Author Archives: Devon E. Hewitt

1. Aldevra, The Case That Keeps on Giving

   December 13, 2011 6:57 pm Leave a Comment

   ‘Tis the season and Aldevra is the case that keeps on giving.  Last we heard (October 11), GAO decided that the VA should have set aside one solicitation and done market research to determine whether there was a reasonable expectation that two or more SDVOSBs/VOSBs would submit a bid on the VA’s kitchen equipment requirement set forth in another solicitation before issuing soliciting task orders for same off of a non-mandatory FSS Schedule.  In a surprising move, the VA thereafter informed GAO that it would not follow its “recommendations.”  (Because of separation of powers issues, the GAO only issues recommendations and not rulings that must be followed like court rulings).  The VA did not provide any reason why it would not follow GAO’s decision.  The VA didn’t do much better in a hearing conducted by two House subcommittees on November 30.   During the hearing, VA representatives were repeatedly questioned regarding the reasoning behind its decision to ignore GAO’s recommendation.  The only real response was given by Tom Leney and he explained that following the law would make acquisitions far more expensive for the VA.

   The VA apparently has reconsidered the wisdom of this approach.  Last week, the Service Disabled Veteran Owned Small Business Network, Inc, a nonprofit based in northern California, filed a lawsuit in the United States District Court for the Northern District of California challenging the VA’s decision to procure supplies from FSS contracts rather than conduct the market research demanded by the Veterans First Contracting Program.  In what appears to be a response to the interrogation it received before Congress and this case, on December 8, the VA sent a letter to the GAO informing it that the VA had decided to cancel the solicitations challenged successfully in the Aldevra protest decision.  Period.  Nothing else.

   So what now?  In an article published by Bloomberg today, I am quoted as saying that the VA’s supposed “about face” is not a victory for SDVOSBS/VOSBs yet.   While the VA canceled the solicitations issued to FSS contract holders, the requirement is not back on the street.  A victory can be declared if and when the VA does the required market research under the Vets First Contracting Program and, hopefully, reissues the solicitations as a SDVOSB/VOSB set-asides.  Until then, one presumes that the VA stands by the position it took before GAO and Congress.

   I think this is the argument that Tim Power, the attorney for the SDVOSB Network Inc. case, will take in the case.  While the VA may argue that the lawsuit is “moot” because the VA has canceled the solicitations, but there is an exception to this doctrine.  (Courts can only rule on cases or controversies in fact and won’t issue advisory opinion based on what could happen; so a case is moot if, in the case before the judge, the issue in question no longer exists).   If an issue is moot in a particular case but will likely recur again, a court may go ahead and render a decision.  But its not a black and white doctrine, so nothing is guaranteed.

   I raised some ancillary issues with respect to Aldevra in my previous blog posts and I’ll raise them again.  One of my clients has a mandatory FSS contract and is a VOSB.  The VA is not ordering off the FSS contract and, instead, is going to the open market for the same items, buying the items from large businesses, at a higher cost than that for which the items are offered on the VOSB FSS contract.  There isn’t any position asserted by anyone or any entity that would justify this result.

   And consider this: on November 2, 2011 an interim rule was issued modifying FAR Part 8, which contains the regulations governing GSA Schedule/FSS/MAS buys.  As you all may know, FAR Part 19 did not apply to FAR Part 8 (but the Vets First rules do according toAldevra).  The November rule modified FAR Part 8 to remove the FAR Part 19 exemption.  Under this rule, which was effective on November 2, an agency can now (1) set aside part or parts of a multiple-award contract for small business concerns or subcategories thereof; (2) set aside orders or BPAs placed against multiple-award contracts for small business concerns or sub category thereof; and (3) reserve one or more contract awards for small businesses or sub category thereof under full and open multiple-award procurements.  However, the new regulation says the agency “may, at their discretion” set aside a requirement; an agency is not required to set aside a requirement for small business if the “rule of two” is satisfied as required by FAR Part 19.

   If you combine Aldevra with the new rule, doesn’t that mean that under the Veterans First Program that VA purchases off the schedule should be set aside for SDVOSBs/VOSBs?  What if you have a mandatory FSS schedule ?  As the rabbit said in Alice in Wonderland, the case just gets “curiouser and curiouser.”

2. New Representation Required for DoD Contractors Employing Former DoD Officials

   November 21, 2011 7:03 pm Leave a Comment

   On November 18, DoD issued a final rule requiring offerors in DoD procurements to represent that former DoD officials employed by the contractor are complying with post-employment restrictions applicable to that contractor.  Such post-employment restrictions are found in the Procurement Integrity Act and Section 847 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2008.

   Federal Acquisition Regulation Part 3.104 implements the Procurement Integrity Act and applies to all Government employees.  Among its provisions, the Procurement Integrity Act prohibits certain activities by former Government employees, including representation of a contractor before the Government in relation to any contract or other particular matter involving specific parties on which the former employee participated personally and substantially while employed by the Government.  Additional restrictions apply to certain senior Government employees and for particular matters under an employee’s official responsibility.

