SDVOSB Ineligible for Award Under Ostensible Subcontractor Doctrine
In Indigo Blue Construction, LLC (SBA No. SIZ-6073) the SBA Office of Hearings and Appeals ("SBA OHA") found that an SDVOSB was ineligible for award because it will rely too heavily on its subcontractors to supervise the work. The solicitation was for an IDIQ type contract for construction projects at the VA Medical Center, Lexington. The judge focused on the Indigo's proposal. It said that all of the on-site managers, including the project manager and site superintendent, were to be subcontractor employees. The judge therefore found that the subcontractor would be performing the vital and primary components of the contract:
OHA has long held that "[t]he primary role of a prime contractor in a construction project is to superintend, manage, and schedule the work, including coordinating the work of the various subcontractors. (citations omitted) As a result, OHA explained, on-site management of the contract is of paramount importance in a construction procurement.
Indigo tried to save itself by arguing that the project manager would become its employee. However, SBA OHA rejected this argument because it goes beyond the four corners of Indigo's proposal.
5-Year Receipts Takes Effect January 6, 2020
Effective January 6, 2020, the SBA has issued a Final Rule on how to calculate a small business' size for all receipts-based size standards. Now, a small business' size is based on the average of its last five (5) years of receipts. This is a change from the prior three (3) year receipts period. Thus, for all receipts-based size standards, the SBA will evaluate a company’s size by calculating its average annual receipts over the last five (5) completed fiscal years.
This could help or hurt small businesses. To avoid possible shocks to system, the SBA will allow firms to choose either the 3-year or 5-year calculation until January 6, 2022. After that, the 5-year receipts rule will apply to everyone.
Firm Found Small Despite Significance Economic Dependence on Large Business
On July 25, 2019, the SBA Office of Hearing and Appeals ("SBA OHA") found that a contractor (Telaforce) qualifies as a small business even though it relied on a large business (CACI) for more than 70% of its business. The catch? A mentor-protégé agreement existed.
Even though TelaForce derived more than 70% of its receipts from CACI through the date of self-certification, a majority of these receipts were generated after the SBA had approved a mentor-protégé agreement between them. Accordingly, SBA OHA found that there was no valid basis to find TelaForce affiliated with CACI through economic dependence. This is because SBA regulations provide that an SBA-approved mentor and protégé are broadly exempt from affiliation based on their mentor-protégé relationship or assistance within the scope of their MPA. 13 C.F.R. §§ 125.9(d)(4) and 121.103(b)(6)
Size Appeal of Avar Consulting, Inc., SBA Siz 6017 (July 25, 2019)
Size Protest Timely Even Though Filed Well After Original Award
In negotiated procurements, a size protest "must be received by the contracting officer prior to the close of business on the 5th day, exclusive of Saturdays, Sundays, and legal holidays, after the contracting officer has notified the protester of the identity of the prospective awardee.” 13 C.F.R. § 121.1004(a)(2). Thus, if you are considering a size protest, it is imperative that you prepare ahead if at all possible.
In a recent case , Size Appeal of Global Dynamics, LLC, SIZ-5979 (December 17, 2018), the SBA Area Office rejected a size protest as untimely because it was not filed within 5 business days after the original award to GiaCare and MedTrust JV, LLC ("GiaMed"). The Office of Hearing and Appeals held the SBA was wrong.
Here, the agency took corrective action after original award to GiaMed in response to a GAO bid protest. The agency cancelled the award to GiaMed, reopened discussions and obtained revised proposals. The agency ultimately awarded the contract to GiaMed again. The protester then filed a size protest within 5 days of this second award.
OHA held that the 5-day period to file a protest started after the second award, not the first. OHA noted that "an award notification will not trigger the deadline for filing a size protest if the procuring agency subsequently takes actions that are inconsistent with that award notification." Thus, because the agency had cancelled the first award and obtained revised proposals, these actions demonstrated that the “evaluation process was not complete” and that the original award notification “was no longer valid.”
I find it hard to understand why the SBA rejected the protest as untimely in the first place. After all, once the agency cancelled the first award and rendered a new award decision, it opened the door to a size protest within 5-days of that new award.
Size Appeal of Global Dynamics, SIZ-5979 (December 17, 2018)
Trump Signs Law that Allows Companies to Remain Small for a Longer Period
On December 18, 2018, President Trump signed the Small Business Runway Extension Act that changes the time period in which a small businesses is determined to be small. Specifically, the look-back period for determining small businesses' size status has been changed from three years to five years. This means that a company's small business status will be based on its last 5-year average of revenue or employee count. This will, in many cases, permit companies to remain small for a longer period of time.
