SBA

The Small Business Administration (SBA) announced December 5 that it is changing the measuring period for calculating average annual gross receipts (revenue) of small businesses to determine small business size from three years to five years.

The SBA uses Size Standards to determine whether a business qualifies as “small” for procurements set aside by the federal government for small businesses.  For example, procurements set aside for contractors with NAICS Code 236220 (“Commercial and Institutional Building Construction”) has a $39.5 million Size Standard. Therefore, businesses with annual revenue below $39.5 million qualify as small for that particular procurement. Small business size for procurements is generally measured based on the annual revenue of the business (or in some circumstances, based on the business’ number of employees).

Size standards based on annual revenue are currently calculated based on an entity’s average annual revenue over the past three tax years (along with the average annual revenue of the business’ affiliates over the same period). 13 C.F.R. § 121.104 (“The average annual receipts size of a business concern with affiliates is calculated by adding the average annual receipts of the business concern with the average annual receipts of each affiliate”). This calculation of annual revenue provides flexibility for entities to maintain their small business status for a procurement even though their revenue for one or more of the past three years may have actually exceeded a procurement’s designated Size Standard. As long as an entity’s three-year average annual revenue falls below the applicable Size Standard ($39.5 million in the example above) the entity is considered small.

On December 5, 2019, the SBA announced that it was modifying its rule to calculate average annual revenue to increase the measuring period from three years to five years. For most small businesses, this change is good news as it will enable the business to remain small for a longer period of time assuming the business’ revenue increases incrementally each year. This five-year change will become effective for procurements issued on or after January 6, 2020.

For detailed coverage of multiple issues related to SBA small business concepts and procedures, consult my free  “Federal Contractors’Guide to Small Business Administration Set-Aside Contracts, Size Standards, Size Protests, and Affiliation” eBook, which can be accessed here.

Doug Hibshman is a partner in Fox Rothschild LLP’s Federal Government Contracts & Procurement; Construction; Litigation; Privacy & Data Security; Mergers & Acquisitions; White-Collar Compliance & Defense; Health Law; and Architecture, Engineering & Design Professional Firms practice groups. He routinely assists clients with understanding and applying the Small Business Administration (SBA) regulations, filing and defending against SBA size protests, mitigating possible affiliation issues, and ensuring compliance with SBA regulations. 

Mary Mikhaeel, a law clerk at Fox Rothschild, contributed to this post.

For the first time since 2014, the Small Business Administration (SBA) adjusted size standards for small businesses to keep pace with inflation.  Initially posted by the SBA for public comment back in June, the interim rule went into effect on August 19, 2019.

According to SBA, the change “restores small business eligibility in real terms to businesses that have grown above the existing size standard due to inflation-led revenue growth rather than due to increased business activity.”

For those readers in the construction industry, the revision increases the applicable size standard to $39.5 million (from $36.5 million) for institutional, commercial, and institutional building contractors.  For most specialty trade contractors, the increase raises the size standard to $16.5 million (from $15.0 million).

Access to the full list of standards for all industries is available at this link.

So what happens now?

The SBA projects that the upward adjustment will make an additional 89,730 firms eligible for small business status.  In theory, that could lead to an increase in the number of size protests as formerly large businesses now seek set-aside work.  The SBA’s pending Runway Extension Act (which changes the applicable size review period from three years to five years) will only add to the lack of clarity.

Newly eligible small businesses should focus on compliance first.  For example, updating the business’ System for Award Management (SAM) profile and completing the representations and certifications (which opens the door for set-aside procurement opportunities).   Contractors should also update their status in the SBA’s Dynamic Small Business Search engine.

Recall that submitting a proposal for a set-aside procurement when the contractor knows – or should know – that it does not qualify due to its size (including all affiliates) may cause the business to be liable for civil or criminal penalties, including liability under the Civil False Claims Act. That is on top of the obvious disadvantage of losing eligibility for set-aside work.

Familiarity with size protests and maintaining compliance with SBA standards has to be of the utmost importance for small businesses.

It is common practice for contractors to provide the government with their confidential and propriety information – whether it comes in the form of a response to a solicitation, invitation for bid, or other materials provided during the course of contract performance.

Since you provided the information on a public contract, does that mean the information is now available to anyone (including your competitors) through a simple Freedom of Information Act (FOIA) request?  A recent decision from the U.S. Supreme Court says that the answer is No.

