On December 17, 2019, the Senate passed the National Defense Authorization Act (NDAA) for Fiscal Year 2020, sending it to the White House for the President’s signature. As with prior NDAAs, the 2020 NDAA includes a number of provisions that affect procurement policy, management, and related matters. Below, we summarize some of the more notable provisions that will impact government contractors.
Section 823 – Modification of Justification and Approval Requirement for Certain Department of Defense Contracts
Section 823 of the 2020 NDAA increases the threshold for justification and approval for 8(a) Program sole-source awards. While the 2010 NDAA required justification and approval for 8(a) Program sole-source awards valued at or above $20 million (later increased to $22 million), Section 823 of the 2020 NDAA increases this threshold to $100 million. This change will benefit entity-owned 8(a) Program participants because, under the Federal Acquisition Regulation (FAR) and Small Business Administration’s (SBA) regulations, those are the only participants eligible for sole-source awards above the competitive thresholds ($7 million for manufacturing contracts and $4 million for all other contracts).
Section 872 – Reauthorization and Improvement of Department of Defense Mentor-Protégé Program
Section 872 of the 2020 NDAA makes many notable changes to the Department of Defense’s (DoD) Mentor-Protégé Program. Besides permanently authorizing the program, Section 872 requires DoD’s Office of Small Business Programs to establish performance goals and periodic reviews to be submitted to the congressional defense committees by February 1, 2020. This serves to improve outcomes, define expectations, and set measurable goals for the DoD Mentor-Protégé Program going forward.
Notably, Section 872 changes the definition of a “disadvantaged small business concern” to align with how small businesses are defined in other programs. To be considered small, the original definition required a business to have “less than half the size standard corresponding to its primary North American Industry Classification System code.” The new definition states that a disadvantaged small business concern must not exceed the size standard corresponding to its primary NAICS code.
Section 874 – Post-Award Explanations for Unsuccessful Offerors for Certain Contracts
Section 874 requires the FAR to be revised within 180 days to require that contracting officers provide a brief explanation of award, upon written request from an unsuccessful offeror, for task order or delivery order awards in an amount greater than the simplified acquisition threshold and less than or equal to $5.5 million issued under an indefinite delivery-indefinite quantity contract. Currently, offerors are only entitled to a debriefing after award of an order exceeding $5.5 million.
If you would like to know more about the 2020 NDAA and its impact on acquisition policy and management, please contact a member of PilieroMazza’s Government Contracts Group.
Megan Connor, the author of this Client Alert, is a Partner in the Firm’s Government Contracts and Small Business Programs & Advisory Services practice groups.
Effective January 6, 2020, SBA will change the period of measurement for receipts-based size calculations from three years to five years. This change is the result of the Small Business Runway Extension Act of 2018 and SBA’s final rulemaking on December 5, 2019. This is a long-awaited change and will have far-reaching impacts for government contractors.
Importantly, SBA is adopting a two-year transition period, until January 6, 2022, during which firms may choose to use either the current three-year calculation or the new five-year calculation. After January 6, 2022, all companies must use the five-year period of measurement in determining their size under a receipts-based calculation. PilieroMazza strongly advocated for a transition period before Congress and in its comments to SBA’s rulemaking.
This shift from using a three-year period to a five-year period for the average annual receipts calculation will affect all of SBA’s receipts-based size standards, though the change in calculation will not yet apply to the SBA Business Loan and Disaster Loan Programs, which will be handled in a separate rulemaking. SBA did not address in its rulemaking how SBA would view contractors that have been using the five-year period of measurement since the Runway Extension Act became law nearly a year ago.
If you would like to know more about these changes and their potential impact on your company, please contact a member of PilieroMazza’s Government Contracts Group.
The co-authors of this Client Alert, Firm Partner Megan Connor and Associate Anna Wright, are members of PilieroMazza’s Government Contracts and Small Business Programs & Advisory Services practice groups.
