Overview of Proposed Changes to SBA s Small Business Government. Contracting and National Defense Authorization Act of 2013 Amendments

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1 Overview of Proposed Changes to SBA s Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments Rule Citation Current Rule Proposed Changes PilieroMazza s Comments Limitations on Subcontracting 125.1(x) Definitions that are important to SBA s Government Contracting Programs 125.6(a) Prime contractors on 8(a), WOSB, EDWOSB, and small business set-aside contracts must perform : (1) for services contracts, 50% of the cost of the contract incurred for personnel with its own employees; (2) for supply or products contracts, 50% of the cost of manufacturing the supplies or products (not including the costs of materials); (3) for general construction contracts, 15% of the cost of the contract with its own employees (not including the costs of materials); and (4) for specialty trade construction contracts, 25% of the cost of the contract with its own employees, not including the cost of materials) SBA defines Similarly situated entity as a subcontractor that has the same small business program status as the prime contractor. In addition to sharing the same small business program status as the prime contractor, a similarly situated entity must also be small for the NAICS code that is assigned to the procurement. In the case of a contract for services (except construction), no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated. Any work that a similarly situated entity further subcontracts to an entity that is not similarly situated will count towards the 50% subcontract amount that cannot be exceeded. In the case of a contract for supplies or products (other than from a nonmanufacturer of such supplies), no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated. Any work that a similarly situated entity further subcontracts to an entity that is not similarly situated will count towards the 50% subcontract amount that cannot be exceeded. In the case of a contract for supplies from a nonmanufacturer, the concern shall supply the product of a domestic small business manufacturer or processor, unless a waiver is granted. Where a contract combines services and supplies, the contracting officer shall select the appropriate NAICS code. The contracting officer s selection of the applicable NAICS code is determinative as to which PM welcomes the changes which allow small businesses to satisfy their limitations on subcontracting targets through the combination of the small business work on the prime contract and any subcontracts awarded to similarly situated entities. Definition provides guidance on how to determine if another entity is similarly situated. While the Proposed Rule brings many welcome changes to the calculations for the limitations on subcontracting, we have a few serious concerns with how the new calculations will be implemented under the proposed regulations as currently drafted. We believe that the draft regulation s proposed language does not provide the requisite clarity concerning how contractors are supposed to treat the cost of materials in their limitations on subcontracting calculations. Currently, the regulations allow contractors to exclude the cost of materials in calculations for contracts dealing with supplies and products, general construction, and specialty trade construction. However, as drafted, the Proposed Rule does not explicitly exclude the cost of materials in determining the limitation on subcontracting for supplies or products. Additionally, no exclusion for the cost of materials is provided in the Proposed Rule s calculation for the general construction and specialty trade construction industries. We also believe the Proposed Rule would benefit from an explanation regarding how SBA defines supplies and materials, so small business 1

2 limitation on subcontracting and performance requirement applies. In no case shall the requirements of both the services and supplies contract requirements apply to the same contract. The relevant limitation on subcontracting shall apply only to that portion f the contract award amount (b) N/A SBA has proposed a rule governing how subcontracts will be awarded to similarly situated entities. A small business concern prime contractor that receives a contract listed in 125.6(a) and spends contract amounts on a subcontractor that is a similarly situated entity shall not consider those subcontracted amounts as subcontracted for purposes of determining whether the small business concern prime contractor has violated 125.6(a). Moreover, such subcontract to a similarly situated entity shall also be excluded from consideration under the ostensible subcontractor rule. However, a small business concern prime contractor must enter a written agreement with every similarly situated entity to detail the percentage of work forecasted to be performed by each entity. The agreement must identify the solicitation number at issue, be signed by each entity, and be attached to the prime contractor s offer. 2 contractors know exactly to which portions of their contracts the new regulations apply. We strongly encourage SBA to modify the Proposed Rule to explicitly exclude the cost of materials from the calculations applicable to construction and specialty trade construction contracts. Nothing in the language of the 2013 NDAA prevents SBA from providing for an exclusion of the cost of materials for small businesses performing construction and specialty trade construction contracts. Indeed, Congress left the establishment, i.e., the formulation, of these percentages directly to the discretion of SBA. The current rules allow for the exclusion of the cost of materials for construction and specialty trade construction, and contractors are accustomed to approaching projects with these exclusions in mind. While we welcome the changes allowing small businesses to satisfy their limitations on subcontracting targets through the combination of the small business work on the prime contract and any subcontracts awarded to similarly situated entities, the proposed rule includes many compliance criteria the prime contractors would be obliged to follow. Some of these proposed compliance criteria do not appear to be workable or practical for certain types of contracts. For example, the Proposed Rule will require small business prime contractors to identify in their proposals those similarly situated subcontractors that they intend to rely upon in order to comply with the limitations on subcontracting, and also identify the percentage of the prime contract award amount that will be spent on each similarly situated entity. Additionally, small business prime contractors will be required to enter into written agreements with each similarly situated subcontractor,

