Small Business Administration

At the end of 2018, the President signed the Small Business Runway Extension Act.  Without much fanfare, the Act delivers a major shakeup to the Federal small business community.

Before the Act, a business would determine its size by calculating its average annual receipts over the three most recently completed fiscal years.  With the stroke of a pen, those average annual receipts are now measured over a five year period.

Perhaps predictably, lots of ink was promptly spilled on the internet both hailing and deriding the change.  For a fast-growing business, the Act provides a longer runway (hence the name) to remain small and continue to compete for set-aside work.  On the other hand, a decelerating business now must include receipts from busier times that could bump it over the size threshold and eliminate future opportunities.

In the midst of all of this angst, Small Business Administration (SBA) decreed in an Information Notice that the Act is not effective immediately.  Instead, SBA will roll out implementing regulations on a date to be determined.  As things stand right now, that date does not seem to be coming anytime too soon.

So, which standard should contractors use?  Three years?  Or Five?

The only certainty lies with contractors that are small under either/both metrics.  A contractor that is only small under the three-year measurement could face a size protest because it is not small under the Runway Act.  On the other hand, a business that is only small under the new five-year standard could be face with the argument that there are no implementing regulation for the new law (and therefore the old three-year period still controls — which is what the SBA itself says).

Candidly, there is no right or wrong answer at this time.  Contractors must make calculated decisions based on a number of factors, including where they fall on the size spectrum, the likelihood of a size protest, and what they consider an acceptable amount of risk.

Given the adverse consequences associated with a negative size determine (to say nothing of the cost of defending against a protest), these are decisions that should be approached strategically before deciding to submit a proposal or otherwise hold your business out as small.

One of the primary benefits offered by the Small Business Administration’s (SBA) mentor-protégé programs is the ability to operate outside the normal rules governing affiliation.  Generally speaking, SBA allows mentors to provide assistance (including technical, management, and financial assistance) to their protégé firms without fear of creating affiliation.  That is, so long as the assistance provided is consistent with the mentor-protégé agreement, it cannot be used as the basis for a finding of affiliation.

However, some time ago, we wrote on this blog that participation in an SBA-approved joint venture does not necessarily guarantee an automatic exemption from affiliation.  Contractors still must abide by particular SBA rules and regulations — or risk an adverse size determination.

We previously examined SBA’s decision in Kisan-Pike, A Joint Venture, SBA No. SIZ-5618 (2014).  In that case, SBA’s Office of Hearings and Appeals (OHA) found affiliation between SBA-approved 8(a) joint venture partners based on the conclusion that the joint venture agreement failed to adequately:

  • Itemize all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each, and/or
  • Specify the responsibilities of parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to a joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements.

Because the joint venture agreement did not rise to the level required by the regulations, the 8(a) member was not shielded from a finding of affiliation.

Now, in a recent decision, SBA reiterates and seemingly expands on this proposition.  In reviewing a joint venture between an SBA-approved mentor and protégé under the All Small program, SBA determined that the joint venture was not small for purposes of the procurement.

As in Kisan-Pike, the decision turns on the inadequacy of the written joint venture agreement.  Specifically, SBA determined that the joint venture agreement:

  • Did not specifically address the applicable procurement.
  • Did not sufficiently describe the work to be performed by each member of the joint venture, and
  • Did not sufficiently indicate that the joint venture partners would adhere to the requirements concerning the division or work and performance of work requirements.

Absent this information, SBA (once again) refused apply the exception to affiliation arising out of the previously approved mentor-protégé relationship.

These decisions offer two major takeaways for contractors when it comes to mentor-protégé joint venture agreements:

First, tailor your joint venture agreement specifically for each procurement.  A key element missing from the agreement in this SBA OHA decision was any mention of the specific procurement at issue.  By revising the agreement or adding an addendum to address the work being sought, it is harder to overlook the details required by the regulations.

Second, add as much detail as possible – and then add some more.  A common thread in both of the protests detailed in this post is the idea that it is often difficult to provide details concerning the equipment, facilities, and other work that will go into the project so far in advance.  The SBA hears you – but it does not seem to care.  The bottom line is that contractors cannot ignore these requirements or rely on generic statements indicating that the joint venture partners will do the work and comply with the law. Details are expected and required.

It may be difficult, but contractors must take care to drill down into the details as much as possible.  Based on what is now a pattern of case law, anything less runs the risk of an adverse size determination.

