The Small Business Administration’s HUB Zone program seeks to encourage development in historically underutilized business (or HUB) zones.  Like the SBA’s other socio-economic programs, HUBZone contractors are eligible for certain set-aside contracting opportunities, as well as participation in the SBA’s new All Small Mentor Protégé Program.

The HUBZone program is different from other SBA programs in that owning a HUBZone business depends less on who you are (unlike, for example, the SBA’s women-owned or service disabled veteran-owned programs) and more on where your business and its employees live and work.  For example (and among several other requirements), the SBA’s HUBZone rules require that at least 35% of the business’s employees must reside in a HUBZone approved area.

This 35% rule can be particularly problematic for HUBZone contractors.  If a company is close to the line, something as simple as one employee moving (from a HUBZone address to a non-HUBZone address) can be enough to tip the scale away from compliance.  For that reason, we recommend that HUBZone contractors implement a vigorous compliance program that tracks employee residency – and emphasizes to employees the vital importance of keeping the company in the know.

Moreover, a recent Court of Federal Claims decision highlights that HUBZone contractors must keep an eye not only on employee residences – but also the HUBZone map itself.  Much like how voting districts can be redrawn, the SBA periodically publishes updated maps defining what areas are – or are not – included in a designated HUBZone.  So, an employee that lived in a HUBZone five years ago might not live in one today – and the Court’s decision makes clear that it is the business’s responsibility to know that and adjust accordingly.

So what do you do if you fall out of compliance (based on an employee change of residence, an updated HUBZone area map, or for any other reason)?

  • Don’t Panic.  The SBA understands that HUBZone eligibility rests on shifting sands.  In fact, there is an “attempt to maintain” exemption that the SBA uses to avoid decertifying firms that temporarily dip below the 35% threshold.
  • Be Proactive.  By running a compliance program like the one described above, you should be able to avoid falling below the 35% threshold.  However, if a perfect storm arises, you should immediately take affirmative steps (like posting job ads in HUBZones) to show SBA that you are doing what it takes to regain compliance.
  • Notify the SBA Immediately.  Even if you will only be out of compliance with the 35% residency requirement for a matter of weeks or even days, it is always better to keep the SBA on notice of the situation.  Notifying the government upfront will almost always have a better overall outcome (when compared to the government uncovering a lack of compliance during an audit or investigation).  If the SBA finds out about your firm’s non-compliance on its own, it is far more likely to decertify your business – or even take steps to suspend or debar you or your company.
  • Do Not Bid on Any HUBZone Jobs.  While your firm is out of compliance, you can continue to perform existing HUBZone set-aside contracts – but should not bid on any new HUBZone work.  After your regain compliance you can, of course, get back on the horse.

Small business owners must always be mindful of what it means to be “small” in the world of government contracting.  After all, losing that small business size status means losing direct access to the lucrative world of set-aside contracts and the SBA’s socio-economic programs.

In the past, we’ve discussed the SBA’s rules on affiliation – in short, the rules that determine whether you actually own and control your small business.  A finding of affiliation between two companies means that the firms are viewed by the SBA as a single entity for purposes of determining size.  Even a very small business can lose its size status if it is affiliated with another company (or multiple companies) that push it over the size threshold.

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In addition to paying attention to active connections that could lead to a finding of affiliation, a recent SBA opinion reminds us that small business owners also need to avoid ostensible contractor affiliation (a current hot topic at the SBA and the reason behind many affiliation determinations).

In a nutshell, ostensible contractor affiliation occurs when a small business holds a prime contract – but a subcontractor hired for the job actually ends up controlling the work.  Specifically, the SBA targets instances where the subcontractor (and not the small business prime) performs the primary and vital work of the contract.  Affiliation can also arise under the ostensible subcontractor rule if the small business is unusually reliant on its subcontractor.

Take, for example, the SBA’s recent holding.  A small business was awarded an Army contract for waste management services.  In its proposal, the small business committed to performing all contract management services, including operations, customer service, and billing.  However, it subcontracted out to another business the work of diversion, disposal, and management of solid waste.  The SBA determined those waste management services to be the essential requirements of the contract and, therefore, found affiliation under the ostensible contractor rule.

As in all cases of affiliation, the finding had damaging effects, as the original contract awardee now exceeded the size standard of a small business and lost the contract.

