What’s in the 2019 NDAA for Small Business Contractors

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The 2019 National Defense Authorization Act contains several provisions to help small business contractors, including extending the prompt payment requirement to small primes. While the changes are only proposed at this point, not passed, we wanted to highlight these ones to watch.

Small business strategy

The bill calls on DOD to establish a small business strategy to identify contracting opportunities for small firms. While there’s some interaction between small business programs, there really isn’t an integrated DOD-wide strategy that talks to all of the different support functions given to small businesses, manufacturers, and so forth.

This small business strategy would provide for a unified management structure within the department for functions related to small business programs, manufacturing and industrial base policy, and procurement technical assistance programs.

The strategy must clearly identify opportunities for small businesses to contract with DOD and ensure these firms have sufficient access to program managers, contracting officers and other relevant DOD personnel. The policy also must promote outreach to small contractors through procurement technical assistance programs.

The strategy is important to ensure small businesses continue to enjoy robust opportunities to contract with DOD, and that everyone is working towards the same set of goals.

Prompt payment

Section 852 of the NDAA requires DOD to establish a goal of paying small business primes within 15 days of receiving a proper invoice, if the contract doesn’t establish a specific payment date (this is a change from 30 days).

“They realize that prompt payment is important for small businesses to continue performance on a contract. This provision is meant to ensure that the government does its part to support these companies.” – Mitchell Bashur, attorney at Holland & Knight

This is definitely a major thing. One downside is in the rush to make payments in 15 days, there may be invoices approved that are not correct – something the government shouldn’t be approving or something you neglected to invoice for and the government didn’t notice. With less time for review, there is more chance the invoice will be rubber-stamped.

Five additional NDAA provisions that will help small business contractors:

  1. Increases participation in the Small Business Administration’s microloan program, where they give smaller amounts of money with less requirement for collateral
  2. Codifies and reauthorizes the Defense Research and Development Rapid Innovation Program to accelerate the fielding of technologies developed pursuant to phase II SBIR Program projects; extends the SBIR and STTR programs for three years until 2022 (it seems odd they don’t just put them into law, but this has to do with money and authority)
  3. Increases funding for procurement technical assistance programs – this is important because this will be very local; this is someone right in your backyard whose job it is to help you negotiate through all the rules and regulations and get contracts
  4. Requires SBIR-covered agencies to create commercialization assistance pilot programs, under which contractors may receive a subsequent Phase II SBIR Program awards – the point is to allow the research done in SBIR and STTR to be commercialized, in other words taken outside of the government sector and into commercial application
  5. Increases opportunities for employee-owned businesses through SBA loan programs such as ESOPs (employee stock ownership programs) – there are problems with how these companies qualify for SBA loan programs and they’re trying to address those issues

Many of these changes are positive, but there are some possible setbacks as well, such as the recommendations put forth by the NDAA-authorized Section 809 panel. They called for eliminating or significantly reducing small business set-asides in commercial contracts and substituting a five percent price preference. The problem is that small businesses can’t qualify for the work at the size that’s usually scoped.

Keep watching this space and we’ll share updates as they arrive.


Limitations on Subcontracting

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We’re continuing our look at several new SBA provisions that were announced in December 2018. Sam Finnerty of PilieroMazza wrote an excellent explanation of each change, and here we’ll look closer at some revisions pertaining to LOS (limitations on subcontracting) compliance.

Now these are a somewhat arcane set of issues. The bottom line is that the prime contractor in a small business set-aside contract is required to do 51% of the work. That can be calculated in many different ways, predominantly established as being 51% of the labor dollars. Therefore that imposes a limitation on subcontracting, essentially meaning that you can’t subcontract more than 49% of the total value of a contract.

Keep in mind that there is a whole other set of rules and regulations to do with buying things, as opposed to buying labor. If, for example I am in a construction contract, I may need a whole bunch of materials – wood, cement, whatever – and those purchases must also comply with the size standard and limitations on the subcontracting. Be sure to consult a contracts attorney on this, somebody who understands the Federal Acquisition Regulations or the DFARS.

At TAPE we had the experience of dealing with a set-aside contract with $1,000,000 of labor, and there were some odd things that happened in the definition when you had an independent employee. There are some Department of Labor regulations about when a 1099 independent person has to count as an employee. So when the SBA regulations force you to treat that independent contractor as a subcontractor but at the same time you’re required to treat them and pay them as an employee, that creates a dichotomy of the treatment of that employee in the contract.