3 Whether particular specific entities perform the forecasted amount of work is not material, as long as the similarly situated entities collectively meet the performance of work requirement. SBA may consider any party s failure to comply with the spirit and intent of such a subcontract as a basis for debarment 125.6(c) N/A The proposed rule requires that contractors issue a certification that it will meet the applicable limitations on subcontracting. Identity of Interest Affiliation 3 detailing the percentage of work forecasted to be performed by each entity. We believe that SBA should consider eliminating these requirements and simply mirror existing regulations which allow for such subcontracting in the SDVOSB and HUBZone programs. Should SBA not adopt this approach, we recommend that the Proposed Rule be amended so that forecasting compliance is required at the task order level for certain types of contracting vehicles. For example, for large multiple award contracts such as those for Indefinite Delivery, Indefinite Quantity ( IDIQ ), the small business prime contractor will necessarily not have an adequate sense of how it intends to utilize its various proposed subcontractors until the specifications for the specific task orders are released by the agency. It seems counterproductive to require a prime contractor to essentially pledge in both the teaming agreement and the proposal that it will utilize a specific subcontractor for a specified percentage of the contract s value, when it is impossible to predict the agency s future requirements, or even a timeline of those requirements. The Proposed Rule does not provide contractors with the necessary flexibility they require in order to properly address future agency needs, such as task orders on an IDIQ vehicle. We believe that more information is required regarding the nature of this certification. For example, the proposed rule says that the contracting officer must be satisfied that the small business concern prime contractor will satisfy the applicable limitation on subcontracting at the time of award. However, it will be difficult for prime contractors to accurately predict future government needs in multiple award and IDIQ contract vehicles.

4 (f)(1) (f)(1) (f)(2) Firms owned by immediate family members are presumed to be affiliated and treated as one party. Presumption of affiliation may be rebutted by showing a clear fracture between the firms. Currently the regulation does not define the types of family relationships that give rise to a rebuttable presumption of affiliation. Firms owned by immediate family members are presumed to be affiliated and treated as one party. Presumption of affiliation may be rebutted by showing a clear fracture between the firms. Currently the regulation does not define the types of family relationships that give rise to a rebuttable presumption of affiliation. Firms that are economically dependent through contractual or other relationships are presumed to be affiliated and treated as one party. Currently there is no fixed percentage that SBA applies when evaluating this criteria. SBA is proposing to insert language clarifying that a presumption of affiliation exists for firms that are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings. SBA is proposing to insert language clarifying that a presumption of affiliation exists for firms that are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings. SBA is proposing to adopt a presumption that if a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other and, therefore, that the two firms are affiliated. We are in favor of the proposal to clarify the types of family relationships that give rise to a rebuttable presumption of affiliation. We are in favor of the proposal to clarify the types of family relationships that give rise to a rebuttable presumption of affiliation. We oppose the proposal to presume affiliation when one firm has derived 70% or more of its receipts from another concern in the previously completed fiscal year. A three-year average of 70% is more indicative of a dependent relationship when compared to just one year that could be just a blip based on a one-time large purchase or other unusual circumstance in that year. We also believe that SBA should account for trends in the current, incomplete fiscal year when determining whether the presumption of affiliation is rebutted. 4 Moreover, we believe SBA should clarify that economic dependence arises when the concern in

5 question serves as a subcontractor to another firm and derives 70% or more of its revenue from those subcontracts. Joint Ventures (h)(3) Currently, in addition to the exclusion from affiliation given to an 8(a) protégé firm that joint ventures with its mentor for any small business procurement, there is also an exclusion from affiliation between two or more small businesses that seek to perform a small business procurement as a joint venture where the procurement is bundled or large (i.e., greater than half the size standard for a procurement assigned a NAICS code with a with a receipts-based size standard and greater than $10 million for a procurement assigned a NAICS code with an employee-based size standard). N/A SBA is proposing to remove the restriction on the type of contract for which small businesses may joint venture without being affiliated for size determination purposes. We also believe that SBA should provide more clarity regarding what constitutes a new or startup firm. It would also be helpful for SBA to clarify that the economic dependence determination is not meant to apply to situations where 70% of revenues are from one government customer or from a major prime contractor responsible for running a government facility. We are strongly in favor of the proposal to permit small businesses to joint venture for any procurement, regardless of the size of the procurement, as long as each joint venture partner meets the applicable size standard (h)(4) SBA is proposing to carve out similarly situated entities from the definition of an ostensible subcontractor. N/A Size Recertification 5

