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Government Contracts Update

There have been several legal developments in the past month that may affect and be of interest to government contractors. This article gives a brief overview of some of those developments.

Updates to SDVOSB Eligibility Rules

As Venable previously covered in its January 2018 update, the U.S. Department of Veterans Affairs (VA) and the Small Business Administration (SBA) proposed new rules in January to implement Section 1832 of the National Defense Authorization Act (NDAA) for fiscal year 2017, which required the VA to utilize the SBA's regulations to evaluate veteran-owned small business (VOSB) and service-disabled veteran-owned small business (SDVOSB) eligibility and placed the responsibility for issuing regulations regarding ownership and control of VOSBs and SDVOSBs on the SBA.

On September 24, 2018, the VA issued its final rule implementing Section 1832 and amending the VA small business regulations found at 38 C.F.R. part 74. Importantly, the final rule ties many of the applicable definitions to the SBA's regulations found at 13 C.F.R. part 125, including the definitions for "joint venture," "veteran," "VOSB," and "SDVOSB," among others. One of the major differences between the VA's and SBA's previous rules was with respect to the SDVOSB control requirements. These differing control requirements meant that a concern could be classified as an SDVOSB under the VA's control requirements, but would not meet the applicable control standards under the SBA regulations. The VA's final rule fixes this potential problem by removing the VA's control requirements and determining control in accordance with the SBA's control regulations at 13 C.F.R. part 125. Ownership is also now determined in accordance with 13 C.F.R. part 125. Although establishing ownership and control criteria for SDVOSBs and VOSBs is now in the hands of the SBA, the VA is still charged with verifying that applicants comply with the requirements before granting verified status. Other changes include the VA and SBA now treating joint ventures the same way and requiring that SDVOSB joint venture agreements meet the requirements of 13 C.F.R. part 125.

During the same week, on September 28, 2018, the SBA issued its final rule implementing Section 1832. One of the major changes to the SBA's regulations in this final rule is the addition of an exception to the control requirements for "extraordinary circumstances." The final regulation states that "SBA will not find that a lack of control exists where a service-disabled veteran does not have the unilateral power and authority to make decisions in 'extraordinary circumstances,'" which only include adding a new equity stakeholder, dissolution of the company, sale of the company, merger of the company, and the company declaring bankruptcy. The final rule makes clear that these circumstances are exclusive, and the SBA will not recognize any other circumstances that would allow for negative control by non-service-disabled individuals. Other major changes include the addition of two rebuttable presumptions with respect to normal business hours and close proximity. With respect to normal business hours, "[t]here is a rebuttable presumption that a service-disabled veteran does not control the firm when the service-disabled veteran is not able to work for the firm during the normal working hours that businesses in that industry normally work." For close proximity, "[t]here is a rebuttable presumption that a service-disabled veteran does not control the firm if that individual is not located within a reasonable commute to [the] firm's headquarters and/or job-sites locations, regardless of the firm's industry."

These are only some of the many changes that these final rules make to the VA and SBA SDVOSB regulations. SDVOSBs and VOSBs are encouraged to review the new rules and regulations in their entirety to ensure that they are meeting all relevant requirements.

Both final rules became effective on October 1, 2018.

DoD Performance-Based Payments Proposed Rule

On August 24, 2018, the U.S. Department of Defense (DoD) issued a proposed rule that would implement Section 831 of the FY 2017 NDAA that addresses the preference for performance-based payments. In the proposed rule, DoD stated that "[t]he fundamental purpose of the rule change is to increase the effectiveness and efficiency of [DoD] in five domains while recognizing that its cash flow policy was outdated and costly to the tax payers." The five domains are: On Time or Accelerated Contract Deliveries, Contractor Quality, Contractor Business Systems, Increasing Contract Opportunities for Small Business and for the Blind and Severely Disabled, and Receipt of Timely Quality Proposals. To effectuate this purpose, DoD proposed to modify the customary progress payment rate for large businesses (currently at 80 percent under FAR 52.232-16) to 50 percent and "[e]stablish opportunities for recognizing contractor behaviors that align themselves with the performance objectives in the five business domains that are important to DoD such that large business contractors could potentially increase the rate . . . and receive progress payments that can be as high as 95 percent of contract cost." DoD set a public meeting date of September 14, 2018 and a comment period ending on October 23, 2018.

On September 21, 2018, DoD announced that it is holding a second public meeting for October 10, 2018. The comment period for the proposed rule is still set at October 23, 2018.