On November 29, 2019, the U.S. Small Business Administration (“SBA”) issued a final rule (“Rule”) that will implement several provisions of the National Defense Authorization Acts (“NDAA”) of 2016 and 2017 and the Recovery Improvements for Small Entities After Disaster Act of 2015 (“RISE Act”), as well as other clarifying amendments. As we outlined nearly a year ago when the Rule was first proposed, these changes address key small business issues for government contractors, including: subcontracting plans, the non-manufacturer rule (“NMR”), Information Technology Value Added Reseller (“ITVAR”) procurements, limitations on subcontracting (“LOS”), recertification, size determinations, and the ostensible subcontractor rule. Below, we summarize fundamental revisions, which take effect on December 30, 2019.
Consistent with the 2017 NDAA, the Rule provides that it will be a material breach of contract when a contractor or subcontractor fails to comply in good faith with its subcontracting plan requirements, including failing to provide reports and/or cooperate in studies or surveys to determine the extent of compliance. The Rule provides a number of examples of what constitutes a failure to make “good faith” efforts, including, among others, (1) failing to timely submit subcontracting reports and (2) failing to pay small business subcontractors in accordance with the terms of the contract. According to SBA, the examples set forth in the Rule are not intended to be inclusive and factors beyond those identified in the Rule may be considered in determining whether good faith efforts were made. The Rule also provides that failure to make a good-faith effort may be considered in any past performance evaluation of the contractor.
With respect to subcontracting plans, the Rule also requires other than small prime contractors with commercial subcontracting plans to include indirect costs in their subcontracting goals.
Small Business Contracting in Disaster Areas
As provided in the RISE Act, SBA is establishing contracting preferences for small business concerns (“SBC”) located in disaster areas and will provide agencies with double credit for awards to such concerns. SBA will use the existing Federal Acquisition Regulation definitions to provide that an agency will receive credit for an “emergency response contract” awarded to a “local firm” that qualifies as an SBC under the applicable size standard for a “major disaster or emergency area.” According to the Rule, a concern is “located in a disaster area,” if, during the last twelve months, it had its main operating office in the area and that office generated at least half of the firm’s gross revenues and employed at least half of the firm’s permanent employees. The Rule provides a number of factors that SBA will consider if the firm does not meet the foregoing criteria in order to determine whether the firm resides or primarily does business in a disaster area.
NMR Size Standard Does Not Apply to ITVAR Procurements
The Rule amends the NMR to expressly state that a firm may qualify as an SBC to provide manufactured products or other supply items as a nonmanufacturer if, among other things, it does not exceed 500 employees “(or 150 employees for the Information Technology Value Added Reseller exception to NAICS Code 541519, which is found at § 121.201, footnote 18)”. According to SBA, because contractors under the ITVAR exception are non-manufacturers, it would make no sense for SBA to retain a 150-employee size standard if concerns could also qualify under the NMR 500-employee size standard.
Allowing a Set-Aside Within a Set-Aside
The Rule provides contracting officers the authority to set aside orders for a socio-economic small business program (e.g., 8(a), HUBZone, SDVO, WOSB) under a multiple award contract (“MAC”) awarded as a generic small business set-aside. This is significant because although SBA has considered implementing such a rule in the past, it has chosen not to, in part because it was concerned that such a rule would unfairly deprive SBCs of an opportunity to compete for orders issued under their MACs. Comments regarding this change were split, with those in opposition claiming that such a rule:
- is unfair to the original small business awardee of the MAC;
- will reduce competition for future task orders; and
- will discourage SBCs from bidding on MACs in the future.
SBA believes these concerns are eased because the rule will only apply proactively and will not affect already awarded MACs (unless socio-economic set-asides were contemplated thereunder). More specifically, according to SBA, going forward, small businesses will know at the time of offer what kind of set-asides, if any, are available at the time of award and on future orders. Notably, however, the text of the Rule does not require a procuring agency to inform offerors whether it plans to make socio-economic set-asides down the road. Thus, it is unclear how this rule addresses the concerns raised by the opposition.
