves a mission-critical role in the VA National Data Center Network.
The RFQ’s PWS required offerors to “determine the appropriate onsite staffing levels to support a 24/7/365 operations.” In written responses to vendor questions, the VA confirmed that “t is a requirement for staff to work onsite in support of the CRRC 24/7/365.”
Wilson 5 Service Company, Inc. (“Wilson 5”) was one of three offerors to submit quotations. Wilson 5’s staffing plan included on-site staffing from 7am to 5pm and emergency “on-call” services after hours, with an ability to call back personnel to the facility if necessary.
The VA determined that Wilson 5’s “lack of off-hours onsite support represents a material failure to meet the Government’s requirement . . ..” The VA rated Wilson 5’s quotation as unacceptable, and excluded Wilson 5 from the competitive range.
Wilson 5 filed a GAO bid protest. Wilson 5 acknowledged that its quotation did not provide for 24/7/365 onsite support. Wilson 5 argued, however, that the RFQ did not require vendors to provide onsite off-hours staffing. Wilson 5 noted that it is “standard industry practice for a contract to provide 24/7/365 coverage by calling back personnel to the facility for an emergency,” rather than staffing the facility onsite during off-hours.
GAO wrote that, when a protester and agency disagree over the meaning of a solicitation, GAO will read the solicitation “as a whole and in a manner that gives effect to all of its provisions.” In this case, GAO held, “the agency’s interpretation of the RFQ, when read as a whole, is reasonable, and the protester’s interpretation is not reasonable.” The GAO noted that various portions of the solicitation “advised vendors of the responsibility to provide onsite staffing to support the 24/7/365 operation.” GAO found that there was no indication that the solicitation could be interpreted to permit call back service as an alternative to the on-site staffing requirement. GAO denied Wilson 5’s protest.
This decision serves as a reminder that offerors must meet the Government’s technical requirements, even if those requirements appear to vary from standard industry practice. As Wilson 5 learned the hard way, the plain terms of a solicitation will trump standard industry practice.
Megan Connor, a summer law clerk with Koprince Law LLC, was the primary author of this post.
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A former 8(a) protege was not automatically entitled to take advantage of the past performance it obtained as part of a mentor-protege joint venture, in a case where the former mentor would not be involved in the new contract.
In a recent bid protest decision, the GAO held that a procuring agency erred by crediting the protege with the joint venture’s past performance without considering the extent to which that past performance relied on the mentor–and the extent to which the mentor’s absence under the new solicitation might impact the relevance of the past performance as applied to the new work.
The case, Veterans Evaluation Servs. Inc., B-412940 et al. (July 13, 2016), involved a solicitation by the VA to acquire medical disability examination services. The VA issued the RFP seeking to award several large IDIQ contracts. Each contract carried a minimum value of $3.7 million and a top value of $6.8 billion. (That’s billion-with-a-b for those scoring at home.)
The RFP split the services area to seven districts throughout the United States and abroad. The VA intended to award two contracts per district 1 through 6, and required the contractors to propose to locate, subcontract with, and train a network of healthcare professionals to perform the examinations.
VetFed Resources, Inc. had been performing the incumbent contract as part of an 8(a) mentor-protege joint venture with QTC Medical Services, Inc. The mentor-protege arrangement apparently had expired by the time that proposals were due under the RFP. VetFed independently submitted proposals for districts 1, 2, and 5. In districts 1 and 5, VetFed proposed to use QTC as its major subcontractor, making available QTC’s provider network and infrastructure. But for district 2, VetFed did not propose to use QTC as its subcontractor.
After evaluating competitive proposals, the VA awarded contracts to VetFed for districts 1, 2, and 5. In its evaluation of all three districts, the VA rated VetFed’s past performance as good.
Three unsuccessful competitors filed GAO protests challenging the results of the VA’s evaluation. All three protesters argued that in district 2, VetFed would not be able to take advantage of QTC’s provider network and infrastructure. The protesters argued that VetFed’s good past performance rating was a result of VetFed’s having access to the resources of its former mentor, and that without that access, VetFed did not deserve a good rating.
GAO wrote that “[a]n agency may attribute the experience or past performance of a parent or affiliated company to an offeror where the firm’s proposal demonstrates that the resources of the parent or affiliate with affect the performance of the offeror.” In this regard, “the relevant consideration is whether the resources of the parent or affiliated company–its workforce, management, facilities, or other resources–will be provided or relied upon for contract performance . . ..” For this reason, “it is inappropriate to consider an affiliate’s record where that record does not bear on the likelihood of successful performance by the offeror.”
In this case, GAO wrote that “VetFed’s relevant past performance example is a contract it performed in close cooperation with QTC; the firms performed using a mentor-protégé arrangement, and there is no dispute that QTC’s provider network and IT infrastructure played a material part in VetFed’s successful performance of the predecessor contract. . . . Since the record here does not show that the agency gave consideration to this question, we conclude that its assignment of a good rating to VetFed for its past performance in district 2 was unreasonable.” GAO sustained this part of the protest.
Given SBA’s strong interest in how mentor-protege joint ventures are treated, it is somewhat surprising that GAO didn’t seek SBA’s input on this aspect of its decision–especially since the decision is troubling from the perspective of 8(a) proteges like VetFed. While GAO’s decision is a logical outgrowth of GAO’s longstanding case law regarding the past performance of affiliates, the particular context is unique, and the SBA’s comments might have been instructive.
In sum, GAO essentially said that a protégé might not get full past performance credit for work it performed in a mentor-protégé arrangement unless the mentor sticks around (in this case as a subcontractor). This is bad news for the protégés of the world, who presumably enter into these relationships in large part for the purpose of gaining experience and knowledge so that they can perform larger contracts on their own in the future. Especially with the new universal mentor-protege program coming online on October 1, it will be important for everyone–mentors, proteges, and contracting officers alike–to fully understand exactly how past performance of mentor-protege joint ventures is to be treated.
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The SBA has corrected a flaw in the profit-splitting provisions of its new joint venture regulations.
Under the corrected regulations, which became effective on December 27, all of the SBA’s joint venture regulations–those for small businesses, SDVOSBs, HUBZones, 8(a)s, and WOSBs–will require that each joint venturer receive profits commensurate with the work it performs. The SBA’s revisions clear up an inconsistency between the 8(a) joint venture regulations and the regulations for the SBA’s other set-aside programs, and eliminates a potential disincentive for joint venturers to avail themselves of the protections of a formal legal entity such as a limited liability company.
Effective August 2016, the SBA overhauled its joint venture regulations. Among the major changes, the SBA eliminated so-called “populated” joint ventures and made numerous additions and revisions to the regulations governing mentor-protege joint ventures, SDVOSB joint ventures, and joint ventures for other set-aside contracts.
For those of us whose day-to-day work involves drafting joint venture agreements, it soon became apparent that the profit-sharing provisions of the new regulations were flawed. As I wrote in an October post on SmallGovCon, the SBA’s revised 8(a) joint venture regulation stated that all joint ventures must split profits based on each joint venturer’s work share. But for mentor-protege joint ventures pursuing small business set-aside contracts, as well as for joint ventures pursuing SDVOSB, HUBZone and WOSB contracts, the regulations stated that a “separate legal entity” joint venture (e.g., an LLC) would split profits commensurate with each party’s ownership interest in the joint venture. In these programs, only joint ventures formed as informal partnerships would split profits based on each party’s work share.
This led to an important inconsistency: as I pointed out in my October post, in order for a “separate legal entity” 8(a) mentor-protege joint venture to receive the exception from affiliation for a small business set-aside contract, the regulations required the joint venture to split profits based on ownership and based on work share. It wasn’t clear how the joint venture could do both.
The inconsistency in the prior regulation discouraged 8(a) mentor-protege joint venturers from establishing an LLC or other separate legal entity: by choosing an informal partnership, the joint venturers could avoid the regulatory inconsistency. But even for other joint ventures, the regulations created a disincentive to form a separate legal entity. By forming an informal partnership, the non-managing member could perform up to 60% of the work and receive a commensurate share of the profits. In contrast, in an LLC or other separate legal entity, the non-managing member could still perform up to 60% of the work, but could receive no more than 49% of the profits.
In the preamble to its correction, the SBA states that “it would not make sense to require a firm to receive 51% of the profits for doing only 40% of the work.” The SBA explains that “SBA’s intent was for profits to be commensurate with the work performed by each member of the joint venture” for all of the set-aside programs, not just the 8(a) program. The SBA then revises the regulations governing joint ventures for small business, HUBZone, SDVOSB, and WOSB set asides to provide that the joint venture agreement must contain a provision stating that the managing member “must receive profits from the joint venture commensurate with the work performed” by the managing member.
In any major regulatory overhaul, there will inevitably be flaws of some sort. Kudos to the SBA for recognizing the problems with its joint venture profit-splitting requirements and acting quickly to correct those flaws.
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So-called “common investments” affiliation under the SBA’s affiliation rules arises most frequently when individuals own common interests in at least two operating companies. But common investments affiliation can also be based on common interests in real estate.
In a recent decision, the SBA Office of Hearings and Appeals held that the SBA had performed an inadequate size determination because the SBA Area Office asked the protested company about common investments in companies–but didn’t directly ask about common investments in real estate.
OHA’s decision in Size Appeal of Costar Services, Inc., SBA No. SIZ-5745 (2016) involved a NAVFAC solicitation for base operations support services. The solicitation was issued as a small business set-aside under NAICS code 561210 (Facilities Support Services).
After evaluating competitive proposals, NAVFAC announced that Mark Dunning Industries, Inc. was the apparent awardee. Costar Services Inc., an unsuccessful competitor, then filed a SBA size protest, alleging that MDI was affiliated with various other entities.
Among its allegations, Costar alleged that MDI’s owner, Mark Dunning, shared an identity of interest with Gregory Scott White under the common investments affiliation rule. MDI contended, in part, that Mr. Dunning and Mr. White jointly owned interests in various real estate properties in Alabama. Costar attached evidence supporting its contentions. Costar argued that, because of the identity of interest, MDI was affiliated with companies controlled by Mr. White.
