Small and Large Business Collaboration in the Federal Market

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2 Small and Large Business Collaboration in the Federal Market Breakout Session #: A08 Presented by: David S. Black, Partner, Holland & Knight LLP Joseph P. Hornyak, Partner, Holland & Knight LLP Date: July 22, 2013 Time: 11:30am-12:45pm

3 Introduction 2

4 Context of Today s Presentation Heightened Competition Shrinking federal budgets More contractors chasing small business dollars Regulatory Risk Maze of small business programs with different eligibility requirements Web of affiliation rules that ensnare the unwary Opportunity For those who can structure large-small relationships around current eligibility rules 3

5 Context of Today s Presentation Common Large-Small Collaboration Structures Small Business Prime & Large Business Subcontractor Large Business Prime & Small Business Subcontractor Joint Venture between two or more businesses Contractor Team Arrangements (GSA Schedule) Today s Goal: understanding the opportunities that each structure presents for contracting dollars 4

6 Today s Agenda Small Business Program Socio-Economic Classifications Subcontracting Considerations Affiliation Size Protests Joint Ventures - Definition/Practical Considerations Strategic Reasons to Bid as a Joint Venture versus Prime/Sub Populated versus Unpopulated Joint Ventures Affiliation/Joint Venture Eligibility For Socio- Economic Classification Co-Prime Teaming Arrangements Under GSA Schedule Contracts 5

7 Overview of Small Business Program and Socio-Economic Classifications 6

8 Small Business Program The government-wide statutory goals are as follows: 23% for all small business classifications; 5% for 8(a) / small disadvantaged businesses; 5% for women-owned small businesses; 3% for HUBZone businesses 3% for SDVOSB Methods to Meet Goals Include: Sole Source Awards Set-Aside Contracting Evaluation Preferences Subcontracting Requirements Joint Ventures (exception to affiliation) 7

9 Socio-Economic Classifications & Small Business Concerns All socio-economic classifications must qualify as small business under the size standard corresponding to the NAICS code identified in Solicitation. Revenue-based standards (three-year average) Employee-based standards (twelve-month average) SBA Affiliation Rules Small Business Concern Self-Certification, subject to SBA protest process Set-Asides Relevant to Prime Contractor Subcontracting Goals Other benefits 8

10 Socio-Economic Classifications 8(a) Concern Economically and socially disadvantaged individuals must own 51% and control business (special rules for ANCs and tribally-owned entities) SBA Certification nine-year program Set-Asides Sole Source Contracts Program declared unconstitutional for certain contracts Small Disadvantaged Business (SDB) SBA/Other Agency Certification no limit on duration Prime Contract Price Evaluation Preferences Relevant to Prime Contractor Subcontracting Goals Program declared unconstitutional / Suspended by DOD 9

11 Socio-Economic Classifications Service-Disabled Veteran-Owned Small Business Concern Service-disabled veterans must own 51% and control business Self-Certification, subject to SBA protest process Sole Source Contracts Relevant to Prime Contractor Subcontracting Goals Veteran-Owned Small Business Concern Veterans must own 51% and control business Self-Certification/VA Certification must be in VA database Set Asides for VA Contracts Only Relevant to Prime Contractor Subcontracting Goals SBA has no authority over VOSB program 10

12 Socio-Economic Classifications HUBZone Small Business Concern Business and one-third of employees must be in HUBZone SBA Certification Set Asides Sole Source Contracts Prime Contract Evaluation Preferences Relevant to Prime Contractor Subcontracting Goals Woman-Owned/Economically Disadvantaged Woman-Owned Women or ED women must own 51% and control business Self-Certification/Private Certification Set Asides in Limited NAICS Codes (recently expanded) Relevant to Prime Contractor Subcontracting Goals 11

13 Prime-Sub Considerations, Affiliation, and Size/Status Protests 12

14 Strategic Considerations of Prime-Sub Structure Large business participation limited by subcontract limitations and ostensible subcontractor rule Can pool past performance of the prime and sub The formerly small incumbent Teaming agreement governs bid and proposal activities Subcontract negotiated after award Subcontract pricing and markup issues Workshare negotiation issues 13

15 Limitations on Subcontracting Service Contracts Old rule: Prime must perform at least 50 percent of the cost of contract performance incurred for personnel with its own employees. New rule (NDAA of 2013): Prime may not subcontract more than 50 percent of the amount paid under a contract; prime s share includes similarly situated entities. Construction Contracts Prime must perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees. 14

16 Limitations on Subcontracting Supply Contracts Old rule: Prime must perform at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials. New rule (NDAA of 2013): Prime may not subcontract more than 50 percent of the total "amount paid" under the contract (less materials); prime s share includes similarly situated entities. Non-Manufacturer Rule 15

17 Other Subcontracting Considerations If prime contractor is a large business, it must submit a small and disadvantaged business subcontracting plan. The plan may be contract-specific or company-wide. NDAA of 2013: Enhanced reporting and enforcement mechanisms for non-compliance. Small business participation as an evaluation factor for award. Extra credit based on prime s size status Extra credit for proposed subcontractors status Compliance with existing subcontracting goals 16