Let’s say there is a subcontractor we use repeatedly, such as an inspector. I may wind up using them for 1,000 hours over the course of time, so the Department of Labor says that’s really an employee not  a contractor. On the other hand, the SBA rules were different because the person was defined as a contractor, meaning those limitations of 51% and 49% rules applied, and you may have a completely separate treatment.

These new rules reconcile all that confusion. If the Department of Labor rules says they must be an employee then you can also count them on as employee within the limitations of subcontractor (LOS) compliance.

In essence, when you need particular expertise that you hire from the outside, be sure you’re treating those people in compliance with the regulations of the SBA and the Department of Labor. If you have a situation where you’re using outside experts and maybe using one in particular a lot, my strong advice is to work with your contracts attorney or somebody who understands the FARS, DFARS and the SBA regulations.


Size Recertification

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We’re continuing our look at SBA’s changes to its small business regulations, as summarized by Sam Finnerty in this PilieroMazza post.

As he wrote:

SBA is also proposing language to clarify that recertification is required on full-and-open contracts when such contracts are awarded to SBCs. In addition, the Rule adds language to SBA’s 8(a) regulations to require recertification under 8(a) contracts. Similar language can be found in SBA’s SDVO, HUBZone, and WOSB/EDWOSB regulations, but had been missing from its 8(a) regulations.

As we know, there are sizing requirements associated with small business set-aside contracts. If a contract is issued as a full and open contract, but there are also small business set-asides that apply within that contract, recertification rules require that every time an option is granted, the small business winners have to recertify in order to establish that they are still that particular type of entity.

As Sam points out, this was really a kind of technical action in one sense, in that this rule already existed almost all of the other specially certified small businesses, except for 8(a) businesses. Now the language is there across the board.

One additional thing that arose at this time was that under the new rules, a prime contractor can now use a “similarly situated entity” (a company who meets the same size standards and set-aside qualifications) to meet the performance requirements.

For example, let’s suppose that I’m bidding on a contract as a service-disabled, veteran-owned small business. Under the rules and regulations as the prime I have to do 51% of the labor costing, however I could engage a fellow service-disabled, veteran-owned small business – one who meets the same size standards and set-aside qualifications as my own company – as a subcontractor, to perform a part of my 51% of the job’s labor.

This new rule states that the similarly situated entity – the subcontractor – must also recertify whenever the prime recertifies. From the perspective of the activity and action, this is no different from what we’ve come to expect, but now the rules are applied across the board.

One effect this will have is that having that similarly situated entity as a subcontractor will not be an open-ended commitment. That business can not, for example, graduate from the small business size standard, or change ownership to a non-member of the service-disabled or veteran-owned class.


Allowing a Set-Aside Within a Set-Aside

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So we know that a contract is either unrestricted, which means anybody can bid, or it’s set aside for small businesses. A contract can be a generic small business set aside, or it can be specifically protected for one of the SBA’s socioeconomic small business programs, i.e., a woman-owned small business (WOSB), a service-disabled veteran-owned small business (SDVOSB), a HUBZone business in a historically underutilized business zones, or an 8(a) small business owned by socially and economically disadvantaged people or entities.

In the past, when a generic multiple-award contract (MAC) was set aside for any small business, it used to be that everyone within that winning pool could bid on all the task orders from that contract.

With this new rule that will be implemented by SBA and eventually populated down into the Federal Acquisition Regulation (FAR), agencies will now be able to set aside task orders for a more specific group (WOSB, SDVOSB, etc.) under a multiple-award contract originally awarded as a general small business set-aside.

As Sam Finnerty points out in this PilieroMazza blog post about several SBA changes, in the past the SBA “was concerned that such a rule would unfairly deprive SBCs [small business concerns] of an opportunity to compete for orders issued under their MACs. In the Rule’s preamble, SBA explains that other actions it has taken in recent years have alleviated these concerns. However, SBA is requesting comments on whether it would impact the ability of SBCs to compete for and receive orders.”

Under this new rule, an agency would have a certain number of awards specified for generic small businesses, but would actually be allowed to go down another level. So even though you may have won the contract as a small business, you’re not guaranteed that every task order is available to you, as they would under the current rules of the road. Some orders may be further set aside and if you don’t qualify for that program, you couldn’t bid on the order.

So this change would restrict certain rights, but it gives the federal agency more room to make sure the right activity comes to the right vehicle, and will also help them keep their small business credits going.