   Section 847 of NDAA FY 2008 inserted a new clause in DoD contracts, 252.203-7000, Requirements Relating to Compensation of Former DoD Officials, which prohibits a DoD contractor from knowingly providing compensation to a “covered DoD official” within 2 years after the official leaves DoD without first determining that the official has sought and received, or has not received after 30 days of seeking, a written opinion from the appropriate DoD ethics counselor regarding the applicability of post-employment restrictions to the activities the official is expected to undertake on behalf of the contractor.  The clause defines a “covered DoD official” as an individual who left DoD on or after January 2008 and either participated “personally and substantially” in certain acquisitions with a value in excess of $10 million or served as a program manager, deputy program manager, procuring contracting officer, administrative contracting officer, source selection authority, member of the source selection evaluation board, or chief of a financial or technical evaluation team for a contract in an amount in excess of $10 million.

   Under the new rule, promulgated at 252.203-7005, Representation Relating to Compensation of Former DoD Officials, an offeror must represent that, to the best of its knowledge and belief, all covered DoD officials (same definition as above) employed by or otherwise receiving compensation from the offeror are presently in compliance with all applicable post-employment restrictions.  The representation only needs to be made once and in connection with a specific proposal; it will not be included in the annual representations and certifications.  The representation requirement only applies in the DoD context and, in that regard, it applies to all DoD solicitations, including those for commercial items and for task and delivery orders.

   The rule is effective November 18, 2011.

   The preamble of the rule contains a number of comments and responses thereto by DoD.  The main takeaway from these comments is that DoD believes it is incumbent on the contractor to thoroughly screen and investigate those matters in which a former DoD official job candidate was involved as well as to track that individual’s ongoing role and responsibilities at the company once the candidate is hired.  Given the complexities of the post-employment restrictions, also known as the “revolving door” regulations, a contractor also should consult with a government contracts attorney well-versed in these matters.  (You can contact me at dhewitt@protoraelaw.com.  :)).

   The rule stems from a May 2008 Government Accountability Report (GAO) entitled “Defense Contracting: Post-Government Employment of Former DoD Officials Needs Greater Transparency.”  GAO found that contractors significantly under reported the employment of former DoD officials and, from that, concluded that defense contractors may employ a substantial number of former DoD officials on assignments related to their former positions.

   If you have been around the block once or twice in this field, you know this rule really goes back to 2003 and the Darlene Druyan debacle.  As Don Rumsfeld said at that time, there was not enough “adult supervision” over relationships between acquisition officials on major defense programs and the defense contractors involved in those programs.

3. Recent Push For More Agency Suspensions and Debarments Does Not Bode Well for Small Businesses

   November 16, 2011 7:04 pm Leave a Comment

   In August 2011, the General Accounting Office (GAO) issued a report which concluded that many agency suspension and debarment programs were inadequate.  The report took a look at the suspension and debarment activity of ten agencies with contract obligations in excess of $2 billion during a four year period, 2006 – 2010.  The report found that, of all suspensions and debarments during that period, 47% involved grants and other types of assistance and 53% involved FAR noncompliance and/or procurements.   The most notable aspect of the report was GAO’s finding that three of the ten agencies reviewed did not report any suspension or debarments during the four year period, including the Department of Commerce, which had over $14 billion in contract obligations during that time.  Five agencies did not have any suspension or debarment actions related to FAR/procurement issues, including the Department of Health and Human Services, which had over $80 billion in contract obligations over the four-year period.

   Hearings were held on the report and there were many calls to action by Congress.  OMB responded last week by issuing a memorandum to federal agencies in which it directed each agency to: (1) appoint a senior “accountable” official who will assess the agency’s suspension and debarment program; (2) review internal policies and procedures to ensure that the agency is “effectively using suspension and debarment, when appropriate”; (3) ensure contracting officers review “relevant databases and other information sources” before making contract awards; and (4) take prompt corrective action when the agency determines it improperly made a contract award to a suspended or debarred entity.

   In of itself, the OMB directive is not surprising, particularly given the GAO report.  This Administration has been very vocal about rooting out fraud, waste and abuse in federal contracting.  Agency fraud, waste and abuse is also an easy rallying call for a Republican Congress adverse to federal spending.  These themes, furthermore, are not new and tend to be cyclical.  What’s important is recognizing that the pendulum has definitely swung towards enforcement and may have reached its farthest point yet.  In fact, the day after Lew issued its directive, the Homeland Security and Governmental Affairs Committee held hearings on a proposal to make suspensions and debarments mandatory in the case of a criminal conviction or indictment related to a federal contract.  Similarly, the fiscal 2012 Defense Department Appropriations Act (H.R. 2219) has a prohibition that would prohibit DoD from awarding a contract to a company that had been convicted of a felony criminal violation in the previous two years.