In the course of its size investigation, the SBA Area Office asked MDI whether “Mr. Dunning has any ownership interest or serve as a director or officer in any company with Mr. Scott White?” MDI responded by stating that the only “business association” between the two men was joint ownership of White & Dunning, LLP, “which is an entity formed for the sole purpose of collecting rent for a single piece of property, a hunting cabin.”
The SBA Area Office determined that Mr. Dunning and Mr. White did not share an identity of interest under the common investments rule, and issued a size determination finding MDI to be an eligible small business for purposes of the NAVFAC procurement.
Costar filed a size appeal with OHA. Among its contentions, Costar argued that the SBA Area Office had performed an incomplete investigation of the potential for common investments affiliation between Mr. Dunning and Mr. White.
OHA agreed. It wrote that “[t]he Area Office did not directly inquire into whether Messrs. Dunning and White have common investments in entities that are not companies, nor ask MDI specifically to address” the Alabama properties identified by Costar. OHA stated that the SBA Area Office had improperly accepted MDI’s responses “without further inquiry,” even though MDI’s representation that Mr. Dunning and Mr. White had no business relationship except their joint ownership of White & Dunning LLP “appear inconsistent with the evidence submitted by” Costar. OHA granted Costar’s size appeal and remanded the matter to the SBA Area Office for a more thorough investigation of the potential identity of interest between Mr. Dunning and Mr. White.
Costar Services size appeal demonstrates, common investments affiliation need not be based on shared interests in operating companies. Instead, as OHA suggested, such affiliation can also be based on shared investments in real estate.
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It’s a Sunday afternoon and instead of watching football (CHIEFS!), you’re shopping for a new refrigerator. You explain to the salesman your must-haves: a black refrigerator with a bottom-drawer freezer and an in-door water dispenser. But rather than showing you refrigerators that meet your criteria, he insists on showing you stainless steel models with the freezer on the side.
If the refrigerator doesn’t meet your needs (or your wants), odds are you won’t buy it. The federal government is no different: if it identifies salient characteristics in a solicitation, proposals that deviate from them likely aren’t going to win the award.
This refrigerator-shopping scenario (which, by the way, sounds like a nightmare) is basically what happened in Phoenics Corporation, B-414995 (Oct. 27, 2017). There, the Navy issued a solicitation for a ground-penetrating radar and named three brand-name items that would meet its needs. Alternatively, an offeror could propose a different model if that model met several salient characteristics listed by the Navy.
Included among these characteristics was a requirement that the radar “have an external and removable locking pin to hold arm secure whether in operation or storage mode.” The solicitation further cautioned that an internal gear mechanism was not acceptable.
Phoenics submitted the lowest-priced quote, but its product was deemed unacceptable by the Navy. Although the gear mechanism in Phoenics’ proposed radar “positively locks the arm with an integral locking insert/pin in either the operating or storage mode,” its locking mechanism was not external and removable. Instead, the locking mechanism was “performed via a control button/lever within easy reach of the operator.” Because Phoenics’ proposed radar did not meet the salient characteristics, the Navy found it unacceptable.
Phoenics then filed a GAO bid protest, saying its product basically met the Navy’s salient characteristics. In response, GAO denied this challenge and stated that Phoenics did not refute the agency’s allegation that the locking pin was neither external nor removable. In other words, GAO said that when it comes to salient characteristics, close isn’t good enough.
From my vantage, Phoenics might have had more luck had it challenged the Navy’s identified salient characteristics as part of a pre-award protest. Offerors can be hesitant to challenge the terms of a solicitation for fear it might lead to animosity by the contracting officer.
But in our practice, we find that concern to be somewhat overblown: if done professionally and civilly, a pre-award challenge to ambiguous or unnecessary terms can be advantageous to both offerors (who have clarity over the requirements) and the government (who will get the best possible proposals). Here, for example, Phoenics might have argued that the salient characteristics overstated the government’s minimum needs by excluding a product like the one Phoenics ultimately offered.
In a footnote, GAO suggested the same thing. It wrote that “to the extent that there was a conflict between the brand name products and the salient characteristics, we find that any resulting ambiguity was patent—that is, apparent on its face.” As such, “Phoenics was required to protest any such defect in the terms of the RFQ prior to the date set for receipt of quotations, which it did not.”
As Phoenics Corporation reiterates, an offeror simply won’t be successful if it doesn’t propose what the government wants. And if the government’s salient characteristics appear overly restrictive, the best time for legal action might be before proposals are due—not after award.
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The HUBZone program has received its fair share of coverage on our blog, from recommended changes in the 35% employee-location requirement to SBA regulatory updates to the program. Well, the HUBZone program is once again undergoing some changes thanks to the 2018 National Defense Authorization Act–but note that these changes are not effective until January 1, 2020.
These changes include a requirement for an improved online mapping tool, a mandate that HUBZone verifications be processed in 60 days, and more. Here’s a look at some of the most significant HUBZone changes in the 2018 NDAA.
Online Tool, Household Income, and Certification
Online Tool. Section 1701(h) of the 2018 NDAA directs the SBA to “develop a publicly accessible online tool that depicts HUBZones” that will be updated immediately for any changes to a redesignated area, base closure area, qualified disaster area, or Governor-designated covered area. For qualified census tracts and qualified nonmetropolitan counties, the SBA must update the online tool “beginning on January 1, 2020, and every 5 years thereafter.” The SBA must also “provide access to the data used by the Administrator to determine whether or not an area is a HUBZone in the year in which the online tool was prepared.”
HUBZone participants may ask, “but doesn’t SBA already have HUBZone maps? What’s the difference under the 2018 NDAA”? A 2016 decision of the Court of Federal Claims may provide some answers. In that case, the SBA’s HUBZone map said that a certain redesignated tract was still HUBZone qualified, even though that was no longer the case. The Court called the SBA’s characterization of the tract “at best . . . unofficial” and noted that the Department of Housing Urban Development, not the SBA, determines which tracts qualify as HUBZone. The Court upheld an SBA decision sustaining a HUBZone status protest against the company.
It certainly seems like Congress had the Court’s decision in mind. The requirement for “immediate” updates will (hopefully) eliminate erroneous information like that at issue in the Court case. Additionally, the requirement for the underlying data will allow HUBZone companies to verify that the HUD data supports the SBA’s characterization of a qualified tract.
Qualified Nonmetropolitan County. Section 1701(b) changes the metric for comparing median household income. The old statute said the median household income of a qualified nonmetropolitan county had to be “less than 80 percent of the nonmetropolitan State median household income.” The 2018 NDAA deletes the word “nonmetropolitan” from the clause, meaning that the comparison of income will include all metropolitan counties as well. This should have the effect of increasing the number of qualified nonmetropolitan counties, because metropolitan counties generally have higher income. In addition, the income comparison and unemployment comparison are now based on a 5-year average of economic data, not the most recent data available.
Examination and Certification of HUBZone Businesses. The 2018 NDAA has added some statutory requirements to the SBA’s review of businesses hoping to become or continue as a HUBZone small business. While the existing statute mainly left it up to the SBA to create certification regulations, the new statute has some specifics that SBA must follow in reviewing HUBZone status of businesses. For the most part, these changes reflect the rules already found in SBA regulations.
One key change is that SBA must “verify the eligibility of a HUBZone small business concern . . . within a reasonable time and not later than 60 days after the date on which” SBA receives documentation. This change should result in HUBZone applications being processed in a timely manner. That said, it could prove difficult for the SBA to effectively implement this change without significant additional resources. When GAO studied the issue a few years ago, it found that the average processing time was 116 days. Achieving a nearly 50% reduction without additional analysts could prove difficult. Hopefully, the bean counters will do their part to help implement this change.
Base Closure Areas
The 2018 NDAA extends HUBZone eligibility for base closure areas in two key ways. First, the statute now allows the SBA to designate a base closure area as a HUBZone before the base actually closes. This is an important change from prior law, which only allowed HUBZone designation once the base was closed. In the 2018 NDAA, Congress appropriately recognized that the negative economic impact of a base closure begins long before the gates shut for the last time.
The 2018 NDAA also extends the length of time that a base closure area may be considered a HUBZone. Under prior law, the designation applied for five years. The 2018 NDAA allows such a designation to last indefinitely, but “not . . . less than 8 years.”
Governor-Designated Covered Areas
The 2018 NDAA adds a new category to the list of HUBZone areas: “a Governor-designated covered area.” This should result, over time, in increasing the number of HUBZones in the country.
The five existing categories are Qualified census tract, Qualified nonmetropolitan county, Redesignated area, Base closure area, and Qualified disaster area. The Governor-designated covered area designation allows a governor to petition the SBA to turn a rural, low-population, high unemployment area of a state into a HUBZone. The SBA, in reviewing the petition, will look at certain factors such as “the potential for job creation and investment in the covered area,” whether the area is part of a local economic development strategy, and whether there are small businesses interested in an area becoming a HUBZone.
Once this process is implemented, it creates a formal procedure under which the governor, with the input of small businesses and the blessing of the SBA, can create new HUBZone areas. But governor-designated areas don’t give state officials blank checks to create new HUBZones: a governor will only be allowed to propose one new HUBZone each year.
The 2018 NDAA makes some important changes to the HUBZone program that should generally have the effect of expanding the program to more areas of the country, giving states (and potentially small businesses) some say in designating HUBZones and making the online mapping tools more transparent.
The government has been missing its 3% HUBZone goal by wide margins in recent years. Hopefully, these changes (as well as important regulatory changes SBA adopted in 2016, such as allowing HUBZones to form joint ventures with non-HUBZones) will help reverse this trend.
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Debriefings play a vital role in the procurement process. When conducted fully and fairly, a debriefing provides an offeror with valuable insight into the strengths and shortcomings of its proposal, thus enabling the offeror to improve its offering under future solicitations. But when an agency provides only a perfunctory debriefing, the process can be virtually worthless–and may actually encourage an unsuccessful offeror to file a bid protest.