This case should lead us to a practical question:  How do I avoid becoming affiliated under the ostensible subcontractor rule?  Fortunately, there are quite a lot of steps that you can take:

  • Focus on the kinds of work and the percentage of prime contractor performance.  In our sample case, it is not too controversial to suggest that waste management services are “primary and vital” to a waste management contract.  However, for other contracts, the essential work that should be performed by the small business prime contractor might not be as obvious.  In all cases, take the time in advance to think about the primary services being performed and whether the prime contractor is performing a reasonable percentage of that work (in addition to the required percentage of self-performance under the SBA’s limitation on subcontracting).  If the subcontractor is performing most or all of the heavy lifting, it is a warning that you might have an ostensible subcontractor problem.
  • Preparation, Preparation, Preparation.  From the outset, your proposal should give the appearance that the small business prime contractor is in control – even if it is already working with a proposed subcontractor.  Adhering to traditional prime and subcontractor roles (rather than approaching from the position of a partnership) can enhance the appearance that the small business is controlling the essential work of the contract.
  • Show Them the Money.  One of the hallmarks of ostensible contractor relationships is profit sharing.  Any non-traditional method of payment will suggest a lack of control to the SBA.  If you hold a prime contract and affiliation is a concern, you should pay your subcontractors like traditional subs.

Like so many issues when it comes to the SBA and affiliation, the ostensible contractor rule exists on a sliding scale.  There is no cure-all for avoiding affiliation, and the SBA will look to multiple factors in weighing the “totality of the circumstances.”

With that in mind, affiliation should always be at the top of your list.  Once a proposal is submitted, it is very difficult to un-tangle the prime and sub relationship.  The focus should be on preparing a proposal that places the small business prime firmly in control and includes proactive measures to ensure sufficient performance of the primary and vital work for the contract.

GSA leases include operating costs (for example, the cost of cleaning services, supplies, materials, maintenance, trash removal, landscaping, water, sewer charges, heating, electricity, and certain administrative expenses attributable to occupancy) that will rise year after year. The key question for leaseholders is how to position yourself to recoup those cost increases beginning with the second year of the lease and for each year thereafter.

The typical GSA lease includes a clause that determines whether the rental rate remains firm throughout the term of the lease, or if the rent is subject to an annual re-adjustment of operating costs. The amount of adjustment is determined by multiplying the operating costs in the base year by the percent of change in the Consumer Price Index in the anniversary year (e.g., the second, third, fourth year). The costs listed on GSA Form 1217 (Lessor’s Annual Cost Statement) are used to set the base rate for the operating costs adjustment. The 1217 is negotiated and agreed upon by GSA and the lessor at the beginning of the lease. The Consumer Price Index is measured by the Department of Labor and published by the Bureau of Labor Statistics.

The lease clause should include a simple mathematical formula. You multiply the operating cost base by the percentage change in the published Consumer Price Index between the base and anniversary years to determine the precise amount due for each year. For example, let’s assume the first year of a lease with a ten-year term began on January 1, 2015. No operating cost increases are paid in the first year 2015. According to the Form 1217, the operating cost base is $1,000,000. To calculate the amount of operating cost escalations GSA is required to pay in the second year (i.e., the first anniversary) requires a two-step process.

First, calculate the difference between the Consumer Price Index in the base year and the anniversary year:

Base CPI                    January 2015                         233.707

Anniversary CPI        January 2016                         236.916

The difference between 233.707 and 236.916 is 3.209 or about a 1.4% increase (0.013730868 to be precise).

Second, plug the numbers into the operating cost escalation formula as follows:

Base Operating Cost Per Lease                  $1,000,000.00

% Increase in CPI                             x            0.013730868                                               

Annual Increase in Operating Costs          $    13,730.87

This amount is relatively small in the first anniversary year. However, it will likely be much larger by the tenth (and final) year of the lease term. Typically, operating cost escalations are divided by twelve and made part of the monthly rent payments.

While the calculation is relatively straightforward, lessors need to be vigilant because GSA often tracks the operating cost escalations in terms of year over year increases – not base year versus anniversary year outlined above. In those instances, GSA runs the operating cost escalation calculation per the operating cost escalation clause in the lease, but then GSA deducts what it paid for cost escalations the previous year. There is no regulation or published guidance (such as the GSA Leasing Desk Guide) to support this methodology. Presumably, GSA does this to make it easier to identify the amount that the rent will increase from the last year. The risk for lessors is that GSA’s methodology differs from the plain language of the lease. If the landlord signs a modification incorporating GSA’s faulty math, it could change the terms of the lease and affect your rights – and, more importantly, the amount of rent to which you are entitled in the future.