   This pendulum swing has grave implications for the contracting community, particularly small businesses.  A number of factors are making this push towards enforcement troublesome.  Everyone agrees that rapists and other criminals should be put behind bars.   The more difficult task is defining the process by which a society identifies and prosecutes criminals.  The same is true in federal procurement.  Everyone agrees fraud, waste and abuse in federal contracting should be identified and eliminated.  Defining and implementing the process for doing so is the issue.

   The GAO report on suspension and debarment noted that those agencies that had the most suspensions and debarments within the four-year period (Defense Logistics Agency, Department of the Navy, General Services Administration and U.S.  Immigration and Enforcement) had common characteristics.  These characteristics include a dedicated suspension and debarment program with full-time staff, detailed policies and procedures, and practices that encourage referrals on potential abusers.  A reasonable take away from the report is that for proper enforcement to occur, all agencies should demonstrate these characteristics.  However, that is not likely to occur in today’s fiscal environment, at least not in a cohesive fashion.  For example, nearly all agency budgets were reduced last year.  SBA’s was as well, although the agency emphasized that it allocated a greater portion of its budget to hiring enforcement staff.  If an agency can’t hire additional personnel (likely, given that many agencies are in the process of offering buyouts and the Administration has committed to an overall reduction of the federal workforce in the next two years), they might engage in training.  But having an adequate number of personnel with little training or not enough trained personnel does not a good suspension and debarment process make.

   The sharpness of the pendulum swing, combined with inadequate agency resources, disproportionately impacts small businesses.  Smaller businesses generally have less resources with which to educate or defend themselves.  However, the environment for small businesses is particularly dangerous now given passage of the Small Business Jobs Act last fall.  The Small Business Jobs Act made two significant changes in the law: it established strict liability or a presumption of liability standard for false size and status certifications (as opposed to the general presumption of innocence on which our criminal justice system is based) and it rewarded the Government for pursuing these types of claims.  Specifically, as a general matter, a prosecutor attempting to prove an individual committed a crime must demonstrate that the individual knew he was committing a crime or that he intended to commit the criminal act.  With respect to certifications, however, a contractor will be presumed to have knowingly and willfully miscertified to its size and status – the element of knowledge or intent does not have to be proved.  Furthermore, in the past federal prosecutors were reluctant to pursue claims of false certification because it often was hard to demonstrate or prove, in dollars, the extent of damage suffered by the Government as a result of the false certification.  Under the Small Business Jobs Act, however, damage will be presumed to be the full contract amount – giving federal prosecutors the justification needed for pursuing miscertification claims.

   Add to the mix the fact that nearly every small business contracting program has been criticized by the GAO, sometimes more than once, for failing to detect fraud and abuse.  Because of these reports, SBA and the VA began using the suspension and debarment process as a way to attack the fraud that GAO stated pervaded these programs.  However, in the SBA’s and the VA’s hands, and in other agency hands as well, I suspect, the suspension is a very blunt instrument for eliminating fraud.  As noted above, agencies do not have adequate budgets to properly staff and train staff regarding suspension and debarments laws and procedures.  The “enforcers,” therefore, are not equipped to act consistently or correctly in implementing the process.  On the other hand, these agencies must show “progress” eliminating fraud and racking up suspension and debarment cases is the easiest way to demonstrate this – especially when the law, through the Small Business Jobs Act, gives you the tools.  Finally, it is important to remember that the suspension and debarment remedy for fraud, waste and abuse encouraged by the Administration and Congress is akin to capitol punishment, and will be the death knell for those contractors determined to be guilty.  There is no rehabilitation here.

   Undoubtedly, there is a percentage of suspension and debarment cases that are shocking and clearly warranted.  But as anyone involved in federal procurement knows, there’s plenty of gray in the FAR.  The landscape is even foggier with respect to small business issues such as “size” and “status.”  In fact, two of my last six blog posts have addressed the nuances of the “control” element of SDVOSB/VOSB status.  Issues such as “affiliation,” “control,” “average annual revenues” and “number of employees” are not black and white.  Attorneys, like me, spend their careers hashing these issues out with the Government on a regular basis.  In fact, last year I handled the VA’s first debarment case against two businesses and four individuals based on miscertification claims made by VA after an adverse status protest decision issued by SBA.

   The FAR expressly states that the suspension and debarment process should not be used as a punitive measure.  The FAR also states that the focus should be on a company’s “present responsibility,” not its past acts.  But combine the provisions of the Small Business Jobs Act with the GAO reports on fraud in small business contracting programs with the GAO finding that agencies do not use the suspension and debarment process effectively with OMB’s recent directive with insufficient or overworked and underpaid agency personnel and you have a witch hunt in the making.  I’m just sayin.

