Legal Meets Practical

On December 29, 2014, the Small Business Administration (SBA) released a proposed rule implementing the National Defense Authorization Act (NDAA) of 2013, which reforms numerous aspects of the SBA regulations, including the limitations on subcontracting rule, affiliation principles, and the eligibility of small business joint ventures. These changes will impact the regulations at 13 CFR Parts 121, 124, 125, 126, and 127 (small business size regulations, 8(a), government contracting programs, HUBZone, WOSB, respectively).

Any business competing for small business set-asides in the federal arena should take a look, but for easy reference, here’s a snapshot of the most important proposed changes:

Limitations on Subcontracting. While the prime contractor is still required to perform 50% or more of the work under both service and supply contracts, the method of calculating the 50% will change. The proposed rule shifts the formula from a “cost-based” analysis that looks at the percentage of total personnel or manufacturing costs spent on subcontractors, to a “percentage of the total award amount” that is spent on subcontractors. Under the new method, the small business prime may not spend more than 50% of the total award amount on subcontractors that are not similarly situated to the prime (i.e., others in the same socioeconomic category). This provision is intended to ensure that the majority of work under a small business set-aside contract is performed by a contractor with the applicable size and socioeconomic status, and not passed through to large businesses or ineligible small businesses beyond the applicable limits.

Affiliation Due to Identity of Interest. The proposed rule would establish rebuttable presumptions of affiliation based on family relationships and circumstances when a concern derives more than 70% of its revenue from another entity. The proposed rule also adds an affiliation exclusion for a joint venture where each party to the joint venture qualifies as small under the applicable size standard.

Joint Ventures.  The proposed rule would broaden the exclusion from affiliation for small business size status, to allow two or more small businesses to joint venture for any procurement without being affiliated with regards to the performance of that particular procurement. The SBA proposes this in part to encourage joint venturing, which furthers the government-wide goals for small business participation in federal government contracting.

Size Protests. The proposed rule would clarify the regulation that specifies who may initiate a size protests. The current language contains a confusing double negative (“Any offeror that has not been eliminated for reasons not related to size may file a size protest.”). The change will clarify the intent to provide standing to any offeror in line for the award, but not to an offeror that was found non-responsive, technically unacceptable, or outside the competitive range.

Other Changes. The SBA proposes to make changes to other provisions as well, including those concerning the non-manufacturer rule, and North American Industry Classification System Code (NAICS) appeals procedures, and the calculation of annual receipts.

If implemented, over the next few years, these changes will likely impact small businesses doing federal work in one way or another. It is important that these business owners review the changes in order to: 1) comment, if necessary; and 2) understand how legal obligations are affected by the rule changes.

To access the full text of the proposed changes (which includes the commentary and the link to submit your own input), click here. Comments are due on or before February 27, 2015.

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On January 22, a New Jersey construction firm, Veteran Construction, reached a $1.3 million settlement with the U.S. Department of Veterans’ Affairs (VA) in order to settle claims that it misrepresented itself as a service-disabled veteran-owned small business (SDVOSB) by using a veteran “nominee” for SDVOSB status. From 2008 through 2011, Veteran Construction used this status to receive over $6.5 million in set-aside contracts from the VA.

In the settlement agreement reached between Veteran Construction and the DOJ, in addition to the $1.3 million payment, Veteran Construction has agreed to never again seek any veteran set-aside government contracts. It will not seek any U.S. government contracts for three years. It also agreed that for three years, none of its current or former members will maintain more than a 10 percent interest in any company seeking SDVOSB set-aside contracts.

The company admitted that it was liable to the U.S. under the False Claims Act (a law criminalizing the act of submitting false claims/requests for payment to the government). It is unclear, however, how the DOJ and Veteran Construction reached $1.3 million as the settlement amount given that it received $6.5 million in set-aside work. Under the False Claims Act, a company found liable under its provisions is responsible for “treble” damages; i.e., it must pay the government’s claim, times three. Other penalties are also involved. (Access the DOJ’s primer on the False Claims Act here).