With this in mind, the Office of Federal Procurement Policy recently issued a memorandum that urges agencies to strengthen the debriefing process. In doing so, OFPP has encouraged agencies to adopt a debriefing guide that will help facilitate effective and efficient debriefings.
FAR 15.506, which governs the post-award debriefing process, provides only general guidance as to the information that must be included in a debriefing. Basically, agencies need only provide minimal information about the award decision, including the evaluation of a proposal’s significant weaknesses or deficiencies and a “summary of the rationale for award.” The FAR prohibits an agency from providing a point-by-point comparison of proposals, or any information that can be deemed as confidential, proprietary, or as a trade secret. Given these restrictions, and considering that agencies are often tasked with debriefing numerous offerors under a solicitation (including the awardee), debriefings can devolve into little more than a notation of the offeror’s score and the awardee’s price.
Written as part of its “myth-busting” series on issues under federal contracting, OFPP’s memorandum explains the importance of effective debriefings:
Debriefings offer multiple benefits. They help vendors better understand the weaknesses in their proposals so that they can make stronger offers on future procurements, which is especially important for small businesses as they seek to grow their positions in the marketplace. In addition to contributing to a potentially more competitive supplier base for future work, debriefings allow agencies to evaluate and improve their own processes.
Despite these benefits, agencies often skimp on the information provided to offerors in a debriefing by providing only the bare minimum required under the FAR. In doing so, an agency may assume that it is limiting its exposure to a post-award protest, by limiting the information (or ammunition) available to a potential protester. OFPP’s memorandum addresses this myth head-on:
[A]gencies that conduct quality debriefings have found a decreased tendency by their supplier base to pursue protests. Studies of the acquisition process have observed that protests may be filed to get information—information that could have been shared during a debriefing—about the agency’s award decision to reassure the contractor that the source selection was merit-based and conducted in an impartial manner.
Offerors—who spend a tremendous amount of time and money to prepare their proposals—are entitled to a debriefing that adequately explains the strengths and weaknesses of their effort and confirms that a fair selection occurred. But agencies are too often quick to limit the information provided in debriefings, in the misguided effort to limit potential protests. OFPP’s memorandum addresses this disconnect, by explaining that an effective debriefing actually tends to lower the risk of a protest.
In our experience, OFPP’s memorandum is spot-on. My colleagues and I frequently speak with clients who are very frustrated with the scant information provided in debriefings. Perception matters in government contracting, and cursory debriefings can appear disrespectful of the time and effort that an offeror puts into its proposal. Worse, bare-bones debriefings can give the impression that the agency has something to hide. In many cases in which we’ve been involved, the agency likely could have avoided a protest if it had provided a comprehensive debriefing. And on the flip side, we have seen many other cases in which a client was initially eager to protest, but changed its mind after a thorough debriefing.
As we recently noted, Congress has also required DoD to analyze and address the effect of the quality of a debriefing on the frequency of bid protests. Hopefully this requirement, together with OFPP’s memorandum, will encourage agencies to make the most of the debriefing process.
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The woman-owned small business program is in the midst of major changes: from the addition of sole source authority, to lingering questions about what the heck the SBA’s plan is to address the elimination of WOSB self-certification.
I recently joined host “Game Changers” podcast host Michael LeJune of Federal Access for an in-depth discussion of recent WOSB program changes, and where the WOSB program goes from here. Click here to listen to the podcast, and visit the Game Changers SoundCloud page for more great discussions with government contracting thought leaders.
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Last month, Steve wrote about a new Class Deviation rule adopted by the VA that, in effect, would limit the VA’s use of class waivers as part of its decision to restrict competition to SDVOSBs (or otherwise issue solicitations as sole source awards). But in an apparent contradiction to this Class Deviation rule, GAO recently denied a challenge to an SDVOSB set-aside decision for a manufacturing solicitation, based in large part on SBA’s adoption of a class waiver for the particular NAICS code.
Before delving into the facts of the protest decision, a brief background may be helpful:
The Veterans Benefits, Healthcare, and Information Technology Act of 2006 sought to provide SDVOSBs and VOSBs a leg-up in contracting opportunities at the VA. One of the main tools employed by Congress was a mandatory Rule of Two, which requires the VA to set-aside a solicitation if two or more SDVOSBs will submit an offer at a fair and reasonable price. The Supreme Court famously upheld the broad scope of this mandate in the Kingdomware case. And as we’ve written, GAO will sustain a protest if the VA fails to follow this Rule (or doesn’t undertake reasonable market research).
Walker Development & Trading Group, B-414365 (May 18, 2017) considered the application of the Rule of Two from the opposite perspective: one of a non-SDVOSB challenging a VA solicitation seeking quotations for mobile cardiac outpatient telemetry, holter monitoring, and cardiokey devices for patient care. The solicitation was issued under a manufacturing NAICS code—334510 (Electrical and Electrotherapeutic Apparatus Manufacturing)—but the VA advised potential offerors that the SBA had issued a nonmanufacturer rule class waiver for that code.
After conducting market research that identified two interested and capable SDVOSB concerns, the VA set the competition aside for SDVOSBs. Walker Development, a non-SDVOSB, protested this restriction, saying that the market research was inadequate.
Considering this challenge, GAO began by noting the discretion contracting officers typically enjoy when deciding whether to set aside a procurement for SDVOSBs. “No particular method of assessing the availability of capable small businesses is required,” GAO wrote, but instead, “the assessment must be based on sufficient facts to establish its reasonableness.” If so, GAO will not question the decision to set aside the solicitation.
In making this determination, moreover, an agency does not have to first actually determine the responsibility of potential offerors. All that is required is that an agency “make an informed business judgment that there is a reasonable expectation of receiving acceptably priced offers from small business concerns that are capable of performing the contract.”
GAO found the VA’s market research to be adequate. The contracting officer conducted a review of prior acquisition history and searched various contracting databases (including VA’s vetbiz.gov), posted a sources sought notice, and emailed ninety-one different vendors about the procurement. After receiving responses, the VA concluded that at least two interested SDVOSBs would submit offers at fair and reasonable prices and, thus, set the solicitation aside.
Walker did not provide any basis to question that competition between these two firms would result in the award being made at a reasonable price. Instead, it said that the VA erred by not considering whether the SDVOSBs would meet the limitation on subcontracting and comply with the requirements of the nonmanufacturer rule.
As Steve recently wrote, to comply with the limitation on subcontracting in manufacturing contracts, SBA’s regulations require that the SDVOSB prime contractor must either (1) pay no more than 50% of the amount paid by the government to it to firms that are not similarly situated or (2) qualify as a nonmanufacturer (by representing that it will supply the product of a domestic small business manufacturer or processor unless a waiver is granted by the SBA).
Here, SBA granted a class waiver for the products at issue. GAO found this waiver to be determinative, writing that “[w]hen SBA issues a waiver of the nonmanufacturer rule, a firm can supply the product of any size business without regard to the place of manufacture.” Thus, GAO found “no merit to the protester’s contention that the agency’s market research failed to consider whether the firms identified had the capability to perform and could comply with the [nonmanufacturer] rule.”
GAO denied Walker Development’s protest.
Coming so close on the heels of the VA’s adoption of a Class Deviation to the VAAR, the Walker Development decision is quite interesting. The decision confirms SBA’s authority to grant a waiver of the nonmanufacturer rule and, when SBA does so, the waiver applies in the contest of an SDVOSB “Rule of Two” analysis. The VA’s Class Deviation, however, attempts to usurp this authority by reserving for its Heads of Contracting Activity the authority approve the use of a class waiver for a particular VA solicitation—strongly suggesting that the VA believes that it can simply ignore existing SBA class waivers in the Rule of Two analysis. This wouldn’t be the first time SBA and the VA butted heads on an SDVOSB contracting issue. Time (and further protests) will tell who is right.
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A group of companies has agreed to pay $5.8 million to resolve a False Claims Act case stemming from alleged affiliations among the companies.
According to a Department of Justice press release, the settlement resolves claims that En Pointe Gov Inc (now known as Modern Gov IT Inc.) falsely certified that it was a small business for purposes of federal set-aside contracts, despite alleged affiliations with four other companies–all of whom will also pay a portion of the settlement.
The government alleged that, between 2011 and 2014, En Pointe Gov Inc. falsely represented that it was a small business. “In particular,” the press release states, “the government alleged that En Pointe Gov Inc.’s affiliation with the other defendants rendered it a non-small business, and, thus, ineligible for the small business set-aside contracts it obtained.” The government also alleged that En Pointe under-reported sales made under its GSA Schedule contract, resulting in underpayment of the Industrial Funding Fee.
The issue came to light as the result of a lawsuit filed by an apparent competitor, Minburn Technology Group, and Minburn’s managing member. Minburn filed the lawsuit under the False Claims Act’s whistleblower provisions, which allow private individuals to sue on behalf of the government. Miburn and its managing member stand to receive approximately $1.4 million as their share of the settlement.
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It’s been a very busy week in government contracting with the SBA issuing its final rule on the small business mentor-protege program. It has given us here at Koprince Law a lot to read over and blog about so that SmallGovCon readers can stay abreast of all of the changes packed inside this lengthy document.
But as important as the mentor-protege rule is for small and large contractors alike, it’s not the only government contracts news making headlines this week. In this week’s SmallGovCon Week in Review, you’ll find articles on proposed new whistleblower protections, opportunities for small businesses at the close of the fiscal year, significant pricing discrepancies under GSA Schedule contracts, and much more.