4. Recent SBA OHA Case Underscores The Importance Of Demonstrating That a Service-Disabled Veteran Controls Its SDVOSB

   November 15, 2011 7:15 pm Leave a Comment

   In September, I blogged on the importance of ensuring that a service-disabled veteran “controls” the company if the company holds itself out as a service-disabled veteran owned business (SDVOSB).  Lack of “control” is the single number one reason a SDVOSB is denied certification or loses a status protest.  While the service-disabled veteran must own the company, ownership is not the same thing as control.  A finding of “control” depends on a number of factors, some of which are not obvious and others of which are subjective.  A case published by the Small Business Administration’s (SBA) Office of Hearings and Appeals (OHA) last week illustrates this principle.

   In Benetech, LLC, OHA held that the service-disabled veteran, William Bennett, did not “control” the company for a number of reasons.  Generally, in assessing a service-disabled veteran’s control over a company, SBA will look at whether the service-disabled veteran controls both the “long term decision-making” and the “day-to-day operations” of the company.  In assessing “control,” SBA looks for certain things such as whether the service-disabled veteran holds the highest officer position in the company and whether the service-disabled veteran has sufficient “managerial experience” to run the company.  In Benetech, OHA did not find persuasive evidence that Mr. Bennett held the highest officer position in the company.  While certain corporate filings and documents contained various titles for Mr. Bennett, SBA explained that it will go behind “corporate formalities” in determining “control.”  In this case, OHA noted that one of the company’s subcontractors testified that it never worked with or even saw Mr. Bennett during the period it did business with the company.  In addition, the minority owner of the company had the title of CEO of the company and was the individual that signed the corporate documents and the lease for the company’s headquarters.  Although not specifically mentioned in the decision, I’m sure it also did not escape SBA’s attention that the minority owner of the company was Mr. Bennett’s son.

   One “corporate formality” SBA did focus on in the decision was the company’s operating agreement.  Benetech is a limited liability company.  A limited liability company has members and typically has an operating agreement rather than articles of incorporation or by laws.  In order to demonstrate “control” in the limited liability company context, the service-disabled veteran must be named themanaging member of the company in the operating agreement.  Mr. Bennett was not so named.

   The Benetech decision is not unusual; rather it is consistent with a long line of cases analyzing a service-disabled veteran’s control over a SDVOSB.  Other SBA OHA cases require the service-disabled veteran, as the managing member, to have the unfettered or “independent” right to bind the company or sell the company, among other things.  In reviewing control, some cases look at the manner in which the service-disabled veteran is portrayed on the company’s website and in its marketing materials, including in proposals submitted to the Government.  A finding of control also may be different for different industries.  For example, a SBA status protest involving a construction contractor found that the service-disabled veteran did not manage the day-to-day operations of the company because the service-disabled veteran was not routinely on the project site.  Thus, SBA takes a holistic approach to determining control and make seize upon a detail or combination of details that otherwise may appear innocuous to those unaware of the case law.

   The good news is that most companies can avoid these traps by consulting with an attorney knowledgeable about small business contracting programs and the SDVOSB program in particular.  The bad news is that companies are now forced to consult with an attorney knowledgeable about small business contracting programs and the SDVOSB program in particular before holding themselves out as a SDVOSB. SDVOSBs face serious penalties, including criminal prosecution, if they don’t. It’s true in the commercial sector as well, but the cost of attorneys is now, more than ever, a cost of doing business as a small business government contractor.

   Postscript 1:  There was another important issue raised in Benetech.  Benetech argued that its application for verification submitted to the VA contained evidence that Mr. Bennett “controlled” the company and that the VA should have forwarded this paperwork to SBA.  SBA disagreed.  SBA explained that verification as an SDVOSB for VA procurements under the VA’s Veterans First Contracting Program is different from and unrelated to SBA’s determination that a company is a SDVOSB for set-asides conducted by agencies other than the VA under SBA’s SDVOSB Contracting Program.  As noted in a number of decisions, the Veterans First Contracting Program applies only to the VA and has statutory authority different from SBA’s small business contracting programs, which include a preferential contracting program for SDVOSBs.  Since these two programs were independent of the other, VA was under no obligation to forward Benetech’s verification paperwork to SBA.

   Postscript 2:  What happens now?  One of the most disturbing aspects of the “control” factor is that what one OHA judge considers evidence of control another judge may dismiss as irrelevant.  Thus, there are many SDVOSBs that have been denied verification or have lost protests whose principals now may be regarded as criminals.  Last fall, Congress passed the Small Business Jobs Act which provides that any time a business certifies that it has a certain status or is a certain size, that certification is considered a knowing and willful certification.  Accordingly, if an individual has mis certified a company’s size or status – or has been determined to have mis certified a company’s size or status – that individual is liable for significant damages and subject to criminal penalties.  I had a client that was in Benetech’s position; that is, it had its appeal on an adverse status decision denied.  Less than a year later, the company was notified that the Government was intending to debar the company from federal contracting, based, in part, on the adverse status decision.   Specifically, the agency alleged that the contractor had mis certified its status with regard to every procurement in which it submitted an offer, before the adverse status determination by SBA.   There were other lurid details, but don’t think the OHA denial is the end of the line in Benetech.  There may be more bad news to come.

