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Taking A Closer Look At The Senate's 2018 NDAA Bill

October 27, 2017
TAKING A CLOSER LOOK AT THE SENATE'S 2018 NDAA BILL

Last week, on October 17, 2017, the U.S. Senate voted to appoint members to join with House members on a conference committee to work out differences between Senate and House NDAA 2018 bills.  The Senate passed its bill on September 18, while the U.S. House of Representative passed its bill in July.  As we stated during our closer look of the House’s bill (here), examining the defense authorization bills gives government contractors an early glimpse and insight of the spending priorities supported by influential constituencies.  There is some overlap between the bills, including appropriations for military housing and construction, a prohibition against another round of base realignment activities, and heavy investments in the missile defense system, which in the Senate version includes appropriations for the Iron-Dome Short Range Rocket Defense Program, the Israeli Cooperative Missile Defense Program, development of space-based sensor architecture, and improved ground-based interceptor capability and reliability.

The differences between the bills, however, are far greater and significant and the Senate bill is every bit the complete re-write it appears to be on a side-by-side comparison.  While it remains to be seen which of the Senate's proposals will ultimately be included in a final bill that is worked out by conference committee members, below are highlights of the Senate bill that government contractors may wish to take note of now.

Changes To Procurement Process

The Senate bill includes reforms to the procurement process including provisions requiring amendments to the Defense Federal Acquisition Regulation Supplement (DFARS) that would implement procedures aimed at making “should-cost” reviews transparent and objective.  The reforms also prohibit the U.S. Department of Defense (DoD) from entering into contracts for services over $10 million based on specific personnel or labor hour requirements without first submitting a justification on why outcome-based or performance-based requirements were not used instead, and mandate a pilot program under which DoD would enter into extended multi-year contracts of up to ten years.

Some of the most significant reforms, however, are proposed changes to debriefing and bid protest rules.  Specifically, the bill requires changes to DFARS that would mandate that all required post-award debriefings must provide detailed and comprehensive statements of the agency’s rating for each evaluation criteria, as well as of the agency’s award decision. The revisions would also encourage agencies to release as part of the debriefing all information that would be releasable during a bid protest, including the agency’s written source selection award determination.  The changes would also provide an opportunity for a round of follow-up questions and answers.

As for bid protests, the Senate bill requires a losing protester with revenues over $100,000,000 to pay for DoD's costs incurred for processing the protest.  In addition, incumbent contractors who file protests are required to have all payments over the incurred costs withheld on any bridge or temporary contract extension awarded to the contractor as a result of any delay in the award that results from the protest filing. The withheld funds are, depending on the protest outcome, released to the awarded contractor, DoD, or the incumbent.

Increased Threshold Limits

The Senate bill also proposes to raise several threshold limits. For example, the bill raises the simplified acquisition threshold for the DoD acquisitions to $250,000.  In addition, the threshold for requiring contractors to submit cost or pricing data – when such submission is required – is raised from $500,000 to $1,000,000, while the micro-purchase threshold has been raised from $3,000 to $10,000.

Space Based Initiatives

While the Senate bill does not take up the House’s proposed Space Corps, it does make several proposals targeting the nation’s space based defense systems.  First, the Senate bill repeatedly pronounces that space is a “warfighting,” “contested,” or “combat” domain, and places the National Space Defense Center at the center of efforts to protect U.S. assets in space and to detect, assess and react to evolving space threats.  It also requires the Commander of the Air Force Space and Missile Systems Center to maintain a watch list of contractors with a history of poor performance on space-related contracts.  And, although not grouped in with, or categorized as, space defense weapons, hypersonic weapons (featured in this Popular Mechanics article ) receive significant support in the Senate bill, which points specifically to technological breakthroughs that have made the pursuit of hypersonic glide weapons feasible from a budgetary standpoint.  According to the bill, although hypersonic weapons “present a radical change in warfare,” other countries (including Russia and China) “are aggressively pursuing hypersonic weapons at an alarming rate that threatens to outpace the United States if the United States does not more aggressively pursue development.”