Please see the following link for Fox Rothschild LLP’s Federal Contractors’ Guide to Small Business Administration Set-Aside Contracts, Size Standards, Size Protests, and Affiliation. 

http://www.foxrothschild.com/douglas-p-hibshman/publications/federal-contractors-guide-to-small-business-administration-set-aside-contracts-size-standards-size-protests-and-affiliation/

The federal government sets aside a significant portion of its procurement dollars each year for purchasing goods and services from small businesses.  Small business set-aside procurements and small business contract awards (“Set-Aside Procurements” and “Set-Aside Contracts,” respectively) provide substantial opportunities for a certified small business concern (SBC) to compete for and perform federal contract work. However, SBCs awarded Set-Aside Contracts are frequently subjected to size protests filed with the U.S. Small Business Administration (SBA) by disappointed competitors looking to challenge the awardee’s size, and if successful, to disqualify the awardee from the procurement.

This guide educates federal contractors on the following issues and concepts:

  • SBA Set-Aside Procurements, Set-Aside Contracts, and Size Standards;
  • The parameters and purposes for SBA size protests, how they are filed, and how contractors can avoid and defend against such protests; and
  • The parameters of SBA affiliation, which contractors can use to their advantage to challenge Large Businesses masquerading as small business concerns, and, as importantly, must understand to protect themselves from being adversely affected by a finding of affiliation at the hands of a size protest.

Doug Hibshman is a partner in the firm’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 represents small, medium, and large clients in the defense, health care, engineering, information technology, construction, manufacturing, and services industries with all manner of complex contract, compliance, and litigation issues.  Doug routinely advises and represents clients on all manner of issues related to the SBA small business regulations, to include size protests, size protest appeals, and SBA affiliation mitigation efforts.   

As I have covered here before, every small business owner needs to be aware of the Small Business Administration’s (SBA) ostensible subcontractor rule.

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.  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.

The typical ostensible subcontractor rule violation involves a small business (prime contractor) and a large business (subcontractor).  For example, if the small business lacks the needed resources or expertise, it can find itself leaning on its large subcontractor to run the project to too great of an extent.  Anytime the large sub takes over a primary role on the project, there is danger of ostensible contractor affiliation.

However, in a recent decision, the SBA’s Office of Hearings and Appeals (OHA) drew out an important distinction in the law.  While the small prime/large sub relationship is more common, the ostensible subcontractor rule remains firmly in play even as between two small businesses.

The OHA decision arises out of a size protest filed in connection with a health services contract offered by the Florida Army National Guard.  After the SBA Area Office found the contract awardee small for purposes of the contract, the protester appealed and argued that the Area Office improperly failed to consider whether the awardee was affiliated with its proposed subcontractor under the ostensible subcontractor rule.

The Area Office based its decision on the size of the proposed contractor/subcontractor team.  Specifically, the Area Office reasoned that – because both firms were small for the purposes of the procurement – even if they formed a joint venture, affiliation by the ostensible subcontractor rule would not be found.  According to the Area Office, the SBA’s regulations intend for joint ventures to be treated as small as long as each of the joint venture members is small, without regard to the ostensible subcontractor rule.

On appeal, OHA disagreed with the Area Office.  OHA pointed out that the ostensible subcontractor rule does not include any exceptions for joint ventures where both members are small. To the contrary, the rule requires SBA to evaluate whether the firms are ostensible subcontractors; if they are, they will be considered joint venturers and affiliated for the purposes of a size determination.

OHA found that it could not accept Area Office’s conclusion that there had been no violation of the ostensible subcontractor rule because it never performed the required analysis.  Accordingly, OHA granted the appeal and ordered the Area Office to make a new size determination, including an examination of whether the participating firms were affiliated under the ostensible subcontractor rule.

Join me on Friday, November 10, 2017 to discuss the impact of the Small Business Administration’s All Small Mentor Protégé Program on the Design-Build Community.  My program is part of the Design-Build Institute of America’s Conference & Expo (Philadelphia, PA).

The impact of design-build in the public sector is well documented.  Federal agencies are increasingly employing integrated delivery services on government construction projects.

Now, the rise of design-build is coupled with the new opportunities (and challenges) presented by the Small Business Administration’s “All Small” Mentor-Protégé Program.  The Program opens the door to allow any small business to partner with a large contractor-mentor.  Together, the mentor-protégé team can chase contracts previously reserved for performance by only small businesses.  In a nutshell, contractors have unprecedented access to contracts of increasing size, scope, and complexity.

The presentation will cover best practices for forming winning designer-contractor teams.  We will walk through the Federal regulations that govern teaming arrangements and take an intensive look at the All Small Program and all of its implications.

The session will also cover the risks and rewards of teaming arrangements for contractors.  For example, we will explore the proper way for teaming partners to deal with potentially tricky issues of compensation and risk allocation.  How should teaming partners divide the cost savings on a successful project?  What about how to shoulder losses if the project fails to meet the team’s expectations?

