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THE COMPANY YOU KEEP - Part II Updates, Practical Issues & Case Studies for Federal Set-Aside Contracts Presented b

THE COMPANY YOU KEEP - Part II Updates, Practical Issues & Case Studies for Federal Set-Aside Contracts Presented by: Stephen Rae Liberty Mutual Surety. PRESENTER BIOGRAPHY

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THE COMPANY YOU KEEP - Part II Updates, Practical Issues & Case Studies for Federal Set-Aside Contracts Presented b

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  1. THE COMPANY YOU KEEP - Part IIUpdates, Practical Issues & Case Studies for Federal Set-Aside Contracts Presented by: Stephen Rae Liberty Mutual Surety April 3, 2012

  2. PRESENTER BIOGRAPHY Steve Rae is Liberty Mutual Surety’s (LMS) General Counsel, a position he has held since December 2006. As General Counsel, Steve manages LMS’ Legal Department which provides general corporate legal support for LMS including underwriting transactional support. Prior to his role as General Counsel, Steve was Senior Surety Counsel in LMS’ Claims Department for five years. Prior to LMS, Steve was a litigation attorney in private practice for ten years primarily in the areas of construction law, employment law and insurance contract disputes. Steve is the current Chairperson for the Surety & Fidelity Association of America’s (SFAA) Corporate Counsel Committee and serves as LMS’ representative on the SFAA’s Government Affairs Advisory Committee. Steve is a member of the American Bar Association (Fidelity & Surety Law Committee) and the National Bond Claims Association. Steve is also a licensed attorney in the Commonwealth of Pennsylvania, the United States District Court for the Eastern District of Pennsylvania and the United States Court of Appeals for the Third Circuit. Steve is a graduate of Pennsylvania State University with a B.A. in Political Science and a graduate of Villanova University School of Law with a Juris Doctor. 2 April 3, 2012

  3. Presentation Goals & Disclaimer • Designed to provide information about the Federal Set-Aside contract programs and raise awareness of potential risks when large business enterprises work with small business enterprises on these programs. • Presentation is not legal advice or risk management advice for any individual or entity that is involved with or is contemplating becoming involved with these programs. 3 April 3, 2012

  4. Topics for Discussion • Why Understanding Risks in the Federal Set-Aside Arena Is Still Important • Self-Certification Verification • Contractual Relationships • Recognizing Improper Affiliations – Case Studies April 3, 2012

  5. Goals for Allocating Federal Dollars 23% of Prime Contracts For Small Businesses 23% of Prime Contracts For Small Businesses 77% Non-Qualified Prime Contracts 21.7% S.D.B. 35.6% SB Set-Asides 13% S.D.V.O-SB 21.7% W.O.S.B 13%HUBZone-SB April 3, 2012 Source: SBA Website www.sba.gov

  6. Congress Continues to Investigate Fraud and Abuse in the Small Business Set-Aside Arena April 3, 2012

  7. April 3, 2012

  8. What are the Surety Risks? • Direct (to Surety) • Default termination on bonded set aside project • Indirect (to Account) • Debarment • Forfeiture of affirmative claims • Civil/criminal penalties (presumed loss) April 3, 2012

  9. Topics for Discussion Why Understanding Risks in the Federal Set-Aside Arena Is Still Necessary Self-Certification Verification Contractual Relationships Recognizing Improper Affiliations – Case Studies April 3, 2012

  10. II. Self-Certification Verification 8(a) Business Development – Minority Small Business Development (8(a) BD) Historically Underutilized Business Zone Program (HUBZone) Small Disadvantage Business (SDB) Service-Disabled Veteran Owned Small Businesses (SDVOSB) Women-Owned Small Business (WOSB) April 3, 2012

  11. Service Disabled Veteran Owned Small Business (SDVO SB) Basics • At least 51% unconditionally and directly owned by one or more service-disabled veterans • Management and daily operations must be controlled by one or more service-disabled veterans • Contractor self-certification • It is an SDVO SB • It is small under the applicable size standard • Will meet the percentage of work requirements April 3, 2012

  12. SDVOSB Status Verification- www.vetbiz.gov Veterans Administration (VA) requirement to bid VA SDVOSB set aside projects Contractors must be approved by VA and listed in the VetBiz.gov Vendor Information Pages (VIP) database Only applies to VA SDVOSB set aside projects Program does NOT evaluate Teaming Agreements or other similar arrangements April 3, 2012