SBA is clarifying that recertification is required on full-and-open contracts when such contracts are awarded to SBCs. In addition, the Rule adds language to SBA’s 8(a) regulations to require recertification under 8(a) contracts. Similar language can be found in SBA’s SDVOSB, HUBZone, and WOSB/EDWOSB regulations, but had been missing from its 8(a) regulations.
Moreover, the Rule provides that, if a prime contractor relies on a similarly situated subcontractor to meet the applicable performance requirements—and the similarly situated subcontractor has to recertify—the prime cannot count the subcontractor towards its performance requirements if the subcontractor recertifies as an entity other than that for which it previously certified. Interestingly, however, the Rule does not impose recertification requirements on the subcontractor, as the duty to recertify generally applies to prime contractors only. As such, it is unclear how this requirement will be administered.
This rule was adopted as proposed despite the fact that 25 of the 32 comments received opposed the change and noted that the “requirement would be overly burdensome and would add ‘complexities to an already difficult compliance system.’”
Limitations on Subcontracting
The Rule implements a number of revisions pertaining to LOS compliance. First, in response to public comment regarding a proposed revision that sought to clarify when an independent contractor can be counted as an employee for size and LOS purposes (a rule which commentators thought was confusing and unnecessarily difficult to comply with), SBA revised its LOS regulation to clarify that contractors should simply apply the analysis in 13 C.F.R. §121.106(a) (i.e., SBA’s rule regarding how it calculates a concern’s number of employees) to determine whether independent contractors are employees or subcontractors. And, in situations where the independent contractor is a subcontractor—its work will count toward meeting the applicable LOS if it is a similarly situated entity. In other words, if the individual at issue is not an employee for size purposes, work performed by that individual must be considered a subcontract for LOS purposes.
Second, SBA is adding language to the LOS regulation to clarify that contracting officers may request information from contractors regarding LOS compliance and that evidence of compliance includes, but is not limited to, invoices, copies of subcontracts, or a list of the value of tasks performed.
Lastly, in a welcome development, SBA is creating several exclusions from calculating LOS compliance where there are no small business providers, such as airline travel, cloud computing services, mass media purchases, or work performed by a transportation or disposal entity for a contract assigned under the environmental remediation NAICS code 562910. According to SBA, this list is not meant to be exhaustive. It allows a small business in another industry in a similar situation to the four delineated categories above to also demonstrate that certain direct costs should be excluded because they are not the principal purpose of the acquisition, and small business concerns do not provide the service.
SBA is amending its regulations to allow an unsuccessful offeror, SBA, or a contracting officer to file a size or status protest regarding a socio-economic set-aside or sole-source award to a prime contractor that is unduly reliant on a small, but not similarly situated subcontractor or where the small, non-similarly situated subcontractor is performing the primary and vital requirements of the contract (commonly referred to as ostensible subcontractor affiliation). This is significant, as SBA’s regulations have never provided such bases to protest. And, the allowance for a status protest is particularly significant. Indeed, it is possible that even if a prime contractor and its small (but not similarly situated) subcontractor are affiliated under the ostensible subcontractor rule as the result of a size protest, the prime contractor may still qualify as a small business and, therefore, remain eligible for the award. Thus, by providing for an ostensible subcontractor status protest in such a scenario, SBA has created a basis for such awardees to be deemed ineligible for award. Of further note, the Rule specifies that SBA will not find that a prime contractor is unduly reliant on one or more non-similarly situated subcontractors where the prime contractor can demonstrate that it, together with any similarly situated entity, will meet the LOS.
Finally, in response to a public comment recommending a comparable change with respect to SBA’s rules regarding protests of SDVO eligibility for contracts awarded by the Department of Veterans Affairs (“VA”), SBA is adding a rule that authorizes a protest challenging whether a prime contractor is unusually reliant on a subcontractor that is not Center for Verification and Evaluation (“CVE”) verified, or a protest alleging that such subcontractor is performing the primary and vital requirements of a VA procurement contract.
