Small Business Contracting Rules

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Derrick Davis
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1 The Professor s Forum Webinar: Small Business Contracting Rules Ralph C. Nash, Jr. Professor (Emeritus) of Law, George Washington University with guest Ira E. Hoffman, Esq. Principal, Offit Kurman, P.A. March 26, 2015

2 Key Acronyms SBA SBC NAICS 8(a) SDVO HUBZone WOSB SDB Small Business Administration small business concern North American Industrial Classification System SBC owned and controlled by socially & economically disadvantaged person(s) Service-disabled/Veteran(s)- Owned SBC SBC located in Historically Underutilized Business Zone Woman-owned SBC Small Disadvantaged Business 2

3 Principal Sources Small Business Act, 15 USC 631 et seq. 13 CFR Part Small Business Size Regulations Part 124-8(a)/SDB Part Gov t Contracting Programs (SDVO) Part HUBZone Programs Part WOSB FAR Part 19 3

4 What We Will Cover The New Proposed Rule, 80 FED. REG (Feb. 5, 2015) (comments due Apr. 6, 2015) Expands Mentor/Protégé JV Opp y to all SBCs Clarifies 8(a) Mentor/Protégé JV Agreements Clarifies Tribally-owned 8(a) SBCs & Primary Industry Classification for entity-owned 8(a)s 4

5 The Basics: Size Standards To be SBC, entity must be Independently owned & operated U.S. firm Not dominant in its primary industry Annual revenues/employees < applicable NAICS size standard NAICS codes Census Bureau creates 6-digit code for each industry SBA designates size standard for each industry CO identifies NAICS code that best fits principal purpose of contract 5

6 Rule of 2 FASA requires all multiple-award contractors have fair opportunity to be considered for award of TOs Rule of Two CO shall set aside any acquisition > $150K for SBCs if reasonable expectation of competitive offers from 2 or more SBCs at fair market prices (13 CFR 125.2(f)) In Delex, B , GAO ruled Rule of 2 applies to multiple-award IDIQ TOs In Edmond Computer Co., B , GAO ruled FAR Pt 19 set-asides do not apply to FSS buys under FAR Subpart 8.4 (even though SBA argued that SB programs override FSS program) 6

7 The Basics: Affiliation SBC & other firm(s) are affiliated if one controls, or has power to control, the other Key Rule: SBA aggregates SBC + all affiliates Exceptions: Firms owned by investment companies under SB Act SBCs owned & controlled by Alaska Native, Native Hawaiian, Native American & Community Dev Corps SBCs that lease employees from Temp suppliers Approved 8(a) mentor/protégé JV 7

8 The Basics Affiliation (cont) Affiliation Indicia Totality of circumstances Stock ownership/options/agreements to merge Interlocking or common management/directors Prior relationships, contractual ties Control may be affirmative or negative Negative control includes minority shareholder having ability to block quorum or Board action 8

9 Special Classes of Small Business 8(a)s HUBZone SBCs Service-Disabled/Veteran-Owned (SDVO) SBCs Women-Owned Small Business (WOSB) SBCs All other SBCs 9

10 8(a) Small Business Concerns SBC that is 51% unconditionally owned & controlled by 1 or more socially & economically disadvantaged persons Qualifying person must be highest officer, have suitable experience, and be highest compensated Socially disadvantaged means member of group with history of being discriminated against Economically disadvantaged means (1) net worth < $250K; (2) average AGR last 3 years< $250K; and (3) total assets <$4M Applicant must have history showing potential for success SBA certifies Participants as 8(a) for up to 9 years 10

11 HUBZone SBCs 51% owned & controlled by U.S. citizens Principal office must be located in HUBZone At least 35% of employees must reside in HUBZone Must be certified by SBA as HUBZone SBC 11

12 Service-Disabled/Veteran-Owned (SDVO) SBC that is 51% unconditionally owned & controlled by 1 or more service-disabled vets (SDV) (except spouse or permanent caregiver for severely disabled SDV) VA s SDV program allows surviving spouse to keep 10 yrs Qualifying SDV must be highest officer, highest compensated, and have suitable experience Control includes negative control 12