A new bipartisan measure would give subgrantees and personal services contractors the same whistleblower protections currently afforded contractors, grant recipients and subcontractors. [Government Executive]
An advocacy group for small businesses is once again claiming that giant corporations are reaping billions from federal small business contracts. [Mother Jones]
It’s not too late to get in on the fourth quarter government spending bonanza so long as you are a company that has some prospects in the pipeline. [Federal News Radio]
DoD’s new procurement evaluation process is moving toward objectivism and a more mathematical system of judgement, as part of an overall shift in favor of Lowest Price Technically Available evaluations. [Federal News Radio]
Officials at five Army components failed to fully comply with rules for evaluating contractors’ past performance when awarding those firms work. [Government Executive]
An audit report shows that Army officials did not consistently comply with requirements for assessing contractor performance. [Office of Inspector General]
IT reseller contracts present significant challenges for the GSA’s schedules program, according to a GSA IG report. [Office of Inspector General]
Nearly half of the Democratic House caucus asked defense authorization conferees to remove “harmful language” narrowing the application of the Fair Play and Safe Workplaces executive order. [Bloomberg BNA]
Small businesses can find plenty of opportunities as the curtain comes down on the federal fiscal year. [Government Product News]
An update to the Freedom of Information Act was signed into law earlier this month and mandates a presumption of openness, and adds new appeal rights for citizens whose requests are denied. [Federal News Radio]
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With the finalization of the new SBA Small Business Mentor Protégé Program, other agencies without statutorily-authorized mentor-protege programs must seek SBA approval of their mentor-protege programs within one year, if they wish those programs to continue.
In a final rule scheduled to be effective August 24, 2016, the SBA questioned the need for other agencies (except the Department of Defense) to continue to operate their own mentor-protege programs, but provided a road map for agencies to preserve their separate mentor-protege programs if they wish.
As we have discussed in detail on SmallGovCon, the new “universal” small business mentor-protégé program establishes a government-wide program open to all small businesses, consistent with the SBA’s mentor-protégé program for participants in SBA’s 8(a) Program. But the final rule doesn’t just add a new SBA mentor-protege program–it may also signal the end of many other Federal mentor-protege programs.
Under the final rule, a Federal department or agency can no longer operate its own mentor-protégé program, unless: 1) the agency submits a program plan to the SBA, and 2) receives the SBA Administrator’s approval of the plan within one year of the SBA’s mentor-protégé regulations finalization. The requirement for SBA approval does not apply to DoD, which has special statutory authority to operate its own mentor-protege program. However, the SBA approval requirement does apply to most other Federal mentor-protege programs, including those operated by the VA, NASA, DHS, State Department, and so on.
The SBA “received only a few comments” regarding the proposal to require most agencies to obtain SBA approval to continue independent mentor-protege programs. These commenters “agreed with the statutory provisions in questioning the utility of other Federal mentor-protege programs” now that the SBA has established a mentor-protege program open to all small businesses. However, commenters raised two specific concerns about the potential phase-out of other agencies’ mentor-protege programs: 1) Would the new regulations be a disincentive for mentors to utilize their protégés as subcontractors? And, 2) would the SBA have the necessary resources to handle mentor-protégé applications for the entire government?
Many of the other agency-specific mentor-protégé programs incentivize mentors to utilize their protégés as subcontractors. For example, some agencies provide additional evaluation points to a large business submitting an offer on an unrestricted procurement where the large business is using its protege as its subcontractor. Other agencies give a large prime contractor additional credit toward its subcontracting plan goals where the large prime contractor uses its protege as a subcontractor.
The SBA acknowledged that the new small business mentor-protege program “assume more of a prime contractor role for proteges, but would also encourage subcontracts from mentors to proteges as part of the developmental assistance that proteges receive from their mentors.” The SBA declined to adopt specific subcontracting incentives as part of its final rule, but will allow individual procuring agencies the flexibility to do so. The SBA writes:
SBA believes that it is up to individual procuring agencies whether to provide subcontracting incentives for any specific procurement, SBA also believes that these incentives should be authorized and used, where appropriate. As such, this final rule identifies subcontracting incentives as a possible benefit to be provided by procuring activities in appropriate circumstances. The final rule authorizes procuring activities to provide incentives in the contract evaluation process to a firm that will provide significant subcontracting work to its SBA-approved protégé firm.
With respect to the processing of mentor-protege applications, the SBA writes that it is “working to adequately process mentor-protege applications,” but if it is unable to handle the volume of applications and agreements, the SBA may institute “open” and “closed” periods wherein the SBA would only accept mentor-protégé applications in the “open” periods. Since the SBA itself is unable to predict whether it will have the resources to process mentor-protege applications year-round, other agencies will have to decide for themselves whether this uncertainty is a reason to maintain separate mentor-protege programs.
The government’s mentor-protege programs have been in a state of flux since early 2013, when Congressfirst directed the SBAto adopt rules governing other agencies’ mentor-protege programs. In 2017, we should finally get some long-awaited clarity as to whether other agencies’ mentor-protege programs will continue.
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Joint venture partner or subcontractor? An offeror’s teaming agreement for the CIO-SP3 GWAC wasn’t clear about which tasks would be performed by joint venture partners and which would be performed by subcontractors–and the agency was within its discretion to eliminate the offeror as a result.
A recent GAO bid protest decision demonstrates that when a solicitation calls for information about teaming relationships, it is important to clearly establish which type of teaming relationship the offeror intends to establish, and draft the teaming agreement and proposal accordingly.
Here at SmallGovCon, my colleagues and I discuss teaming agreements and joint ventures frequently. As important as teaming is for many contractors, one might think that the FAR would be overflowing with information about joint ventures and prime/subcontractor teams. Not so. Most of the legal guidance related to joint ventures and teams is found in the SBA’s regulations. The FAR itself is much less detailed. FAR 9.601 provides this definition of a “Contractor Team Arrangement”:
“Contractor team arrangement,” as used in this subpart, means an arrangement in which—
(1) Two or more companies form a partnership or joint venture to act as a potential prime contractor; or
(2) A potential prime contractor agrees with one or more other companies to have them act as its subcontractors under a specified Government contract or acquisition program.
So, under the FAR, a Contractor Team Arrangement, or CTA, may take two forms: a joint venture (or other partnership) under FAR 9.601(1), or a prime/subcontractor teaming arrangement under FAR 9.601(2). The details of how to form each arrangement are left largely to guidance established by the SBA.
Let’s get back to the GAO protest at hand. The protest, NextGen Consulting, Inc., B-413104.4 (Nov. 16, 2016) involved the “ramp on” solicitation for the NIH’s major CIO-SP3 small business GWAC IDIQ. The solicitation included detailed instructions regarding CTAs. Specifically, the solicitation provided that if an offeror wanted its teammates to be considered as part of the evaluation process, the offeror’s team needed to be in the form prescribed by FAR 9.601(1), that is, a joint venture or partnership. In contrast, the solicitation provided that, for prime/subcontractor teams under FAR 9.601(2), only the prime offeror would be evaluated.
NextGen Consulting, Inc. submitted a proposal as a CTA. NextGen identified three teammates: WhiteSpace Enterprise Corporation, Twin Imaging Technology Inc., and the University of Arizona. The teaming agreement specified that NextGen and WhiteSpace were teaming under FAR 9.601(1), whereas Twin Imaging and the University were teaming with the parties under FAR 9.601(2).
The teaming agreement identified “primary delivery areas” for each teammate. With respect to the 10 task areas required under the solicitation, NextGen was to handle overall contract management and related responsibilities for task areas 2 and 4-10, WhiteSpace was assigned task area 1, Twin Imaging was assigned task area 3, and the University was assigned task areas 1, 4, 5, and 10. In its proposal, NextGen referred to the capabilities of “Team NextGen” for all 10 task areas.
The NIH found that because the teaming agreement distributed the task areas without regard for whether the teaming relationship fell under FAR 9.601(1) or FAR 9.601(2), it was impossible for the agency to distinguish between the two types of teammates. The NIH concluded that the resulting confusion about the roles and responsibilities of the parties made it impossible for the NIH to evaluate the proposal in accordance with the solicitation’s requirements–which, of course, called for the evaluation only of FAR 9.601(1) teammates. The NIH eliminated NextGen from the competition.
NextGen filed a bid protest with the GAO, challenging its exclusion. NextGen argued that the NIH unreasonably excluded its proposal based upon a misintepretation of the teaming agreement. NextGen contended that, taken as a whole, the teaming agreement was clear. NextGen pointed out that the teaming agreement specifically identified itself and WhiteSpace as FAR 9.601(1) teammates, and specifically identified Twin Imaging and the University as FAR 9.601(2) teammates.
The GAO disagreed. It noted that “the solicitation required that a CTA offeror submit a CTA document to clearly designate a team lead and identify specific duties and responsibilities.” Contrary to NextGen’s contentions, “[t]he record shows that as a whole, NextGen’s CTA provided conflicting information as to who the team lead was, and failed to clearly identify the specific duties and responsibilities of the team members.” GAO pointed out that NextGen’s proposal used the term “Team NextGen,” which “did not provide any indication as to what the specific duties and responsibilities of the team members were.”
Joint venture agreements and prime/subcontractor teams are very different arrangements. As the NextGen Consulting protest demonstrates, it is important for an offeror to understand what type of teaming arrangements it is proposing, and draft its teaming documents and proposal accordingly.
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The government’s use of specifications within a contract carries an implied warranty that the specifications are free from errors. When a contractor is misled by the erroneous specifications, the contractor may seek recovery through an equitable adjustment to the contract. But what happens when the government seeks services through a requirements contract and is simply negligent in estimating its needs?
A recent Federal Circuit decision, Agility Defense & Government Services, Inc., v. United States, No. 16-1068 (Fed. Cir. 2017) finds that a contractor may be able to recover damages in such instances under a negligent estimate theory.
The underlying contract at issue in Agility Defense was a requirements contract whereby Agility agreed to dispose of as much surplus military property as required by the DLA Defense Reutilization and Marketing Service (“DRMS”). While DRMS had historically performed the underlying services, in 2007, DLA determined it needed help to sustain the workload, and decided to solicit outside contractors.