Cybersecurity

Another area that received significant, if not the most, attention is not surprisingly cybersecurity. The Senate bill declares a U.S. policy to use “all instruments of power” to deter, and respond to, any and all cyber attacks that target U.S. interests.  The bill includes numerous DoD mandates, a few of which include:

  • Requiring DoD to conduct a comprehensive review of U.S. cyber posture for the next 5 to 10 years and submit a report to Congress;
  • Requiring DoD to incorporate cybersecurity of election systems as a component of its Cyber Guard Exercise;
  • Requiring DoD to submit to Congress a plan to meet the increased demand for cyberspace careers in the armed reserves;
  • Mandating the establishment of the DoD Cybersecurity Scholarship Program;
  • Requiring an annual assessment of “cyber resiliency” of the nuclear command and control system, including its ability to operate through a cyber attack from Russia and China;
  • Requiring DoD to submit a congressional report on the training infrastructure of cyber forces;
  • Requiring Army to report on the cyber capability and readiness shortfalls of its Army Combat Training Centers;
  • Requiring DoD to report on significant security risks to defense-critical electric infrastructure posed by significant malicious cyber-enabled activity;
  • Requiring the Comptroller General of the United States to submit a report to congressional committees of any critical telecommunications equipment, technologies or services obtained by DoD, or its contractors or subcontractors, manufactured directly or indirectly by a foreign supplier closely linked to a leading cyber-threat actor;
  • Requiring DoD to submit to appropriate congressional committees a report on the potential offensive and defensive applications of “blockchain” technology and other distributed database technologies;
  • Requiring DoD to establish a cross-functional task force that will integrate across organizations that are responsible for information operations, military deception, public affairs, electronic warfare, and cyber operations;
  • Requiring DoD to establish a “Strategic Cybersecurity Program” that will continuously assess information assurance and overall effectiveness of offensive cyber systems, long-range strike systems, nuclear deterrent systems, national security systems, and DoD’s critical infrastructure; and
  • Requiring an evaluation by the Commander of U.S. Cyber Command of alternative methods for developing, acquiring, and maintaining software-based cyber tools and applications that must include agile software development, agile acquisition, and other best practices of commercial industry. 

On this last point, the Senate bill expressly requires the Commander to consult with commercial software companies, but it seems likely that many of the other evaluations and reports mandated under the bill will require commercial or contractor consultation.

In addition, in order to make secure work spaces available to small and nontraditional businesses, the bill also requires DoD to establish procedures to build and maintain certifications for multi-use sensitive compartmented information facilities where multiple companies can work on multiple projects at different security levels and not tied to any single contract.

Lastly, the bill also prohibits any U.S. government department, agency or organization from using, directly or indirectly, any hardware, software or services developed by Kaspersky Lab or any entity in which Kaspersky Lab has majority ownership.

Other Integration of Agile Methods

The Senate bill contemplates a much broader integration of agile software and methods that goes far beyond application to cyber threats described above.  For example, the bill requires DoD to identify one major program per military service and one defense-wide program for tailoring into a smaller increment.  Each program must be either a major defense acquisition or formerly a major automated information system.  In addition, DoD is required to conduct a comprehensive assessment of investments in between four and eight defense business systems and priorities for realignment and restructuring into smaller increments and incorporation of agile acquisition methods.  DoD is also required to identify between four and eight software development activities to be developed using modern agile acquisition methods and without incorporating requirements that typically may otherwise apply such as (1) earned value management or EVM-like reporting; (2) development of integrated master schedule; (3) development of integrated master plan; (4) development of a technical requirement document; (5) development of systems requirement documents; (6) use of information technology infrastructure library agreements; or (7) use of software development life cycle (methodology).

Open Source Requirement and Changes to Technical Data Rights

Perhaps more controversially, the bill requires all unclassified custom-developed software and related technical data that is not a defense article regulated by the Arms Export Control Act but that is developed under a DoD contract award to be managed as open source software unless specifically waived by a service acquisition executive.  Thus, DoD must require contractors to release source code and related technical data in a DoD approved public repository subject to a license through which the copyright holder provides the rights to use, study, reuse, modify, enhance, and distribute the software to anyone and for any purpose.  Moreover, with regard to existing custom-developed computer software, DoD must, where appropriate, seek to negotiate open source licenses with contractors that developed it, and release related source code and technical data in a DoD approved repository.  Lastly, DoD must task the Defense Advanced Research Program Agency with a project to identify and reverse engineer custom-developed computer software and related technical data for which source code is unavailable.

As we have noted in our white paper on computer software and data rights (here) and in our GovCon Video Blog™ series on software and data rights (see here), the government’s rights that are designated as “unlimited” are broad and expansive, but it is clear that the Senate’s bill intends for the government to aggressively make full use of those unlimited rights.