18 Affiliation Rules To determine size, contractor must include revenue or headcount of all affiliates as defined in SBA rules. Bases for affiliation include: Stock Ownership (can include minority owners / negative control) Stock Options and similar agreements are given present effect Common Management Identity of Interest (e.g., family or investments) Newly-Organized Concerns Joint Ventures Ostensible Subcontractors Franchise Agreements Totality of Circumstances 17

19 Who may protest? Size / Status Protests Any interested party, SBA or the Contracting Officer can challenge the size or status of an entity. Interested parties may challenge NAICS Codes Protest deadlines? Interested party challenges must be filed within 5 working days of learning the identity of the successful offeror SBA (including Inspector General)/CO challenges can be filed any time, even after award. NAICS Code Appeals: 10 Calendar Days after Solicitation Issued 18

20 Response deadlines? Size / Status Protests Time for responding to size protests is extremely short; responses usually due in 3 business days. Appeal to SBA Office of Hearings and Appeals? OHA hears appeals of size protests, but not for certain status protests. Consequences of a Sustained Protest? If found ineligible, recertification by SBA may be required before the challenged concern can self-certify again. 19

21 Overview of Joint Ventures 20

22 Regulatory Guidance re Joint Ventures Federal Acquisition Regulation (FAR) Does not define the term joint venture But recognizes that joint ventures may be desirable to complement the members capabilities or offer the government cost or performance advantages. FAR

23 Regulatory Guidance re Joint Ventures DCAA Audit Manual Defines a joint venture as: An enterprise owned and operated by two or more businesses or individuals as a separate entity (not a subsidiary) for the mutual benefit of the members of the group. Joint ventures possess the characteristics of joint control; e.g., joint property, joint liability for losses and expenses, and joint participation in profits. Joint ventures can be either incorporated or unincorporated. DCAM b.(1). DCAA Audit Guidance For Joint Ventures, Teaming Arrangements and Special Business Units (SBUs) Mostly to address the members ability to charge indirect costs (G&A) to the joint venture. DCAA Contract Audit Manual

24 Advantages of Joint Venture Eligibility: SBA regulations permit multiple entities to bid as a joint venture and still qualify as a small business or other socio-economic classification (e.g., 8(a), SDVO, HUBZone). Costs: Advantages versus prime-subcontractor arrangement because not required to mark-up of subcontractors costs; can share profit/fee. Qualifications: The Government often permits the joint venture to use the qualifications/past performance of all member companies. Success: Win rates for joint ventures are much higher than non-joint ventures. Payment: Government payment directly to JV (i.e., both parties) 23

25 Form Practical Considerations Most government contract JVs are limited liability companies, but a JV can be in any form including a partnership. If JV is a separate entity (corporation, LLC, LLP), the government may seek guarantees from member companies. Filing Requirements Corporations, LLCs and LLPs are established by filing a certificate with a state government for a small fee. Entity should be established before submission or proposal. No state filing required for general partnerships. 24

26 Documentation Practical Considerations Typically, the LLC operating agreement or partnership agreement serves as the joint venture agreement. The operating/partnership agreement should address management, voting, capital requirements/funding, distributions, dispute resolution, dissolution (see SBA requirements for 8(a)s). The operating agreement does not need to be signed before proposal submission unless the solicitation requires submission of the joint venture agreement. 25

27 Populated Populated vs. Unpopulated The JV has its own employees. The JV pays its own fringe benefits, taxes, ODCs, etc. The JV has its own G&A rate. Unpopulated The JV relies on members to provide personnel, typically through a subcontract or secondment arrangement (i.e., borrowed employees). The JV may receive G&A allocations from members. 26

28 Populated vs. Unpopulated Strategic Considerations Populated JVs tend to lower overall cost to the customer. Populated JVs are common when bidding to take over an incumbent workforce. Unpopulated JVs give member companies greater flexibility to assign personnel to other projects. Unpopulated JVs permit greater recovery of G&A. 27

29 SBA Definition of Joint Venture An association of individuals or concerns in any number or degree or proportion of interests. Sharing of profits. Not on a continuing basis. No more than three contract awards over two-year period. Can be corporation, LLC, partnership or any other form. Can be express or implied. 28

30 Eligibility of Joint Ventures for Set-Aside Contracts 29

31 Affiliation Between JV Members Joint Venture members are considered affiliated with each other for the procurement in question unless an exception to affiliation applies. If deemed affiliated, the joint venture must count the combined revenues or employees of all members to determine if it meets applicable size standard. Prime and subcontractor can be deemed a joint venture under ostensible subcontractor rule. If entity does not qualify as joint venture, general rules of affiliation apply. Exemptions from affiliation for various programs

32 JVs Qualifying for SB Set-Asides Small Business plus Small Business The JV is considered small as long as (A) each member meets the size standard for procurements exceeding (i) if revenue-based, half the size standard or (ii) if employeebased, $10 million; or (B) it is a bundled procurement. Otherwise, the JV s members in the aggregate must meet the size standard. 31