Finally, the program will cover the special considerations of small business teams – from both the small and large business perspective. The U.S. Small Business Administration provides special rules and regulations that apply only to teams involving small businesses.  Failure to follow these rules can lead to major compliance problems and even False Claims Act liability.

If you are unable to attend the conference in person, please feel free to contact me to discuss any questions.

The most common basis to establish timeliness for a Government Accountability Office (GAO) bid protest is found in Section 21.2 of the GAO’s regulations.  Under the regulation, the protester must file the protest “not later than 10 days after the basis of protest is known or should have been known”.

Important Disclaimer:  There are plenty of other events that can trigger the running of a GAO bid protest filing deadline.  Please feel free to reach out to me directly if you need guidance in this area.

In a recent decision, GAO placed a hard emphasis on the “should have known” element of the regulation.  The case involved a protest over the Department of Veterans Affairs’ award of a contract for construction services.  Among other things, the protest alleged that the agency improperly relied on a Small Business Administration (SBA) Certificate of Competency (COC) finding the awardee responsible for the procurement.

On review, GAO dismissed the entire protest as untimely.  Specifically, GAO determined that the clock on the protest started to run when the protester received a letter from the agency stating its award decision (and also indicating reliance on the SBA’s COC).  Because the filing was not made within 10 days of that “should have known date,” the window to protest closed.

Of note, GAO specifically rejected the protester’s argument that its time to file a protest should be expanded based on its lack of knowledge concerning the COC program.  According to the protester, it did not understand the purpose/process of the program and sought clarification from the agency.  Ultimately, it took until several weeks after the agency’s award letter for the protester to gain a sufficient comfort level to file the protest.

The protester’s delay argument failed because the SBA’s COC program is detailed in both the Federal Acquisition Regulation and the SBA’s own regulations – i.e., publicly available sources.  Accordingly, GAO found that there was no basis to extend the applicable 10-day deadline for filing.

For federal contractors contemplating a bid protest at GAO – this case demonstrates that the time for contemplation is very short.  Any information giving rise to knowledge of a potential protest basis must be treated as potential triggering event.  If a stay of award or performance is needed, the time to file could be even shorter (as little as 4 calendar days).

The only option to preserve the important rights vested in the GAO bid protest process is to act fast and stay out in front of these deadlines.

 

Today, we take a look at the culmination of a long fight over the size status of a joint venture competing for a Federal contract.  After losing battles at the Small Business Administration (SBA) Area Office and Office of Hearings and Appeals (OHA) – the joint venture finally won the war when the Court of Federal Claims (COFC) declared that SBA incorrectly applied the economic dependence test.

quick refresher on SBA economic dependence:  In a nutshell, the SBA will find two firms affiliated through economic dependence when a small business is dependent on another company for a disproportionate amount of its revenue.  Without a steady flow of business from its counterpart, the small business would be unable to survive (let alone thrive).  When one business is economically dependent on another, there is a presumption of affiliation.

That was precisely SBA’s finding with respect to the joint venture that teamed up to bid on a Department of Defense Missile Defense Agency support contract.  The SBA Area Office found the joint venture was “other than small” for purposes of the contract (and, therefore, ineligible for award).  OHA agreed, confirming that one of the joint venture partners was affiliated with a third entity (and therefore had to include that entity’s average annual receipts in its size calculation).  As a result of this affiliation, the joint venture partner was deemed to be a large business under the relevant size standard, thus disqualifying the joint venture.

Specifically, SBA found the two firms affiliated because the purported small business received more than 70% of its revenue from the third firm, thus creating an “identity of interest due to economic dependency.”  According to OHA’s decision, “as a matter of law, a firm that derives 70 percent or more of its revenue from another firm is economically dependent on that firm.”

On appeal to COFC, the joint venture argued that SBA misapplied the presumption of economic independence as a bright line rule – as opposed to a rebuttable presumption.  Here, the mitigating factors weighing against affiliation included the fact that the small firm had only been operating a short time and held a small number of contracts (which distorted the 70% figure relied on by OHA).  The joint venture also presented evidence of the firm’s attempts to diversify and expand to other sources of revenue.

The COFC was persuaded by these arguments and remanded size determination back to the Area Office for a new review.  In its decision, the court affirmed that the 70% standard  is highly indicative of economic dependence – but still not an absolute rule.  COFC determined that OHA failed to consider properly the mitigating factors presented.

This is a fascinating case study and a great example of a firm forcing SBA to faithfully apply its own regulations.  But – importantly – it also needs to be taken with a grain of salt and viewed as the exception to the rule.