Indeed, the bill requires changes to definition of “technical data,” which currently is simply and broadly defined under 10 U.S.C. 2302 as “recorded information (regardless of the form or method of the recording) of a scientific or technical nature (including computer software documentation) relating to supplies procured by an agency.”  Under the bill, the definition now explicitly includes "everything required to reproduce, build/recompile, test, and deploy working system binaries on system hardware, including all source code, revision histories, build scripts, build/compilation/modification instructions/procedures, documentation, test cases, expected test results, compilers, interpreters, test harnesses, specialized build and test hardware, connectors, cables, and library dependencies."

Moreover, the bill amends the data rights provisions in 10 U.S.C. 2320 to require, with respect to any software delivered to the government, (i) delivery in native format; (ii) builds that are not dependent on predefined build directories; and (iii) in the case of licensing restrictions that do not allow library dependent inclusion, documentation and verified accessible repositories and revision history.

If the Senate proposals are adopted, therefore, government contractors developing custom-software or integrating proprietary software into custom solutions will have to take particular attention to their data rights assertions to ensure that unlimited rights are properly confined to the particular software or data to which they apply.

SBIR/STTR Program

The bill also proposes several important changes to the SBIIR and STTR Programs. First, the bill amends the portion of the Small Business Act relating to Phase III awards. In particular, Section 9(r)(4) of the Small Business Act (10 U.S.C. 638(r)(4)) currently states that to “the greatest extent practicable” government agencies and prime contractors must issue Phase III awards related to technology to the SBIR and STTR award recipients that developed the technology.  Although the Senate bill does not eliminate the wiggle room requiring Phase III awards to the technology developers only to the “greatest extent practicable,” it does now add a provision that explicitly states that agencies and prime contractors must construe any prior Phase I or Phase II award as satisfying any “full and open” or other competition requirements, and that a Phase III award can be made without further justification.  In addition, the bill Senate proposes to implement a pilot program under which DoD shall award multiple award contracts to small businesses in order to purchase technologies, supplies or services that were developed under the STTR and SBIR programs.  Similarly here, DoD is authorized to establish procedures to waive the competition in contracting requirements for any such purchases. 

To download a copy of the Senate bill go here, and to read other articles from The GovCon Bulletin™ go here.

SBA Updates Small Business Size Standards and Amends WOSB-Eligible NAICS Codes

October 13, 2017
Join Us For the Federal Government Contractors New (Fiscal) Year Soiree!
The Amadeo Law Firm is pleased to be a sponsor of the Federal Government Contractors New (Fiscal) Year Soiree, organized and hosted by our good friends at Jennifer Schaus & Associates.  The event will be held at the Kennedy Center on October 23, 2017, beginning at 5:30 pm.  For more information about the event and to register, go here!  
Mark Amadeo

 
SBA UPDATES SMALL BUSINESS SIZE STANDARDS AND AMENDS WOSB-ELIGIBLE NAICS CODES

SBA Updates Small Business Size Standards

Two weeks ago, on September 27, 2017, the U.S. Small Business Administration (SBA) issued a final rule that adopted proposed revisions to its small business size standards.  Specifically, the final rule implements the U.S. Office of Management and Budget’s (OMB) changes to the North American Classification System (NAICS), which is used by the SBA to set size standards - by industry category - for purposes of determining when businesses are considered small businesses.

OMB’s changes to NAICS (NAICS 2017 Changes) created twenty-one new industry categories by reclassifying, combining and splitting the existing twenty-nine industry categories. The NAICS 2017 Changes changed the 6-digit NAICS code for eight industry categories without changing their definitions or titles, and amended the title of one industry category without changing its six digit NAICS code.  As a result of the SBA’s implementation of the NAICS 2017 Changes, the SBA’s small business size standard increased for six industry categories and part of one industry category and decreased for two industry categories.  And for one industry category, the measurement for determining whether a company is small was changed from a measurement based on average annual receipts to a measurement based on the number of employees.  The final rule, which can be downloaded here, contains a table that shows the changes to the industry categories made by the NAICS 2017 Changes.  The updated size standards are effective as of the beginning of the fiscal year - October 1, 2017.