This isn’t the only SDVOSB set-aside fraud to come out of the Garden State recently. In October, a Teaneck, New Jersey woman was sentenced to eight months home confinement (and to pay $100,000 in restitution) for pretending her business was owned by a disabled veteran so she could score $1.2 million in VA set-aside contracts from 2010 through 2011. She had asserted SDVOSB status for her company, Office Dimensions, claiming her father-in-law, a veteran, owned and controlled the company. The problem? Not only did he have no involvement with the company, but he was not service-disabled. Eventually the misrepresentation caught up with her.

This illustrates why it is important that we now have an official certification (verification) program to verify eligibility for the VA’s Veterans First Contracting Program. Based on when these actions took place (i.e., before verification existed), these companies must have checked the appropriate boxes to self-certify and then bid on the set-aside contracts. They were under the radar enough that no one questioned or protested their status. This may not have happened if they had gone through the wringer at the VA’s Center for Verification and Evaluation first.

So yes, the verification process is a pain, but as a veteran, wouldn’t you rather have to go through it rather than know that companies like this are getting the set-aside work designed for veterans like yourself?

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When small businesses hear the word “pass-throughs,” they go up in arms. “Pass-throughs” has a negative connotation – we think of a small business obtaining a set-aside contract and funneling the work through a big business.

Pass-throughs can be permissible. That word also stands for contracts where certain products or services are to be contracted out through subcontractors (i.e., the work is “passed through” to someone else – a “divide and conquer” approach to the work required under the contract).

Successful offerors for contracts exceeding $650,000 that have subcontracting possibilities are required to submit a subcontracting plan which includes, along other things, a statement of the total dollars to be subcontracted, the principal type of supplies and services to be subcontracted, and assurances that the offeror will submit periodic reports so the government can determine the extent to which it has complied with the plan. This is so the government can keep track of who is doing what (and, more importantly, who is really getting paid).

One concern the government has with pass-through arrangements is whether it creates additional costs. Section 852 of the National Defense Authorization Act (NDAA) for Fiscal Year 2007 directed the Secretary of Defense to issue regulations to ensure that pass-through charges on contracts or subcontracts (or task or delivery orders) are not excessive in relation to the cost of work performed by the contractor or subcontractor. The DoD issued an interim rule in 2007 to this end; and the 2009 NDAA expanded requirements related to these pass-through charges. (The Federal Acquisition Regulation was amended to limit these pass-through charges).

Building on this previous legislation, in January of 2013, Section 802 of the NDAA for Fiscal Year 2013 directed the DoD, Department of State (“State”), and United States Agency for International Development (“USAID”) to issue any necessary guidance and regulations to ensure that contracting officers take additional steps when an offeror informs the agency of its intention to subcontract more than 70% of total costs of work to be performed for relevant contracts. (The FAR Council is currently developing a regulation to incorporate Section 802 requirements applicable to all executive agencies). The deadline for this was July 2013.

Fast forward to now. On December 22, the GAO issued a report analyzing the DoD’s, State’s, and USAID’s progress in developing guidance and regulations to ensure that contracting officers complete additional analyses prior to awarding pass-through contracts. In the event a contractor intends to sub out more than 70% of the total cost of the work, a contracting officer must do the following:

• Consider the availability of alternative contract vehicles and the feasibility of contracting directly with a subcontractor or subcontractor that will perform the bulk of the work; and
• Make a written determination that the contracting approach selected is in the best interest of the government; and
• Document the basis for such determination.

In general, the GAO’s report found that none of these three agencies met their requirements, and this is over two years after it was mandated to put steps in place. (They did make some progress, but nothing with “teeth” – only bulletins or guidance documents with soft language). This is a disappointment given the potential cost impact on excessive use of subcontractors, as well as small businesses’s interest in ensuring that these dollars and contract allotment are accounted for.

In the end, the GAO recommended that the DoD, State, and USAID take two actions: issue guidance to help contracting officers perform the additional steps required, and revise management review processes and guidance to verify implementation. The DoD and State agreed with GAO’s recommendations but USAID did not, stating that additional guidance might limit its contracting officers’ discretion. GAO maintains that both recommended actions are still warranted for USAID.

In general, the report is frustrating to read. The takeaway is it has been over two years since three agencies were told to take action, and the action taken was the drafting a few memoranda. And since a GAO report is a recommendation, it’s difficult to imagine that this will prompt change.

Access the GAO report here.

