SBA SIZE PROTEST LAW: SBA Size Determination Protests & Appeals - Attorneys

Size Appeal Denied Because it was Based on New Arguments

On December 4, 2017, the SBA Office of Hearing and Appeals ("OHA") denied an appeal by Serviam Construction, LLC. We represented the firm challenging their size. We argued that Serviam was affiliated with several other family businesses and therefore it was not a small business. The SBA Area Office agreed and found Serviam to be other than small. Serviam appealed this determination.

On appeal, Serviam raised arguments that were not presented to the SBA Area Office. OHA held that it "will not overturn a size determination based on arguments that were never raised to the area office. It is well settled law that "an area office cannot have erred by failing to address information or arguments that were never presented to it in the first instance." This case emphasizes the importance of raising all possible arguments to the SBA Area Office. 

Size Appeal of Serviam Construction, LLC (SBA No. SIZ-5872)

Company Cannot Exclude Certain Inter-affiliate Transactions When Measuring Its Size

On October 27, 2017, the SBA Office of Hearings and Appeals ruled that Johnson Development is a large business due to affiliation with several other companies. Johnson Development was competing for a new VA Outpatient Clinic project in Tyler, Texas. A competitor, SMN, LLC, filed a size protest against Johnson Development. The SBA Area Office determined that Johnson Development was affiliated with 31 other companies. Based on this affiliation, the SBA Area Office determined that Johnson Development was not a small business.

Johnson Development appealed the SBA Area Office's determination to the SBA Office of Hearing and Appeals. Johnson Development argued, among other things, that the SBA should have excluded receipts between affiliates for size determination purposes. Johnson Development cited SBA Policy Statement No. 3 and 13 C.F.R. 121.104(a), which excludes receipts between "a concern and its domestic or foreign affiliates" when calculating size. SMN argued that this exclusion did not apply (i) to receipts between affiliates in which Johnson Development was not a party, and (ii) to receipts between affiliates where no double counting will occur if counted. The SBA Office of Hearing and Appeals agreed and affirmed the Area Office's determination that Johnson Development was not a small business.

SIZE APPEAL OF: Johnson Development, LLC, SBA No. SIZ-5863 (October 27, 2017)

Contractor Losses SDVOSB Status Due to Lack of Unconditional Ownership

On August 31, 2017, the Office of Hearings and Appeals ("OHA") ruled that Veterans Contracting Group, Inc. does not meet the SBA SDVOSB regulations' unconditional ownership requirement. Veterans Contracting Group, SBA No. Vet 265 The contractor's shareholder agreement included a provision, which provides that in event of a shareholder's death or incapacity, he must sell their shares to the corporation at certain price. We represented the protestor in this case and argued that this provision does not meet the unconditional ownership requirement under the Wexford standard, which provides:

In the context of 13 C.F.R. § 125.9 [now moved to § 125.12], unconditional necessarily means there are no conditions or limitations upon an individual's present or immediate right to exercise full control and ownership of the concern.  Nor can there be any impediment to the exercise of the full range of ownership rights. Thus, a service-disabled veteran: (1) Must immediately and fully own the company (or stock) without having to wait for future events; (2) Must be able to convey or transfer interest in his ownership interest or stock whenever and to whomever they choose; and (3) Upon departure, resignation, retirement, or death, still own their stock and do with it as they choose. In summary, service-disabled veterans must immediately have an absolute right to do anything they want with their ownership interest or stock, whenever they want. Wexford Group International, SBA No. SDV-105 (2006)

The contractor argued that the Wexford standard is dead, citing the Miles and AmBuild cases where the Court of Federal Claims held that the VA SDVOSB regulations permit a right of first refusal since it follows "normal commercial practices."  OHA disagreed, stating that the SBA's and VA's definitions on unconditional ownership are different:

The DVA regulation contains a specific exception for ownership restrictions which are found to be included in "normal commercial practices". The SBA regulation contains no such provision, and the Wexford standard does not allow for it. Appellant would have OHA write a "normal commercial practices" exception into SBA's regulation, but OHA does not have the authority to rewrite regulations. The Wexford standard has been in place and consistently followed for eleven years, and SBA has taken no step to disturb it or to revise the regulation to allow for "normal commercial practices" of the type permitted by the DVA regulation. SBA has determined that it will instead keep the stringent definition of unconditional ownership in the regulation, in order to ensure that the benefits of ownership accrue to the SDV. The D/GC did not err in applying the established Wexford standard for determining whether Mr. Montano's ownership of Appellant is unconditional.

This dispute is not over. This case is now before the Court of Federal Claims who will decide whether OHA is right.  A hearing is scheduled for November 21, 2017.  We will keep you posted. Meanwhile, if you are competing for non-VA SDVOSB set aside contracts, it would be best to review your corporate docs to ensure compliance with the Wexford standard.

 

Affiliation Found Between Family Members

Quigg Bros Inc. ("Contractor") argued that it is a small business and challenged the Government Contracting, Area VI ("Area Office") decision holding otherwise.  The Contractor appealed this decision to the SBA Office of Hearing and Appeals ("OHA").

On appeal, OHA found that Quiqq Bros Inc. is associated with six members of the Quigg family; Patrick Quigg and John D. Quigg holding the largest interests.  As such, there is a presumption of affiliation between family member businesses unless there is a clear line of fracture between them.  This could not be proven, however, because there were various business dealings between the brothers and their respective companies.  For example, the family collaborated on loans and joint investments. OHA held that these “business dealings” prove there was no clear line of fracture present." The SBA Office of Hearings and Appeals therefore found affiliation between the family member businesses.

Affiliation between family members often arises in size protests.  To prevent affiliation, you must keep business relationships between family businesses to a minimum, or none at all.  Our webpage talks more about this.  Check it out.

Size Appeal of: Quigg Bros Inc. SBA No. SIZ-5786 (October 25, 2016)

Government Uses Wrong NAICS Code Where RFP is for Admin Services, Not Engineering Services

SBA Office of Hearing and Appeals (“OHA”) held that Government assigned wrong NAICS code because the contract is for administrative support services, not engineering services.

The RFP was based on NAICS code 541330, “Engineering Services, under the Military and Aerospace Equipment and Military Weapons (MAE&MW) Exception,” with a corresponding $38.5 million annual receipts. The Tolliver Group, Inc. (“Contractor”) complained that this NAICS designation is wrong because the Performance Work Statement (”PWS”) did not require the Contractor "to design, develop, or build anything." Instead, the PWS requires assistance with performance analysis, business process design and workforce training.

The Contractor argued that, because the services are administrative in nature, the NAICS designation should be NAICS code 541611, “Administrative Management and General Management Consulting Services,” with a corresponding $15 million annual receipts size standard.

OHA held that neither the NAICS Manual, nor applicable regulations, describe what services fall under the MAE&MW exception under NAICS code 541330. OHA then turned to its own case law and stated that this exception requires that the RFP involve the procurement of weapons, or the design and manufacture and development of weapons:

Nevertheless, merely because a procurement is for the military, does not justify use of the MAE&MW exception. Military agencies procure a host of services and supplies, most of which are not engineering services.

The key issue in a case where the question is the applicability of the MAE&MW exception is whether those services are in support of military or aerospace weapons or equipment.

The instant procurement is not for weapons, or the design and manufacture and development of weapons, but for the assistance in the marketing of weapons to foreign governments.

Further, it is important to remember the exception is part of the Engineering Services code, and therefore in order to be designated under this exception, a procurement designated under it must involve professional engineering services with a military or aerospace application, “applying physical laws and principles of engineering.” NAICS Manual, at 746.