The fact remains that there is a rock solid basis to support the SBA’s use of the 70% threshold as a standard for finding affiliation based on economic dependence – both in the regulations and in the case law.  If your business receives even close to 70% of its receipts from one business – there is a definite cause for concern.  This case confirms that your business has the ability to try and rebut the presumption of affiliation – but that can be a steep mountain to climb.

If you are concerned about your firm losing its size standard due to economic dependence – now is the time to think about proactive strategies for diversifying.  Relying on a winning rebuttal argument with the SBA is betting against the house.

A short reminder to join me on Thursday, August 24, 2017 for lunch (11:30 am to 1:30 pm) and learn about the Small Business Administration’s All Small Mentor Protégé Program. The event is sponsored by Design-Build Institute of America Mid-Atlantic and will be held at Maggiano’s in Tysons Corner.

For months, we poured over the proposed and final rules – speculating about how the Program would look and operate.  Now it is here.  With the SBA accepting and processing applications at a healthy clip, there is no better time than the present to get up to speed.

During the event, we will walk through the basics of the All-Small Program, including the application and approval process.  We will also talk about big picture issues, including the Program’s general shield against affiliation and the most important questions for contractors (both large and small) considering taking the leap.

The event will also offer insights for contractors that have already investigated the Program.  For example, we will discuss the newly published requirements for mentor-protégé agreements and joint venture agreements formed between Program participants.  Careful consideration of the issues captured in these agreements can make the difference between a successful partnership . . . and the undesirable alternatives.

I hope that you can join us on the 24th.  I am happy to chat after the presentation about any specific questions facing your business.  If you can’t make the event, you can always contact me here to discuss your questions.

Join me on Thursday, August 24, 2017 for lunch (11:30 am to 1:30 pm) and learn about the Small Business Administration’s All Small Mentor Protégé Program. The event is sponsored by Design-Build Institute of American Mid-Atlantic and will be held at Maggiano’s in Tysons Corner.

For months, we poured over the proposed and final rules – speculating about how the Program would look and operate.  Now it is here.  With the SBA accepting and processing applications at a healthy clip, there is no better time than the present to get up to speed.

During the event, we will walk through the basics of the All-Small Program, including the application and approval process.  We will also talk about big picture issues, including the Program’s general shield against affiliation and the most important questions for contractors (both large and small) considering taking the leap.

The event will also offer insights for contractors that have already investigated the Program.  For example, we will discuss the newly published requirements for mentor-protégé agreements and joint venture agreements formed between Program participants.  Careful consideration of the issues captured in these agreements can make the difference between a successful partnership . . . and the undesirable alternatives.

I hope that you can join us on the 24th.  I am happy to chat after the presentation about any specific questions facing your business.  If you can’t make the event, you can always contact me here to discuss your questions.

Contractors seeking to avoid affiliation under the Ostensible Subcontractor Rule know the soundbite:  Your firm must self-perform the “primary and vital” contract requirements.

A small business prime contractor must zero in on the essential objective of its contract and make sure to perform those requirements with its own employees.  If those requirements are subcontracted out to others, the SBA will have all the ammunition it needs to find affiliation.

While the “primary and vital” requirements test is the most commonly cited metric for the Ostensible Subcontractor Rule, a recent Small Business Administration Office of Hearings & Appeals decision reminds us that there is another factor to consider.  Namely, affiliation can also arise under the Ostensible Subcontractor if the small business prime contractor is unusually reliant on its subcontractor.

The SBA considered a General Services Administration custodial, landscaping, and grounds maintenance services contract set aside for small businesses.  On the facts presented in the appeal, it appears that the small business prime contractor would meet the requirement to perform the contract’s primary and vital requirements by, among other things, providing custodial services and controlling all contract management activities

Digging deeper, however, the SBA determined that the primary and vital issue was irrelevant to the final analysis.

According to the SBA, the Ostensible Subcontractor Rule is “disjunctive” – which is to say that the contractor must perform the primary and vital requirements AND cannot be unduly reliant on its subcontractor.  The inquiries are totally independent and a black mark on either is enough to tip the scales towards affiliation.

So, getting back to the appeal, the SBA looked at the small business’s relationship with its subcontractor and found a textbook example of over-reliance:

  • The subcontractor was the incumbent contractor on the project, but ineligible to submit its own proposal on the restricted set-aside contract
  • The small business prime planned to staff its part of the contract almost entirely with the subcontractor’s former employees
  • The proposed project manager previously served with the subcontractor on the incumbent contract, and
  • The small business prime lacked its own experience and needed the subcontractor to successfully perform (including a stated intent to sub-out 49% percent of the work to one entity)

Cumulatively, these factors were enough for the SBA to find affiliation based on the Ostensible Subcontractor Rule (and, specifically, the prohibition against undue reliance).  No further inquiry into performance of the primary and vital requirements was necessary.