As for small businesses, we want the agency to come to this vehicle and this change makes it attractive to them by allowing them to get additional credits, not just small business credits but credits for using specially certified businesses as well. This is particularly important at the end of the year when everything is done in a rush and they’re looking to get in their numbers.

The hope of course is that they will continue to come back to that vehicle, and maybe some of those task orders will be ones that your small business does qualify for. Stuff escapes the system all the time and we’re trying to get to the point where they don’t have to go somewhere else. Ultimately we want them to meet all their requirements in this vehicle and to keep all the agency work together.


DOD Rule for LPTA Allows More Focus on ‘Best Value’ Procurements

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In the previous administration, one of the things that became popular in the drive to save the government money was the use of an evaluation process or technique called LPTA, or least price technically acceptable.

So what was different about this? Instead of doing a detailed review of the technical proposal, technical approach, management approach, past performance, etc., all those factors were lumped together and made into a pass/fail or technically acceptable criteria.

What further assisted the contracting officers and the government was that under an LPTA evaluation, you could start by evaluating the least priced proposal and if their technical approach was acceptable, then you didn’t need to even look at the rest of the proposals.

So if, for example, I got 10 proposals, and I started out with the very first one that was the lowest cost, and that proposal represented a technically acceptable approach, then I didn’t have to review the other nine proposals. Clearly this is an enormous saving of time and energy for the contracting officers and everyone else.

On the other hand, what eventually came to happen, was that people were awarded LPTA contracts and then were unable to perform because their rates were too low. So while the contracting officers were happy because they got more work done, the people in the program offices who had received these kinds of awards on their contracts were unhappy because the people couldn’t do the work at the price they’d bid.

So a new set of rules has been implemented, explained well by Jeff Kinney at WashingtonExec, which implement criteria from NDAA 2017 that make it harder to justify an LPTA approach. This will ensure that procurements that are solving more complex problems that require creative and innovative solutions will be evaluated under ‘best value’ criteria rather than LPTA.

As Kinney explains, the ‘best value’ approach “allows the government flexibility to determine the best mix of price and capability, rather than merely accepting the lowest bid that meets minimum criteria.”

Frankly, only time will tell whether it works out correctly.


Small Business Contracting in Disaster Areas

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As Sam Finnerty of PilieroMazza recounted in this blog post, in December 2018 the U.S. Small Business Administration (“SBA”) issued a proposed rule to implement several provisions of NDAA 2016 and 2017, as well as the Recovery Improvements for Small Entities After Disaster Act of 2015 (“RISE Act”).

As we all know, there have been many major disasters like the fires in California, and hurricanes that happen every year. In these situations, the Federal Emergency Management Agency (FEMA) has a process in place to have the President declare a national disaster and designate a disaster area. The SBA also has separate size standards for small businesses in a “major disaster or emergency area.”

The SBA’s new provisions are important for small business owners because they provide additional incentives and credits for using local small businesses in response to these disasters. As a point of fact, this rule applies to any contracting within the disaster area, not necessarily a contract associated with disaster recovery.

There are some limitations, for example you need to have your main operating office in the disaster area, plus they want 50% of your revenue generated there and 50% of your employees located there. However, the SBA will consider other factors if your business doesn’t quite meet those standards.

The fundamental issue is that firms within a disaster area now get extra benefit in the form of a small business credit awarded to the government agency issuing the contract. This is obviously good for small business because the more incentives people have to use small business, the better it is for those businesses.


Subcontractor Plans – Stronger Penalty Standards

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As Sam Finnerty explained on the PilieroMazza blog, “On December 4, 2018, the U.S. Small Business Administration (‘SBA’) issued a proposed rule (‘Rule’) to implement several provisions of the National Defense Authorization Acts (‘NDAA’) of 2016 and 2017 and the Recovery Improvements for Small Entities After Disaster Act of 2015 (‘RISE Act’), as well as other clarifying amendments.”

These changes will likely be implemented in March 2019. We’ll be taking a closer look at several of these, beginning with subcontracting plans. Finnerty writes:

“Consistent with the 2017 NDAA, the Rule states that it shall be a material breach of contract when a contractor or subcontractor fails to comply in good faith with its subcontracting plan requirements, including failing to provide reports and/or cooperate in studies or surveys to determine the extent of compliance. The Rule provides a number of examples of what constitutes a failure to make ‘good faith’ efforts, including, among others, (1) failing to timely submit subcontracting reports and (2) failing to pay small business subcontractors in accordance with the terms of the contract. The Rule also provides that failure to make a good faith effort may be considered in any past performance evaluation of the contractor.