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In the Appeal of Atlas Int’l. Trading Corp., on December 2 the Armed Services Board of Contract Appeals (“ASBCA”) held that a contractor’s bribery of an agency’s program manager made the contract at issue in its appeal void ab initio (“from the beginning”).

As set forth in the Statement of Facts the ASBCA relied upon, from 2008 through 2011 the contractor’s owner paid a government program manager more than $185,000 in exchange for favorable procurement treatment. Both the business owner and the government official ultimately pleaded guilty to statutory criminal charges arising from their actions. In other words, “but for” the bribery, the contractor appealing to the ASBCA would not have won the contract. In particular, the program manager had provided the contractor with intel to let it know to submit an unsolicited proposal, which resulted in the award.

Then, in July of 2013, the Government terminated the contract for cause. The Government requested that the ASBCA deny the contractor’s appeal from the termination of the contract because, the government contended, the contract was tainted by fraud from its inception, and so was void ab initio. Illegal conduct will make a contract void ab initio where a contractor would not have received a contract but for illegal conduct.

The ASBCA agreed with the Government, holding that if a contract is void ab initio, a contractor cannot establish that it had a contract with the Government and the Government is entitled to judgment as a matter of law. It denied the appeal, upholding the Government’s decision to terminate for cause.

The takeaway – if you weren’t allowed in the game in the first place, you can’t complain that the Government broke the rules.

Access the decision at: http://www.asbca.mil/Decisions/2014 /59091%20Atlas%20International%20Tr ading%20Corporation%2012.2.14.pdf.

Now that it is the new year, it is time for us to make resolutions and promptly abandon them. Oh ye of little will power, I understand.

There are, however, resolutions worth making and keeping. And I’m not talking about losing weight, as it is your right as an American to that second pint of Ben & Jerry’s. They are, after all, buy one, get one, and it is unfair to expect you to eat New York Cheesecake and pass on Americone Dream.

No, I’m talking about resolutions you can actually keep and build upon next year. I’m talking about the resolutions good for your business. As a small business owner myself, I have five resolutions it might be good for small business owners to consider:

1. Attend a conference. This serves many, many purposes when done right. For one, it gives you the chance to develop and hone your elevator speech about your business. When someone asks you what you do, can you rattle off something that sounds snazzy in a minute or less? Conferences also give you an opportunity to network – when I attend conferences, I often meet people I’ve heard of via blogs and LinkedIn, and I’m able to make an in-person connection. And conferences are wonderful ways to educate yourself – they offer learning sessions, and free advice from procurement officials and others who know the ropes. The National Veteran Small Business Coalition will host one in Norfolk this June, and the VA’s National Veterans Small Business Engagement (yes, the names really are that similar) will host its annual conference this summer (exact date and location pending).

2. Look at your website. Do you like it? If you stumbled on it during an Internet search, would you sign up for your blog or click on any of the webpages? I add webpages and resources to mine in order to enhance search engine optimization (such as my quarterly newsletter), and I get more traffic because of it.

If you don’t have a website, you can fairly easily and cheaply make one yourself, with the help of GoDaddy (for domain/hosting) and Elegant Themes (for a website template). (I provides these examples only because I use them – there are other options). Chances are, someone in your family/circle of friends can help you out if this task seems daunting. And if not, hiring a web developer won’t break the bank.

3. Shamelessly seek information. Don’t be afraid – ask a not-too-bright question on LinkedIn. Or at a networking event. How else are you going to find out the answer? Owning your own business comes with a huge learning curve, and people who have been in your position understand where you’re coming from. Just don’t take what you hear as gospel – not everyone who talks, should.

4. Sign up for publications. Part of being a successful business owner is staying in the know. Luckily, it’s easily to do that for free. There are many wonderful blogs that help you stay up to date on things that affect you. I am a regular contributor to VetLikeMe, a national publication that catches about everything that impacts veteran business owners, and you can sign up for free. Google using keywords, and you’ll find other publications as well.

5. Set a schedule. As your own boss, it can be hard to stop working at 6 pm or to not check emails on a Saturday. That’s fine every once in a while, and there are some people who simply have to check email, always (I’m one of them), but it’s important to delineate between working time, and your time.

There you have it! Five resolutions, and know that I’ll be keeping them this year too. Honestly, they’re things I should be doing anyway because they help my business. I tell myself they aren’t simply resolutions, but part of a business improvement plan.