Federal agencies are required to disclose any information requested under FOIA — unless it falls under one of nine exemptions.  Exemption No. 4 protects trade secrets and/or a contractor’s commercial or financial information that is confidential or privileged.

The Supreme Court considered whether commercial or financial information that is customarily and actually treated as private by its owner – but nevertheless provided to the government during contract performance – remains “confidential” under FOIA Exemption No. 4 (and is therefore shielded from disclosure).  The Court held that the exemption applies, even where the contractor provided the information on a public contract.  Critically, the Court also held that the contractor is not required to show that disclosure of its confidential information would also cause substantial harm to its competitive position – the confidential nature of the information is sufficient.

This ruling provides contractors who are trying to protect their confidential and proprietary information with significant leverage against FOIA requests from competitors.

However – while the decision is favorable for contractors – it should only be relied on as a last line of defense.  Even with the recent ruling, a contractor can still take additional precautionary measures to prevent their information from disclosure to third parties under FOIA.  Simple steps like the following can go a long way:

·       Disclose confidential or proprietary information only when necessary/required by the government

·       Limit the internal availability of the information to only critical employees, and

·       Label all sensitive information as confidential and proprietary.

Contractors failing to follow these protocols run the risk of the agency determining the information is not confidential – thus opening the door to FOIA requests (and placing the contractor’s information outside of the protections of the Supreme Court decision discussed above).

When a contractor delivers goods to the government that do not conform to the precise requirements of the contract, the results are usually . . . not good.  When the agency specifies certain products in the contract, the contractor should plan to satisfy the exact specifications (or prepare to suffer the consequences).

A straightforward example arose recently on a GSA construction contract.  The contract called for the installation of products from specifically named manufactures (with limited sources identified).  The contract also expressly called out that the agency would not permit substitutions for those named products.

After award, the contractor proposed substitutions for what it considered “equivalent” products from a manufacturer that did not appear on the agency’s approved source list.  The agency declined to consider the contractor’s requested exceptions.

The contractor wisely proceeded to provide the brand name products – but also filed claims seeking the excess costs associated with those products (as compared to the lower-priced equivalents that it suggested to the agency).  The contractor argued that the agency improperly rejected the substitution.

Not surprisingly, the Civilian Board of Contract Appeals granted the agency’s motion to dismiss.  The Board found that the contract language clearly did not provide for substitutions – and that GSA did not breach the contract by refusing to consider the contractor’s proposed equivalents.

Was the contractor totally out of line with this request?  No.  There are certainly examples of agencies waiving contract requirements – even for specified products.  But that would be the exception to the rule.  Without a waiver, the contractor certainly did the right thing by providing the brand name products.

When contractors substitute products without a waiver, we quickly descend into discussions about breach of contract remedies (or worse).  At a minimum, the government is entitled to tap into the contractor’s costs savings from using a product other than the one specified.  The government can even seek damages from the contractor when the substituted product is objectively equal (based on the perceived damaged to the government’s competitive procurement system).

Even worse, agencies often view product substitutions as an intent to defraud the government, leading to criminal sanctions or alleged Civil False Claims Act violations.  Examples arise when contractors intentionally mismark products or otherwise seek to mislead the agency into believing it is receiving something other than the product actually supplied.

Given the government’s current posture in prosecuting fraud under the False Claims Act, contractors must be wary of even honest mistakes being treated as allegedly intentional fraud.

Contractors must read and abide the contract’s fine print.  Substitutions are not forbidden in government contracting, but must be treated as the narrow exception to the larger rule.

Nick Solosky is a Partner in Fox Rothschild’s Government Contracts & Construction Practice. You can reach Nick directly at NSolosky@FoxRothschild.com or 202-696-1460.

Two weeks ago, I presented on Common Issues in Government Contract Interpretation.  The course examined common issues encountered by government contractors in bidding on and performing government contracts – as well as the dispute resolution process under the Contract Disputes Act.

One of the course’s major topics was the Plain Meaning Rule – the concept that Boards and Courts interpreting government contracts will look to the contract language first.  In fact, if the language is clear, the Judge will look at the contract exclusively and ignore any outside (or extrinsic) evidence concerning the parties’ intent.

On the heels of that presentation, the Armed Services Board of Contract Appeals (ASBCA) issued a decision that highlights the critical role that the Plain Meaning Rule plays in government contract disputes.