  13. Women-Owned Small Businesses Economically Disadvantaged Women-Owned Businesses (EDWOSB) • One or more women unconditionally and directly own at least 51% of the business • Management and daily operations controlled by one or more women • EDWOSB • Economically disadvantaged plus limitation on net worth – 750K in assets (excluding ownership of the business and primary residence) • Contractor self-certification or third-party verification April 3, 2012

  14. WOSB Status Verification • SBA permits/authorizes designated third-party vendors to confirm WOSB/EDWOSB status • Only the threshold determination • Four approved Third-Party Certifiers • El Paso Hispanic Chamber of Commerce • National Women Business Owners Corporation • US Women’s Chamber of Commerce • Women’s Business Enterprise National Council (WOSBs only) April 3, 2012

  15. Topics for Discussion • Why Understanding Risks in the Federal Set-Aside Arena IS Still Necessary • Self-Certification Verification • Contractual Relationships • Recognizing Improper Affiliations – Case Studies April 3, 2012

  16. Affiliation Determination • Affiliation Defined • An affiliation exists when an entity controls or has the power to control the other, or a third party or parties controls or has the power to control both • Totality of the circumstances analysis(weighted averaging of several factors) • Particularly fact-intensive and may produce different results on a case-by-case basis April 3, 2012

  17. Factors to Weigh When Making an Affiliation Finding • The SBA affiliation factors include: • Ownership Interest • Management Control • Employee and Family Ties • Contractual Relationships (i.e. Subcontracts, Teaming Agreements, Joint Venture Agreements) April 3, 2012

  18. Subcontracts An affiliation is found under the ostensible subcontractor doctrine when a small business is in essence, performing as a subcontractor to a large business that is nominally a subcontractor on the project The small business general contractor is therefore “unusually reliant” on the large subcontractor April 3, 2012

  19. Subcontracts • The large subcontractor performs “primary and vital” requirements of the contract • Contract management • Control of Project Funds • Technical responsibilities • Large percentage of actual labor • Teaming Agreements • Financial and bonding assistance • Large subcontractor is the incumbent contractor April 3, 2012

  20. Subcontracts An Ostensible Subcontractor affiliation may be found during contract performance A new regulation closed a “bait & switch loophole” SBE must now annually certify that it is performing the primary and vital tasks during contract performance April 3, 2012

  21. Teaming Agreements Defined in the Federal Acquisition Regulations (FAR) as a potential prime contractor agreeing with one or more other companies for them to act as a subcontractor under a Government contract The FAR recognizes teaming arrangements may offer the best combination of performance, cost and delivery The Government will accept the validity of teaming arrangements provided they are fully and timely disclosed April 3, 2012

  22. Teaming Agreements • Teaming Agreements will be reviewed to determine whether it creates an affiliation under the ostensible subcontractor rule • Issues Considered in the Affiliation Review • Delineation of the proposed division of work and compliance with the performance thresholds • The proportion of skills, knowledge and experience brought to the contract by each team partner • Who will manage the day-to-day functions April 3, 2012

  23. Teaming Agreements • Issues Considered in the Affiliation Review (continued) • Whether terminology is used in the agreement that would indicate the parties have entered into an impermissible joint venture (i.e., “we”, the “Team”) • The extent to which the subcontractor was involved in the contract proposal • If, and how, profit is distributed (profit sharing is red flag for an affiliation) April 3, 2012

  24. Joint Venture Agreements • Parties to a Joint Venture are considered affiliated with each other • Three exceptions: • Each entity is “small” and the contract is greater than half the assigned size standard • A Joint Venture of at least one 8(a) participant and one or more other small businesses • A Joint Venture consisting of a mentor and protég April 3, 2012

  25. Joint Venture Agreements • Temporary and Limited Purpose, Not on a Continuing or Permanent Basis • Three Contracts over two-year span (SBA tracks) • The number of contracts is determined at the time of offer • Example - if a JV has had two contracts in two years and then submits three offers, the JV will not violate the rule even if it receives all three contracts for a total of 5 contracts • Permissible to Create More Than One Joint Venture • The same two (or more) entries may create additional joint ventures, and each new JV may be awarded three contracts • A long-standing inter-relationship between the same JV partners increases the chances of an affiliation finding April 3, 2012