Good luck on your business improvement plan, and enjoy that pint of Ben and Jerry’s.

*Did you find this article informative? If so, sign up for Sarah Schauerte’s weekly blog on timely veteran small business issues at: https://legalmeetspractical.com. Please remember to check the link sent to your email to activate your subscription!

It looks like the heat is under VA employees to prove they aren’t part of the catastrophic problems of one of our Government’s most important agencies. Or is it?

As I blogged previously, after the VA healthcare scandals (Phoenix in particular) received widespread attention, four senior VA employees were proposed for firing. And this wasn’t for mere incompetence – it was for engaging in shenanigans such as steering contracts to a specific contractor and doctoring records. Of those four employees, only one has now been fired, two have retired (presumably with full benefits), and the decision on the fourth has been delayed.

In addition to actions against these senior executives, over 5,000 employees have been proposed for disciplinary action since Secretary Robert (“Bob”) McDonald was confirmed on July 29 of this year.

“We don’t agree with that, we think they should be fired. Period,” said Stewart Hickey, national executive director of AMVETS, a major veterans advocacy group. “For vets to regain trust, some people have to be fired so people see there’s a consequence for their action and that’s part of rebuilding trust.”

Under new laws implemented by Secretary McDonald, any employee proposed for termination has a five-day window to respond to such action. While many veterans advocates (and critics of the VA) complain that VA employees should be fired outright for outrageous or fraudulent actions, the VA would face a class action lawsuit if it chose that route. Government employees have a constitutional property right in their positions, and to remove them from employment without due process would violate such right. This makes it really hard for the VA to “trim the fat,” so to speak (or, more accurately, to “cut off the cancerous moles”).

Accordingly, while working at the VA may be uncomfortable for thousands of VA employees right now, it’s unlikely that anything terrible will happen to them directly. They can thank the U.S. Constitution for that.

All criticisms aside – and this might be the holidays affecting me – I should also mention that the VA is not running rampant with terrible employees. It’s important to point out that there are many VA employees who truly care about its mission. I have personally dealt with individuals working at the Regional Offices who go above and beyond to ensue that veterans receive the benefits they deserve. Many veterans have relayed to me the outstanding care provided at VA medical facilities. The individuals at the Center for Verification and Evaluation recently took an OATH affirming their commitment to their mission towards veteran-owned small businesses. And at the National Veterans Small Business Engagement this year, newly-confirmed Secretary McDonald impressed veterans with his vision and practical approach to the VA’s huge issues. (I have to say I feel optimistic about his appointment).

Who knows what will come in the following months? VA employees might have a constitutional right to their jobs, but for thousands of VA employees, this right is being questioned.

And of course, no one is immune to media scrutiny and public criticism. This might be enough to induce the VA to operate more efficiently. After all, no one likes bad press.

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On Friday, December 12, the Senate passed the National Defense Authorization Act (NDAA) of 2015, sending it to President Obama for signature. The $585 billion bill includes $521.3 in base defense spending and another $64 billion in war funding.

The NDAA contains a number of provisions that affect small business contractors, including:

• Comprehensive Subcontracting Plan Reform (Section 821) – The NDAA includes provisions to increase transparency and accountability in the Test Program for Negotiation of Comprehensive Small Business Subcontracting Plans. This requires prime contractors to report subcontracting plan compliance to the Department of Defense on a semi-annual basis and adds additional penalties for non-compliance, such as downgrading past performance in technical evaluations for subsequent government procurements.

• Reverse Auctions Reform (Section 824) – Within the Department of Defense, this provision limits the use of reverse auctions by banning the use of single-round reverse auctions, single-bid reverse auctions absent price protections, third-party reverse auctions that include inherently governmental functions or private past performance evaluations, and reverse auctions for design-build work. Given that 95 percent of reverse auctions are for contracts of less than $150,000, improper use of this tool has been harming small businesses, limiting competition, and delivering contracts that fail to save the taxpayers money. (This was memorialized in a GAO report, which was released in December of 2013).

