L & R Alert June 2016

SECAF Legislative and Regulatory Committee Alert
June, 2016
New SBA Regulations Implementing Provisions of the NDAA FY 2013
On May 31, 2016 the Small Business Administration issued regulations implementing certain provisions of the National Defense Authorization Act for FY 2013.  The new regulations cover the following topics:  Limitations on Subcontracting, Subcontracting Plans, Affiliation, Joint Ventures, Calculation of Annual Receipts, Recertification, Size Protests, Non-manufacturer Rule, and Certificate of Competency, among other issues.  We discuss the highlights of the new regulations below.

Limitations on Subcontracting
One of the key provisions in the new rule addresses “Limitations on Subcontracting.”  Contracting Officers must include FAR 52.219-14, Limitations on Subcontracting, in every contract set-aside for small businesses.  The clause requires the small business prime contract to perform a certain percentage of the prime contract itself.  The FAR clause reflected SBA regulations on the same issue.  These SBA regulations have now been revised per the new SBA rule.  One of the important changes is that the limitations apply to the total amount paid to the small business prime rather than the cost of the contract which had previously been the case.  The limitations on subcontracting are as follows:

  • For services contracts, a small business prime cannot subcontract more than 50% of the total amount paid the small business prime
  • For supply contracts, a small business prime cannot subcontract more than 50% of the total amount paid the small business prime, excluding the cost of materials
  • For construction contracts, a small business prime cannot subcontract more than 85% of the total amount paid the small business prime, excluding the cost of materials
  • For contracts involving special trades, a small business prime cannot subcontract more than 75% of the total amount paid the small business prime, excluding the cost of materials
The most significant change to SBA’s existing limitations on subcontracting rules is the manner in which these rules will be applied.  The new rule states that “similarly situated entities” who receive work from a small business prime will not be considered a subcontractor for purposes of the new limitations on subcontracting rule.  Stated another way, the amount subcontracted to a “similarly situated entity” is considered part of the work performed by the prime, not work that is subcontracted.  A “similarly situated entity” is a business that is small under the NAICS code assigned the subcontract and which has the same small business program status as the prime contractor.  For example, in a procurement set aside for HUBZones, the “similarly situated entity” must also be a HUBZone in order to be exempt from the limitations on subcontracting rule.  In addition, the “similarly situated entity” has to perform the work with its own employees.  Independent contractors are considered subcontractors for purposes of the rule and can qualify as “similarly situated entities” as long as they meet the definition.
          Contractors should be aware that these changes apply only to SBA’s rules regarding limitations on subcontracting.  Presumably, the FAR will adopt these changes and issued a new FAR clause on Limitations on Subcontracting.  Until such time, it is unclear which rule will apply, the one stated in the FAR clause that reflected the old regulations, or the new regulations described above. 
For more information on this topic, please contact Devon Hewitt at dhewitt@protoraelaw.com

Expansion of Joint Venture Opportunities
          SBA’s regulations presume that members to a joint venture are affiliated.  There were two exceptions: (1) a joint venture between a Mentor and a Protégé in the 8(a) program and (2) a joint venture between small businesses provided the value or nature of the procurement met certain requirements.  The SBA’s new rules have eliminated the requirement that the procurement have a certain value or characteristics for the second exception.  The SBA rules now allow joint ventures with small business members to bid on set aside contracts provided each member is small under the NAICS code/size standard applicable to the procurement. 

Subcontracting Plans
          SBA enacted several new measures to strengthen enforcement of its small business subcontracting program and to eliminate opportunities for fraud with regard to subcontracting plans. 
          First, as required by the NDAA, the SBA added a provision obligating the head of the contracting agency to collect, report and review data on the extent to which the agency’s contractors meet their subcontracting objectives as stated in their required subcontracting plans. 
          Second, the new rule stiffens the penalties for a contractor that fails to make a good faith effort towards meeting its subcontracting goals or fails to submit a corrective action plan in response to inadequate implementation of its subcontracting goals.  Thus, in addition to the already existing penalty of liquidated damages, the new rule adds the requirement that the contractor be found to be in material breach of its contract and that the failure to make a good faith effort in implementing the subcontracting plan be considered in evaluating the contractors past performance.  Additionally, the rule states that any contractor that is suspected of having made a false statement in relation to its small business subcontracting plan be reported to the SBA’s Inspector General.
          Third, the rule clarifies that the SBA’s evaluations of a contractor’s implementation of its subcontracting plan is only a supplement to the agency’s evaluation and that the agency’s review remains paramount.
          Fourth, the rule requires prime contractors to notify potential subcontractors, in writing, before including the subcontractor in a proposal or subcontracting plan. 
          Lastly, the rule establishes a reporting mechanism, namely a report to the SBA’s Inspector General, for subcontractors that suspect fraud or bad faith by a prime contractor with respect to a subcontracting plan.