As I’ve covered extensively on this blog, the U.S. government is conducting a wide-spread and on-going crackdown on contracting fraud.  Under the Civil False Claims Act alone, the government clawed back $3.5 billion in 2015.  And 2016 is poised to be another banner year.

One of the hot topics in fraud prevention of late is small business contracting fraud.  The government is investing heavily in making sure that there are optimum opportunities for small businesses to receive federal contracting dollars (for example, through small business set-aside contracts and socio-economic contracting programs).  IG offices are on alert to make sure that those contracting dollars actually reach small and disadvantaged business owners.

Recently in the news is the latest example of a contractor paying hefty penalties in connection with a small business contracting scam.  This time, the government revealed that a small business and a large business colluded to obtain over $70 million in small business set-aside contracts, but (illegally) have the large business perform all of the work on the contracts.

All federal contractors need to be aware of the uptick in fraud investigations – but they should not be lulled to sleep by this latest example.  This case was an easy one for the government – what I like to refer to as “old school fraud.”  The guilty parties acted intentionally with the hope of beating the system and making an easy dollar for as long as possible.

Fortunately (or unfortunately), these kinds of cases are the exception, not the rule.  My experience shows that most contractors investigated for fraud are far less culpable than this extreme example.  In fact, I’ve seen plenty of fraud cases based on a failure to know the rules – which is particularly troubling given how fast those rules are changing today’s environment.  Contractors are also facing fraud investigations based mistakes made by lower level employees – not the top brass.

So how do you avoid getting caught up in the IG’s net?  There are a few simple steps your business should be following right now to create what I call a Culture of Compliance:

  • Implement a Contractor Code of Business Ethics and Conduct (even if you are not technically required to have one under FAR 52.203-13)
  • Establish a Business Ethics Awareness and Compliance Program (including regular employee trainings and updates)
  • Establish an Internal Control System (to monitor for and catch issues before they arise); and
  • Inform the IG Office of “Credible Evidence” of any Violation (and know what “credible evidence” really means before you do).

By taking these steps, your employees will be much less likely to commit mistakes rising to the level of fraud – and will be in a much better position to interface with the government in the event an investigation takes place.

 

Government contractors are frequently faced with the situation where they are owed additional time or are entitled to damages from the government on a contract.  For example, the government might be responsible for delays to the project schedule.  Or it might direct changes to the contract that make it more expensive to perform.

There are generally two methods for the contractor to pursue recovery – (1) filing a Claim under the Contract Disputes Act or (2) submitting a request for equitable adjustment (REA) to the contracting officer.  There are pros and cons to both methods and Contractors should take the time to consider these options carefully before moving forward.

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What is the Difference between a Claim and an REA?

Claims and REAs are very similar (but not identical) in both form and function.  The basic concept is that the contractor is owed time or money (or both) on a contract and is providing the government with a written request for compensation.  The well-drafted Claim or REA will include a basic summary of the contractor’s performance and an easy-to-understand explanation of why it is entitled to the damages sought.

So what are the differences?  The primary difference is the government’s obligation to promptly respond.  A Claim puts the government “on the clock” and establishes a fixed deadline for a formal response (typically 60 days from the date it is filed).  On the other hand, there is no firm or fixed deadline for the government to respond to an REA.  For this reason, many contractors favor filing Claims (rather than having an REA sit unanswered by the government for months, or even longer).

There are also a few key differences in what a Claim must include.  Unlike an REA, the Claim must include an expression of damages in the amount of a “sum certain” – in other words, the exact amount of damages, in dollars, being claimed.  A Claim of $100,000 or more must also include a formal Contractor Certification (the exact language is provided at FAR 33.207).  The Certification is the contractor’s assurance that the claim is current and accurate as of the date of submission.

Is a Claim or an REA Better for You?

As outlined above, a Claim offers the immediate advantage of requiring a response from the government by a specified date.  For that reason alone, Claims are usually considered more advisable than REAs.  The government will either grant or deny the Claim, or offer a partial settlement.  If the contractor is unhappy with the decision, it has the option to file an appeal and argue its case before a board of contract appeals or the U.S. Court of Federal Claims.