A review of the detailed requirements establishes the great majority of the work required here is not engineering. Human resource support management does not qualify as engineering. Neither is the financial and systems analysis required under resource management support. These deal with budgeting tasks and managing FMS administration. Neither task includes engineering of weapons systems. The program management includes research on customer requirements, and tracking FMS assets. These are all administrative tasks, not engineering. The same is true of the cost estimating and budget activities.

The SBA OHA opinion sheds light on application of the MAE&MW exception under NAICS code 541330. Specifically, the RFP must be for the procurement, design, manufacture or development of weapons. If not, the exception does not apply. Further, to fall under a NAICS code for engineering services the work must involve the application of physical laws and principles of engineering.

TOLLIVER GROUP, INC., APPELLANT, SBA No. NAICS-5705, 2016 (S.B.A.), 2016 WL 197153 (January 11, 2016)

TOLLIVER GROUP, INC., APPELLANT, SBA No. NAICS-5705, 2016 (S.B.A.), 2016 WL 197153 (January 11, 2016)

Small Business Size Determined at Time Proposal was Submitted Under GWAC, Not at Time of Task Order Award

In a bid protest filed by Software Engineering Services Corporation, B-411739 (October 8, 2015), the protestor argued that OBXtek, Inc. should not receive award of a task order under a Government-Wide Acquisition Contract (GWAC) because it was not small at the time the task order was awarded.  The GAO denied the protest.

The GAO held that PSI International, which OBXtek, Inc. later acquired, was small at the time it submitted a proposal to be awarded the underlying GWAC.  Further, the GWAC did not require recertification of small business size before award of the task order.  Accordingly, OBXtek, Inc. was considered small even though it was not small at the time the task order was awarded.

 

Timing the Sale of Business

The SBA Office of Hearings and Appeals (“OHA”) issued a decision earlier this year that illustrates considerations for timing the sale of a business. SIZE APPEAL OF: TESCOM, SBA No. SIZ-5641 (2015) The chronology is interesting:

  • In March 2014, the apparent successful bidder, Guisys, submitted an offer.
  • In April 2014, Guisys initiated discussion with a potential buyer for the company, Greenlee.
  • In August 2014, Greenlee acquired Guisys.
  • December 16, 2014, the CO announced that Guisys was the successful offerer.
  • The next day, on December 17, 2014, Tescom filed a size protest with SBA, alleging that Guisys was not a small business because Greenlee, a division of Textron, a large business, had acquired Guisys.

In general, employees and revenue of businesses are combined with affiliates for purposes of size determination.  Additionally, agreements to merge, even in principle, provide a company with power of control sufficient to find affiliation.  However, an agreement to discuss a possible merger or sale of stock is not an agreement in principle and does not affect control of a concern over another.

Here the date for the size determination was March 10, 2014 – the date of initial offers.  Because acquisition discussions did not commence until April, OHA found that Guisys was not affiliated with Greenlee.

Additionally, OHA noted that although a concern must recertify its size to the procuring agency after a merger or acquisition pursuant to 13 C.F.R. § 121.404(g)(2), after such a notice “the Navy can no longer count options or orders issued under this contract toward its small business goals,”  but that a “concern that qualifies as small at the time it receives a contract is small for the life of the contract.”  (citing The W.I.N.N. Group, Inc., SBA No. SIZ5360 (2012).

If handled properly these regulations allow a small business to capitalize on a prospective contract award if it times the negotiations and sale of its business judicially.

SBA Office of Hearing and Appeals Finds G&C Fab Con is Not Small

We recently prevailed in defending an SBA Size Determination that was appealed to the U.S. SBA Office of Hearing and Appeals. The VA awarded three contracts to G&C for construction projects at national cemeteries.  Our client, Freedom Contracting, submitted a size protest.

We argued that G&C was affiliated with several other companies based on family relationships and common management.  The Office of Hearings and Appeals agreed and counted the revenue of several other affiliated companies when determining whether G&C exceeded the $33.5M small business size standard.