• Women-Owned Small Businesses (Section 825) – Permits sole-source contracts for Women-Owned Small Businesses (WOSBs) and Economically-Disadvantaged Women-Owned Small Businesses (EDWOSBs) if there is only one WOSB or EDWOSB who can perform the work and the value of the contract is below $ 4 million, or $6.5 million for manufacturing. This provides WOSBs and EDWOSBs with the same sole-source authority currently available to HUBZone and Service-Disabled Veteran-Owned Small Business firms

For the last 52 years, Congress has not once failed to pass the NDAA that provides funding to our military. And in a bi-partisan vote (89-11), on December 12 Congress made it 53. Now it’s all up to President Obama. Access the bill here.

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By the time all protests are resolved, there might not be anyone left to take the reins of the VA’s Center for Verification and Evaluation (“CVE”).

In late November this year, the VA rescinded its September $39.9 million contract award to Monterey Consultants Inc. (“Monterey”) of Dayton, Ohio. That award, the bulk of which was for processing VetBiz applications, was protested by a disappointed offeror, Loch Harbour Group, Inc. (“Loch Harbour”).

Loch Harbour alleged conflict of interest related to other work Monterey performs for the VA under different contracts, questions about Monterey’s status as a veteran-owned small business, and concerns about how the proposals were evaluated. Its protest was pursued in the U.S. Court of Federal Claims (“CoFC”).

In reaction to the protest, the VA confirmed that it would re-evaluate Loch Harbour’s proposal to determine whether the company qualified for the award. Monterey would no longer be eligible for re-award of the contract, according to the filing. Unhappy with this development, Monterey filed its own suit in the CoFC on December 3. This lawsuit protested the VA’s decision to no longer consider Monterey eligible for the contract, and Monterey asked that the court order a permanent injunction on the VA’s decision to cancel the contract and — for now — stop the VA from taking corrective action. The court denied the latter, meaning that the contract can transition to Loch Harbour on December 26, but it is still considering the merits of Monterey’s protest of the award decision.

Not long after that – less than a week, in fact – the VA* itself filed a size protest with the Small Business Administration (“SBA”), challenging Loch Harbour’s status as a service-disabled veteran-owned small business (“SDVOSB”) and therefore eligible for the set-aside opportunity. This is despite the fact that Loch Harbour was re-verified by the CVE less than ten months ago; and that the VA (as the contracting agency) determined it eligible for the award during the contract evaluation process. Counsel for Loch Harbor, Lee Dougherty of Vienna, Virginia, has been quoted as saying that this is: “a terrible tactical move,” and that “[t]he retaliation taken by the program and contracting officer is absolutely inappropriate and a gross violation.”

A terrible tactical move or not, technically it’s allowed. Under the SBA’s rules on size protests, a contracting officer may initiate a size protest. 13 CFR 121.1001. And unlike size protests lodged by disappointed offerors, which must be filed within five days of receiving a Notice of Unsuccessful Offer, a contracting officer can do it at any time. 121 CFR 121.1004.

So here we are. Monterey is knocked out of line for the award, and Loch Harbour’s eligibility is being questioned by the VA itself. While great that the VA takes the initiative to make sure that the awardee of a large contract – which fulfills such an important mission – is truly eligible, the fact of the matter is that the VA already had months and months to question Loch Harbour’s status. Why now?

One thing’s for certain. The VA’s good at getting flak.

*VA, not CVE. The CVE’s been in the hot seat for a few items lately, but it’s important to notice that the action here all seems to stem from the VA officials responsible for awarding the contract, and not the CVE.

**Did you find this article informative? If so, sign up for Sarah Schauerte’s legal blog on veterans’ issues at: https://legalmeetspractical.com. Remember to click the link sent to your email to activate your subscription! Also, the LMP quarterly newsletter is officially out. Access it here.

by Sarah Schauerte

In a landmark case, the U.S. Court of Federal Claims held that the VA’s Center for Verification and Evaluation (“CVE”) denied due process to a Service-Disabled Veteran-Owned Small Business (“SDVOSB”) by revoking its “verified” status without proper notice and also unreasonably interpreted its own rules on unconditional ownership.

For companies that want to do set-aside work with the VA, the CVE is the gatekeeper. The CVE examines applications to the Veterans First Contracting Program, assessing whether a business has shown that it meets the requirements of being both “owned” and “controlled” by a veteran. As you might guess, these terms are very loaded.