SBA Amends WOSB-Eligible NAICS Codes

More recently, on October 11, 2017, the SBA issued a Notice updating the NAICS codes for industry categories used under the SBA's Woman-Owned Small Business (WOSB) Program for set-asides and sole source procurements.  Under the WOSB Program, contracting officers can set aside procurements for WOSB’s as long as (1) the acquisition is for a good or service in an industry - as represented by its corresponding NAICS industry category code - in which WOSB’s are substantially underrepresented; (2) there is a reasonable expectation that at least two WOSBs will submit bids; and (3) the award will be made at a fair and reasonable price.  Sole source awards, moreover, are permitted if only one WOSB can perform the contract at a fair and reasonable price.  Similarly, Economically Disadvantaged Women-Owned Small Businesses (EDWOSBs) in NAICS industry codes in which SBA has determined that WOSBs are underrepresented, rather than substantially underrepresented, can also receive set-asides and sole source awards.

In order to align the WOSB Program with the NAICS 2017 Changes (described above), the SBA issued the Notice to amend the NAICS codes that are eligible for use under the WOSB Program.  That is because the NAICS 2017 Changes reduced the number of four-digit industry groups that are eligible for WOSB set-aside procurements from 113 to 112 (which resulted after NAICS groups 5171 and 5172 were merged into NAICS group 5173).  In addition, the NAICS 2017 Changes reduced the number of eligible six-digit NAICS industry category codes for WOSB set-asides from 365 to 364, while leaving the eligible six-digit NAICS industry category codes for EDWOSBs the same.  The reduction in six-digit industry codes was the net result of changes set forth in the Notice and described below to several of six-digit industry category codes that are eligible for WOSB set-asides.

First, NAICS industry category codes 333911 and 333913 were merged into NAICS industry category code 333914, and NAICS industry category codes 512210 and 512220 were merged into NAICS industry category code 512250.  

In addition, in two instances involving industry categories eligible for WOSB set-asides, the six-digit NAICS industry category codes were revised without any change in definition or titles: NAICS industry category code 517110 was changed to 517311; and NAICS industry category code 517210 was changed to 517312.  EDWOSBs are eligible to pursue sole source contracts or set-aside contracts under NAICS industry category code 517311, while WOSBs are eligible to pursue sole source contracts or set-aside contracts under NAICS code 517312.

Lastly, new industry categories were created by splitting two industry categories into two parts with one part of each industry category defined as a separate industry category and combining other parts of the two industry categories to form a separate new industry category.  As a result of this change, NAICS industry category code 541711 now corresponds to 541713 and 541714, while NAICS industry category code 541712 corresponds to 541713 and 541715.

The Notice, which can be downloaded here, includes tables that illustrate the changes to the four-digit group codes and six-digit category codes that were implemented by the 2017 NAICS Changes.

To read other articles from The GovCon Bulletin™ go here.

Taking A Deep Dive Into Lost Creek: The SBA’s Curtailment of the Ostensible Subcontractor Rule & Joint Venture Doughnut Holes

September 10, 2017
TAKING A DEEP DIVE INTO LOST CREEK: THE SBA'S CURTAILMENT OF THE OSTENSIBLE SUBCONTRACTOR RULE & JOINT VENTURE DOUGHNUT HOLES

Recently, the SBA's Office of Hearings and Appeals issued a decision sustaining, in part, a protest over the SBA's size determination of a purported ostensible subcontractor joint venture.  In this edition of The GovCon Bulletin,™ we take a deep dive into the decision, which as we explain below, is particularly informative to small business government contractors since the SBA chose to announce during the protest proceedings its intent to revise its regulations to curtail the application of the "ostensible subcontractor rule."

In Size Appeal of Lost Creek Holdings, LLC, Lost Creek Holdings LLC (Lost Creek) protested two awards made by the Florida Army National Guard (ANG) to LifeHealth LLC (LifeHealth) under two separate Requests for Quotation (RFQ’s) for Women-Owned Small Business (WOSB) set-aside acquisitions.  ANG’s Contracting Officer (CO) referred both protests to the SBA Area Office (Area Office), which then issued size determinations that LifeHealth was an eligible small business.  Lost Creek then appealed the Area Office’s size determinations to the SBA’s Office of Hearings and Appeals (OHA).

Lost Creek largely made the same arguments in its opposition to both awards during the proceedings before the Area Office and OHA.  Apart from arguing unsuccessfully that LifeHealth and its subcontractor, Dentrust Dental International, Inc. (Dentrust), each individually were not small businesses, Lost Creek insisted that LifeHealth and Dentrust were “affiliates.”

