Staying Small by Avoiding Affilia3on

Transcription

1 Staying Small by Avoiding Affilia3on Jackson W. Moore Smith, Anderson, Blount, Dorse:, Mitchell & Jernigan, LLP (919)

2 Today s Goals Defining the terms Small Business Concern and AffiliaOon. AffiliaOon factors. AffiliaOon and Small Business SubcontracOng Plans. Risks and PenalOes for Non- Compliance. 2

3 What is a Small Business Concern? No Master List for SBCs (typically). What is small and not small varies by industry. Size status is cerofied when the business responds to the government solicitaoon. Two methods varying by NAICS code: gross receipts averaged over three years, or employees over one year (temporary or full Ome). 3

4 NAICS Codes NAICS Code Descrip3on Size Standard LOGGING 500 EMPLOYEES COMMERCIAL AND INSTITUTIONAL BUILDING CONSTRUCTION $36.5 million OTHER HEAVY AND CIVIL ENGINEERING CONSTRUCTION $36.5 million ROOFING CONTRACTORS $15.0 million SITE PREPARATION CONTRACTORS $15.0 million MANUFACTURED HOME (MOBILE HOME) MANUFACTURING 500 EMPLOYEES INLAND WATER FREIGHT TRANSPORTATION 500 EMPLOYEES LESSORS OF NONRESIDENTIAL BUILDINGS (EXCEPT MINIWAREHOUSES) $27.5 million SECURITY GUARDS AND PATROL SERVICES $20.5 million OTHER WASTE COLLECTION $38.5 million REMEDIATION SERVICES $20.5 million EMERGENCY AND OTHER RELIEF SERVICES $32.5 million 4

5 How Small Business Goals Are Set Congress sets small business goals : Small Business Overall (prime contracts): 23% Small Disadvantaged Businesses: 5% Women Owned Small Businesses: 5% HUBZone Businesses: 3% Small Disadvantaged Veteran Owned Small Businesses: 3% SBA sets agency- specific preference goals every year. SBA not the procuring agency - - decides whether a business is small, or other than small ; they also decide whether NAICS code selected for procurement is appropriate. 5

6 Ques3on #1 A Business self- cerofies as small on an insotuoonal building construcoon cotnract (NAICS ; $36.5 MM). Business has three- year average revenues are $35.0 MM. Is the business small? 6

7 What is Affilia3on? AffiliaOon is an SBA determinaoon that two or more businesses are sufficiently intertwined through ownership, control, or other factors that the revenues and employees of the businesses should be combined for purposes of determining SBC s eligibility for a small business set- aside. 7

8 Affilia3on: Not Just Naked Ownership SBA uses totality of circumstances test. 13 CFR to determine affiliaoon. Few bright lines. Common ownership or control. Common management. Undue influence by one company or person over SBC. Economic co- dependency/high revenue percentages. Other factors. Newly organized enooes will be scruonized. Ownership. Power to Control is test, not actual exercise of control. 8

9 Control Through Power of the Purse SDVOSB stock owned 55% by Service Disabled Veteran. But, three other owners of the company loaned money to the business secured by one- third of the stock owned by that 55% owner. Stock Pledge Agreements said owner could not sell or transfer the notes without consent of note holders. Company could not give owner a dividend or profit distribuoon unol notes paid off. SBA: pledging stock to a bank might be okay as part of a normal commercial pracoce, but this pracoce was not normal: lenders were also owners, not banks. Rush- Link One JV, SBA VET- 228 (2012). 9

10 Affilia3on Through Contractual Rela3onships/Economic Dependency When one or both of the concerns depends upon the other for a high percentage of its revenues. Faison Office Products, LLC, SBA No. SIZ (2007). AffiliaOon may also arise from repeat teaming or cononuing contractual relaoonships. Taylor Consultants, Inc., SBA No. SIZ (2009). Company A provides significant loans to Company B and guarantees other loans to Company B. Company B s over reliance of dependence on Company A s financial support (both direct and indirect) results in their affiliaoon. 10