13 Women-Owned SBC WOSB must be 51% owned & controlled by women Economically Disadvantaged WOSB (EDWOSB) must be 51% owned & controlled by ED women Self-certify/SBA/SBA-approved 3 rd party certifier Woman must be highest officer, highest compensated & have suitable experience 45 NAICS codes for WOSB/83 NAICS codes for EDWOSB 13

14 SBC Subcontracting Limits (13 CFR 125.6) For full or partial set-aside for services... 8(a) or WOSB prime must perform 50% of cost of personnel with its own employees SDVO or HUBZone prime must perform 50% of cost of personnel with its own employees or with its own and employees of other SDVO or HUBZone 8(a) mentor/protégé prime must perform 50% of cost of personnel with JV employees If 8(a) buy, 8(a) must perform 40% of non-admin work for unpopulated JV or JV with only admin personnel 14

15 JVs - Current Rules JVs are considered affiliated -- except for SBAapproved 8(a) mentor/protégé JVs If 2 concerns form JV that is awarded > 3 contracts in 2 year-period concerns are affiliated for all purposes But 2 concerns may for additional JVs, and each JV has new 3 contract/2 year limitation If both members of 2-member JV are small under NAICS code JV is exempt from affiliation 15

16 Current Non-Mentor/Protégé 8(a) JVs 8(a) must obtain SBA approval for a JV agreement SBA will not approve JV unless 8(a) cannot perform alone & other SBC brings substantial benefit to 8(a); if 8(a) brings very little to the table, SBA will not approve 8(a) JV agreement For competitive 8(a) set-aside, JV is eligible if 8(a) is < ½ of size standard; other venturer is SBC; and procurement > ½ of size standard or $10M For smaller 8(a) set-aside, 8(a) & other SBC are affiliated 16

17 8(a) Mentor/Protégé JV Current Rule Mentors Any sized business w/commitment & ability to assist 8(a) Need SBA approval for > 1 protégé; maximum of 3 Must certify good character & financial health annually May own 40% equity of protégé 17

18 8(a) Mentor/Protégé JV Current Rule Protégés Must be 8(a) in good standing and 1) Be in developmental stage of 8(a) participation, or 2) Never have received 8(a) contracts, or 3) Size is < ½ size standard for primary NAICS code Can have 1 mentor only, unless SBA approves 2 nd mentor b/c no conflict or competition between JVs & 2 nd JV is for different NAICS code or 2 nd mentor has different specific expertise 18

19 New Proposed Rule Implements provisions of Small Business Jobs Act of 2010, PL , & National Defense Authorization Act for FY 2013, PL , to establish government-wide mentor/protégé program for all SBCs, modeled on with 8(a) mentor/protégé program Clarifies 8(a) Mentor/Protégé JV Agreements Clarifies Tribally-owned 8(a) SBCs & Primary Industry Classification for entity-owned 8(a)s Adds New WOSB provisions 19

20 Proposed Mentor/Protégé Rule 1 Proposes 1 mentor/protégé program for all SBCs Approved mentor/protégé JV would be eligible as SBC for any K for which protégé is eligible (e.g., if protégé is WOSB JV is eligible for WOSB set-aside) New program would provide benefits of mentor to all SBCs, not just 8(a)s Clarifies that term informal JV referred to separate legal entity, not to JV without written agreement 20

21 Proposed Mentor/Protégé Rule 2 SBA still must approve mentor/protégé JV agreement If JV is separate legal entity, it can be populated or not If populated, employees of JV can be admin only, i.e., cannot perform contract work awarded to JV Otherwise SBA could not track benefit to protégé from JV HUBZone protégé could have non-hubzone mentor Non-profits can no longer be mentors, even for 8(a)s 21