5. Aldevra, Chapter II

   November 8, 2011 7:16 pm Leave a Comment

   Last month I posted a bit on the Government Accountability Office’s decision in Aldevra.   The case raised an interesting issue:  do the Veterans First Contracting Program rules trump  the “required sources of supply” rules?  Specifically, Aldevra argued that before the VA could order off of a FSS contract, it had to do market research to determine whether it was feasible to procure the product/service from a SDVOSB or VOSB under the Veterans First Contracting Program.  The case presented an interesting legal issue because FSS contracts generally are regarded as “required sources of supply” for Government agencies.  Since FSS contracts provide commercial items to the Government on a “most favored customer” basis, agencies are encouraged to use FSS schedules before expending agency resources on procurements. However, over the VA’s objections, the GAO held that the Veterans First Contracting Program takes precedence over buys from at least certain FSS contracts.

   GAO’s legal reasoning in reaching this conclusion was fairly sound.  The basis for the decision is simply that the language of statute authorizing the Veterans First contracting preferences for SDVOSBs/VOSBs(the Veterans Benefits, Health Care, and Information and Technology Act of 2006) says that the VA “shall” set aside contracts first for SDVOSBs and then for VOSBs.  The Act does not exempt FSS contracts from its application.  Thus, the plain language of the statute controls.

   Notably, however, the FSS contract in question in Aldevra was a non-mandatory FSS schedule.  While FSS contracts generally are considered “required sources of supply,” in fact, not all FSS contracts are required sources for agencies.  The relevant provision is FAR 8.002, entitled “Priorities for use of Government supply sources.”  The regulation lists the priority of sources for the acquisition of supplies and for the acquisition of services.  The list includes agency inventories, excess property, Federal Prison Industries, purchases from organizations employing blind/disabled persons as required sources before mandatory FSS contracts.  Mandatory FSS contracts are given priority over “optional use”  FSS contracts.  Both mandatory and optional use contracts are given priority over “commercial sources.”  Reading this language on its own, VA seems to have a point.  Although the VA did not make this argument in Aldevra, since both mandatory and optional use FSS contracts have priority over commercial sources in FAR Part 8, why should the Veterans First contracting preferences trump the required sources since the preferences are implemented through set-asides which seek commercial sources?

   I’ll tell you why.  It’s in the “small print.”  FAR 8.002 starts with the prefatory phrase:  “Except . . . as otherwise provided by law . . .”.  The language means that the priority of sources listed in the regulation does not apply if a law provides for a different priority.  The GAO rightly found that, in the Aldevra case, the 2006 law did provide another order of priority with respect to VA acquisitions:  SDVOSB and then VOSB set-asides before the required sources listed in 8.002.  The Aldevra case, furthermore, is consistent with other rulings stating that the 2006 Act and the Veterans First contracting preferences take priority over other contracting requirements, such as the specialized rules for architect/engineer services mandated by the Brooks Act (see Powerhouse Design Architects & Engineers Ltd., B-403175, October 7, 2010) or requirements tagged for the Ability One program (organizations employing the blind/disabled) (seeAngelica Textile Services, Inc. v. US,  95 Fed. Cl. 208, Oct. 2010).  In the two aforementioned cases, the analysis was the same – shall means shall and trumps any other contracting requirement.  Ironically, the same lawyer represented the VA in both the Powerhouse Design Architects and Aldevra cases.

   Neither the GAO nor the VA analyzed the language of FAR 8.002 and neither the GAO nor the VA made an analogy to the other cases addressing the Veterans First priorities.  Instead, the VA made an analogy to another part of FAR Part 8, 8.404, “Use of Federal Supply Schedules.”  The prefatory language of this rule explains that the provisions of certain other parts of the FAR, including FAR Part 19, do not apply to FSS buys.   FAR Part 19 addresses small business contracting programs such as the SDVOSB program administered by SBA.  The GAO correctly rejected this argument, noting that the SDVOSB program discussed in FAR Part 19 is different, and has a different statutory basis, from the Veterans First Contracting Program.  So, the GAO remarked, the exclusion of FAR Part 19 referenced in FAR 8.404 is irrelevant to the issue of whether FSS contracts have priority over the Veterans First Contracting Program requirements.

   [By the way, the exclusion of FAR Part 19 from FAR Part 8 is a thing of the past.  Per a new, interim rule published November 2, federal agencies are now authorized to set aside task and delivery orders under MAS contracts; use partial set asides under those contracts; and reserve one or more contracts for small businesses in full and open competitions.  A new blog post is coming on this rule.]

