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Government Contracts Update

Regulatory

SBA Regulations. On December 4, 2018, the U.S. Small Business Administration (SBA) issued a proposed rule, which could have a substantial impact on small business contractors. The rule implements various provisions of the National Defense Authorization Act (NDAA) of 2016 and the Recovery Improvements for Small Entities After Disaster Act of 2015 ("RISE Act"), as well as other clarifying amendments. These proposed changes include the following:
  • Material Breach of Subcontracting Plan. The proposed rule states that it will constitute a material breach of contract to fail to comply in good faith with subcontracting plan requirements. The proposed rule provides several examples of failure to make good faith efforts, including (1) failing to designate and maintain a company official to administer the subcontracting program and (2) failing to conduct market research identifying potential small business concern subcontractors. Additionally, the propose rule states that such failure may be considered in past performance evaluations.
  • Small Business Contracting in Disaster Areas. The propose rule would establish contracting preferences for small business concerns (SBCs) located in disaster areas. The proposed rule would also provide double credit to agencies that award to such concerns.
  • Set-Aside Within a Set-Aside. The proposed rule would allow contracting officers to set aside orders for socioeconomic small business programs under a multiple award contract (MAC) awarded as a generic small business set-aside. In proposing this rule, the SBA acknowledged concerns that such a rule would limit the opportunities of other SBCs to compete for orders issued under their MACs. Thus, the SBA requested comments on such an impact.
  • Size and Status Recertification. The proposed rule would also clarify that size recertification is required on full-and-open contracts when those contracts are awarded to SBCs. Additionally, the proposed rule adds language requiring 8(a) recertification under 8(a) contracts.
  • The proposed rule addresses several other areas of interest for contractors including the non-manufacturer rule, the ostensible subcontractor rule in the context of socioeconomic set-aside contracts, subcontracting compliance reviews, and set-asides where one offer is received.

GAO Reports

Report on Buy American Act. On December 18, 2018, the Government accountability Office (GAO) released a report finding that several government agencies need to improve compliance with the Buy American Act (BAA). Under the BAA, agencies generally must purchase domestic products but may purchase foreign products under certain circumstances. The report found that the Office of Management and Budget, the Department of Homeland Security, the Department of Veterans Affairs, and the Department of Health and Human Services need to provide more training to their officials. As all four agencies concurred with the report and pledged to provide training and guidance to their officials, contractors can expect increased scrutiny under the BAA.

Report on Improving Procurement of Information Technology. On December 12, 2018, the GAO published a report finding that the federal government continues to spend billions on information technology projects that have failed or performed poorly. The report noted that despite agencies having implemented about 59% of the 1,242 IT management-related GAO recommendations and about 73% of the approximately 3,000 security-related recommendations, significant actions remain to be completed.

Report on Agencies' Use of Noncompetitive and Bridge Contracts. On December 11, 2018, the GAO published a report questioning the government estimate that 30% or $15 billion of annual IT spending is noncompetitive, based on findings of misreported data by the Departments of Defense, Homeland Security, and Health and Human Services. This misreported data was in part due to misunderstandings of bridge contracts. Consequently, the GAO report renewed a request that the Office of Federal Procurement Policy define bridge contracts and provide guidance on their use.

Legislation

Significant Change to How Size Status Is Determined. On December 17, 2018, the president signed H.R. 6330, the Small Business Runway Extension Act of 2018, which amends the Small Business Act to change how the size of small businesses is determined. Specifically, the new law amends Section 3(a)(2)(C)(ii)(II) of the Small Business Act (15 U.S.C. § 632(a)(2)(C)(ii)(II)), which used to require that the size standard for categorizing a business concern as small had to provide for determining "the size of a business concern providing services on the basis of the annual average gross receipts of the business concern over a period of not less than 3 years." The law, however, changes "3 years" to "5 years," meaning that now a five-year average, rather than a three-year average, will be used for determining the size of small business concerns for purposes of NAICS codes that are based upon average receipts. The SBA regulations at 13 C.F.R. § 121.104 still need to be amended to incorporate the change. This new five-year average will be significant for many small businesses, as now the prior five years of receipts will be considered in determining their size, thus enabling many growing businesses to remain "small" for a longer period of time. It may also mean that larger businesses facing declining revenues may remain "large" for a longer period of time than desired.

In the Courts

Stricter Pre-Award Standing Standard at COFC. In Veteran Shredding, LLC v. United States, No. 18-981 (Fed. Cl. Dec. 6, 2018), the U.S. Court of Federal Claims applied a stricter pre-award protest standing standard. Veteran Shredding challenged the pre-award cancellation by the Department of Veteran Affairs (VA) of a solicitation, for which Veteran Shredding was the third-highest priced offeror out of five bidders. The solicitation was intended to be awarded on a lowest-priced technically acceptable basis. Veteran Shredding argued that in the context of a pre-award protest, the "substantial chance" test for determining a direct economic interest for establishing standing does not apply. Rather, Veteran Shredding argued that the less rigorous "non-trivial competitive injury" standard applied. While the court acknowledged that normally the less rigorous standard applied in a pre-award protest, because Veteran Shredding's protest was filed post-bid and there was a sufficient factual foundation established by the evaluation and determination to cancel the solicitation, the "substantial chance" standard applied and Veteran Shredding's protest was dismissed for lack of standing.