This new law will not go into effect until the SBA revises their regulation on the look back period from 3 years to 5 years. We will keep you posted.
The Small Business Runway Extension Act of 2018 (HR6330)
Size Protest Untimely
On October 9, 2018, the SBA Office of Hearings and Appeals ("SBA OHA") dismissed a size protest as untimely. When a size protest is sent to the Contracting Officer, it is then transmitted to the SBA Area Office. The SBA Area Office has 15 days to issue a size determination. If the contractor does not agree with the size determination, the contractor can file an appeal to SBA OHA within 15 days after receipt of the size determination.
In this case, the Area Office issued a determination finding that the contractor was not a small business. But, the Contracting Officer told the contractor that the contract would not be terminated because the SBA Area Office did not issue a size determination within 15 calendar days. Give this assurance, the contractor saw no need to appeal the size determination.
Unfortunately, the Contracting Officer later flipped flopped and said he would terminate the contract because the SBA Area Office determined that the contractor was not small. The contractor filed an appeal with SBA OHA. SBA OHA, however, dismissed it because it was not filed within the 15-day deadline. SBA OHA held that it had no other choice:
An appellant must file a size appeal within 15 calendar days after receipt of the size determination. 13 C.F.R. § 134.304(a). Filing is the receipt of the appeal at OHA. 13 C.F.R. § 134.204(b). Here, Appellant concedes that it received the size determination no later than August 24, 2018. Appeal at 4. Appellant did not file its appeal until September 26, 2018. Appellant concedes it filed its appeal after the expiration of the deadline. Appellant pleads in mitigation of its actions the long time the Area Office took to issue the size determination and the CO's initial assurance that MSC would not terminate the award. Neither of these factors is relevant here. The regulation is clear; a size appeal must be filed within 15 days of receipt of the size determination. There are no exceptions. There is nothing in the regulation which permits an appellant to rely upon the word of a procuring agency to extend the time limit for filing a size appeal. Indeed, the regulation prohibits OHA from extending the deadline for filing an appeal. 13 C.F.R. § 134.202(d)(2)(i)(A). The fact that the CO initially indicated MSC would not terminate the award does not alter the time limit Appellant faced after receiving the size determination. Appellant relied upon the CO's word to its detriment. The regulation mandates that I dismiss this appeal.
The lesson learned here is do not rely on the Contracting Officer's promise not to terminate the contract. If faced with a adverse SBA Area Office size determination, appeal it within 15 calendar days if you disagree.
Size Protest Filed After VA Took Corrective Action is Untimely
In the size appeal of Navarre Corporation, SBA Siz-5492 (July 24, 2018), the SBA Office of Hearing and Appeals ("OHA") dismissed a size protest as untimely. It was filed over a year after the VA awarded the contract to Owl, Inc. During that time, the VA took corrective action twice in response to GAO protests challenging the award to Owl. Each time, the VA decided that the award should still go to Owl. After the last corrective action, Navarre Corp. filed a size protest.
OHA ruled that the size protest was untimely because the VA never cancelled the award to Owl. It just suspended performance of Owl's contract while the VA fought the GAO protests. OHA held that that the size protest should have been filed within 5 days after the contract award over a year ago:
SBA regulations stipulate that, on a negotiated procurement such as found here, “[a] protest must be received by the contracting officer prior to the close of business on the 5th day, exclusive of Saturdays, Sundays, and legal holidays, after the contracting officer has notified the protestor of the identity of the prospective awardee.” 13 C.F.R. § 121.1004(a)(2). Interpreting this rule, OHA has consistently held that the regulation does not contemplate an exception if corrective action occurs after award notification. (citations omitted) Here, in response to the bid protest litigation at GAO, VA undertook corrective action, amended the RFP, and reevaluated proposals. Importantly, though, VA never cancelled or terminated the original award to Owl, instead opting to suspend performance of the contract. It follows, then, that in order to have been timely, any size protest must have been filed within five business days after the original award notification on March 15, 2017. Appellant's second size protest was filed more than a year later, on May 1, 2018, and thus was plainly untimely.
The VA's strategy worked here. By suspending performance for over a year while it took corrective action in response to the GAO protests, the VA did not have to award the contract again and avoided a possible size protest. Keep this into consideration when dealing with the VA in the future. It might be beneficial to insist that the award be cancelled as part of the VA's corrective action, depending on whose side you are on.
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
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.