22 Proposed Mentor/Protégé Rule 3 Mentor can have up to 3 protégés, whether, e.g., all 3 as 8(a)s; 1 8(a) & 2 SDVOs; or 1 8(a), 1 SDVO & 1 WOSB Eliminates the 3 limiting requirements on 8(a) protégés Other Agency mentor/protégé programs (except DoD) will lapse 1 year after new rule becomes final unless Agency obtains SBA approval Disappointed bidders may protest size of 8(a) JV 22

23 Proposed Mentor/Protégé Rule 4 Person who is not from designated group will have burden of proving particularized social disadvantage Entity-owned concern (e.g., Tribally owned 8(a)) will not be exempt from affiliation if it will have substantial unfair competitive advantage within industry, using 6-digit NAICS code for industry SBA will be able to change primary NAICS code for entityowned 8(a) participant 23

24 SBA Comment Requests SBA expressly requests numerous comments, including, e.g.: Whether it should create 1 mentor/protégé program or 5 Whether all JVs formed under mentor/protégé agreements should be separate legal entities Can HUBZone SBCs form JVs with non-hubzone entities? How best to track set-aside awards to JVs? Whether SBA should allow protégés to serve as mentors Whether sub-k incentives under some other Agency mentor/protégé programs should be government-wide Whether 40% ownership interest should be temporary Whether primary industry should automatically update 24

25 Questions? 25

Ralph C. Nash, Jr. Ralph C. Nash, Jr., is Professor Emeritus of Law of The George Washington University, Washington, D.C., from which he retired in 1993.

26 Ralph C. Nash, Jr. Ralph C. Nash, Jr., is Professor Emeritus of Law of The George Washington University, Washington, D.C., from which he retired in He founded the Government Contracts Program of the university s National Law Center in 1960, was Director of the Program from 1960 to 1966 and from 1979 to 1984, and continues to be actively involved in the Program. He was Associate Dean for Graduate Studies, Research and Projects, of the Law Center from 1966 to Professor Nash has specialized in the area of Government Procurement Law. He worked for the Navy Department as a contract negotiator from 1953 to 1959, and for the American Machine and Foundry Company as Assistant Manager of Contracts and Counsel during 1959 and Professor Nash is active as a consultant for government agencies, private corporations, and law firms on government contract matters. In recent years, he has served widely as neutral advisor or mediator/arbitrator in alternate dispute resolution proceedings. He is active in the Public Contracts Section of the American Bar Association, is a member of the Procurement Round Table, and is a Fellow and serves on the Board of Advisors of the National Contract Management Association. 26

Ira E. Hoffman Ira E. Hoffman, who has 30 years experience practicing law, is a Principal in the Government Contracts, Cybersecurity and International Practice Groups at Offit Kurman, PA.

27 Ira E. Hoffman Ira E. Hoffman, who has 30 years experience practicing law, is a Principal in the Government Contracts, Cybersecurity and International Practice Groups at Offit Kurman, PA. He is also an instructor & Director of the Public Contracting Institute ( PCI ), and the Editor of The Annotated Export Administration Regulations Desk Reference (West 2013). Mr. Hoffman regularly counsels clients on small business issues (e.g., 8(a), SDVO, HUBZone and WOSB programs), subcontracts, intellectual property rights, cybersecurity contracting, ethics & compliance, cost issues, False Claims Act, security clearances, Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), OFAC, FMS, FCPA and other international issues. He has represented clients in bid protests at the GAO, Court of Federal Claims, and SBA, and in negotiating claims and resolving investigations with numerous U.S. Government agencies. Mr. Hoffman is a graduate of the University of Michigan (B.A. 1973); the London School of Economics (M.Sc 1975), where he also taught; and the University of Miami School of Law (J.D. cum laude & Law Review,1983). Tel: / ihoffman@offitkurman.com 27

28 Next Month s Professor s Forum Webinar: April 30: Applicability of OCIs and PCIs 12:00 pm to 1:30 pm EDT 28

HUBZone Program First Wednesday Virtual Learning Series 2018

HUBZone Program First Wednesday Virtual Learning Series 2018 www.sba.gov 1 Hosts Christopher Eischen, Procurement Center Representative SBA Office of Government Contracting, Area IV, Kansas City, MO christopher.eischen@sba.gov