The second issue was an accounting one.  G&C argued that revenue exchanged between affiliates should not be counted towards revenue.  G&C cited an exclusion under SBA size standard regulation 13 C.F.R. § 121.104(a), which excludes revenue between “transactions between a concern and its domestic or foreign affiliates.”  The Office of Hearing and Appeals held that this provision only applied to revenue “between a parent company and its subsidiary, irrespective of whether a consolidated tax return was filed.”  This prevents companies affiliated by other means, such as by common management or ownership, from unfairly excluding revenue between themselves when determining size.

SIZE APPEAL OF: G&C Fab-Con, LLC, APPELLANT, SBA No. SIZ-5649 (March 23, 2015)

Affiliation by Family Relationship Not Found

In the Size Appeal of MCH Corporation, SBA No. SIZ-5622 (December 8, 2014), the SBA Office of Hearing and Appeals (SBA OHA) held that a clear line of fracture existed between family members' companies.  The SBA OHA noted that “factors that may be pertinent in examining clear line of fracture include whether the firms share officers, employees, facilities, or equipment; whether the firms have different customers and lines of business; whether there is financial assistance, loans, or significant subcontracting between the firms; and whether the family members participate in multiple businesses together.”

Against these factors, SBA OHA found that a clear line of fracture existed.  Although the two companies were are presumed affiliated based on the family relationship (parent child), as of the date for determining size, they had no business dealings with one another, did not have common owners or managers, and did not share employees or facilities. As a result, the presumption of identity of interest was rebutted.  SBA OHA noted that while the two companies had a past history of business dealings, there were no such dealings at the time of self-certification for the procurement.

This case illustrates the need to keep business dealings between companies with family relationships to a minimum. This does not mean there can be no business dealings, but not to a point where there is interdependence.

SBA OFFICE OF HEARINGS AND APPEALS REJECTS JOINT VENTURE

In the SIZE APPEAL OF: KISAN-PIKE, A JOINT VENTURE, APPELLANT, SBA No. SIZ-5618 (November 24, 2014), the SBA Office of Hearing and Appeals (“SBA OHA”) ruled that a Joint Venture Agreement was invalid for failure to comply with applicable regulations. A Joint Venture was created between an 8(a) company and a large business as an SBA approved mentor. Even though the SBA previously approved the JV, SBA OHA found that the JV failed to meet applicable regulations.

The solicitation was set aside for small businesses. The JV submitted a proposal and self-certified itself as a small business. The JV was the apparent awardee. However, the Contracting Officer decided to initiated a size protest against the JV. He was concerned that the JV did not comply with applicable regulations and therefore ineligible for the mentor-protégé joint venture exception from affiliation.

The Contracting Officer’s suspicions were correct and the SBA OHA held that the JV did not comply with applicable regulations because:

  • The JV did not specifically itemize “all major equipment, facilities, and other resources” to be furnished by each of the joint venture partners. 13 C.F.R. § 124.513(c)(6) Instead the JV merely stated that each member of the JV would “provide equipment, facilities and other resources to the Joint Venture required to execute the contract.” SBA OHA held that this was not specific enough.
  • The JV did not specify the roles and responsibilities of each of the JV partners. 13 C.F.R. § 124.513(c)(7) The JV said that the 8(a) president will negotiate the contract, but does not designate his specific tasks or responsibilities.
  • The JV did not indicate how it will comply with the requirement of that the 8(a) BD participant perform at least 40% of the work. 13 C.F.R. § 124.513(d) The JV argued that it could not do so with specificity because this was a design-build construction procurement and details on construction were not yet known. The SBA OHA disagreed and stated that the “regulations do not authorize an exception for design-build procurements or other situations where a joint venture may have difficulty providing detailed information.” SBA OHA suggested that the JV complain to SBA policy officials, not to OHA.

This case is a warning to those who may have an SBA-approved JV agreement. Just because it is SBA approved, does not mean it cannot be challenged in a size protest. Revisit your JV to make it as specific as possible.

 

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