Certificate of Competency Program
          The SBA made two changes to its Certificate of Competency (“COC”) program, the program by which the SBA issues a written certification to a procuring agency that the subject contractor possesses the requisite responsibility to perform the contract in question. 
          First, the rule clarified that when the contractor is pursuing an Indefinite Delivery/Indefinite Quantity (“IDIQ”) contract and the contractor is found to be lacking the financial capacity to perform the full amount of the award, the SBA may nonetheless issue a finding of financial responsibility up to a certain amount that is less than the total amount of the IDIQ award.  Thus, for example, if a contractor is pursuing a $10 million IDIQ contract and the SBA finds that the contractor does not have the financial capacity to perform a $10 million contract but does have the financial capacity for a $5 million effort, the SBA may issues a COC for up to $5 million.  At that point, the agency cannot deny a contractor a contract or an order solely on the grounds of a lack of financial capacity so long as the contractor has not yet exceeded the financial capacity limit. However, the agency may, at its discretion, exceed the limit of the COC and issue a contract or an order above that amount.
          Second, the new rule clarifies that in order to be eligible for a COC, the contractor must have agreed to comply with the applicable limitation on subcontracting and nonmanufacturer rules, if applicable.
For more information on the above topics, please contact Ryan Bradel at bradelr@gtlaw.com

SBA recently amended its affiliation regulations concerning “identity of interest” and “economic dependence” affiliation.  The regulation, at 13 C.F.R. § 121.103(f), previously explained that the interests of two or more persons may be aggregated and treated as one party where “[i]ndividuals or firms [] have identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) . . . .”  As amended, the SBA divided § 121.103(f) into two distinct paragraphs and set forth two major changes to how affiliation will be determined. 
First, SBA amended § 121.103(f) by explicitly stating the types of relationships that will create a presumption of affiliation.  Specifically, the regulations now, at new subparagraph (f)(1), state that a rebuttable presumption of affiliation exist for firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings.  The second major change to the affiliation regulation involves SBA adopting a bright line test based on economic dependence.  In this regard, SBA added § 121.103(f)(2), which states that a presumption of affiliation based upon economic dependence exists if a firm derives an average of 70% or more of its revenue from another firm over the preceding three-year period. 

Small Business Innovation Research and Small Business Technology Transfer Programs
SBA amended 13 C.F.R. § 121.702(a)(2), which addresses an ownership and control element of the eligibility requirements for the SBIR program, to clarify confusion surrounding the permissibility of certain entities owning and controlling more than 50% of an SBIR awardee.  Specifically, § 121.702(a)(2) now makes clear that it is permissible for an SBIR awardee to be majority owned by a single venture capital operating company, hedge fund, or private equity firm if that firm meets the definition of a small business concern (per SBA regulations) and is more than 50% directly owned and controlled by U.S. citizens or permanent resident U.S. aliens.

Size Protests
SBA amended 13 C.F.R. § 121.1001(a) to clarify that only an offeror that is in line or under consideration for award has standing to initiate a size protest.  SBA further added authorization under this regulation permitting the SBA’s Director, Office of Government Contracting, to initiate a formal size determination in connection with eligibility for the Service Disabled Veteran Owned Small Business, the Women Owned Small Business, and the Economically Disadvantaged Women Owned Small Business programs. 
For more information on the above topics, contact Marques Peterson at mpeterson@vedderprice.com

Recertification if Merger or Acquisition during Pending Bid
SBA’s final rule adopts, as proposed, a requirement that a contractor who undergoes a merger or acquisition while it has pending bids must recertify its size status to the contracting officer for those pending bids.  The rule requires this recertification to be made “prior to award.” 
The regulation previously stated that contractors must recertify within 30 days of a merger or acquisition, but the regulation was ambiguous as to whether a recertification had to be made for a pending bid.  Now, SBA has clarified that ambiguity, indicating that it never intended for the recertification requirement to apply based on when the merger or acquisition occurred (i.e., prior vs. after award). 
However, questions remain.  Instead of the traditional 30-day clock, the final rule requires the recertification to be made “prior to award,” and contractors are often unaware when award will be made.  Further, it is not clear what effect a recertification under this new provision will have on the eligibility of the pending bid.  Traditionally, the recertification requirement has not led to contract termination; a recertification as “large” means only that the agency cannot continue to count the contract towards its small business goals.  SBA’s final rule appears consistent on this issue, explaining that “[a]n agency’s receipt of small business credit should not depend on whether an acquisition or merger occurs the day before award of contract.”  However, this new recertification, being made prior to award, gives a contracting officer the opportunity to favor another offeror.  And because SBA has not clearly rejected the theory, there likely will be protests from disappointed offerors challenging the size eligibility of a business that recertified as large immediately prior to a set-aside award.
For more information regarding this new regulation, please contact Stephen P. Ramaley at sramaley@milesstockbridge.com, or 703-610-8626.