   A couple of last words on the Aldevra case.  First, the VA has informed the GAO that it will not follow the decision and will continue to exercise discretion in deciding whether to order off the FSS or compete a requirement under the Veterans First Contracting Program.  The VA didn’t cite any legal basis for this decision; instead it punted the question, acknowledging that it will be up the “courts to decide.”  Second, if my analysis of 8.002 and my reference to the other cases addressing the Veterans First Contracting Program priorities is correct, I have answered one of the questions left open by the Aldevra case:  does the Veterans First Contracting Program trump mandatory FSS contract buys?  Per my analysis, it would, as the required sources and priorities identified in FAR Part 8.002l apply only if there is not other law identifying another priority.  The 2006 Act is that other law.

   Finally, the Aldevra case is of particular interest to me because the VA has not been consistent in its view of FSS buys.  I am aware of a company that has a mandatory FSS schedule.  Instead of ordering products off of this schedule, the VA is ordering the products, under either micro-purchase or SAT procedures, from the open market and from large businesses.  To make matters worse, the FSS contract holder is a VOSB!

   As a lawyer who has practiced government contracts law for over 20 years,  I struggle between fascination and frustration over the VA’s acquisition decisions and its justifications for them.

6. New Proposal on Executive Compensation

   September 29, 2011 7:18 pm Leave a Comment

   In a blog post earlier this week, I discussed Obama’s proposal to lower the cap on the amount of executive compensation for which contractors can see reimbursement under their cost contracts.  Obama’s proposal is to lower the cap to $200,000, down from the current cap of about $700,000.  The cap, however, only applies to a contractor’s five most highly compensated employees.  Now Congress has proposed to extend the cap to additional contractor employees.  Specifically, the Senate Armed Services Committee’s version of the 2012 Defense authorization bill proposes to expand the cap to all management employees and senior executives.  Of course, if passed, the “extended cap” would only apply to reimbursement under defense contracts.  Industry groups object to both Obama’s and Congress’ proposal to lower and/or extend the cap, repeating that seeking parity between government and private sector salaries is not appropriate.  Industry also correctly points out that OMB has yet to “score” these proposals; that is, OMB has yet to identify the supposed cost savings to the Government of these proposals. I’ll keep you posted.

7. SBA Awards Grants Under Its Small Business Teaming Pilot Program

   September 28, 2011 7:37 pm Leave a Comment

   On September 23, the Small Business Administration announced the awardees of grants made by the agency under a pilot program designed to aid small business government contractors. The grant was authorized by the Small Business Jobs Act passed last Fall. The program is called the “Small Business Teaming Pilot Program”. Under the program, SBA is authorized to provide grants to organizations that will train, counsel and mentor small businesses interested in competing for federal contracts. In particular, the funds distributed by SBA will be used to assist small business contractors to team with one another for larger federal procurements. These teaming relationships may be in the form of a prime/subcontractor relationship or a joint venture. Recipients of the grants will help with the formation and execution of teaming arrangements, identify larger contract opportunities and aid small business teams in bidding on these opportunities. SBA considers “larger federal procurements” to be those where the total value of the contract (including options) exceeds half of the size standard corresponding to the NAICS code assigned to the contract or, in the case of an employee-based size standard, exceeds $10 million. This is the same test applicable to the affiliation exemption for small business joint ventures.

   SBA received more than 300 applications but made only 11 grant awards. The majority of the awards were for about $500,000 but the term of each grant is for a base project period of one year, with four one year options. Thus, if each grantee has its grant renewed, the amount funded through each organization could reach $2.5 million. The list of grantees is, for the most part, not surprising and includes primarily community economic development foundations. There is one unusual grantee – Raytheon. You can find the full list here.

8. Obama Proposes to Lower the Cap on Reimbursable Executive Compensation Costs

   September 26, 2011 7:41 pm Leave a Comment

   Obama’s deficit reduction plan released last week includes a proposal to lower the cap on the maximum allowable executive compensation reimbursable to federal contractors.  Sounds ominous, but what does it mean?  Under federal law, the Office of Management and Budget is charged with the responsibility to set a cap on the amount of executive compensation that can be included by government contractors in their overhead pools and allocated to their cost-reimbursement contracts.  This issue is also addressed in the cost principle set forth in FAR Part 31 (31.2056(p)).  The cap (also known as the “benchmark compensation amount”) is supposed to reflect the median compensation amount for the five most highly compensated employees of corporations with revenues in excess of $50 million.  The median compensation of these executives, in turn, is taken from information provided by the SEC (which generally requires publicly traded companies to disclose compensation paid executives).  “Compensation” in this context means the total amount of wages, salary, bonuses and deferred compensation provided executives.

