The Supreme Court's recent decision in Kingdomware Technologies, Inc. v. United States, 136 S.Ct. 1969 (2016) now requires the Department of Veterans Affairs (VA) to perform a "Rule of Two" analysis and determine if there is a reasonable expectation that two or more veteran-owned small businesses will bid for the contract at a fair and reasonable price that offers best value to the United States on all competitive contracts. This includes orders procured under Federal Supply Schedule (FSS) contracts. The top 3 takeaways government contractors, including both veteran-owned small businesses and large businesses, should consider in the wake of the decision are:
- Confirm your business's registration in the VA's Vendor Information Pages (VIP) database as a veteran-owned or service-disabled veteran owned small business. Now that the Supreme Court has confirmed the VA's obligation to perform a "Rule of Two" analysis and award competitive contracts to veteran-owned small businesses, eligibility will be at a premium. Indeed, the VA has already issued interim guidance requiring that for evaluation purposes under all solicitations, only VA-verified service-disabled veteran owned small businesses (SDVOSBs) and veteran-owned small businesses (VOSBs) registered in the VA's Vendor Information Pages (VIP) database will be considered for award. The VA has also directed contracting officers to review market research that has already been conducted to ensure that they have followed the "Rule of Two" requirement, and they have reviewed the VIP. Contractors, therefore, should be ready for potential changes to existing procurements if contracting officers have reached a new "Rule of Two" determination after following the interim guidance.
- Consider your teaming options immediately. Now that the VA is obligated to prioritize veteran-owned small businesses for all competitive contracts, including orders under FSS contracts, contractors that do not hold veteran-owned small business status face the prospect of being ineligible for award on follow-on contracts. In such cases, the only viable option may be for the incumbent to team with an eligible veteran-owned small business as a subcontractor. Of course, any such arrangement will have to ensure it does not violate the VA's limitations on subcontracting requirements. Per the VA's interim guidance, contracting officers must consider the Limitations on Subcontracting clauses – 852.219-10, VA Notice of Total Service-Disabled Veteran-Owned Small Business Set-Aside or 852.219-11, VA Notice of Total Veteran-Owned Small Business Set-Aside. These clauses require that at least 50 percent of the cost of personnel for contract performance (or generally the cost of manufacturing in supply contracts or, with regard to construction contracts, other percentages) will be spent for employees of the veteran-owned small business (or other eligible veteran-owned small business concerns). In addition, any small business prime contractor will have to ensure that a team with a large business incumbent does not violate the ostensible subcontractor rule. To avoid such a circumstance, the team should ensure the prime contractor is performing the necessary and vital requirements of the contract and the prime contractor is not unusually reliant on the subcontractor. These are the general bases for finding an ostensible subcontractor relationship under the Small Business Administration's Small Business Regulations at 13 C.F.R. 121.103(h)(4).
- Consider the prospects of expanded application of Kingdomware. The Supreme Court in Kingdomware held the VA's obligation to perform a Rule of Two analysis was triggered by the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the VA Act). Soon after the decision was issued, the SBA reported to the Senate Small Business and Entrepreneurship Committee that it is considering the potential impact of the decision on small business goaling and the operation of the Small Business Act, which generally governs the application of small business preferences in procurements throughout the federal government. Though the Supreme Court did not discuss "Rule of Two" obligations under the Small Business Act, the Court's statement that FSS orders are contracts appears to have prompted the SBA to analyze whether, under the Small Business Act, such analysis is necessary for FSS orders competed by all federal agencies. If so, the steps taken by the VA in response to the Kingdomware decision could serve as a preview of changes to come throughout the federal government and trigger potential "Rule of Two" analyses on all federal FSS procurements.
For more information on the impact of the Kingdomware decision on contracting preferences at the VA and other federal agencies, please contact Keir Bancroft, Rebecca Pearson, Paul Debolt, or any of the other attorneys in Venable's Government Contracts Practice Group.