  26. 8(a) Joint Ventures • An 8(a) may partner with one or more other small businesses to perform an 8(a) contract • JV Agreement must be approved by the SBA before contract award • An 8(a) / SBC Joint Venture is permissible only: • When the 8(a) participant lacks the capacity to perform the contract on its own • The agreement is fair and equitable • The 8(a) participant will substantially benefit from the Joint Venture April 3, 2012

  27. 8(a) Joint Ventures • The JV Agreement must state: • The purpose of the Joint Venture • The 8(a) is the managing partner • The project manager is an employee of the 8(a) • The 8(a) must own at least 51% of the JV if it is a separate legal entity • 8(a) must receive proportionate share of profits • Performance responsibilities • The equipment, facilities and resources contributed by each partner April 3, 2012

  28. 8(a) Joint Ventures • New Performance of the Work Requirements as of February 2011 • The prior regulation required an 8(a) to perform “a significant portion of the contract” • Current regulations require the 8(a) to perform 40% of the work performed by the JV: • The 8(a) must do more than administrative functions • Unpopulated Joint Venturers - when both the 8(a) and non-8(a) partners are technically subcontractors, the amount of work performed by the partners will be aggregated and the work by the 8(a) must be at least 40% of the work done by all partners • Populated Joint Venturers - the non-8(a) JV partner, or any affiliates, may not be a subcontractor to the JV, unless approved by the SBA April 3, 2012

  29. 8(a) Joint Ventures • New Annual Reporting Requirement • The 8(a) partner must report annually to the SBA how the performance of the work threshold is being met for each contract April 3, 2012

  30. 8(a) Mentor/Protégé • A Feature of the 8(a) Program • Purpose • Enhance the capabilities of the protégé and improve its ability to compete • No affiliation due to the mentor / protégé agreement or assistance provided • Must enter into written agreement subject to SBA review • Relationship will be annually reviewed by the SBA April 3, 2012

  31. 8(a) Mentor/Protégé • Mentors • Can be a non-profit or an 8(a) BD graduate • Generally only one protégé at a time, need SBA approval & never more than three • Demonstrate favorable financial health • Protégés • Developmental stage OR never received 8(a) contract OR ½ applicable NAICS code (not during last 6 mos.) • Generally one mentor at a time (different NAICS code) • Approved written agreement, one point of contact, support for at least one year & significant consequences April 3, 2012

  32. 8(a) Mentor/Protégé • New annual reporting requirements • Protégé must report to the SBA on the mentor’s assistance each program year • Annual certification whether any changes to the agreement • New consequences of the mentor not providing the stated plan of assistance • Termination of the mentor / protégé relationship • Firm will be ineligible to mentor for two years • SBA may recommend the procuring agency issue stop work order for each mentor / protégé JV contract • SBA may consider failure to be a basis for debarment April 3, 2012

  33. Contractual Relationships Other Consequences • Will the rights and obligations of the “small business” entity be enforceable if the entity was actually ineligible for the set-aside contract? • Recent decision held that an affiliated large subcontractor could not enforce provisions of its agreement with a small business who obtained a set-aside contract in violation of the SBA RegulationsMorris-Griffin Corp. v. C&L Serv. Corp., 731 F.Supp. 2d 488 (E.D. Va. 2010) order vacated (Dec. 7, 2011). • Potential implications for sureties April 3, 2012

  34. Weighing the Risks Has there been a SBA certification approval? Has the small business entity provided the Government with documentation defining its relationship with the larger entity? Is the relationship between the small business entity and the larger entity an approved relationship, i.e. Mentor/Protégé? April 3, 2012

  35. Topics for Discussion Why Understanding Risks in the Federal Set-Aside Arena Is Still Necessary Self-Certification Verification Contractual Relationships Recognizing Improper Affiliations – Case Studies April 3, 2012

  36. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 1 • U.S. Air Force contract for mission hardware and software training, support and logistics management. • The contract was set aside for SDVO SBC’s. • Company A, the low bidder, was a subcontractor on the predecessor contract. • Company A is a SDVO SBC. • Company B, a large business, is the incumbent prime contractor for the predecessor contract. April 3, 2012

  37. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 1 • Company A submits a proposal, self-certifying as an SDVO SBC, identifying itself as the prime contractor, and Company B, the large contractor, as a subcontractor and teaming partner. • Company A’s proposal refers to A and B as a “team” that offers a low-risk option because Company B’s knowledge and personnel retention will offer a seamless transition. • The logos of both companies appear on almost every page of the proposal. April 3, 2012