As we noted in our complimentary primer on joint ventures, Using Joint Ventures To Capture Federal Government Contracting Opportunities, Second Edition (sign up to receive our free primer here), a finding of “affiliation” between two or more businesses triggers a particular and sometimes fatal kind of treatment for purposes of determining whether a business meets a small business size standard for a contract.  Specifically, under 13 CFR 121.103(a)(6), in determining the size of a business, the SBA aggregates or counts all revenues or employees of a business and all of its affiliates.  Consequently, a finding of affiliation between a contractor and any other entity or entities will cause the contractor to be ineligible for a small business contract if, collectively, the contractor and its “affiliates” exceed the small business size standard of the contract.  The SBA’s regulations, moreover, set out several grounds on which businesses may be found to be affiliates.  Indeed, in the proceedings before the Area Office and OHA, Lost Creek argued that LifeHealth and Dentrust were affiliates based on several of those grounds.

First, Lost Creek argued that the businesses were affiliated under the SBA’s "ostensible subcontractor rule."  13 CFR 121.103(h)(4) states that a contractor and its “ostensible subcontractor” are treated as joint venturers, and therefore affiliates, for size determination purposes.  The SBA regulation goes on to state that an ostensible subcontractor is a subcontractor that is not a similarly situated entity and performs primary and vital requirements of a contract, or of an order, or is a subcontractor upon which the prime contractor is unusually reliant.  Lost Creek argued that LifeHealth was unusually reliant on Dentrust to perform the contract and that Dentrust is not a women-owned small business.

Lost Creek also argued, alternatively, that LifeHealth and Dentrust should also be considered affiliates based on their “identity of interests.”  SBA regulations state that affiliation may arise among two or more entities with an identify of interest, including “firms that are economically dependent through contractual or other relationships.”  13 CFR 121.103(f).  Lost Creek argued that LifeHealth and Dentrust shared an identity of interest because LifeHealth, in awarding 25 subcontracts to Dentrust, was economically dependent on Dentrust, which also performed on 34 of LifeHealth's contracts that constituted 82% of LifeHealth's revenues.

Lastly, Lost Creek argued that LifeHealth and Dentrust were “de facto” or “implicit” joint ventures that did not meet the requirements for the application of any of the joint venture exceptions to affiliation.

As we explain in our joint venture primer, under 13 CFR 121.103(h)(2) joint venture partners are generally deemed to be affiliated with each other for purposes of the size standard under a contract, unless their joint venture falls within one of three joint venture categories excepted from affiliation.  In addition, under 13 CFR 121.103(h), all joint ventures must comply with certain prerequisites to remain eligible for any of the joint venture exceptions to affiliation, including these four prerequisites cited by Lost Creek: (i) they must put their joint venture arrangement in writing; (ii) they must do business under the name of the joint venture; (iii) they must identify the joint venture in SAM; and (iv) they must meet the “3-in-2” contract award rule.  Under that rule, a joint venture may not be awarded more than three contracts over a two-year period, without the partners to the joint venture being deemed affiliated for all purposes.  Although the same parties are permitted to enter into multiple joint ventures, the SBA’s regulation cautions against sustained, long-term serial joint ventures by providing that “at some point...a longstanding inter-relationship or contractual dependence between the same joint venture partners will lead to a finding of general affiliation between and among them."  13 CFR 121.103(h).

Lost Creek argued that the LifeHealth and Dentrust joint venture should be subject to affiliation because it failed to comply with the four prerequisites for any exception to affiliation and, alternatively, comprised a longstanding inter-relationship or contractual dependence among joint venture partners.

Ostensible Subcontractor Joint Ventures Are - For The Time Being - Not Eligible For Joint Venture Affiliation Exceptions Under 13 CFR 121.103(h)(3)

Addressing Lost Creek’s assertion of an ostensible subcontractor relationship, OHA rejected arguments by the Area Office and the SBA’s General Counsel over the interaction between the regulations concerning one of the three categories of joint ventures excepted from affiliation – namely joint ventures made up of small businesses – and the ostensible subcontractor rule.

As stated above, 13 CFR 121.103(h)(4) provides that “[a] contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes.” Meanwhile, under 13 CFR 121.103(h)(3)(i), a joint venture of two or more businesses “may submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract.”  

In issuing its size determinations, the Area Office side-stepped the issue of whether LifeHealth was, in fact, unusually reliant on Dentrust and thus in an ostensible subcontractor relationship. Rather, it concluded that Dentrust was a small business and that even if LifeHealth and Dentrust were affiliated as joint venturers under the ostensible subcontractor rule, the joint venture would be considered a small business under 13 CFR 121.103(h)(3)(i). Consequently, the Area Office decided an ostensible subcontractor analysis was unnecessary.  