The contract at issue in the case involved the construction of a hospital facility and dental clinic at Joint Base Andrews, Maryland.  On appeal, the contractor argued that the owner of existing water and sewage infrastructure was responsible for the construction of new systems expected to connect to existing infrastructure.  The Navy countered that the contract clearly differentiated between new systems (priced and performed by the offeror) and work performed on existing systems (performed by the current system owner and priced after award).

The Board sided with the Navy, finding that the government’s interpretation offers the only reasonable way of reading the contract.

In specifically discussing principles of contract interpretation, the Board states:

[The Board cannot] grant summary judgment if we needed to consider disputed extrinsic evidence to resolve an ambiguity. The problem we see with [the contractor’s] argument is that the contract’s language . . . is unambiguous.

In other words, the Board will only turn to extrinsic evidence outside the four corners of the contract if it finds the language ambiguous.  Because it found only one reasonable interpretation of the contract language, the inquiry ended there (in favor of the Navy).

The Plain Meaning Rule presents the minimum threshold a contractor must clear in order to present extrinsic evidence of intent to the Board or Court.  In this case, the contractor may well have possessed key evidence of shared intent with the Navy – but the Board never heard it.

The unambiguous contract language controlled.

The key takeaway for contractors is to work aggressively and proactively against potential ambiguities during the pre-bid phase.  If you can see two ways of interpreting contract language, do not assume the government shares your intent. Raise the issue and push the agency to go on record regarding its interpretation.

Once the contract is signed, it automatically becomes the best – and perhaps only – form of evidence the Court or Board will examine.

Nick Solosky is a Partner in Fox Rothschild’s Government Contracts & Construction Practice. You can reach Nick directly at NSolosky@FoxRothschild.com or 202-696-1460.

Join me today, Monday July 15, 2019 at 3:00 p.m. (Eastern) for Lawline’s Live Course: KEY QUESTIONS OF CONTRACT INTERPRETATION IN GOVERNMENT CONTRACTS.

During the 90-minute course, I’ll cover the key principles of contract interpretation as they relate to government contracting.  To take best take advantage our my limited time and maximize value for those in attendance, I’ll be breaking our discussion down into three parts:

  • Contract Formation – How the U.S. Government forms contracts with private contractors, including tips on avoiding common pitfalls during the proposal phase;
  • Contract Interpretation – Examination of how the U.S. Court of Federal Claims and Boards of Contract Appeals interpret federal contracts (and how it often differs from common commercial practices); and
  • Contract Disputes – A walk-through the dispute resolution process and how formation/interpretation issues impact a contractor’s ability to prevail on claims/appeals and recover damages.

By the end of the class, attendees will learn:  (1) winning strategies for bidding federal work, (2) best practices for interpreting federal contracts with an eye towards successful performance, and (3) how to handle the dispute resolution process in the event an issue arises.

Not able to attend today, but still have questions about interpreting government contracts or contract claims procedures?  Feel free to contact me directly.  202-696-1460 or Nsolosky@FoxRothschild.com

I’ve spent a good deal of time on this blog discussing practical strategies for Best Value procurements.  As the name implies, the goal of every Best Value proposal should be to  maximize the benefit your business can provide to the agency.  While price is always a consideration, Best Value RFPs present an opportunity to flex and show how you can do it better than anyone else (whatever it is).

Today, we take a look at an instructive example of a Best Value protest and examine GAO’s reasoning for upholding the agency’s award decision.

The procurement concerns a U.S. Army contract for test equipment used on missiles, aircraft, and military ground vehicles.  The RFP required offerors to submit a sample device and accessories.  The Army then evaluated the device and assigned a technical score based on its analysis.

Following the evaluation, the Army found that three offerors’ technical scores exceeded the baseline requirement – but only one offeror “significantly exceeded” the objective.  The Army awarded the Contract to that offeror based on the conclusion that the exceptional equipment would prove more advantageous in terms of meeting the agency’s future demands — in other words, the equipment offered the agency the Best Value.

GAO found the Army’s evaluation reasonable and upheld the award decision.  Although the agency accepted the highest-priced proposal, it sufficiently documented its rationale for doing so. Given the awardee’s technical superiority, the Army found the highest-priced proposal “worth the price premium.”

This protest is enlightening because it emphasizes the BEST in Best Value procurements.  The Army received three offers that exceeded the RFP’s objective in terms of technical performance.  If all offers were relatively equal in terms of technical merit, the agency would have been  justified in falling back on price to break the tie.