SBA is also removing the kit assembler exception to the NMR. Instead, SBA will apply the multiple-item rule to kit assembler acquisitions. Under this rule, if the majority of the items in a kit are made by a small business, no waiver of the NMR is required. However, if the majority of the items are not made by a small business, a waiver of the NMR must be obtained.
SBA is also amending 13 C.F.R. § 121.404(a) to make it clear that size is generally determined at the time of initial offer or response including price—and not when other formal responses are received after the initial offer, such as final proposal revisions. Furthermore, SBA is adding a paragraph to the foregoing regulation to articulate an exception to this general rule. Namely, when an agency awards a MAC that does not require offers for the contract to include price, size will be determined on the date of initial offer for the contract, which may not include price.
The Rule addresses a few other topics such as posting notice of substantial bundling, subcontracting compliance reviews, procurement center representative reviews, and set-asides where one offer is received.
If you would like to know more about the Rule and its potential impact on your company, please contact a member of PilieroMazza’s Government Contracts Group.
Samuel Finnerty, the author of this Client Alert, is a member of the Firm’s Government Contracts, Small Business Programs & Advisory Services, and Government Contracts Claims and Appeals practice groups.
 SDVOSB = Service-Disabled Veteran-Owned Small Business; HUBZone = Historically Underutilized Business Zones; WOSB = Woman Owned Small Business; EDWOSB = Economically Disadvantaged Women-Owned Small Business.
Effective December 26, 2019, the Small Business Administration (SBA) will implement final rules overhauling regulations for the Historically Underutilized Business Zone Program (HUBZone Program). The new rules will (1) offer HUBZone firms reduced regulatory burdens, (2) help government agencies by eliminating ambiguities in the regulations, and (3) make it easier for HUBZone firms to understand and comply with Program requirements. Below is a practical guide on how the final rules will impact the business goals of government contractors in the HUBZone Program. For an in-depth look at the changes to SBA’s HUBZone Program, please join PilieroMazza on December 10, 2019, for a webinar on this important topic. Visit this link to register.
Key changes to the HUBZone Program include:
- An individual will continue to be treated as a HUBZone resident if that individual worked for the firm and resided in a HUBZone at the time the concern was certified or recertified as a HUBZone—even if the area where the individual lives no longer qualifies as a HUBZone or the individual has moved to a non-HUBZone area.
- HUBZone firms will only be required to certify on an annual basis, meaning such concerns will no longer be required to expressly qualify as a HUBZone at the time of each offer for a HUBZone contract and award.
- For compliance purposes, HUBZone firms must maintain at least 20% HUBZone residents as employees when performing on HUBZone contracts, or SBA will propose the firm for decertification. HUBZone firms have an affirmative duty to notify SBA if they fall below the 20% attempt to maintain the standard.
- When a company buys an office located in a HUBZone or enters into a long-term, 10-year lease for such office space, intending the space to be its principal office, the concern will be able to meet the principal office HUBZone criterion for a period of at least 10 years—even if at some point after the property is purchased or leased, the office location no longer qualifies as a HUBZone. The idea behind this rule is that the HUBZone program should incentivize and reward companies that invest in HUBZones.
Start preparing before the new rules take effect at the end of the month by registering here for PilieroMazza’s December 10, 2019 webinar “Changes to SBA's HUBZone Program Are Here: Their Impact on Your Business Goals”.
On November 12-13, 2019, the U.S. Small Business Administration (SBA) hosted its 5th Annual Mentor Protégé Conference where SBA’s John Klein, Associate General Counsel for Procurement Law, answered questions from the audience regarding various mentor-protégé issues. Mr. Klein provided some key insights regarding recent and upcoming SBA rulemakings that will have a significant impact on small business government contractors. We outline some of these updates below, and will also host a breakfast seminar on November 18, 2019 where Mr. Klein and Pamela Mazza will offer an in-depth discussion on these and other changes (please visit this link for more information).