On appeal to OHA, the SBA’s Office of General Counsel filed agency comments in support of the size determinations.  In support, the SBA followed a “kitchen sink” approach pointing first to its regulation under 13 CFR 125.8(b)(1) stating that joint ventures do not have to be in any particular form to qualify as a small business.  The SBA insisted this regulation extends to prime-subcontractor arrangements that are treated as joint ventures under the ostensible subcontractor rule. The SBA also cited again the affiliation exception under 13 CFR 121.103(h)(i) for joint ventures among small businesses, and pointed to recent regulation changes that lifted limitations on small business contractor subcontracts with other small businesses.

The SBA’s last-ditch effort to support the Area Office's size determinations is most revealing for the future of the ostensible subcontractor rule.  In the face of the rule’s clear and explicit instruction that ostensible subcontractors and their primes would be treated not only as joint ventures but also “as affiliates,” the SBA argued that in its recent revisions to the affiliation regulations it “should have changed” not only the ostensible subcontractor rule, but also the regulation under 13 CFR 121.103(h)(2).  That regulation provides a clear and explicit general rule that businesses submitting offers as joint ventures will be deemed affiliated during contract performance, and specifies only one place to go to for any exception to the general rule.  Specifically, it points to paragraph (h)(3), which sets forth the three categories of joint ventures excepted from joint venture affiliation.  The SBA argued that retaining the general joint venture affiliation rule and the ostensible subcontractor rule in their present form “was merely an oversight,” that they should be disregarded as “vestiges” of a prior regulatory scheme, and that the SBA intended to delete the provisions in the “near future.”  The SBA further stated that it intends that all joint ventures in which each venturer is small will be treated as small for any small business procurement.

OHA, however, would have none of it.  Finding that the ostensible subcontractor rule and 13 CFR 121.103(h)(i) were issued in the same rule-making, OHA rejected the argument that one negates the other.  OHA also pointed to the ostensible subcontractor rule’s specific and explicit instruction that prime contractors and subcontractors in an ostensible subcontractor relationship are affiliated for size determination purpose.  Moreover, OHA reminded the SBA that nothing in the Administrative Procedure Act permits an agency to ignore its own regulation by declaring it a vestige.  OHA ultimately concluded that that the ostensible subcontractor rule remained in full force and effect and that the Area Office erred in not conducting an ostensible subcontractor analysis.

Nevertheless, small business subcontractors should look out for changes in the affiliation regulation under 13 CFR 121.103(h) that the SBA has signaled are coming.  Specifically, it appears that the SBA will, at a minimum, curtail the application of the ostensible subcontractor rule so it does not apply to prime-subcontractor relationships between small businesses. 

The Key Question For Identity of Interest Affiliation Based On Economic Dependence: How Does The Money Flow?

OHA rejected Lost Creek’s argument that the number of subcontracts between LifeHealth and Dentrust made them affiliated based on the economic dependence prong of the identity of interest rule under 13 CFR 121.103(f).  In doing so, OHA essentially turns a factor that gives rise to a presumption of economic dependence in certain circumstances into a threshold for determining economic dependence in all instances.

The SBA’s regulation on affiliation based on identify of interest under 13 CFR 121.103(f) states that affiliation “may arise” when entities have an identity of interest.  The SBA regulation elaborates further that businesses that have identical or substantially identical business or economic interests may be treated as one party with their interests aggregated, and sets forth examples of such interests, including when firms “are economically dependent through contractual or other relationships.”  

Additionally, the regulation provides that the SBA may “presume” an identity of interest based on economic dependence if a “concern in question” derives 70% or more of its receipts from another concern over the prior three years.  Pointing mainly to this presumption’s requirement that the “concern in question” obtain receipts from the entity it is alleged to be affiliated with, OHA concluded that under the regulation any finding of an identity of interest based on economic dependence “requires a revenue stream...to flow” from an alleged affiliate to the protested contractor.

Thus, under OHA's ruling, no matter how many times a small business teams up with another business in a prime-subcontractor relationship, including with a large business, the SBA cannot deem the small business to be economically dependent on the other business as long as federal government money flows down from the small business as prime contractor to the other business as subcontractor.