In this case, Ambuild Company, LLC v. U.S., an agency-level protest was lodged against Ambuild, an SDVOSB. No. 14-1786 (October 10, 2014). Even though neither the protestor nor the contracting officer raised an issue with whether Ambuild was unconditionally owned by a veteran, the CVE decided to investigate this on its own. The CVE determined that the veteran was not an “unconditional owner” because of an “involuntary withdrawal” provision contained in the company’s operating agreement. Ambuild was never given an opportunity to address this issue before it was de-verified and removed from VetBiz. As such, the CoFC determined that this violated Ambuild’s rights to due process.

This is the part that is cringe-worthy. The provision the CVE found unacceptable required a member to involuntarily withdraw from the company if the member “is adjudged bankrupt or insolvent or there is entered against the [m]ember an order for relief in any bankruptcy or insolvency proceeding.” While the VA claimed that this provision would terminate the veteran’s ownership shares upon the occurrence of any type of personal bankruptcy, the CoFC found that this argument was “inconsistent with federal bankruptcy law.” Regardless of what the operating agreement says, in the event of bankruptcy, the veteran’s ownership interest would go to the bankruptcy estate. Accordingly, the CoFC held that this clause is a standard commercial arrangement that does not run afoul of the SDVOSB “unconditional ownership” requirements.

Upon reading this case, I was surprised the CVE reached this interpretation of the unconditional ownership provision given that in all fifty states, as a matter of law, a member’s interest must revert to the company if certain events occur (such as death or incapacity, and in many cases, bankruptcy). This is not something you can draft around in an operating agreement. It is fairly common for operating agreements to have a provision, in the “transfer” section, that says that a member’s interest shall revert to the company “as a matter of law.” Because this is so common, I took a look at the CVE’s Verification Brief on “unconditional ownership,” and saw that it did not address this situation.

What happened here? Does the CVE not realize what situations are encompassed in “as a matter of law?” Obviously that term means something. Here, poor Ambuild got into trouble because it included additional detail. This makes little sense, as the CVE routinely comes across this “as a matter of law” provision in the operating agreements submitted to it. The examiners should know what “as a matter of law” entails.

This should be a wake-up call for the CVE. Companies are entitled to due process (See 38 CFR 74.22 and 48 CFR 819.307) before their “verified” status is revoked. And the CVE must be reasonable in interpreting its own regulations. In that way, this CoFC decision is similar to a 2012 decision, Miles Construction, which held that a “right of first refusal” transfer restriction is permissible given that it is a standard commercial arrangement.

What do you think? Will this inspire change, or will this be more of an “academic” victory for SDVOSBs?

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The one disadvantage to protesting agency contract action at the Government Accountability Office (GAO) is that GAO decisions aren’t binding or mandatory – they’re effectively advisory. A contracting agency doesn’t have to follow them (although if it does not, it must explain why). But based on the GAO’s annual report released to Congress on November 18, 2014, it’s clear that this “disadvantage” doesn’t really exist, as in Fiscal Year 2013, every single contracting agency facing a sustained GAO protest elected to implement the GAO’s recommendation, with only one exception.

In case you’re curious, this one case involved the Air Force’s effort to implement its Food Transformation Initiative without following applicable competitive procedures. The protestor successfully argued that the Air Force had improperly invoked the public interest exception under 10 U.S.C. 2304(c)(7), which led to the unreasonable justification of using a Memorandum of Agreement to implement the Food Transformation Initiative. Asiel Enterprises, Inc., B-408315.2, (September 5, 2013).

The GAO’s annual report also addressed the government shutdown’s effect on protest resolutions. As noted, during this time, the GAO extended bid protest deadlines by one day for each day the GAO was shut down. When the federal government shut down on October 1, there were 280 active bid protest cases in progress. Because the government shutdown lasted for 16 days, the bid protest deadlines were extended for a maximum of 16 days.

Last, the annual report gave us the skinny on statistics: how many protests before the GAO were successful? According to the annual report, of the 556 protests decided on the merits (i.e., not denied for timeliness or procedural issues), only 13% (72 protests) were sustained. However, we should keep in mind that these figures don’t account for the instances where an agency took corrective action on its own initiative following a GAO protest, resulting in the protest being dismissed as moot. This means the success rate isn’t truly 13%; according to a chart on page seven of the report, 43% of all protestors received some form of relief from the agency (such as voluntary corrective action). Not too shabby.

Access the GAO’s report here.

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