   For FY 2010, OMB set the cap at $693,951, up slightly (1.4%) from $684,181 the prior year.  The cap remains in place until revised by OMB.  What has grabbed headlines recently is that Obama’s deficit reduction plan proposes to reduce the cap to $200,000.  This amount reflects the cap on salaries given senior federal executives such as a cabinet-level secretary and is designed to put contractor executive salaries on par with federal executive salaries.

   The proposal certainly seems like a serious blow to contractors.  The difference between a cap of almost $700,000 and a cap of $200,000 is substantial.  More importantly, Obama’s proposal completely ignores the formula for the cap authorized by statute.  Under the applicable statute, the cap is supposed to be set following a comparison of contractor salaries to salaries of other commercial companies.  A comparison of contractor salaries to federal salaries is not an apples to apples comparison.  Stan Soloway (of PSC fame) makes the same point in an article published in the Washington Business Journal last week. (A copy of the article can be foundhere)  Others quoted in the article warned that Obama’s proposal would result in the exodus of many government contractor senior executives to commercial companies.  (Interestingly, no one suggested that the reduction in the cap would lead to an exodus of government contractor executives to the Government.  One wonders if Obama was seeing the cap reduction as another “insourcing” mechanism or a way to stop the “brain drain” in the Government).

   The proposal, however, may not be as shocking as it first appears.  First, the proposal only addresses the amount of compensation contractors can seek to have reimbursed for their five most highly paid executives.  It does not propose to cap compensation provided other executives or employees.  Second, the cap only affects the amount the Government will reimburse contractors through their cost reimbursement contracts; it does not cap the amount contractors can actually pay their executives.  Second, as the Washington Business Journal article also points out, most senior executives are not compensated solely through salary.  Instead, their compensation often is a combination of salary and equity in the company.  To the extent that the amount of salary that can be recouped through cost contracts is reduced, companies likely will make up the difference in increased equity compensation.  Third, in order for the proposal to become law, the current statute will have to be amended or rescinded by Congress.  However, consensus is not the hallmark of this Congress.  Thus, Obama’s proposal may be nothing more than posturing in a campaign year.

   What is troubling is that Obama’s proposal is a familiar refrain: Government overspending results from the high prices the Government pays its contractors.  The $500 hammer remains embedded in everyone’s minds and, as a result, contractors are the predictable, easy and traditional scapegoat in  a budget crisis.  If the Government really wants to reduce the amount of government contractor executive compensation it reimburses, it just needs to move from cost reimbursement contracting to fixed price contracting.  This move, in fact, has recently been suggested by DoD.  The problem with fixed price contracts from the Government’s perspective is that it places the onus on the Government to clearly state and predict its requirements. It requires hard work up front; cost reimbursement contracting, by contrast, is the easy way out.  Criticizing federal employees, however, is not likely to win an election.  Taking on contractors, on the other hand, is a bit like taking on Wall Street.  A villain everyone can agree on.

9. Veterans Small Business Verification

   September 19, 2011 7:44 pm Leave a Comment

   Monday of this week the Washington Post featured an article on the Department of Veterans Affairs “Veterans First” Contracting Program.  The article focused on the VA’s verification process and how that process has led to the rejection of 70% of veterans listed in the VA’s Vendor Information Pages.  This blog topic provides a summary of the history and the current issues regarding VA verification.

   The Veterans Benefits, Health Care and Information Technology Act of 2006 created the Veterans First Contacting program which provided the VA with the authority to provide its own contracting assistance to Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) and direct contracting assistance to Veteran-Owned Small Businesses (VOSBs) in addition to that provided by SBA to SDVOSBs.  Like the name implies, under the Veterans First Contracting Program the VA must consider acquisition strategies that give priority to SDVOSBs first and then to VOSBs before pursuing other strategies benefitting 8(a) contractors, women-owned small businesses and HUBZone small businesses.  The Veterans Benefits Act of 2006 required the VA’s Center for Veterans Enterprise (CVE) to verify ownership and control of SDVOSBs and VOSBs participating in the Veterans First Contracting Program through the VetBiz.gov Vendor Information Pages (VIP) database.  In order to be identified in VIP and to participating in the program, a company typically self-certified as to its veteran-owned status until VA was able to review its verification application and officially verify the company’s status.

   In October 2010, President Obama signed the Veterans Benefits Act of 2010.  The law expanded and accelerated the VA’s obligations with regard to the verification of SDVOSBs and VOSBs.  Under the act, by December 31, 2011, all small businesses seeking to participate in VA’s Veterans First Contracting Program must be verified by VA and must appear in the VIP database.  Effective October 13, 2010, The act required the VA to notify all businesses then identified in the VIP database but not yet verified that they had no later than 90 days after they received the VA’s notification to submit business documents to VA establishing that their businesses were owned and controlled by a veteran or service-disabled veteran.  According to the VA, 13,000 letters were sent regarding the need to submit verification documents.

