Small Business Legal and Regulatory Update : Changes Affecting Both Large and Small Contractors

1. Small Business Legal and Regulatory Update:  ChangesAffectingBothLargeandSmallContractors February 14, 2013 NCMA Raleigh/Durham

2. Legislative Action • New laws (NDAA, SBJA) • House Small Business Committee initiatives • Executive Action • New regulations interpreting statutes • Bid/Size Protests (interpreting regulations and statutes) • Judicial Action • Court of Federal Claims cases Small Business Updates

3. The Small Business Jobs Act of 2010 directed rulemaking authorities to update FAR provisions which affect small business programs, but most updates have yet to be made final in the FAR.

4. The 2013 NDAA amended the Small Business Act, which is 1953 legislation that created the Small Business Administration. Where regulatory updates are authorized, they have yet to be implemented.

5. Jobs Act of 2010 authorized Interim Final Rule published by FAR Council on November 2, 2011 (effective that date), 76 FR 68032 • FAR Subpart 8.4 amended to clarify that agencies may set aside orders and blanket purchase agreements under the GSA Schedule • FAR Subpart 12.2 now acknowledges that discretionary set-asides may be used under multiple-award contracts • FAR Subpart 16.5 and 19.5 amended to clarify that agencies may set-aside orders for small businesses in connection with multiple-award contracts (and orders thereunder) Multiple-Award Contract Set-Asides

6. Proposed Rule published on May 16, 2012 (77 FR 29130). • Anticipated to be final by mid/late-2013 Reason: Small businesses expend time and money to obtain (MACs) with the Federal Government but end up being out-competed for awards by large businesses. • Rules authorize: • More Set-Asides under Multiple Award Contracts (MACs) • Partial Set-Asides under MACs • Contract Reserves under MACs • Order Set-Asides under MACs • Rules require documentation when one of the above tools are used Task and Delivery Order Contracts

7. Agencies may set-aside parts of MACs for small businesses; • Where the MAC procurement can be broken up into smaller discrete parts and where the set-aside part is expected to receive at least two bids from small businesses at fair market price. • Agencies may reserve one or more MAC awards for small businesses; and • As long as market research shows that at least two small businesses could perform that portion. Task and Delivery Order Contracts

8. Agencies may set-aside orders under MACs or include a reserve for small businesses. • Where neither partial set-asides nor reserves are used, agencies can still “commit” to setting aside orders under a MAC in the future. Task and Delivery Order Contracts

9. SBJA Section 1311 – Consolidation (proposed rule May 16, 2012, no scheduled Final Rule) • “Consolidation” = a solicitation that seeks offer for two or more requirements that had been performed previously under two or more contracts at a cost less than the cost of the contract for which offers are solicited • Agencies cannot consolidate contracts for a contract valued at greater than $2 million without market research, justification and assurances that small businesses will included • NDAA 2013 eliminated $5 million, DoD-specific review threshold an imposed government-wide $2 million review threshold. Bundling and Consolidation

10. SBJA Section 1312 – Bundling (Final rule effective Nov. 28, 2011) • “Bundling” is consolidation of two or more requirements previously performed by small businesses • SBA must establish a Government-wide policy • on bundling • Agencies must create a website and publish a list and rationale for bundled contracts Bundling and Consolidation (Cont’d)

11. Proposed Rule published on Oct. 7, 2011, 76 FR 62313 (will be final March 2013) • Implements “presumption of loss” rule  if a business misrepresents size, government will have an irrefutable presumed loss of the value of the contract (fixes an otherwise nebulous damage calculation) • Government would recover under False Claims Act • NDAA: SDO can now debar/suspend for misrepresentations regardless of present responsibility Small Business Size and Status Integrity

12. Proposed Rule also implements “limitation of liability” provision  contractors can’t be held liable for unknowing misrepresentations or technical errors • NDAA FY 2013 further limits liability where contractor relied in good faith on an “advisory opinion” from the Small Business Development Center” or a “Procurement Technical Assistance Center” • SBDC/PTAC must send letter to SBA, but letter can be relied upon unless SBA affirmatively disagrees • Senate balked at “legal opinion” safe-harbor, but it’s likely that SBDCs/PTACs will be rubber stamping legal opinions. Small Business Size and Status Integrity (Cont’d)