The Perpetual Ostensible Subcontracting Doughnut Hole

As stated, Lost Creek argued that LifeHealth and Dentrust should be deemed to be affiliated because the extensive contracting between them violated the "3-in-2" rule, and alternatively, comprised a longstanding inter-relationship or contractual dependence among joint venture partners.  In response, the Area Office stuck to formality and concluded that the "3-in-2" limitation only applies when the offeror has submitted an offer "as a joint venture."  (Never mind that the affiliation exception for joint ventures among small businesses relied on by the Area Office to find the LifeHealth/Dentrust joint venture was a small business also applies only when parties submit offers as a joint venture.)  The Area Office's response prompted Lost Creek to argue on appeal that the Area Office's decision not to apply the "3-in-2" rule to an ostensible subcontract joint venture created a "doughnut hole" that nullified the prerequisites for the application of the joint venture affiliation exceptions under 13 CFR 121.103(h), including the requirement that the joint venture agreement be in writing and the joint venture be identified separately and registered in SAM.  

Although OHA did not address the issue in detail, in remanding the case to the Area Office on the issue of whether an ostensible subcontractor relationship exists, OHA instructed it to "also" consider Lost Creek's contention that LifeHealth and Dentrust were engaged in a longstanding inter-relationship or had developed a contractual dependence.  OHA's decision implies, therefore, that ostensible subcontractor joint ventures must comply not only with the rule against longstanding perpetual joint ventures, but also the "3-in-2" rule and as well as each of the remaining other prerequisites under 13 CFR 121.103(h) for the application of any joint venture exceptions to affiliation.

To read the Lost Creek decision go here.  To read other articles from The GovCon Bulletin™ go here.

SBA’s Agenda Anticipates Significant Rule Changes To WOSB, SDVOSB, And HUBZone Programs

September 1, 2017
SBA’S AGENDA ANTICIPATES SIGNIFICANT RULE CHANGES TO WOSB, SDVOSB, AND HUBZONE PROGRAMS

Last week the SBA published its semiannual Regulatory Agenda (the “Agenda”), which is a summary of current and projected regulatory actions and completed actions.  The Agenda (which can be downloaded here) highlights several anticipated changes to regulations that impact small business government contractors, including women-owned small businesses (WOSB’s), service-disabled veteran owned small businesses (SDVOSB’s) and HUBZone small businesses. Below are several of the anticipated changes that government contractors should look out for in the very near future.

WOSB & EDWOSB Certification Procedures

As we wrote about in a prior edition of The GovCon Bulletin™ (here), the National Defense Authorization Act for Fiscal Year 2015 (NDAA 2015) imposed several mandates on the SBA’s WOSB program, including a requirement that a firm be certified as a WOSB or economically-disadvantaged women owned small business (EDWOSB) under one of four options: By a federal agency, by a state government, by the SBA, or by a national certifying entity approved by the SBA.  The SBA subsequently issued an advanced notice of proposed rule-making on December 18, 2015, again described in the same edition of the The GovCon Bulletin,™ in which the SBA raised several pointed questions and sought public input on each of the four proposed certification options.  The comment period ended on February 16, 2016 and now the SBA intends to issue a new rule that will propose certification standards and procedures.  In addition, the new rule will revise procedures for continuing eligibility, program examinations, protests and appeals.  Although not much is known about the specific changes, the SBA did make clear that the new certification procedures will include an electronic WOSB and EDWOSB application and certification process.

NDAA 2016 & 2017 Mandated Rules

The Agenda also anticipates that in the near future the SBA will implement a variety of rule changes required under the National Defense Authorization Act for Fiscal Year 2016 (NDAA 2016) and National Defense Authorization Act for Fiscal Year 2017 (NDAA 2017), including requirements concerning SDVOSB ownership and control, a pilot program granting past performance ratings to subcontractors, and subcontracting report compliance.

1. SDVOSB Ownership And Control Rules

The Agenda indicates that the SBA will issue a proposed rule establishing a uniform definition of a “small business concern owned and controlled by service-disabled veterans” that will be used for SDVOSB procurements by both the Veterans Administration (VA) and by non-VA agencies.  Before NDAA 2017, the definition for purposes of VA SDVOSB procurements was contained in VA statutes under former 38 U.S.C. 8127(l), while a different definition for non-VA procurements was contained in SBA legislation under 15 U.S.C. 632(q)(2).  Meanwhile, regulations fleshing out the SDVOSB definitions for purposes of VA procurements are under the VA’s regulations in 38 CFR Part 74 and, for purposes on non-VA procurements, under the SBA regulations in 13 CFR Part 125.

