Small Business Administration

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.

Small business owners need to be aware of the simple, proactive measures that are available right now to avoid headaches down the road.

One prime example is properly maintaining your SAM.gov profile.  Taking the time to properly check (and periodically re-check) your SAM.gov reps and certs can help to establish and maintain your eligibility in the SBA’s socio-economic programs (like the Women-Owned, Service-Disabled, and HUBZone programs).

For example, a recent SBA size protest considered the case of whether an apparently woman-owned small business was disqualified from receiving a WOSB set-aside contract award based on incorrect information in its SAM profile.  The protest allegations included that the profile included inconsistent representations concerning the business’s size status and WOSB qualifications.

The SBA did not disagree with the basis of the protest – the SAM profile was inconsistent and did not accurately reflect the correct size status for the set-aside contract.  Nevertheless, the SBA denied the protest (and the subsequent appeal), finding that the awardee met the WOSB requirement of being at least 51% owned and controlled by one or more women (regardless of the conflicting SAM representations).

So, is the lesson here that SAM reps and certs don’t matter as long as you meet the SBA’s criteria?  Definitely not.

First, it should go without saying that small businesses should not actively open the door to size protests.  Even if you prevail on the protest (and the potential appeal), you will still have spent valuable time, money, and other resources defending against a preventable action.  It is much more advisable to bolster your company’s size status from all challenges and at every turn.

Second, I do not take this recent opinion as a blank check from the SBA to ignore SAM.gov reps and certs.  If you follow size protest decisions, you’re well aware that the SBA determines issues like affiliation using a “totality of the circumstances” test.  In other words, even if one size issue alone does not establish affiliation – it is still possible that that one issue, when combined with a number of other indicators, could still result in a finding of affiliation.

With that said, I think it is possible that a failure to properly manage a SAM.gov profile – when combined with other issues or facts – could lead to the SBA taking a longer look at your business’s size status in connection with a size protest.  In fact, it already has.

After years of pushing by industry groups and the passage of the National Defense Authorization Act for Fiscal Year 2014, the U.S. Small Business Administration (SBA) issued a final rule to amend the federal small business subcontracting plan requirements in order to allow other than small (i.e., large in SBA speak) federal prime contractors to receive credit for lower-tier subcontracting awards to small business concerns (SBCs) and other socio-economically disadvantaged SBCs.  Effective on January 23, 2017, federal prime contractors will no longer be limited to counting only the subcontract awards they make at the first tier towards satisfying their small business subcontracting goals.  They will now be able to count the awards their other than small first tier subcontractors make to SBCs as well.

The amended 13 CFR Section 125.3 reads in relevant part:

Where the prime contractor has an individual subcontracting plan, the prime contractor shall establish two sets of small business subcontracting goals, one goal for the first tier and one goal for lower tier subcontracts awarded by other than small subcontractors with individual subcontracting plans.  Under individual subcontracting plans the prime contractor shall receive credit for small business concerns performing as first tier subcontractors (first tier goal) and subcontractors at any tier … in an amount equal to the dollar value of work awarded to such small business concerns (lower tier goal).

The prime contractor’s performance under its individual subcontracting plan will be calculated using its own reporting at the first tier and its subcontractor’s first tier reports under their plans for lower tier subcontracting goals.  The prime contractor’s performance … must be evaluated based on its combined performance under the first and lower tier goal.

Up until this regulation change, the FAR limited contractors to counting only next tier subcontractors toward achieving goals.  For example, prime contractors were permitted to count only their first tier subcontractors towards the goals identified in subcontracting plans.  A federal contractor could not count a second tier subcontractor towards its goals, even when the second tier subcontractor was a qualified SBC.  Similarly, first tier subcontractors could count only next (second) tier subcontractors to satisfy subcontracting goals.  Because of this limitation, a contractor could still theoretically achieve its goals even if its first tier SBC subcontracted a large portion of its work to a large, second tier contractor.  The result was that a higher tier contractor received subcontracting credit regardless of the fact that the SBC did not perform an equivalent amount of work.  More likely than not, the cause of this problem lay in the pre-electronic submission era where government agencies had to compare separate pieces of paper from large prime and first tier subcontractors.

To put this in context, unrestricted federal procurements over $700,000 ($1.5 million for construction of any public facility) include Federal Acquisition Regulation (FAR) clauses 52.219-8 (Utilization of Small Business Concerns) and 52.219-9 (Small Business Subcontracting Plan), which require prime contractors to make a “good faith effort” to meet or to exceed the procuring agency’s small business subcontracting goals. Under FAR part 19.704, a “flow-down provision,” large subcontractors must also formulate subcontracting plans if they receive a subcontract in excess of the monetary threshold.  The higher tiered contractor is responsible for obtaining, approving and monitoring the subcontracting plans of lower-tiered contractors.  Failure to make this effort could result in liquidated damages, default termination and negative performance evaluations.

Small business concerns (SBCs), HUBZone businesses, women-owned small businesses (WOSBs), economically disadvantaged women-owned small business concerns (EDWOSBs), small disadvantaged businesses (SDBs), veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs) count toward achieving subcontracting goals.  In addition, Alaska Native Corporations (ANCs) and Indian tribes satisfy subcontracting goals and, unlike other SBCs, they do not need to qualify as small to count toward subcontracting goals.  Under this regulation change, prime contractors may rely on paper self-certifications as to size or socioeconomic status or a subcontractor’s electronic certification such as size representations or certifications made in the System for Award Management (SAM).

Another important change is that the amended regulation now requires contractors to assign a specific North American Industry Classification System (NAICS) code and corresponding size standard that best describes the principal purpose of the subcontract to each small business subcontract.  Specifically, contractors must provide some sort of written notice of the NAICS code and size standard to potential small business subcontractors before acceptance and award of the subcontract.

The ability to count lower tier SBC subcontract awards is a long awaited change.  That said, federal contractors must carefully understand federal subcontracting plan requirements and how they have changed.  This includes knowing what information other than small contractors need from SBCs and what information they must provide SBCs prior to awarding subcontracts.  The penalties for failure to make good faith efforts to satisfy the requirements are huge.

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.