33 JVs Qualifying for SB Set-Asides Mentor-Protégé (8(a) plus large or small business) Mentor-Protégé Agreement must be approved by SBA. JV Agreement does not need SBA approval but must meet SBA requirements (subject to review if protest). JV members collectively must meet Limitations on Subcontracting requirements (not each member). 8(a) / Protégé work share requirements Protégé must perform at least 40% of work in unpopulated JV. No performance requirements in populated JV. Protégé must receive profits commensurate with its share of work or 51% in populated JV. 32

34 JVs Qualifying for 8(a) Contracts Three Kinds of 8(a) JVs 8(a) plus 8(a) 8(a) plus Small Business Mentor-Protégé (8(a) plus Large/Small Business) 8(a) JV Agreements must be approved by SBA District Office and meet SBA requirements 8(a) member must be managing venturer and employ project manager. 8(a) member(s) must receive profits from JV commensurate with work share if unpopulated or 51% if populated. 8(a) member(s) must perform 40% of work in unpopulated JV. Limitations on Subcontracting - JV collectively. 33

35 JVs Qualifying for SDVO Contracts SDVO Small Business plus Small Business The SDVO JV is considered small as long as each member meets the size standard for procurements exceeding (i) if revenuebased, half the size standard or (ii) if employee-based, $10 million. Otherwise, JV in the aggregate must meet the size standard. JV Agreement does not need SBA approval. JV Agreement must meet certain requirements. SDVO must receive 51% of profits from JV. SDVO must be managing venturer and employ project manager. Limitations on Subcontracting - JV as a whole must perform 50% (not each member). 34

36 JVs Qualifying for HUBZONE Contracts HUBZONE Small plus HUBZONE Small Each member of JV must meet the size standard for procurements exceeding (i) if revenue-based, half the size standard or (ii) if employee-based, $10 million. Otherwise, JV members in the aggregate must meet the size standard. JV Agreement does not need SBA approval. Limitations on Subcontracting - JV collectively. 35

37 JVs Qualifying for WOSB/EDWOSB Contracts WOSB or EDWOSB plus Small Business Must meet requirements for small business joint venture. WOSB/EDWOSB must be managing venturer and employ project manager. WOSB/EDWOSB must perform significant portion of work. Limitations on Subcontracting - JV collectively 36

38 Ostensible Subcontractor Joint Ventures The Ostensible Subcontractor Rule A prime contractor and its subcontractor will be treated as a joint venture and therefore affiliated for purposes of size determination if it is the subcontractor who performs the primary and vital requirements of a contract or is unusually reliant upon the subcontractor. If challenged the prime-sub relationship is challenged in a size protest, SBA will review the teaming agreement, proposal and any other relevant information. 37

39 Ostensible Subcontractor Joint Ventures SBA uses a totality of the circumstances test to determine whether prime and subcontractor are affiliated, including the following: Who manages the contract? Who has the requisite background and expertise? Who pursued or chased the contract award? Who prepared or bore the cost of preparing the proposal? Are there discrete tasks to be performed, or is there a commingling of personnel and material? What is the amount of work to be performed prime and subs? Who performs the most complex or costly functions? Another key factor: whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation. 38

40 The Rule SBA Recertification Rule Size is typically determined on date of price proposal submission and remains for duration of contract. Contractor must re-certify size status before exercise of 6th year or if merger/acquisition. After recertification, agency can no longer count contract dollars toward SBA goals. Task and delivery orders: CO has discretion to recertify. SBA proposed rule would require a joint venture to recertify its size status when a participant in the joint venture is either the acquiring or the acquired entity in an M&A transaction. 39

41 GSA Schedule Teaming Agreements Joint Ventures: Not possible unless the joint venture entity itself has GSA schedule contract. Prime-Subcontractor: Prime must have GSA schedule contract; subcontractor need not. Contractor Team Agreements... 40

42 GSA Schedule Teaming Agreements Contractor Team Agreements Unique to GSA schedule contracts. Both members must have applicable GSA Schedule contract/special Item Number. If successful, both members have direct contractual relationship with Government. Each member pays IFF. Each member must comply with Price Reductions clause. Typically, one member is the team lead. 41

43 Successful Large-Small Collaboration 42

44 Successful Large-Small Collaboration Continuing Due Diligence Programs Procurements Partners Be the Early Mover Identify set-aside opportunities Find your partner and determine your relationship structure Document your relationship (teaming agreement, JV agreement, etc.) Get SBA approvals, when required 43

45 Successful Large-Small Collaboration Mitigate Size/Status Protest Risk Due diligence of the small s other relationships Careful proposal writing to avoid ostensible subcontractor rule Mitigate False Claims Act Risk Accurate self-certifications of size Compliance with subcontracting limitations Maintain a Relationship of Equals Avoid overreaching by the large business Minimize disputes and indignities Think long term 44

46 QUESTIONS? Joe Hornyak: ; David Black: ; 45