6 N/A (g)(2)(ii)(D) SBA is proposing to clarify when recertification of size is required following the merger or acquisition of a firm that submitted an offer as a small business concern. In this regard, SBA is proposing to clarify that if the merger or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award. We strongly oppose the proposed change requiring a firm to recertify its size if a merger or acquisition occurs after offer but prior to award. We believe that the recertification requirement already has gone too far in depressing the value of small businesses and restricting their ability to freely operate their businesses and to maximize their opportunities. The great risk with this proposal is that many contracting officers, thinking that recertification indicates the firm is no longer eligible for the contract, would decline to award the contract to the recertifying firm and therefore, small businesses will lose contracts for which they were eligible based on their size as of the date they submitted their proposal. Size Protests (a)(1)(i) Any offeror whom the contracting officer has not eliminated for reasons unrelated to size has standing to file a size protest. SBA is proposing to provide standing to any offeror that is in line or consideration for award, but to not provide standing for an offeror that has been found to be nonresponsive, technically unacceptable or outside of the competitive range. 6 We think SBA should push for the recertification after the contract award. However, if SBA decides to include such a recertification requirement in the final rule, we believe that it should consider establishing a size parameter on the requirement. Regardless, we recommend that the proposal be removed from the final rule. It creates a chilling effect on commerce which already is severely frustrated by the current recertification rules for mergers and acquisitions. We agree with the proposal to make clear that firms eliminated from a procurement due to technical unacceptability or non-responsiveness do not have standing to protest size. However, we have some concern with the proposal to not allow protests from firms eliminated from the competitive range. An agency is permitted to establish a competitive range of only one firm, which would effectively insulate that one firm from any size challenge except by the contracting officer or SBA. Also, when a firm is eliminated from the competitive

7 range, this is not the same as a firm found to be non-responsive or technically unacceptable. A firm may be eliminated from the competitive range, even if well-regarded, because the agency determined that other proposals were more highly rated. If one of the firms in the competitive range was eliminated due to size issues, that might lead the agency to make a new competitive range determination including another firm. NAICS Code Appeals (b)(1) An appeal from a contracting officer s NAICS code or size standard designation must be served and filed within 10 calendar days after the issuance of the solicitation or amendment affecting the NAICS code or size standard. SBA is seeking comments on what is the appropriate timeline for filing a NAICS code appeal. We believe the current 10-day period for NAICS code appeals is the right amount of time and should not change (c)(1)(i) Upon receipt of the service copy of a NAICS code appeal, the contracting officer is required to stay the solicitation. SBA is requesting comments on whether its regulations should provide that the contracting officer should not award the contract or that the agency should delay the offer or bid response date. Nonmanufacturer Rule N/A N/A SBA is proposing to clarify that the limitations on subcontracting and the nonmanufacturer rule do not apply to small business set-aside contracts valued between $3,000 and $150,000. We are strongly in favor of making clear in SBA s rules that the filing of a NAICS code appeal requires the contracting officer to suspend the proposal deadline until the conclusion of the appeal. We believe the rules should make clear that the proposal deadline must be suspended until conclusion of the appeal, so there is no confusion as to whether firms have to go through the time and expense of preparing a proposal for a solicitation for which they may not be eligible depending on the outcome of the appeal. We agree with the proposal to continue the exemption from the limitations on subcontracting for small business set-asides between $3,000 and $150, However, we believe that it would be appropriate for the exemption to be extended to all set-asides. We also think that SBA should clarify whether or

8 not the exceptions to the nonmanufacturer rule apply to individual orders issued against multiple award contracts, or if they apply only to total contract values between the micropurchase and simplified acquisition thresholds. We believe that it would be beneficial to small businesses if the exceptions extended to orders as well as individual contracts N/A SBA is proposing to require that contracting officers notify potential offerors of any waivers, whether class waivers or contract specific waivers, that will be applied to the procurement. SBA proposes that this notification of the application of a waiver be contained in the solicitation itself. SBA is also proposing to specifically authorize SBA to grant a waiver to the nonmanufacturer rule for an individual contract award after a solicitation has been issued, provided the contracting officer agrees to provide all potential offerors additional time to respond We agree with the concept that solicitations should identify whether a class waiver of the nonmanufacturer rule exists and that SBA should allow for waivers after contract award when the contract requirements have changed. However, if an individual waiver is pending on the due date for proposal submission, small businesses will be faced with the uncertainty of knowing that a waiver is pending when they put their team together. From this perspective, requiring that the contracting officer state in the solicitation that a waiver request is pending without further guidance will not be helpful. 8