Nonmanufacturer Rule Clarifications and Changes
SBA’s final rule includes a variety of clarifications, as well as some rule changes, amending SBA’s Nonmanufacturer Rule, which is found at 13 CFR 121.406(b)
To recap, the Nonmanufacturer rule (NMR) allows a small business to sell products/supplies to the federal government under set-aside contracts even if it is not the manufacturer of those supplies.  Without this rule, most small business dealers and resellers would be frozen out of the set-aside marketplace because they would not be able to comply with the Limitation on Subcontracting clause’s test for supply contracts. In this sense, the NMR serves as an exception to the Limitation on Subcontracting clause.  Further, the NMR applies only to supply contracts, not to services contracts.
Among other things, the NMR requires small businesses to provide the products of U.S. small business manufacturers, or else have a waiver for this requirement if the product is not made by any U.S. small businesses. 
The basics of the rule are remaining the same.  The changes and clarifications include:
  • The NMR will not apply to small business set-aside contracts valued at between $3,500 (micro purchase threshold) and $150,000 (simplified acquisition threshold). 
  • The government’s rental of an item shall be treated as a service, not a product.  Therefore, the NMR will not apply to set-aside contracts for item rental (but the Limitation on Subcontracting clause will then apply).
  • In the case of a contract for multiple items, only some of which are made by U.S. small business, whether an NMR waiver is required depends on the percentage of NMR-compliant products. 
    • If more than 50% of the products are manufactured by U.S. small businesses, no waiver is necessary.
    • If less than 50% of the products are manufactured by U.S. small businesses, SBA will grant a contract-specific waiver to “for one or more items in order to ensure that at least 50% of the value of the products to be supplied by the nonmanufacturer comes from domestic small business manufacturers or are subject to a waiver.”
  • SBA has significantly revamped the NMR waiver process.  Previously, all waivers were required to be obtained prior to issuance of the solicitation.
    • Where appropriate, SBA may now grant NMR waivers for a contract or order after a solicitation has been issued, as long as the contracting officers gives all potential offerors an adequate time to adjust their proposals in response to the waiver.
    • SBA may also grant NMR waivers after award of a contract for new items being added to the contract, as long as those new items are within contract scope.
  • SBA now requires contracting officers to notify potential bidders via the solicitation if an NMR class waiver applies.
    • Previously, vendors sometimes had to guess if generically-worded class waivers applied to supply requirements.  Now, the contracting officer will be required to make this determination up front.  
  • SBA has clarified a longstanding question about the treatment of software. 
    • Where the government is buying “unmodified software” that is generally available to both the public and government, the software should be classified as a “product”, and thus the NMR, or NMR waivers (if applicable), will apply. 
    • Where the government is buying software that is custom built or includes custom modifications, this should be classified as a “service”, and thus the NMR and NMR waivers do not apply.
For more information regarding the Nonmanufacturer rule updates, please contact Stephen P. Ramaley at sramaley@milesstockbridge.com, or 703-610-8626.
Supreme Court Rules in favor of VOSBs/SDVOSBs
The Supreme Court recently issued a decision in Kingdomware Technologies, Inc. v. United States which will have the result of increasing the number of opportunities VOSBs and SDVOSBs will have at the Department of Veterans Affairs.  Federal law requires that the VA shall award contracts to VOSBs/SDVOSBs when there is a reasonable expectation that two or more such businesses will bid for the contract at a “fair and reasonable price that offers best value to the United States.”  This provision is known as the Rule of Two.  Historically, the VA has taken the position that the Rule of Two only applied where necessary for the agency to meet its annual small business contracting goals.  Most importantly, the VA took the position that it was not required to apply the Rule of Two to acquisitions made under Federal Supply Schedule contracts.
The Supreme Court disagreed and rejected the VA’s arguments.  The Supreme Court held that the VA must apply the Rule of Two to every acquisition regardless of whether the agency otherwise met its annual minimum contracting goals.
For more information on this topic, contact Devon Hewitt at dhewitt@protoraelaw.com