  38. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 1 • Company A will adopt techniques and approaches developed by Company B during the predecessor contract. • Company A plans to retain Company B’s incumbent workforce, its facility lease, and Government furnished equipment. • The Teaming Agreement provides that Company B must consent to Company A soliciting employees. • Company A’s program manager will be primarily responsible for managing the contract. • Company A will not receive financial assistance from Company B. • Company B has the option to terminate the Teaming Agreement to bid for the contract if the set-aside requirement is removed April 3, 2012

  39. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 1 • Holding • Company A is not affiliated with Company B • Company A will be performing primary and vital contract requirements and will be primarily responsible for managing the work. • Although Company A is adopting certain techniques and approaches from Company B, Company A was already acquainted with them from being the incumbent subcontractor. • Company A is not usually reliant on Company B for its workforce because Company A will be independently retaining and managing the employees.Spiral Solutions & Tech., Inc., SBA No. 5279 (Sept. 15, 2011). April 3, 2012

  40. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 2 • U.S. Air Force contract offered in May 2011 to perform construction, maintenance and repair projects at Hill Air Force Base, Utah. • The contract is set-aside for participants in the 8(a) BD program. • Company A submits a proposal self-certifying as an eligible 8(a) contractor. • Company A and Company B had an SBA-approved mentor-protégé agreement. • The mentor-protégé agreement was terminated by mutual request in same month as the solicitation. April 3, 2012

  41. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 2 • The SBA approved 11 joint ventures of companies A and B between 2008 and 2010, but only 1 contract was awarded. • Company B awarded 21 subcontracts to company A since 2004. • Company A awarded 6 subcontracts to Company B since 2004. • Company B provided bond indemnification on 13 Company A contracts. April 3, 2012

  42. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 2 • Company A’s sole owner is the wife of a former officer and employee of Company B. • The husband of Company A’s sole owner is now also currently employed by Company A April 3, 2012

  43. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 2 • Holding • Company A is not affiliated with Company B. • Company B provided assistance, including bonding, within the scope of the parties’ mentor-protégé agreement. • By regulation, any connection more than three years prior to the proposal cannot be considered. • In addition, Company A and Company B are not affiliated under the Identify of Interest Rule because the husband never held a controlling interest in Company B. • Lastly, the Newly Organized Concern Rule does not apply because the wife never was an officer (or employee) of Company B.Rio Vista Mgmt, LLC., SBA No. 5316 (Jan. 11, 2012) April 3, 2012

  44. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 3 • Solicitation issued by the Department of the Army for a contractor to perform public works services at Fort Hood, Texas. • The contract was set-aside for SDVO SBC’s. • Company A and Company B formed a joint venture to bid on the project. • Company A is a SDVO SBC, Company B is not. • The Joint Venture Agreement indicates that Company A and Company B will each appoint one managing director and the two will make all decisions by mutual agreement. April 3, 2012

  45. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 3 • The JV Agreement provides for an employee of Company A to serve as project manager, but did not state the name of that employee. • The JV Agreement also indicates that Company A will share 51% of the net operating income and net operating losses of the joint venture. • Lastly, the JV Agreement contains a statement that the parties will comply with the SBA Regulations, rather than delineating each party’s responsibilities. April 3, 2012

  46. IV. Recognizing Improper AffiliationsRecent Case Studies • Case 3 • Holding • The bidding Joint venture is ineligible for the project because the JV Agreement did not meet the requirements of the SBA Regulations in the following ways: • Company A is not designated as the managing venturer, and in fact, splits the decision-making between the venturers; • A specific project manager for Company A was not named; • While the JV Agreement addressed net operating income losses, it did not establish Company A would receive 51% of net profits, as required; • The agreement did not specifically define the responsibilities of each venture partner.Hana-JV, SBA No. VET-227 (February 22, 2012). April 3, 2012

  47. THE COMPANY YOU KEEP - Part IIUpdates, Practical Issues & Case Studies for Federal Set-Aside Contracts YOUR QUESTIONS? If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenter directly: Stephen Rae Liberty Mutual Surety Stephen.Rae@LibertyMutual.com 610.832.8254 47 April 3, 2012

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