However, while a Claim is certainly the most direct way to proceed, it is not always the best for the contractor.  Your firm might have a good working relationship with the contracting officer.  Or you might want to proceed cautiously in order to preserve your relationship with a particular client.  In those cases, an REA offers the opportunity to reach a mutually-beneficial settlement without having to file a formal Claim.  Bear in mind, a contractor can also convert an REA into a Certified Claim at any time (in the event that the government does not respond to the REA, or negotiations stall).

Is There Anything Else to Consider?

Before making a final decision, contractors should also think about the potential hidden money in Claims and REAs.  For example, contractors can include “contract administration” costs as part of the damages sought in an REA.  These costs can include the attorneys’ fees and consultants’ fees incurred in preparing and submitting the REA.

Attorney and consultant fees are not recoverable as part of a Claim.  However, the Contract Disputes Act does provide for the recovery of interest on any amount that becomes due on a claim.  Depending on how long the Claim takes to resolve and the amount at stake, the interest collected can be considerable and should not be overlooked.

Final Thoughts

The decision of whether to file a Claim or submit an REA should be made on case-by-case basis.  One size does not fit all, and it is very likely that the right answer will change from contract to contract.

Making the right decision could save you time and money – and result in a better overall outcome for your company.

 

If you’re a government contractor, you likely already know about the Small Business Administration’s new Small Business Mentor-Protégé Program (now also being referred to as the “All Small” Mentor-Protégé Program by the SBA).  If you’re playing catch-up, you can find our initial thoughts on the Program here, our summary of Program pros and cons here, and our strategies for effective mentor-protégé teaming here.

The SBA started accepting applications for the Program on October 1, 2016.  During this early roll-out period, applicants initiated enrollment by simply emailing the SBA and going through an interactive information disclosure.  October applicants should expect to receive an update from the SBA soon prompting them to complete the administrative application process.  This will include certifying at SBA.gov and uploading files into the SBA’s on-line repository.

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Starting November 1, 2016, all applicants (that is, both prospective mentors and protégés) will be required to complete an on-line training module.  This requirement is waived for October applicants. The SBA is hopeful that the full on-line application process (available through SBA.gov) will result in faster processing times for applicants.

As a reminder, the SBA website now offers a mentor-protégé agreement template that prospective applicants can utilize.  While the template is fine for purposes of a basic outline, we advise against total reliance on any form document.  Your partnering relationship is unique, and your ultimate agreement should reflect how each party intends to maximize the benefits of its participation.

Under the Small Business Administration’s regulations, two firms may partner as a joint venture to perform a small business set-aside contract, provided that each partner is a small business under the size standard assigned to the contract.  But, a recent SBA decision highlights the fact that simply entering into a joint venture does not excuse each member of the joint venture from SBA scrutiny over affiliation.

In this recent case, a U.S. Department of Defense, Missile Defense Agency contract for business operations support was awarded to a joint venture composed of two (allegedly) small businesses.  Following a size protest, the SBA took a closer look at each member of the JV and didn’t like what it found.

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While one of the JV partners was in fact small, the other had a problem.  Specifically, citing to the economic dependence rule, the SBA found that the second firm derived more than 70% (and, in fact, close to 100%) of its business from one source (a large business) over a three year period.  Based on this dependence, the SBA determined that the firms are affiliated.

This is bad news not only for the (now no longer small) firm, but also the JV itself.  Because each member of the JV is not small, the SBA determined that the JV is not small for purposes of this procurement.  In other words, the JV lost the contract.

This case highlights two important points.  First, it is essential for small businesses to understand the SBA’s rules on affiliation and be confident in their size.  Size protests unfold quickly, so information about your business’s size should be at your fingertips — and nothing should come as a surprise.  Second, the case reinforces the importance of smart teaming on government contracts.  If you pick the wrong dance partner, you could find your time and effort in pursuing (and even winning) a contract award is ultimately wasted.

If you are interested, you can learn a lot more about smart and strategic teaming in this presentation.

For small business government contractors, the question of affiliation should always be at the top of the list of priorities.  A finding of affiliation between your business and another business (and, in particular, a large business) could be enough to lose your small business size status – and the ability to compete for those coveted set-aside contracts.