Evaluation Factors for Multiple-Award Contracts Proposed Rule

On September 24, 2018, DoD, GSA, and NASA issued a new proposed rule to amend the FAR to implement Section 825 of the FY 2017 NDAA, which amended 10 U.S.C. § 2305(a)(3) to modify the requirement that DoD, NASA, and the coast guard consider cost or price as an evaluation factor in the award of particular multiple-award task order contracts. The proposed rule would amend FAR parts 13 and 15 to state that "[w]hen issuing a solicitation valued above the simplified acquisition threshold for a multiple-award contract for the same or similar services and the solicitation states that the Government intends to make an award to each and all qualifying offerors, the contracting officer may choose not to include price or cost as an evaluation factor for the contract award." The contracting officer must consider price in awarding each order under the multiple-award contract. The comment period for this proposed rule ends on November 23, 2018.

CRS Bid Protest Report

In its January 2018 update, Venable mentioned the bid protest report released by the Congressional Research Service (CRS) that provided an overview of bid protests at the three available fora—agencies, U.S. Government Accountability Office (GAO), and the Court of Federal Claims (COFC)—as well as recent bid protest reform efforts. On September 26, 2018, CRS released an updated report, "Government Contract Bid Protests: Analysis of Legal Processes and Recent Developments," which includes new updates, including the new bid protest reform provisions found in Section 822 of the FY 2019 NDAA, which requires DoD to report on an expedited bid protest process for procurements valued at less than $100,000 and on the frequency and effects of bid protests of the same award at GAO and COFC.

SBA 8(a) Inspector General Audit Report

On September 7, 2018, the SBA's Office of Inspector General (OIG) issued a report, "Improvements Needed in SBA's Oversight of 8(a) Continuing Eligibility Processes," in which the OIG reviewed the SBA's 8(a) Business Development Program "to determine whether SBA's oversight ensured 8(a) program participants met continuing eligibility requirements." The Small Business Act requires that firms meet several eligibility requirements to qualify for and remain eligible for the 8(a) program. The Small Business Act further requires the SBA to conduct annual reviews of 8(a) program participants to determine their continued eligibility for the 8(a) program. The OIG came to some rather startling conclusions through its audit. The OIG found that 20 of the 25 firms that it reviewed should have been removed from the 8(a) program; moreover, these 20 firms received $126.8 million "in new 8(a) set-aside contract obligations in FY 2017 at the expense of eligible disadvantaged firms." These shocking numbers underscore the OIG's three main audit findings: (1) SBA's reviews did not consistently identify ineligible firms in the 8(a) program; (2) SBA did not remove ineligible firms in a timely manner from the 8(a) program; and (3) SBA did not investigate or log all complaints regarding 8(a) firms' eligibility. Out of these findings, the OIG provided 11 recommendations to the SBA to improve its oversight of 8(a) program participant eligibility.

GAO Reports
  • GAO Federal Acquisitions Report. The GAO released a new report, GAO-18-627, "Federal Acquisitions: Congress and the Executive Branch Have Taken Steps to Address Key Issues, but Challenges Endure." The Services Acquisition Reform Act of 2003 established the Acquisition Advisory Panel to review federal acquisition laws, regulations, and policies and to identify opportunities for improvement. The Advisory Panel issued its final report in 2007, which identified six key issues—Requirements Definition, Competition and Pricing, Contractor Oversight, Acquisition Workforce, Federal Procurement Data, and Small Business Participation. The GAO was tasked with following up on the Advisory Panel's 2007 report to identify what progress has been made in these key issue areas. For Competition and Pricing, the Advisory Panel found that competition can help reduce prices. The GAO found that competition rates have remained consistent government-wide and have declined at DoD, and that agency use of bridge contracts can place the government at risk of paying higher prices due to delays in competition. For Small Business Participation, the Advisory Panel identified several challenges facing agencies' ability to meet small business goals. The GAO found that small business participation has increased, but that many agencies are not meeting the requirements governing their offices of small disadvantaged business utilization. The GAO's full findings are set forth in its report.
  • GAO Small Business Procurement Scorecard Report. The GAO released a new report, GAO-18-672, "Small Business Administration: Actions Needed to Improve Confidence in Small Business Procurement Scorecard." Every year, SBA issues a Small Business Procurement Scorecard that measures how much spending each federal agency allocates to small businesses and whether the federal government is meeting its small business contracting goals. The scorecard methodology is used to assign numeric scores and letter grades to each agency. The FY 2016 NDAA directed SBA to take steps to revise the scorecard methodology and provided for GAO evaluation of the effects of those revisions. In its report, the GAO made two recommendations for the SBA based upon its review: "(1) design and implement a comprehensive evaluation to assess scorecard revisions and (2) institute a process for reviewing scorecards for accuracy prior to publication and a mechanism for disclosing corrected information."
  • GAO HUBZone Report. The GAO released a new report, GAO-18-666, "Small Business Contracting: Small Business Administration Could Further Strengthen HUBZone Eligibility Reviews in Puerto Rico and Programwide." In this report, the GAO examined SBA's "development of criteria and guidance on using a risk-based approach for certifying and recertifying HUBZone firms," as well as SBA's implementation of its revised policies and procedures for HUBZone firms located in Puerto Rico. With respect to the HUBZone firms located in Puerto Rico, the GAO reviewed the files of 12 firms and found that the SBA did not have complete documentation in 9 of the 12 cases, and that in 4 of the 12 cases the SBA did not follow its policy of conducting three levels of review when approving or denying a firm.
  • GAO Grants Workforce Report. The GAO released a new report, GAO-18-491, "Grants Workforce: Actions Needed to Ensure Staff Have Skills to Administer and Oversee Federal Grants." GAO was tasked with reviewing the workforce training for federal grants. The GAO reviewed the steps that the Office of Personnel Management (OPM), the Office of Management and Budget (OMB), and the Chief Financial Officers Council (CFOC) have taken to ensure that the federal grants workforce receives training. The GAO found that the five basic grants training modules and Career Roadmap that were developed by OMB and CFOC were not widely publicized to federal agencies. Additionally, sub-agencies at the Department of Health and Human Services (HHS), the Department of Agriculture (USDA), and the Department of Education (Education) "vary in following leading training practices for planning, designing, implementing, and evaluating their grants training programs." The GAO thus recommended, among other suggestions, that OMB and CFOC publicize the Career Roadmap and collect data and user feedback on its use and that HHS, USDA, and Education establish processes to monitor and evaluate their grants training.