During the solicitation period, DRMS issued several amendments relevant to the anticipated workload and costs. Amendment 002, issued in February 2007, directed offerors to a website containing DRMS workload history and inventory levels. DRMS updated its website biweekly to reflect line items received, scrap weight, and scrap sales during the prior weeks. Amendment 004, issued in June 2007, stated, “[w]e anticipate an increase in property turn-ins.” The amendment also added clause H.19, which notified contractors of possible significant workload increases or decreases and provided a process for the contract to renegotiate the price in the event of a 150% workload increase when compared to the previous three months. The following month, DRMS issued Amendment 007, which projected a stable workload for the first two years and then workload decreases for option years three through five.
Agility, one of three offerors, received notice of award in November 2007, and was issued its first task orders in early 2008. These task orders incorporated a workload baseline derived from the same website referenced in Amendment 002. Upon starting performance, Agility quickly fell behind after inheriting a backlog of approximately 70,000 line items and a larger volume of line items than anticipated. In response to DRMS’s performance concerns, Agility increased its staffing by 50%. After issues arose concerning the increased workload and interpretation of clause H.19, the parties modified clause H.19 to allow for a price adjustment if the workload increased by more than 25% above monthly averages.
The contract was terminated for convenience in June 2010, and Agility filed a claim to recoup the increased costs of performing the contract. After DRMS awarded only a fraction of costs claimed, Agility pursued its claim in the Court of Federal Claims. The court denied Agility’s claim, finding DRMS’s conduct was acceptable because it provided Agility with “reasonably available historical data.” Upon appeal, the Federal Circuit court disagreed.
In finding DRMS’s estimates unrealistic, the court noted that to prove the government negligently estimated its requirements contract needs, “the contractor must show by preponderant evidence that the government’s estimates were ‘inadequately or negligently prepared, not in good faith, or grossly or unreasonably inadequate at the time the estimate was made.’”
By way of background, for requirements contracts, FAR 16.503 requires contracting officers to provide offerors with a “realistic estimate” of the workload. The FAR caveats this requirement with the following terms:
This estimate is not a representation to an offeror or contractor that the estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. The contracting officer may obtain the estimate from records of previous requirements and consumptions, or by other means, and should base the estimate on the most current information available.
In Agility Defense, the court held that the Court of Federal Claims’ decision was “clearly erroneous” because it ignored that DRMS had provided both historical data and requirements estimates in Amendment 007, and the historical data was not “the most current information available.” Since Amendment 007 projected stable and then declining scrap weight, DRMS estimated that property turn-ins would be constant and then decline.
Furthermore, the court found that providing historical data was not per se reasonable. Since DRMS possessed not only is historical requirements, but also information concerning its anticipated requirements, DRMS was aware of an anticipated surge in workloads. Thus, DRMS could not rely on the fact that it provided historical workload data to satisfy the requirements of FAR 16.503. While “DRMS was not obligated to guarantee the accuracy of its estimates or perfectly forecast its requirements,” DRMA was negligent in not providing Agility was a realistic estimate.
Agility Defense shows that the government is given much latitude in estimating its needs under a requirements contract. However, this is latitude is not unlimited. Where the government’s estimates are unrealistic and not based on the most current information available, a contractor is not left to bear the risk.
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The SBA has changed its affiliation regulations to clarify when a presumption of affiliation exists due to family relationships or economic dependence.
In its major final rulemaking published today, the SBA clears up some longstanding confusion regarding affiliation based on a so-called “identity of interest.”
The SBA’s current “identity of interest” affiliation rule states that businesses controlled by family members may be deemed affiliated–but does not explain how close the family relationship must be in order for the rule to apply. The SBA’s final rule eliminates this confusion. It states:
Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.
By limiting the application of the rule to certain types of close family relationships, the SBA essentially codifies SBA Office of Hearings and Appeals case law, which has long interpreted the rule to apply only to close family relationships. It’s a good thing to have the types of relationships at issue spelled out in the regulation, rather than buried in a series of administrative decisions.
More interesting to me is the fact that the final rule suggests that the presumption of affiliation doesn’t apply unless the firms in question “conduct business with each other.” I wonder whether this regulation essentially overturns OHA’s recent decision in W&T Travel Services, LLC. In that case, OHA held that two firms were affiliated because the family members in question were jointly involved in a third business–even though the two firms in question had no meaningful business relationships. I will be curious to see how OHA addresses this component of the final rule when cases begin to arise under it.
The SBA’s final rule also codifies OHA case law regarding so-called “economic dependence” affiliation. As my colleague Matt Schoonover recently wrote, OHA has long held that a small business ordinarily will be deemed affiliated with another entity where the small business receives 70% or more of its revenues from that entity. The final rule provides:
(2) SBA may presume an identity of interest based upon economic dependence if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years.
(i) This presumption may be rebutted by a showing that despite the contractual relations with another concern, the concern at issue is not solely dependent on that other concern, such as where the concern has been in business for a short amount of time and has only been able to secure a limited number of contracts.
As with the rule on family relationships, the codification of the “70% rule” will help small businesses better understand their affiliation risks, without having to delve into OHA’s case law. In that regard, it’s a positive change.
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NAICS code appeals, while little known, can be an extraordinarily powerful tool when it comes to affecting the competitive landscape of government acquisitions.
Case in point: in a recent NAICS code appeal decision issued by the SBA Office of Hearings and Appeals, the appellant prevailed–and obtained an order requiring the contracting officer to change the solicitation’s size standard from 500 employees to $15 million.
OHA’s decision in NAICS Appeal of Hendall Inc., SBA No. NAICS-5762 (2016) involved an HHS solicitation for support for its public engineering platform. HHS issued the solicitation as a small business set-aside under NAICS code 511199 (All Other Publishers), with a corresponding 500 employee size standard.
Here’s where many small businesses would throw in the towel: “500 employees? I can’t compete with that. I’m moving on to the next solicitation.”
But Hendall Inc. understood that a prospective small business offeror has the right to file a NAICS code appeal directly with OHA. So Hendall filed a NAICS code appeal, arguing that the HHS had assigned an incorrect NAICS code. Hendall made the case that the appropriate NAICS code was 561422 (Telemarketing Bureaus and Other Contact Centers), with a corresponding $15 million size standard.
The incumbent contractor–which presumably was small under the 500-employee size standard, but not under the $15 million size standard–intervened in the case. The incumbent argued that HHS’s original NAICS code designation was correct.
OHA evaluates NAICS code appeals primarily by comparing the solicitation’s statement of work to the NAICS code definitions in the Census Bureau’s NAICS Manual. In this case, OHA noted that the NAICS Manual defines NAICS code 511199 as establishments “generally known as publishers,” who “may publish works in print or electronic form.” NAICS code 561422, in contrast, comprises “establishments engaged in operating call centers that initiate or receive communications for others via telephone, facsimile, email, or other communication modes . . ..”
After examining the statement of work, OHA wrote that “the Contractor will not be writing, editing, or in any other way producing publications for [HHS].” Because “the Contractor will not be engaged in activities which constitute publishing . . . the CO’s designation of a publishing NAICS code for this procurement is clear error.”
Having found the original NAICS code to be erroneous, OHA then turned to the question of what NAICS code was appropriate. This second part of the analysis is as important as the first; OHA is under no obligation to accept the appellant’s proffered NAICS code even when OHA agrees that the original NAICS code was incorrect. In many cases, OHA has assigned a third code–one that neither the appellant nor the agency wanted.
In this case, however, OHA wrote that “the operating of the Contact Center appears to be the major part of this procurement.” The Contact Center, in turn, “responds to inquiries by telephone, email, fax and postal mail.” Thus, while Hendall’s suggested NAICS code might not be the “perfect fit,” OHA concluded that NAICS code 561422 “best describes the principal purpose of the instant acquisition . . ..”
OHA granted Hendall’s NAICS code appeal. OHA issued an order requiring HHS to “amend the solicitation to change the NAICS code designation from 511199 to 561422.” And just like that, the solicitation’s size standard changed from 500 employees to $15 million.
The Hendall NAICS code appeal, on its surface, is a fact-specific case about a particular HHS solicitation. But beyond that, the Hendall case is an example of the potential power of a NAICS code appeal. By successfully appealing the solicitation’s NAICS code, Hendall dramatically affected the competitive pool for the solicitation–including, potentially, excluding the incumbent as an eligible offeror.
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Federal construction contracts incorporate the FAR’s payment and performance bonding requirements as a matter of law, even if the solicitation omits these bonding provisions.
In a recent Armed Services Board of Contract Appeals decision, K-Con, Inc., ASBCA Nos. 60686, 60687, a contractor ran headlong into construction bonding issues when the Army demanded payment and performance bonding for two of its construction contracts despite there being no bonding requirements in either of the contracts. According to the ASBCA, the bonds were required anyway.
K-Con involved two Army procurements for the construction of a laundry facility and communications equipment shelter at Camp Edwards in Massachusetts. The solicitations were both posted through the GSA’s eBuy system. The Contracting Officer inadvertently used Standard Form 1449 (Solicitation/Contract/Order for Commercial Items) despite the procurement being for construction services. As a result, neither of solicitations included provisions requiring payment or performance bonding.
K-Con, Inc. submitted proposals and was awarded both contracts on October 10, 2013. Before work began on either project, the Army requested that K-Con obtain performance and payment bonding. K-Con, however, was unable to obtain the necessary bonding, and proposed an alternative solution. Negotiations progressed slowly. On September 20, 2015—two years after the contract was awarded—K-Con finally obtained the requested bonding. K-Con subsequently completed the contract.
As a consequence of having performance delayed two years, K-Con was forced to pay more for labor and materials than it originally anticipated in its bid. After completing the construction work, K-Con submitted a request for equitable adjustment under each contract. Between the two REAs, K-Con sought a total of $116,336.56. K-Con argued it was entitled to the upward adjustment because performance bonding was not a requirement in either of the original solicitations.