NDAA 2017, however, requires a government-wide uniform definition by amending 38 U.S.C. 8127 to refer back to 15 U.S.C. 632 for one controlling definition.  Moreover, NDAA 2017 clears the way for the SBA to provide the sole and definitive guidance on what it means to be owned and controlled by a service-disabled veteran by prohibiting the VA from issuing regulations relating to either small business status or the ownership and control of a small business.

As for the new uniform definition of “small business concern owned and controlled by service-disabled veterans,” NDAA 2017 provides three categories of businesses that will meet the definition:

First, a small business concern (i) not less than 51 percent of which is owned by one or more service-disabled veterans or, in the case of any publicly owned business, not less than 51 percent of the stock (not including any stock owned by an ESOP) of which is owned by one or more service-disabled veterans; and (ii) the management and daily business operations of which are controlled by one or more service-disabled veterans or, in the case of a veteran with permanent and severe disability, the spouse or permanent caregiver of such veteran;

Second, a small business concern (i) not less than 51 percent of which is owned by one or more service-disabled veterans with a disability that is rated by the Secretary of Veterans Affairs as a permanent and total disability who are unable to manage the daily business operations of such concern; or (ii) in the case of a publicly owned business, not less than 51 percent of the stock (not including any stock owned by an ESOP) of which is owned by one or more such veterans; and

Third, a small business concern that met either of the two requirements described above immediately before the death of a service-disabled veteran who was the owner of the concern, the death of whom causes the concern to be less than 51 percent owned by one or more service-disabled veterans, if (i) the surviving spouse of the deceased veteran acquires such veteran's ownership interest in such concern; (ii) the veteran had a service-connected disability rated as 100 percent disabling by the VA or such veteran died as a result of a service-connected disability; and (iii) immediately prior to the death of such veteran and during the period it is otherwise an SDVOSB the small business concern is included in the VA’s VetBiz database.

A surviving spouse in the third category can only continue to operate the SDVOSB until the tenth anniversary of the veteran’s death, the date he or she remarries, or the date he or she relinquishes ownership, whichever comes first.  As for the small businesses in the first two categories, small business owners should take note of the exclusion of stock owned by an ESOP in the determination of whether ownership requirements are met for a publicly owned business.

2. Pilot Program For Qualified Subcontractors To Obtain Past Performance Ratings

NDAA 2017 also authorized the SBA to establish a pilot program that would enable first tier small business subcontractors without any past performance rating to, nevertheless, obtain past performance ratings for work done as subcontractors.  Under the proposed pilot program a subcontractor must submit to a designated official an application for a past performance rating for work done under a government contract within either 270 days of the completion of the subcontractor’s work or 180 days after the completion of the prime contractor’s work, whichever is earlier.  The subcontractor is required to include with the application evidence of the past performance factors that it seeks to be rated on, as well as its own suggested past performance ratings.  The designated official must then forward the application to the covered contract agency’s Office of Small and Disadvantaged Business Utilization (OSDBU), as well as to the prime contractor.  Thereafter, the OSBDU and the prime contractor must submit a response to the subcontractor’s application.  NDAA 2017 provides procedures if there is agreement or disagreement over proposed past performance ratings, as well as a procedure for a small business subcontractor to respond to any disagreements by the OSDBU or a prime contractor over proposed past performance ratings.

3. Failure To Act In Good Faith In Submitting Timely Subcontracting Reports Will Be A Material Breach Of The Contract

NDAA 2017 also makes changes to the Small Business Act that makes a failure to act in good faith in providing timely subcontracting reports a material breach of a government contract. NDAA 2017 requires the SBA to provide examples of activities that would be considered a failure to make a good faith effort to comply with requirements.

Comprehensive Changes To The HUBZone Program

Lastly, the SBA Agenda anticipates significant changes to the SBA’s HUBZone program.  Although short on any specifics, the Agenda indicates that “comprehensive” revisions will be made to the HUBZone program and regulations under Part 126 of the SBA’s regulations. The SBA indicates that its focus will be to make it easier for participants to comply with program requirements and to maximize program benefits, to determine if regulations should be modified, streamlined, expanded or repealed to make the HUBZone program more effective and/or less burdensome on small business concerns, and to maintain a framework that identifies and reduces waste, fraud, and abuse in the program. 

The SBA has invited the public to comment on any aspect of its Agenda.

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