13. SB Jobs Act authorized a Proposed Rule, published on Oct. 5, 2011, 76 FR 61626 (will be final March 2013) • No more “bait and switch”  If SubK plan required, prime must use the small business that assisted in preparing its offer, and notify the contracting officer (CO) in writing if/why it fails to do so. • Prime must notify CO if and why it reduces payments to a small business subcontractor or when payments are 90 days past due • Prime cannot prohibit a subcontractor from discussing any “material matter” with the CO Small Business Subcontracting

14. NDAA 2013: • If prime identifies a small business in its bid/proposal, it must notify the small business • Agencies now required to establish a “reporting mechanism” by which subcontractors can report “fraudulent” or “bad faith” actions by primes in implementing their SubK plans • Goes hand-in-hand with proposed rule prohibiting primes from keeping subs from contacting the government. Small Business Subcontracting (Cont’d)

15. Enforcement: Prime’s failure to meeting SubK goals (from its SubK plan) may be considered as negative past performance Small Business Subcontracting (Cont’d)

16. Proposed Rule published on Dec. 19, 2012, 77 FR 75089 (comments due Feb . 19, 2013) • Creates FAR Clause mandating that primes who are paid on an accelerated basis must then pay small business subcontractors on an accelerated basis, even where subcontract imposes a later payment due date. • This Clause implements OMB policy memorandum from July 2012, which encouraged paying primes within 15 days of paperwork Accelerated Payments To Small Business Subcontractors

17. Proposed Rule published on Aug. 10, 2012, 77 FR 47797 (comments were due Oct. 12, 2012) • Clarifies for COs that R&D contracts shall set-aside for small businesses if there is a reasonable expectation that there are two or more businesses capable of “providing the best scientific and technological approaches” at fair market prices • This authority existed previously, but was vague. This rule would make clear that the basis for setting-aside lies in the objective evidence obtained from the market research conducted Small Business Set-Asides for Research and Development

18. 2010 Jobs Act authorized mentor-protégé programs for SDVOSB, WOSB, and HUBZone(No proposed regulations yet) • NDAA 2013 authorized mentor-protégé programs for all small businesses (not just socioeconomic classes) • Agencies other than SBA (except for DoD) that wish to have a program must have approval of SBA  to ensure consistency among programs • Some agencies were wrongly telling their program participants that they were exempt from SBA’s affiliation rules (but only SBA-approved JVs wereexempt) Small Business Mentor-Protégé Programs

19. NDAA 2013, Section 1651, changes accounting methods: • Service contracts  Compliance now measured by “>50% of amount paid to the small prime contractor” under the contract • Replaces “>50% of the cost of contractor performance incurred for personnel” • Supply contracts  Compliance now measured by “>50% of the amount (less the cost of materials) paid to the small prime” • Replaces “>50% of the cost of manufacturing” Limitation on Subcontracting Clause

20. NDAA extended exemptions to small businesses who subcontract to “similarly situated” entities • Before this change, small businesses were actually discouraged from subcontracting to other small businesses! • Section 1652 of the NDAA set a penalty for violation of the clause  the greater of $500,000 or the dollar amount expended, in excess of permitted levels, on subcontractors • Before this change, there wereno express penalties for violations of the clause (could only protest violator’s proposal as “nonresponsive” to Clause’s requirements) Limitation on Subcontracting Clause (Cont’d)

21. Section 1661 of the NDAA FY 2013 • SBA must publish information it used to formulate/revise size standards • SBA allowed to use a “common size standard” for a group of 4-digit NAICS codes, but only if SBA publishes a justification for how that standard is appropriate for each individual industry classification • Section 1697 of the NDAA FY 2013 • Removes caps on setting-aside procurements for WOSBs/EDWOSBs (formerly $6.5 million for manufacturing; $4 million for other contracts) Size Standards and Set-Asides for WOSB