The ASBCA’s discussion of the facts glosses over what happened next. Apparently, however, the Army rejected the REAs, and took the position that bonding had been required by law, even if it wasn’t specified in the solicitations or contracts. Since an REA is not a claim (and the ASBCA lacks jurisdiction over an appeal of a denied REA), the Army must have treated the REAs as claims, or K-Con must have refiled its REAs as claims–the decision doesn’t specify. One way or another, though, the dispute ended up at the ASBCA.
In resolving the case, the ASBCA turned to the longstanding contracting doctrine first developed in G.L Christian & Associates v. United States, 320 F.2d 345 (Ct. Cl. 1963)—the so called Christian doctrine. As the ASBCA explained, “nder the . . . Christian doctrine, a mandatory contract clause that expresses a significant or deeply ingrained strand of public procurement policy is considered to be included in a contract by operation of law.”
In the case of the FAR’s bonding provisions, the ASBCA found that both prongs of the Christian doctrine were met.
First, FAR 28.102-1 requires payment and performance bonding be obtained by contractors for almost all construction contracts exceeding $150,000. FAR 28.102-1 implements a federal statute formerly known as the Miller Act, and currently codified at 40 U.S.C. 3131-3134. When FAR 28.102-1 applies, the solicitation and contract are required to contain the clause at FAR 52.228-15, which imposes the contractual requirement for payment and performance bonds. Because of this legal framework, the ASBCA ruled that “FAR 52.228-15 was a mandatory clause in the contract.”
Second, the ASBCA concluded payment and performance bonding was a “significant component of public procurement policy.”
The ASBCA explained that, with respect to payment bonds, “[a] principal underlying purpose of the payment bond provision is to ensure that subcontractors are promptly paid in full for furnishing labor and materials to federal construction projects.” In particular, “the Miller Act provides subcontractors on federal construction projects with the functional equivalent of a mechanic’s lien available to subcontractors on non-federal projects.” Because the government is immune from most lawsuits, “mechanics’ liens cannot be placed against public property.”
The purpose of a performance bond is to “assure that the government has a completed project for the agreed contract price.” The performance bond “provides protection to the government in situations where the prime contractor defaults in the performance of work or is terminated for default.”
The ASBCA concluded both types of bonding were deeply ingrained features of federal procurement policy. As such, the second prong of the Christian doctrine was satisfied.
The ASBCA held that “the bonding requirements set forth in FAR 52.228-15 were considered to be included in the contracts by operation of law pursuant to” the Christian doctrine. The ASBCA denied K-Con’s appeals.
As K-Con demonstrates, the Christian doctrine allows the government to apply mandatory FAR provisions to contractors even if those provisions were inadvertently omitted in the solicitation. It is thus wise for offerors to carefully review the provisions of a solicitation for the specific terms that the offeror should expect to find. If a particular omission seems too good to be true, odds are it is–and it may be better to raise the issue before proposals are submitted than risk the application of the Christian doctrine down the road.
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The HUBZone contracting program, while well-intended to provide economic and employment opportunities in otherwise low income, high unemployment areas, must nonetheless connect HUBZone firms with government contracts, the overwhelming majority of which are not located within a HUBZone.
If HUBZone firms are to experience growth, they will need to utilize the local labor force in the area where the contract is to be performed, in addition to utilizing the labor force residing in their HUBZone to perform indirect labor functions. As a company’s direct labor force grows, their indirect labor will also grow, producing more employment opportunities within the HUBZone, thereby fulfilling an intent of the program.
The HUBZone Empowerment Act became law through the Small Business Reauthorization Act of 1997. The Small Business Administration (SBA) regulates and implements the program, determines the businesses eligible to receive HUBZone contracts, maintains a database of qualified HUBZone businesses, and adjudicates protests of eligibility to receive HUBZone contracts. HUBZone contracting encourages small businesses to locate in and hire employees from economically disadvantaged areas of the United States. HUBZone entities may receive competitive advantages in winning federal contracts.
The HUBZone program was designed to promote economic development and grow employment opportunities in metropolitan or rural areas with low income, high poverty rates, and/or high unemployment rates, by targeting federal contracts to small businesses in these areas. This is a conceptual shift where contracting preference is targeted at geographic areas with specified characteristics, as opposed to targeting it to people or businesses with specified characteristics.
There are five classes of HUBZones: qualified census tracts; qualified counties; Indian reservations; difficult development areas; and military bases closed under Base Realignment and Closure Act. The program uses three mechanisms for targeting contracts to HUBZone businesses: set-asides, sole source awards, and a 10% price preference; with set-asides being the preferred method of matching HUBZone businesses with federal opportunities.
The government-wide goal for most agencies is to award at least 3% of their eligible federal contracting dollars to HUBZone-certified firms [see 15 USC 644 (g)]. Almost all federal agencies participate in the HUBZone program. Although several individual agencies often met or exceeded this goal, it has never been achieved government-wide.
The following table shows the performance of HUBZone against other small business goals in fiscal year 2015.
Small Business Contract Spending by Federal Agencies (FY15)
Eligible Dollars – Excludes Some Special Programs 20 Largest Spending Agencies
*Millions of Dollars (rounded)
Revised January 2017; Fiscal 2016 data will not be official until mid-2017
The table shows that HUBZone demonstrates tremendous potential for growth. Peaking in 2009, the HUBZone program nearly reached its 3% goal, finishing just short at 2.7%. Since 2011, as funding for the program has decreased, so has the use of HUBZone businesses, now averages 1.74% of procurement budget between 2013-16. ALL = All Small Businesses; SDB = Small Disadvantaged Businesses [including 8(a)]; WOSB = Women-Owned Small Businesses; SDVO = Service-Disabled Veteran-Owned Small Businesses; HUBZONE = HUBZone-Certified Small Businesses. Source: smallbusiness.data.gov.
Early program critics questioned if the program would offer enough incentive for business to choose to locate/relocate in areas they would otherwise avoid. HUBZones are rarely located at or near Federal installations or business locations; could the failure to achieve the government’s goal be mitigated by amending the 35% requirement against all employees employed by the business, to a 35% requirement against indirect employees only? Here is a practical example:
Company “R” is a small business whose principal office is located on an Indian Reservation in South Dakota approximately 200 miles from the nearest Federal installation or location of business. Company R has 20 employees at its principal office: 1 executive, 3 finance, 2 HR, 1 compliance, 3 business development, and 2 project managers and 8 direct employees who work in the company’s primary business line. All the employees (10 indirect; 10 direct) live on the reservation. Meeting the all requirements to include the 35% mandate, the company certifies as a HUBZone.
Implementing its growth strategy, Company R subcontracts to a prime for a contract whose place of performance is Huntsville, AL. The subcontract is to provide 100 full time equivalent (FTE) employees. None of the new direct employees live in the HUBZone where Company R is located, nor in any adjoining HUBZone. As a result, of the 120 employees, only 20 (16.7%) live in the HUBZone. Company R can no longer certify as a HUBZone company.
This example, shows that as a practical matter, a company in a HUBZone is not incentivized to secure a HUBZone certification when performance on a federal contract will likely not be located near or in the HUBZone. With 20 employees all residing in a HUBZone, Company R is capped as a 57-person labor force – in other words, either priming or subbing on a 37 FTE contract vs. the full 100 FTE. However, if Company R were to ONLY count its indirect employees as the basis for the 35% requirement, it could continue as a HUBZone concern.
Therefore, to expand the HUBZone program, legislation should be submitted to amend the Small Business Act and 13 C.F.R. 126.200 be amended to require a HUBZone small business to:
Maintain a principal office located in a HUBZone and ensure that at least 35% of its indirect employees reside in a HUBZone as provided in paragraph (b)(4) of this section; or
Certify that when performing a HUBZone contract, at least 35% of its indirect employees will reside within any Indian reservation governed by one or more of the Indian Tribal Government owners, or reside within any HUBZone adjoining such Indian Reservation
If these changes are made, HUBZone businesses will have the potential to grow their companies and better serve the economic development needs of the areas in which they are located. As these companies grow, their workforce from the HUBZone area will also grow to meet the company’s management and overhead needs. Finally, these changes will better position government agencies to make their HUBZone goals.
Michael Anderson, Executive Director
Michael “Keawe” Anderson, is a Native Hawaiian who is passionate about advancing Native economic development. He is NACA’s principal advocate of policies and programs for the participation of Native American Tribes, Alaska Native Corporations, Native Hawaiian Organizations, and individually-owned Native businesses in the federal marketplace.
NACA represents Native community-owned businesses who serve a million tribal members or shareholders by applying their earning from government contracts to the benefit of their communities. NACA recently added individually-owned Native businesses as NACA Associates. In total, these businesses provide quality goods and services to federal agencies in all 50 states and internationally.
A graduate of the Air Force Academy, Mike has a master’s in business administration from the University of Northern Colorado, a master’s in strategic military studies from the Air University, and a master’s certificate in government contracting from the George Washington University.
Native American Contractors Association – 750 First Street NE, Suite 950 – Washington, DC – 20002
Phone: 202-758-2676 Email: email@example.com Website: www.nativecontractors.org
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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While an agency may require a unilateral reduction in a contractor’s price due to a reduced scope of work, the government carries the burden of proving the amount.
In a recent decision, the Armed Services Board of Contract Appeals held that while an agency was entitled to unilaterally reduce the scope of work, the agency had not proven the amount of the unilateral deduction it demanded–and the government’s failure to meet its burden of proof entitled the contractor to the remaining contract price.
In HCS, Inc., ASBCA No. 60533, 08-1BCA ¶ 33,748 (2016), the Naval Air Station at Corpus Christi developed a sink hole, which the Navy believed was attributable to a leak in a buried 8-inch pipe. To correct the problem, the Navy issued a firm-fixed price solicitation for excavation and repair of the damaged pipe section, among other tasks. Offerors were instructed they could expect to replace up to 60 feet of 8-inch pipe.