Federal Circuit Decision

The Federal Acquisition Streamlining Act (FASA) requires federal agencies, "to the maximum extent practicable," to ensure that "requirements are defined so that commercial items or . . . nondevelopmental items other than commercial items, may be procured to fulfill such requirements" and that "offerors of commercial items and nondevelopmental items other than commercial items are provided an opportunity to compete in any procurement to fill such requirements." 10 U.S.C. § 2377(a). Under this preference for commercial items, agencies also must, to the maximum extent practicable, "acquire commercial items or nondevelopmental items other than commercial items to meet the needs of the agency." Id. § 2377(b)(1). FASA requires agencies to conduct market research to determine whether there are commercial items available that meet the agency's requirements, could be modified to meet the agency's requirements, or could meet the agency's requirements if the requirements were modified to a reasonable extent. See id. § 2377(c).

On September 7, 2018, the U.S. Court of Appeals for the Federal Circuit addressed FASA's preference for commercial items in the case of Palantir USG, Inc. v. United States. In Palantir, the army issued a solicitation in December 2015 to procure Increment 2 for the army's Distributed Common Ground System (DCGS-A2) to "introduce a new and modernized data management architecture (DMA) using a modular system approach to perform Army intelligence analysis capabilities." After the solicitation was issued, Palantir USG, Inc. filed a pre-award protest at the GAO, which was denied. Palantir subsequently filed a protest at the Court of Federal Claims, alleging that the army violated FASA by not soliciting the data management platform as a commercial item and by failing to determine whether its needs could be met by commercial items. Relevantly, Palantir insisted that its flagship software product, called the Gotham Platform, could satisfy the army's requirements. COFC sided with Palantir, and the government appealed.

The Federal Circuit held that only after the army complied with the FASA requirements could it proceed to award a contract to meet the DCGS-A2 requirements. The court made clear that it was not suggesting that the army had to choose Palantir, but rather only that it must satisfy FASA's requirements. The Federal Circuit therefore affirmed the judgment that the army must satisfy the requirements of FASA regarding the preference for commercial items.

Legislative Efforts Supporting Small Businesses

On September 25, 2018, the House of Representatives passed nine bipartisan bills that support small businesses:

  • H.R. 6316—Small Business Advocacy Improvements Act of 2018
  • H.R. 6330—Small Business Runway Extension Act of 2018
  • H.R. 6347—7(a) Real Estate Harmonization Act
  • H.R. 6348—Small Business Access to Capital and Efficiency (ACE) Act
  • H.R. 6367—Incentivizing Fairness in Subcontracting Act
  • H.R. 6368—Encouraging Small Business Innovators Act
  • H.R. 6369—Expanding Contracting Opportunities for Small Businesses Act of 2018
  • H.R. 6382—Clarity on Small Business Participation in Category Management Act of 2018
  • S. 791—Small Business Innovation Protection Act of 2017