22. Essentially three (3) types of protests: • (1) Pre-award • Challenges the terms of the solicitation (must be filed before bids are due) • Venue: Agency, GAO, or COFC • (2) Post-award • Challenges evaluations and government’s choice of awardee • Venue: Agency, GAO, or COFC • (3) Size-protest • Asserts that a competitor has violated the Small Business Regulations (13 CFR) • Venue: SBA only Protest Overview

23. DynalanticCorp. v. U.S. Department of Defense (D.D.C., August 15, 2012). • Not a protest • U.S. District Court for the District of Columbia ruled that the government’s 8(a) program — which offers preferences for “socially and economically disadvantaged individuals” — is unconstitutional when used by the Department of Defense  (DoD) to procure simulation and training equipment. U.S. District Court: The 8(a) Program is Unconstitutional?

24. Consequences: • More federal court challenges in other markets • More protests (if COFC/GAO accept reasoning) • Preemptive cancellation of set-asides • Unknowns: • Definition of industry and sufficiency of evidence of past discrimination • Possibly overturned on appeal U.S. District Court: The 8(a) Program is Unconstitutional? (Cont’d)

25. Firstline Transportation Security, Inc. v. United States, COFC No. 12-601C (Nov. 27, 2012) • Pre-award protest • Court of Claims upheld practice of agencies setting high small business subcontracting goals in a solicitation. • Court said that the high goals (40% in this case) need not be tied to robust market research. • Court also upheld practice of applying small business subcontracting goals to all contract dollars, not just subcontracting dollars. COFC: Agencies Can Impose High Small Business Subcontracting Goals

26. Holding gives agencies looking to boost small business utilization another arrow in their quiver. • Agency could procure full and open, but impose high subcontracting goals in the solicitation that require large businesses to do their best in meeting those goals or risk being eliminated from competition. • Indirect method to “de facto set-aside” for small business participation. COFC: Agencies Can Impose High Small Business Subcontracting Goals (Cont’d)

27. Holding gives agencies looking to boost small business utilization another arrow in their quiver. • Agency could procure full and open, but impose high subcontracting goals in the solicitation that require large businesses to do their best in meeting those goals or risk being eliminated from competition. • Indirect method to “de facto set-aside” for small business participation. COFC: Agencies Can Impose High Small Business Subcontracting Goals (Cont’d)

28. Kingdomware Technologies, Inc. v. United States (COFC, Nov. 27, 2012). • COFC overruled GAO’s Aldevracases, siding with the VA in interpreting the Veteran’s First Program to exempt FSS purchases from mandatory set-asides. • Veterans First Program requires VA to consider setting aside to SD/VOSBs before exploring other procurement possibilities, but the Act does not address the FAR Part 8 (FSS) exemption to FAR Part 19. • Where the FAR is silent, agency interpretation prevails. Aldevrais Over: COFC Finally Says VA Not Required to Set-Aside FSS Purchases

29. Size Appeal of Wear-Mark, Inc., SBA No. SIZ-5397, 5403 (Sept. 2012) • Nonmanufacturer rule = SBA rule preventing small business prime resellers from being “pass-throughs” for large manufacturers • SBA OHA upheld reseller’s status as a nonmanufacturer retailer of flags where reseller took ownership of flags in a “drop shipping arrangement” but did not take physical possession Resellers Don’t Violate SBA’s Nonmanufacturer Rule

30. Despite backlog of regulatory updates, House Small Business Committee intends to be prolific • SBA increasingly opposed to “bundling”, but many political hurdles. • Federal Strategic Sourcing Initiatives (BPAs) growing in popularity, but many officials within SBA are angered by this • GSA’s “Demand Based Model” poses threat to small business utilization, but SBA/House Small Business Committee appears to have succeeded in convincing GSA to delay/cancel implementation Predictions for FY 2013

31. Stephen (Steve) P. Ramaley, Esq. • Attorney, Centre Law Group • 1953 Gallows Rd., Ste. 650 • Tysons Corner, VA 22182 • Phone: (703) 288-2800 (x232) • E-mail: sramaley@centrelawgroup.com Questions?