HCS, Inc. was subsequently awarded the contract at a fixed price of $40,975. After obtaining the necessary permitting, HCS began excavating the damaged pipe sections. During the excavation, HCS discovered there was a previously undisclosed section of 4-inch pipe that ran perpendicular to the 8-inch section the Navy believed was damaged. The 4-inch pipe intersected the 8-inch pipe in a “tee” joint. Upon further inspection, it became clear that the 4-inch pipe was the actual cause of the leak.
HCS consulted with the Contracting Officer’s Representative, who informed HCS that the 4-inch pipe previously provided water to a structure that had since been torn down. The 4-inch pipe had been capped, but was now leaking. HCS explained there were two paths forward. HCS could either splice in a new segment of 8-inch pipe, thereby removing the tee intersection with the 4-inch pipe, or demolish the majority of the discovered 4-inch pipe and recap it, preserving the tee intersection. HCS was instructed to preserve the tee intersection and recap the 4-inch pipe. No 8-inch pipe needed to be replaced.
As a result of the change in work, HCS estimated that the total price to the government would decrease by $1,435. But even though HCS had performed work related to the 8-inch pipe, the Navy contended the costs for the 8-inch pipe work should be removed from the contract. The Navy instructed HCS to submit a cost breakdown of labor, materials and equipment for the entire project. HCS countered that the Navy was only entitled to the documentation for the new work because this was a firm fixed price contract. When HCS did not provide all the documentation the Navy desired, the COR estimated the revised contract work to be worth $19,892.87. The Navy unilaterally lowered the contract price to that amount.
HCS filed a claim seeking payment of the full original contract price. The Contracting Officer (unsurprisingly) denied the claim. HCS then filed an appeal with the ASBCA, arguing that the amount of the Navy’s unilateral deduction was unreasonable and unsupported.
The ASBCA wrote that under the FAR’s Changes clause “the contract price must be equitably adjusted when a change in the contract work causes an increase or decrease in the cost of performance of its work.” In the case of a “change that deletes contract work,” the government “is entitled to a downward adjustment in contract price to the extent of the savings flowing to the contractor therefrom.”
However, although the government is entitled to a downward adjustment in such cases, “[t]he government has the burden of proving the amount of cost savings due to deletion of work.” A contractor, therefore, “is entitled to receive its contract price, unless the government demonstrates the government is entitled to a price reduction for deleted work.”
In this case, the ASBCA held that “the burden of proof is on the Navy to show the amount of cost savings due to its deletion of work.” The ASBCA rejected the Navy’s assertion that it was essentially entitled to “re-price” the entire contract, writing, “[w]e are aware of no authority allowing the Navy to delete work from a contract after work performance and then refuse to pay for the work initially specified and performed, and the Navy cites us no legal authority for such action.”
The ASBCA noted that “[a]t trial, the Navy did not specifically challenge the reasonableness of any of the dollar amounts presented by” HCS. “Simply put,” the ASBCA concluded, “the Navy did not carry its burden of proof. It has made no showing here of entitlement to a price reduction based on deleted work.”
The ASBCA sustained HCS’s appeal, and held that HCS was entitled to recover $23,082, plus interest.
When a contract change results in a reduction in the contractor’s scope of work, the agency is entitled to an equitable adjustment. But, as HCS, Inc. demonstrates, the government–not the contractor–bears the burden of demonstrating that the amount of that downward equitable adjustment is appropriate. In the context of a firm fixed price contract, if the agency cannot provide the necessary proof, the contractor is entitled to the full contract price.
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An agency acted improperly by excluding an offeror from the competitive range simply because the offeror received a “neutral” past performance score.
In a recent bid protest decision, the GAO wrote that the FAR precludes evaluating an offeror unfavorably because of a “neutral” or “unknown” past performance rating–and that the prohibition on unfavorable treatment prevents an agency from excluding an offeror from the competitive range on the basis of a neutral rating.
The GAO’s decision in Xtreme Concepts Inc., B-413711 (Dec. 19, 2016) involved an Army Corps of Engineers solicitation for the installation of transformers at Millers Ferry Powerhouse in Alabama. The solicitation, which was issued as a small business set-aside, contemplated a best value tradeoff, considering both price and non-price factors.
Past performance was one of the non-price factors the Corps was to consider. The solicitation specified that only the past performance of the prime contractor would be considered. (The GAO’s decision does not explain why the Corps chose to deviate from FAR 15.305(a)(2)(iii), which provides that the past performance of a major subcontractor “should” be evaluated).
Xtreme Concepts Inc. submitted a proposal. In its proposal, Xtreme submitted five past performance projects–all of which had been performed by Xtreme’s proposed subcontractor.
In its evaluation, the Corps concluded that, consistent with the solicitation’s instructions, it could not evaluate the subcontractor’s past performance. The Corps assigned Xtreme a “neutral” past performance rating. Xtreme’s proposal was the lowest-priced, and Xtreme’s non-price scores (other than past performance) were similar to those of the other offerors.
The Corps then established a competitive range. The Corps excluded Xtreme from the competitive range, reasoning that Xtreme’s proposal was not among the most highly-rated due to its neutral past performance rating. The offerors included in the competitive range were all rated “satisfactory confidence” or “substantial confidence” for past performance.
Xtreme filed a GAO bid protest challenging its exclusion. Xtreme argued that it was improper for the agency to exclude its proposal based solely on a neutral past performance rating, especially in light of Xtreme’s low price.
The GAO wrote that “the FAR requires that an offeror without a record of relevant past performance, or for whom information on past performance is not available, may not be evaluated favorably or unfavorably on past performance.” In this regard, “an agency’s exclusion of an offeror from the competitive range based solely on a neutral or ‘unknown’ past performance rating constitutes ‘unfavorable treatment’ and is improper.”
In this case, the GAO held, “the agency was not permitted by either the terms of the solicitation or FAR 15.305(a)(2)(iv) to evaluate offerors favorably or unfavorably when they lack a record of relevant past performance . . ..” The GAO sustained Xtreme’s protest.
The FAR protects contractors from being evaluated unfavorably based on a lack of relevant past performance. As the Xtreme Concepts bid protest demonstrates, the FAR’s prohibition on unfavorable treatment extends to an agency’s competitive range determination.
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The Service Contract Act requires contractors to pay certain provide no less than certain prevailing wages and fringe benefits (including vacation) to its service employees. The amount of vacation ordinarily is based on an employee’s years of service—and service with a predecessor contractor counts. The FAR’s Nondisplacement of Qualified Workers provision, in turn, requires follow-on contractors to offer a “right of first refusal” to many of those same incumbent employees.
A follow-on contractor is to be given a list of incumbent service personnel, but that information ordinarily isn’t available at the proposal stage. So what happens when a follow-on contractor unknowingly underbids because it isn’t aware how much vacation is owed to incumbent service personnel? The answer, at least in a fixed-price contract, is “too bad for the contractor.”
So it was in SecTek, Inc., CBCA 5036 (May 3, 2017)—there, the Civilian Board of Contract appeals held that a contractor must pay employees retained from the incumbent nearly $170,000 in wage and benefit costs based on its underestimate of those costs in its proposal.
In 2015, the National Archives and Records Administration issued a request for quotations to provide security services at two NARA buildings. This solicitation fell under the Service Contract Act and also included the FAR’s the Nondisplacement of Qualified Workers clause (FAR 52.222-17). In other words, the successful contractor had to provide a right of first refusal to qualified service employees, and honor years of service incurred by those employees with the predecessor contractor.
The solicitation included a wage determination that informed offerors that incumbent employees’ benefits were defined in part under a collective bargaining agreement. Under this agreement, the predecessor contractor had agreed to provide its employees with the following levels of vacation time:
2 weeks, for employees with 1-4 years of service;
3 weeks, for employees with 5-14 years of service; and
5 weeks, for employees with 15+ years of service.
Before submitting its final quote, SecTek asked whether the government would provide a list of the incumbent contractor’s security officers, including their seniority, before proposals were submitted. The government did not, citing the FAR’s provision that this list must instead be provided after award.
Without this list, SecTek was forced to guess the amount of vacation that would be due incumbent personnel. SecTek estimated that the average length of service for incumbent personnel was only three years and provided 80 hours of vacation time for all guards.
SecTek’s fixed price offer was $40,918,522.84. It was awarded the contract and, ten days later, was given a seniority list of the predecessor contractor’s service employees.
After award, SecTek learned that some of the incumbents service employees were owed more than 80 hours of vacation, given their seniority. So SecTek sought an equitable adjustment of its contract for this vacation time, totaling nearly $170,000. NARA denied this request, saying that it fully complied with the FAR’s requirements in disclosing the seniority list.
SecTek then filed a formal certified claim seeking a contract adjustment. After NARA refused to timely respond, SecTek appealed the deemed denial to the Civilian Board of Contract Appeals.
The issue, on appeal, was relatively straightforward: did NARA’s failure to provide SecTek with a seniority list of the incumbent contractor’s service employees before contract award entitle SecTek to a price adjustment reflecting those employees’ true vacation time? According to SecTek, the government’s refusal to provide this information precluded it from knowing the actual level of vacation pay that it would be required to pay the incumbent contractor’s employees; had it been provided this information, it could have priced its offer accordingly.
The Board denied SecTek’s appeal, finding that NARA did not violate any FAR provision by refusing to provide the incumbent contractors’ seniority levels before the award. Just the opposite, in fact:
Although information about the seniority of the predecessor contractor’s employees may have been helpful in estimating the level of benefits extended to those employees, this does not mean that the information must be, or even could have been, provided in advance of the contract award. . . . The Government . . . is not entitled to request the list [from the incumbent contractor] until thirty days prior to the expiration of the contract. In addition, the Government is not permitted to release the seniority list to the successor contractor until after contract award. The Government furnished the seniority list to SecTek on August 28, 2014—ten days after contract award and in full compliance with the FAR requirement.