One of the few recognized exceptions to affiliation is an approved mentor-protégé relationship under the Small Business Administration’s (SBA) 8(a) business development program.  In short, an 8(a) protégé can joint venture with its SBA-approved large business mentor and still qualify as a small business for any federal government contract or subcontract – without the fear of affiliation.

While it may seem a bit obvious or a simple matter of housekeeping, the SBA’s Office of Hearing and Appeals recently issued a stern warning that the exception to affiliation depends of having an approved mentor-protégé agreement in place.  Specifically, OHA concluded that failure to obtain the proper documentation resulted in a finding of affiliation and precluded eligibility for a small business set-aside contract — even when the two firms involved had a long history of participation in the mentor-protégé program.

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This decision serves as an important reminder for firms currently partnering as part of the 8(a) program to stay current – but it should also be a wake-up call for all of the businesses out there planning to take advantage of the SBA’s imminent (groundbreaking) expansion of the mentor-protégé program.

Now that the SBA is accepting expanded mentor-protégé program applications, it is a great time to take stock of how to make the program work for your business.  As we recently highlighted, partnering between government contractors can open the door to new and exciting opportunities – but it works best for those firms that conduct proper due diligence.

Is your mentor-protégé agreement working for you?  Now is the time to find out and (if necessary) make the appropriate course corrections.

Every government contractor that files a bid protest has the same goal in mind – corrective action.  The agency made a procurement error and changes need to be made.

But just because the agency takes corrective action does not mean it will be the corrective action your firm wants.  Contractors should take the time to consider the possible outcomes of a successful bid protest before filing.

Take, for example, the recent U.S. Court of Federal Appeals decision denying a protest over corrective action.  In that case, an unsuccessful offeror successfully protested a United States Transportation Command non-temporary storage contract.  In response to the protest, the agency took corrective action and started the process of re-evaluating all offerors in order to make a new award decision.

But this was not the corrective action the protestor expected.  Because the protest argued that the original awardee’s proposal was technically deficient, the protestor wanted the government to cancel the first award and make a new award decision (in its favor) without further evaluation.

The Court rejected the idea that a protester can limit the agency’s authority to correct evaluation errors.  To the contrary, the decision holds that it is within the agency’s discretion to review its prior conclusions and conduct a re-evaluation (provided that the new evaluation conforms to the solicitation and is fair to all offerors).

So is the takeaway that your firm shouldn’t file a protest unless it knows it will receive the award?  Not at all.  As this decision makes clear, you cannot control or limit the agency’s authority when it comes to corrective action.  The correct takeaway is that you should make sure that your firm is prepared for all contingencies before moving forward with filing a bid protest – including the possibility of a complete re-evaluation.

Again, on this point, the COFC decision is extremely illuminating.  Even though the protestor was successful in obtaining corrective action, it also found out that its own proposal was not considered technically acceptable by the agency (due to an alleged failure to meet the solicitation criteria).  If not for that proposal drafting error, it is possible the protest would have a different outcome (including a new award decision rather than a re-evaluation).

Taking the time to work through these scenarios in advance is the key to time and cost effective bid protests.  Even bid protests that result in corrective action are disappointing when they do not result in a new contract for your business.

 

The Government Accountability Office (GAO) is establishing a new system for filing bid protests – the Electronic Protest Docketing System (EPDS).  GAO promises that the new system will be both “secure” and “easy-to-use.”

This week, GAO rolled out a new set of instructions that offers greater insight into the new e-filing process.

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The instructions include definitions of key terms, details on eligibility for bid protest filers, and some logistical information on how protests will be filed and processed under the new EDPS system.

GAO still has not provided a firm date from when EPDS will go live.  When a start date is set, will the change to EPDS be earth-shattering? No.  GAO bid protests will still be subject to the same rules concerning content, standing, and timeliness (among other things).

One new EPDS feature sure to garner more attention as the roll out continues is the new $350.00 filing fee.  Currently, filing bid protests is free.  GAO says that the new fee is included in order to offset the cost of the EPDS system.

The filing fee is new, but should not affect a contractor’s strategy for pursuing a protest at the GAO.  As we’ve covered in detail before, the GAO is the ideal forum for protesting straight-forward agency errors that can – at least in theory – be resolved quickly in the GAO’s streamlined environment.  Protests involving more complicated legal questions are better suited for resolution at the Court of Federal Claims.

For more on the pros and cons of protests at the GAO, check out my Government Contracts 101 guide.