11 What is an Ostensible Subcontractor? AffiliaOon between SBC prime and large subcontractor. Subcontractor is really the prime contractor because it performs primary and vital requirements of the contract, or the prime is unusually reliant on the subcontractor. DMS Management Services, LLC, SIZ (2014) Not a percentage workshare determinaoon, but a consideraoon of all aspects of the relaoonship. Foregoing factors of affiliaoon plus, Agreements between prime and sub, Terms of teaming agreement (technical responsibilioes) 11

12 But The Prime Is Doing 51% of the Work? Small Business Prime Bids on $60,000,000 MATOC, has 6 employees and annual revenues totaling less than $150, MATOC was for Design/build projects that included heavy construcoon and highway worked, and that required $5,000,000 in bonding. Prime lists large teammates as subcontractors. Almost all of the designers and construcoon personnel who would perform the work come from these subcontractors. The qualificaoons [of] Appellant s teammates or subcontractors... Were, effecovely, the only qualificaoons offered. 12

13 Affilia3on by Subcontrac3ng Away Primary and Vital Purpose of Contract Prime contractor agreed to provide box lunches, equipment, furniture, personnel to serve, coordinate their preparaoon, and then clean up. Prime subcontracted the preparaoon the making of sandwiches. Protestor said that making of sandwiches was a primary purpose of the contract. SBA at first agreed. On Appeal SBA said no: the primary purpose of the contract was the provision of a meal.... That management and coordinaoon were the primary purpose of the contract. TLC Catering, SBA No. SIZ (2010) 13

14 Other Affilia3on Factors Loan guarantees and bond indemnificaoon Inland Dredging Co., LLC, SBA No. SIZ (1999) ( Appellant receives more favorable terms from its bonding company when [affiliate family members] back it with indemnity agreements. ) Subsidiary Allows Prime s Use of equipment at no cost Pointe Precision, LLC, SBA No. SIZ (2001) (there were other factors) Affiliate provides clerical and office support services Size Appeal of First American Tax ValuaOon, Inc., SBA No (1996). Supplying equipment and technical assistance Size Appeal of Mingus Constructors, Inc., SBA No (1989). 14

15 True or False: Ques3on #2 Large Prime Contractors Bidding on Non- Set- Aside Contracts Don t Need to Focus on Small Business Status of their Subcontractors? 15

16 Small Business Subcontrac3ng Plans Each contract valued at $650,000 ($1,500,000 for construcoon) and has subcontracong possibilioes shall require a subcontracong plan. If no plan is submi:ed the bidder is ineligible for award. Small businesses not required to comply. Primes now must cerofy they will use same small businesses at same % submi:ed with bid. NoOficaOon to KO if prime late- pays a small business subcontractor. Annual review of compliance with small business contracong plans. Small business uolizaoon part of performance review. 16

17 Small Business Subcontrac3ng Plans Large Primes now can protest allegedly small subcontractors of other large primes. - IAP World Services Inc., SBA No. SIZ-5480 (2013). 17

18 Limita3ons on Subcontrac3ng Included in all Small Business/8(a) set- asides FAR ; 13 CFR Small Business prime must perform at least 50% of the cost of the contract with its own employees. (25% for specialty construcoon; 15% for general construcoon). Proposed new rule may be amount paid to the small business under the contract. 18

19 Enforcement of Small Biz Goals Debarment. (GTSI) GTSI debarred axer size protest demonstraong GTSI set up prime contractor bidder as front company on $165MM informaoon technology contract. Refusal to enforce subcontracts. (Morris- Griffin) False Claims Act claims. Default rule for willful small business misrepresentaoon is full value of contract. Criminal penaloes: $500,000 fine, 10 years imprisonment or both, for violaong subcontracong limits or knowingly misrepresenong small biz size. 19

20 V. Ques3ons? Smith, Anderson, Blount, Dorse:, Mitchell & Jernigan, LLP Jackson W. Moore (919)