- On November 13, 2019,SBA sent a final rule to the Federal Register for publication that will implement comprehensive revisions to the regulations governing the Historically Underutilized Business Zone (HUBZone) Program. These revisions, as proposed in October 2018, are available here. A couple of the key changes are: (1) an individual will continue to be treated as a HUBZone resident if that individual worked for the firm and resided in a HUBZone at the time the concern was certified or recertified as a HUBZone—even if the area where the individual lives no longer qualifies as a HUBZone or the individual has moved to a non-HUBZone area; (2) HUBZone firms will only be required to certify on an annual basis, meaning such concerns will no longer be required to expressly qualify as a HUBZone at the time of each offer for a HUBZone contract and award.
- In addition to the revisions proposed in October 2018, the final HUBZone rule will also implement a significant change to the regulations that was proposed during public comment. Specifically, the final rule will indicate that when a company buys an office located in a HUBZone or enters into a long-term, 10-year lease for such office space, intending the space to be its principal office, the concern will be able to meet the principal office HUBZone criterion for a period of at least 10 years—even if at some point after the property is purchased or leased, the office location no longer qualifies as a HUBZone. The idea behind this rule is that the HUBZone program should incentivize and reward companies that invest in HUBZones.
- Mr. Klein also noted that SBA’s proposed rule, issued on June 24, 2019, implementing the Small Business Runway Extension Act (Act) is being finalized and will be published in the Federal Register in the next couple of weeks. The Act has been the subject of much concern because although Congress intended the Act to change the relevant time period SBA uses to calculate average annual receipts for size purposes from 3 to 5 years, SBA has taken the position that the Act had no such effect because Congress inadvertently amended the wrong section of the Small Business Act. Nevertheless, to promote consistency, SBA’s soon to be finalized rule (which is available in its proposed form here) will change SBA’s size standards to provide for a 5-year averaging period for calculating annual average receipts for all receipts-based size standards. Notably, the final rule will include a 2-year “phase in” period, an item PilieroMazza attorneys advocated for during the public comment period. This “phase in” will allow contractors, for a period of two years, to choose whether they wish to certify using a 3-year or 5-year lookback. In other words, rather than thrusting some small business into the dicey waters of “other than small” status by immediately subjecting them to a 5-year receipts calculation, SBA will give these concerns two years to transition to the new 5-year rule, after which all companies will be subject to a 5-year calculation. That being said, it is unclear how the final rule will treat firms that assumed the Act was already effective and, as such, have already certified using a 5-year calculation. This is an issue we will ask Mr. Klein to address during our upcoming seminar.
- SBA’s final rule implementing the Act will also contain a provision that was not included in the proposed version and was adopted by SBA in response to public comment. Specifically, because of the alleged burden that the 5-year rule would impose on participants in SBA’s Section 7(a) loan programs, these programs will not be covered by the 5-year rule and, instead, SBA will issue a separate proposed rule to address these concerns.
Lastly, Mr. Klein gave a high-level overview of the comprehensive changes SBA recently proposed to its 8(a) and mentor-protégé programs. As we outlined previously, these changes would have significant implications for the government contracting community. Consequently, to update the industry and to facilitate a meaningful dialogue on this topic, PilieroMazza is hosting a seminar on November 18, 2019, from 7:30 AM – 10:30 AM EST at The Ritz-Carlton, Tysons Corner. During our two-hour seminar, Mr. Klein will join Pamela Mazza, Managing Partner of PilieroMazza, to provide government contractors with a comprehensive understanding of the proposed changes and an opportunity to comment. For more details and to register, please visit this link. All comments to this proposed rule must be submitted by January 17, 2020.
Samuel Finnerty, the author of this Client Alert, is a member of the Firm’s Government Contracts, Small Business Programs & Advisory Services, and Government Contracts Claims and Appeals practice groups.