The awardee did not let price hijack the procurement.

By offering equipment head-and-shoulders above the competition, it proved to the Army that its services are worth the premium price.

Nick Solosky is a Partner in Fox Rothschild’s Government Contracts & Construction Practice. You can reach Nick directly at NSolosky@FoxRothschild.com or 202-696-1460.

It has been a long time coming, but it appears that the government will (finally) amend the Federal Acquisition Regulation (FAR) to align with prior changes by the Small Business Administration (SBA) concerning credit for lower-tier small business subcontracting.

The proposed rule addresses changes to FAR 19.704 and 52.219-9 to marry the regulation up with SBA’s amendments.

We first covered this issue back in 2016 when SBA issued a final rule amending the small business subcontracting plan regulations.  SBA’s amendment allows large prime contractors on federal jobs to receive credit for lower-tier subcontracting awards to small businesses and other socio-economically disadvantaged firms.  That is, rather than limit credit to first-tier subcontracts, prime contracts may count the awards their first-tier subcontractors make to small businesses towards their subcontracting goals.

Prime contractors must have two sets of goals in their subcontracting plans:  The first set includes the prime contractor’s goals for direct subcontract awards and the second set of goals addresses subcontracts awarded at lower tiers.

Receiving credit for those lower-tier subcontracts is often a big deal for large prime contractors.  It provides some much needed flexibility when preparing a federal small business subcontracting plan.  The change also benefits small business subcontractors based on the potential for increased subcontracting opportunities that add value to prime contractors.

Of course, among all of these positives, we need a word of caution.  Federal contractors (both large and small) must carefully understand subcontracting plan requirements, including these recent changes.  Penalties for failure to make good faith efforts to satisfy the requirements are significant – and can include liquidated damages, default termination, and negative performance evaluations.

 

Back in January, I commented on the lack of clarity associated with the the Small Business Runway Extension Act.   The Runway Act calls for calculating a business’s size by averaging its annual receipts over the five most recently completed fiscal years.  That, of course, is a change from the Small Business Administration’s (SBA) standard practice of calculating size under the same metrics, but for a three-year period.

Should a business use the three- or five-year standard to measure its size when submitting a proposal?  It appears that a definitive answer is on the horizon.

This week, SBA proposed a rule that would incorporate the change to the five-year metric into the applicable regulations.  Comments are due no later than August 23, 2019, which means that we should see some resolution on this issue in Fall 2019.

While we wait for a final rule, the the proposed rule itself provides some measure of clarity for contractors trying to reconcile the Runway Act against the existing SBA regulations.  SBA provides a fixed line of demarcation between the three- and five-year standards.  That is, until SBA adopts a final rule, it will continue to apply the three-year average for calculating average annual receipts.

Therefore, contractors submitting proposals at any time between now and the final rule can now feel confident in relying on the three-year standard to determine their size.

Check back for additional updates on this issue when SBA issues its final rule.

 

 

The essential elements of the government’s Service-Disabled Veteran-Owned Small Business (SDVOSB) program are ownership and control of the business by a qualifying service-disabled veteran of the U.S. military.

A recent protest challenged a firm’s SDVOSB status on that precise basis – i.e., that a service-disabled vet did not control the day-to-day operations of the company.  The Small Business Administration’s Office of Hearings and Appeals (OHA) denied the protest in summary fashion.  In doing so, the decision provides a winning playbook for other protested SDVOSB firms.

Specifically, in denying the protest, OHA relied on the awardee’s ability to demonstrate:

·                51% (or more) Ownership by the Service Disabled Vet

·                Unconditional Control by the Service Disabled Vet; and

·                The Service Disabled Vet’s Management Ability and Experience.

Primarily by relying on the company’s Operating Agreement, the SDVOSB demonstrated that only “member-managers” have the ability to make business decisions, direct the organization, and legally bind the company.  The company’s only member-manager is a service-disabled vet.  Further, the company relied on evidence of the service-disabled vet’s management experience as evidence of his ability to run the company and make strategic decisions.

Is every SDVOSB status protest going to be this straightforward?  No.  Allegations will vary and – of course – the protested firm may face unique challenges based on any number of factors unique to its business.

However, regardless of whatever issues come to define the protest – a challenged SDVOSB cannot go wrong in focusing its response on: (1) 51%+ ownership, (2) unconditional control, and (3) proof of the service-disabled vet’s ability to run the business.