Because NARA could not have properly provided SecTek with the incumbent contractor employee seniority list before the award, it did not bear any responsibility for SecTek’s low estimate of incumbent employee vacation time. The Board noted that the contract had been awarded on a fixed-price basis, and that “the general rule in fixed-price contracting is that, in the absence of a contract provision reallocating the risk, the contractor assumes the risk of increased costs not attributable to the government.” Here, SecTek “bore the risk that its cost projections might prove to be insufficient,” and SecTek alone was on the hook for the additional vacation time costs.
Through no fault of its own, SecTek underestimated the amount of vacation time due incumbent employees (which it was required to make make good faith efforts to hire) and, as a result, must absorb nearly $170,000 in additional benefit costs. SecTek, Inc. shows that when the Service Contract Act and Nondisplacement of Qualified Workers provisions intersect on a fixed-price contract, the result can be harsh.
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It’s been more than a year since the SBA issued a final rule overhauling the limitations on subcontracting for small business contracts. The SBA’s rule, now codified at 13 C.F.R. 125.6, changes the formulas for calculating compliance with the limitations on subcontracting, and allows small businesses to take credit for work performed by similarly situated subcontractors.
But the FAR’s corresponding clauses have yet to be changed, and this has led to a lot of confusion about which rule applies–especially since many contracting officers abide by the legally-dubious proposition that “if it ain’t in the FAR, it doesn’t count.” Now, finally, there is some good news: the FAR Council is moving forward with a proposed rule to align the FAR with the SBA’s regulations.
By way of quick background, way back in January 2013, former President Obama signed the 2013 National Defense Authorization Act into law. The 2013 NDAA made major changes to the limitations on subcontracting. The law changed the way that compliance with the limitations on subcontracting is calculated for service and supply contracts–from formulas based on “cost of personnel” and “cost of manufacturing,” to formulas based on the amount paid by the government. And, importantly, the 2013 NDAA allowed small primes to claim performance credit for “similarly situated entities.”
Interestingly, about a year later–well before either the SBA or the FAR Council had amended the corresponding regulations–the GAO issued a decision suggesting (although not directly holding) that the similarly situated entity concept was currently effective. But most contractors and contracting officers continued to apply the “old” rules under the FAR and SBA regulations.
On May 31, 2016–about three and a half years after the 2013 NDAA was signed into law–the SBA published a final rule implementing the changes. The SBA’s regulation took effect on June 30, 2016. Less than a month later, the VA issued a Class Deviation, incorporating by reference the new SBA regulations for VA SDVOSB and VOSB acquisitions. But for many other procurements, contracting officers continued to include FAR 52.219-14, which uses the old formulas and makes no mention of similarly situated entities. (FAR 52.219-14 applies to small business, 8(a) and WOSB contracts. For HUBZone and non-VA SDVOSB procurements, the subcontracting limits are implemented by other clauses, which use the old formulas but allow the use of similarly situated entities).
This, of course, has led to a lot of confusion. Does a contractor comply with the SBA regulation? The FAR clause? Both? Some contracting officers have taken the position that the FAR clauses govern until they’re amended. But the SBA, of course, wants contractors to follow the SBA regulations. Indeed, a joint venture formed under the SBA’s regulations must pledge to comply with 13 C.F.R. 125.6. It’s a mess.
Now, it seems, the FAR Council seems to be making progress on eliminating the FAR/SBA discrepancy. (The FAR Council is a shorthand term for the body of defense and civilian agency representatives who propose and implement changes to the FAR. If you’re interested in how this works, FAR 1.2 is chock full of fun and exciting details).
In its most recent list of “Open FAR Cases,” published on June 9, 2017, the FAR Council says that it is working on a “Revision of Limitations on Subcontracting.” Specifically, the new FAR rule “mplements SBA’s final rule” from last year, and “[a]lso implements SBA’s regulatory clarifications concerning the application of the limitations on subcontracting, nonmanufacturer rule, and size determination of joint ventures.”
As of June 5, the CAAC–that’s the civilian side–has concurred “with draft interim FAR rule.” FAR Council staff are “preparing to send to OFPP after DoD approval to publish.”
This is important news for a couple reasons. First, this means that the draft rule is well along in the process. Review by the Office of Federal Procurement Policy is one of the final steps before a rule or proposed rule is published in the Federal Register. Second, it appears that the FAR Council intends to adopt an interim rule, rather than a proposed rule. An interim rule takes effect immediately (or very soon) after publication, and then can be adjusted after receipt of public comments. A proposed rule, on the other hand, doesn’t take effect until public comment is received and a final rule is published. In other words, if the FAR Council uses an interim rule, the changes will take effect a lot sooner.
It likely will still be a few months until an interim rule is published, but it appears that an end to the confusion is on the horizon. Stay tuned.
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As a branch of the Treasury Department, the United States Mint would usually be subject to federal procurement laws, like bid protests. As one contractor recently discovered, however, certain activities at the Mint have been exempted from many federal procurement laws, including GAO protest review.
Simply put, the GAO can’t decide a bid protest of Mint procurements.
A-Z Cleaning Solutions, B-415228 (Nov. 6, 2017), involved a procurement for janitorial services at the Mint facility in San Francisco, California. A-Z Cleaning was named an unsuccessful offeror. Following notification, A-Z Cleaning filed a protest before GAO, challenging the Mint’s best-value trade-off decision.
The Mint moved to dismiss the protest, arguing that GAO lacked jurisdiction to hear the case. The Mint’s argument was based on the interaction between the Competition in Contracting Act (the “CICA”) and specific statutes addressing Mint activities.
Under the CICA, GAO has the authority to decide “a protest submitted . . . by an interested party.” See 31 U.S.C. § 3553(a). Protests are a “written objection by an interested party to . . . [a] solicitation or other request by a Federal agency for offers for a contract for the procurement of property or services.” 31 U.S.C. § 3551(1)(A). Federal agency is defined as “an executive agency[.]” 40 U.S.C. § 102(5). What this collection of statutes means is that GAO generally has jurisdiction to decide protests of procurements conducted by executive branch agencies.
The Mint, as a branch of the Treasury Department, is an executive agency. Accordingly, its procurement decisions should be subject to protest before GAO. A separate statute, however, complicates matters.
In 1996, Congress expressly exempted Mint procurements for operations and programs from the CICA. Pursuant to 31 U.S.C. § 5136, “provisions of law governing procurement or public contracts shall not be applicable to the procurement of goods or services necessary for carrying out Mint programs and operations.” The statute also defined Mint operations and programs as follows:
(1) [T]he activities concerning, and assets utilized in, the production, administration, distribution, marketing, purchase, sale, and management of coinage, numismatic items, the protection and safeguarding of Mint assets and those non-Mint assets in the custody of the Mint, and the [Mint Public Enterprise Fund]; and (2) includes capital, personnel salaries and compensation, functions relating to operations, marketing, distribution, promotion, advertising, official reception and representation, the acquisition or replacement of equipment, the renovation or modernization of facilities, and the construction or acquisition of new buildings[.]
In A-Z Cleaning, the Mint argued that the janitorial services it ordered were “functions relating to operations” of the Mint; therefore, the procurement of such services was excepted from procurement laws—including the CICA—and thus outside of GAO’s jurisdiction.
GAO agreed with the Mint’s argument. After walking through the statutes laid out above, GAO said:
Because the establishing legislation provides that federal procurement laws and regulations do not apply to the procurement of goods or services necessary for carrying out the Mint’s operations and programs, and those operations and programs are defined broadly enough to encompass substantially all of the Mint’s activities, we conclude that the Mint is not subject to the terms of CICA. Furthermore, because the bid protest jurisdiction of our Office derives from CICA, we must conclude that the Mint is not subject to that jurisdiction.
GAO further explained that its conclusion regarding the Mint was consistent with prior decisions regarding the Presidio Trust and United States Postal Service, which are subject to similar exemptions. Accordingly, GAO dismissed the protest.
What does GAO’s decision in A-Z Cleaning mean for Mint bidders? Clearly, GAO believes that it lacks authority to decide pretty much any bid protest of a Mint procurement. (As noted above, while the statutes may not be 100% clear on the extent of the prohibition, the GAO believes that the jurisdictional ban applies to “substantially all” of the Mint’s activities). The Court of Federal Claims may still be an option; however, not all contractors are interested in full-blown courtroom litigation against the government. Simply put, for contractors bidding on Mint jobs, the potential protest options are considerably narrower than normal.
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Native Hawaiian Organizations soon will be able to own HUBZone companies under a new SBA direct final rule published yesterday in the Federal Register.
The new rule implements provisions of the 2016 National Defense Authorization Act, in which Congress instructed the SBA to open the HUBZone program to NHOs.
Under current law, NHOs are unable to majority-own HUBZone companies, even though Indian tribes and Alaska Native Corporations can be HUBZone owners. The new rule, which will amend the SBA’s HUBZone regulations in 13 C.F.R. 126.103, defines a HUBZone entity to include an entity that is:
(8) Wholly owned by one or more Native Hawaiian Organizations, or by a corporation that is wholly owned by one or more Native Hawaiian Organizations; or
(9) Owned in part by one or more Native Hawaiian Organizations or by a corporation that is wholly owned by one or more Native Hawaiian Organizations, if all other owners are either United States citizens or small business concerns.
The new regulation defines a Native Hawaiian Organization as “any community service organization serving Native Hawaiians in the State of Hawaii which is a not-for-profit organization chartered by the State of Hawaii, is controlled by Native Hawaiians, and whose business activities will principally benefit such Native Hawaiians.”
In addition to adding NHOs to the HUBZone program, the new final rule treats certain “major disaster areas” as HUBZones for a period of five years, treats certain “catastrophic incident areas” as HUBZones for a period of 10 years, and extends HUBZone eligibility for Base Closure Areas and contiguous areas.
The SBA’s direct final rule will take effect on October 3, 2016 unless the SBA receives significant adverse comment from the public. If that happens (and it’s not expected), the SBA would withdraw and republish the rule to address the adverse comments.
NHOs have long asked that they should be treated like Indian tribes and ANCs for purposes of the HUBZone program. Soon, that’s exactly what will happen.
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