   March 14, 2011 was the date by which all verification applications had to be submitted to VA for those businesses that previously had been identified in the VIP database but had not yet been verified.  On March 15, VA removed all businesses listed in the database that did not submit a verification package by the March 14, 2011 deadline.  In attempting to meet this target deadline, the VA prioritized the applications it reviewed for verification.  The first priority was any small businesses that had been identified as an apparent successful offeror in a VA acquisition; in this instance, if the business was not yet verified, VA would “jump” the business to the head of the line for verification under a “Fast Track” verification process.  Under this process, VA promised to review and determine the status of the apparent successful offeror’s verification application within 21 days.  After the “apparent successful offerors’ applications are reviewed, the VA then first reviewed applications by businesses who had current contracts with the VA followed by those businesses that were not identified for a contract award and did not have current business but were identified in the VIP database in October 2010 and had submitted an application within the 90 day deadline noted above.

   Many veteran-owned businesses have complained about the VA’s delay in reviewing verification applications and the fact that VA has jumped certain applications to the head of the queue. The VA originally set a target deadline of July 31, 2010 for completion of verification applications –  a deadline which the agency did not meet. However, at the Veterans Conference in New Orleans and then again at the American Legion annual convention at the end of August, Tom Leney, Director of the VA’s Office of Small and Disadvantaged Business Utilization, stated that at that time there were only six verification applications left for the VA to review. Thus, the issue of “fast tracking” certain applicants should not be a concern going forward.  According to the VA, new verification applications should only take 90 days to review.

10. Unconditional Ownership and Control of a Veteran-Owned Small Business

    September 19, 2011 7:43 pm Leave a Comment

    A small business may only participate in the VA’s Veterans First Contracting Program if it demonstrates that it is unconditionally owned and controlled by a veteran or service-disabled veteran.  It is the “unconditional” aspect of the ownership and control requirement that most often trips up applicants, typically for good reasons.  The fact that there cannot be any limits on the veteran’s role in the company is often impractical in a start-up business which has other investors or members.  For example, under relevant case law, a veteran must be able to convey or transfer his ownership interest in the business whenever and to whomever he or she chooses, which might not be agreeable to other, minority members or stockholders who depend on the company’s status as a VOSB or SDVOSB to get a return on their investment.  While the veteran could include provisions in the applicable business agreements compelling the minority interest or interests to sell on the same terms as the veteran (“drag along rights”) or allowing the minority interest to sell on the same terms if the veteran determines to sell (“tag along rights”), the precise language in these provisions frequently determines the difference between staying within the rules and crossing the line.

    Many businesses also are unaware that seemingly innocuous provisions in the company’s articles of incorporation, by laws or operating agreement conflict with the control requirement.  In order to demonstrate “control,” a veteran must show that it controls both the “strategic policy” setting exercised by the board of directors of the company or the members of the LLC as well as day-to-day management and administration of the business operations of the company.  In the case of a LLC, control means that the veteran must serve as the LLC’s managing member and control all decisions of the LLC, including those decisions typically requiring a majority vote such as mergers, dissolutions and amendments to a company’s operating agreement.  Other provisions, such as quorum requirements in by laws, create the same problems by allowing minority owners to exercise “negative control” over the business.

    Unfortunately for veteran owners of small businesses, many of these issues are not obvious and, generally, only can be spotted by an attorney well-versed in this area of the law.  Indeed, there are nearly a hundred cases debating the issues of unconditional ownership and control.  In addition to the steep learning curve in this area, recent regulations have increased substantially a veteran’s risk in submitting a defective verification application to VA. The instructions regarding verification on the VA’s website advise applicants that the penalties for misrepresentation of veteran-owned status include debarment. Under other recent legislation passed by Congress last year, the Small Business Jobs Act, the fact that a company or an individual did not know it had misrepresented its status or did not intend to make such a misrepresentation is irrelevant.

    Tom Leney, VA’s Director for Small and Disadvantaged Business Utilization, assured veterans at the Veterans conference and at the American Legion convention that his office will not report for debarment applicants denied verification.  He also stated that he does not inform Contracting Officers, including those from agencies other than the VA, whether or not the VA has denied verification to an applicant not listed in the VIP database.  Mr. Leney, however, did indicate that there is a proposal for the VA to take its veteran verification process Government-wide. And while the OSDBU may not be a source of VA debarment candidates for the moment, competitors have always been able to protest the veteran status of a SDVOSB or VOSB.  This blogger is personally aware of a case where a company’s SDVOSB status was protested by a competitor to SBA, SBA decided in favor of the protester, and the VA debarred the contractor for misrepresentation of status in connection with not only the procurement that was the subject of the protest, but all procurements for which the company had submitted a bid or proposal prior to that procurement.  Any representation of status made to the Government, in any context, therefore, should be carefully considered.