With respect to subcontracting plans, the Rule also requires other than small prime contractors with commercial subcontracting plans to include indirect costs in their subcontracting goals. According to SBA, the burden imposed by this change would be de minimis, as approximately 95% of the firms with commercial subcontracting plans in 2017 already included indirect costs in their subcontracting goals.”

Normally, subcontracting plans are required for large businesses where the RFP requires a certain amount of small business participation. Unfortunately, most small businesses have experienced inconsistencies between what they thought they were going to get from their subcontract and what actually ends up happening.

So NDAA 2016 and 2017 contained changes that were designed to put some teeth into the potential penalties for non-compliance on the part of large businesses. First of all, the rule essentially creates the potential for a contracting officer to find the large business in breach of contract when they fail to comply. That is a much stronger penalty standard than the kind of scolding which was basically all they could do at present.

A few of the things that are required are one, as silly as it sounds, is to not only submit timely formal subcontracting reports, but also to cooperate when the SBA or any small business agency is doing a study or a survey. The second issue is to honor their payment terms with their small business subcontractors, who are highly dependent on their subcontract revenue coming in on time because of loans and other commitments. Too often a large business will withhold payment for some mythical time related to their accounting system that has nothing to do with whether the work had been completed.

The third issue is that subcontracting plans will include not just direct costs but what are called indirect costs. What this does is increase the accounting accountability of these issues.

Stay tuned for our continued look at these important small business issues.


Small Business Runway Extension Act of 2018 (H.R. 6330)

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The Small Business Runway Extension Act of 2018 (H.R. 6330), authored by U.S. Senator Ben Cardin (D-Md.), Ranking Member of the U.S. Senate Committee on Small Business & Entrepreneurship, passed on December 6th and has now been signed by the President.

As explained in this press release, this legislation (also know as the “5-year look back”) ensures that small business size standards are calculated using average annual receipts from the previous five years, instead of the previous three. This change will significantly reduce the impact of years wherein businesses experience unexpectedly rapid growth, often causing them to prematurely lose their small business status.

We heard the news from Tonya Saunders of Mid-Tier Advocacy (MTA), in a follow-up to December’s MTA CEO Roundtable meeting, which Louisa and I were happy to sponsor and host.

While Tonya pointed out that this bill doesn’t help most mid-tiers, it is an incremental start at addressing some of the problems that a growing firm faces as they begin to grow beyond small.

She also passed along a note of thanks from Barbara Ashe, Executive Vice President of the Montgomery County Chamber of Commerce, who thanked MTA for our support as a Coalition Partner in the Midsize Initiative. Ms. Ashe wrote: “Not only does this legislative change open the door to other initiatives for companies bumping up against small business standards, we also successfully changed the term from ‘mid-tier’ to ‘midsize businesses’ in an effort to clarify the businesses we are seeking to assist.”


How the Order-Level Materials Initiative Improves the Schedules Program

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On January 24, 2018, a final General Services Acquisition Regulation (GSAR) rule was issued that incorporates order-level materials (OLMs) into the Multiple Award Schedule (MAS) program. On selected schedules, agencies can now acquire not just the products and services they’ve come to rely on from GSA, but also the associated items required to make use of them at the order level.

From GSA: “OLMs are supplies and/or services acquired in direct support of an individual task or delivery order placed against a Schedule contract or BPA. OLM pricing is not established at the Schedule contract or BPA level, but at the order level. Since OLMs are identified and acquired at the order level, the ordering contracting officer (OCO) is responsible for making a fair and reasonable price determination for all OLMs.

OLMs are procured under a special ordering procedure that simplifies the process for acquiring supplies and services necessary to support individual task or delivery orders placed against a Schedule contract or BPA. Using this new procedure, ancillary supplies and services not known at the time of the Schedule award may be included and priced at the order level.”

So what are the new benefits of this policy, and why should you care?

  • OLMs increase the flexibility of contracts using the various GSA Schedules, especially the ones that focus on services, to provide a total solution to meet the actual customer requirements.
  • OLMs reduce customer agency procurement/administrative costs and makes leveraging GSA Schedules that much easier – of course GSA likes this because they get the order through the MAS, along with any associated fees (the downside is that the company gets OLM “revenue,” which generally is just a pass-through fee, not a profit margin, and therefore is using up revenue).
  • Contracting officers are happy because it reduces contract duplication by eliminating the need to set up new commercial IDIQs and/or open market procurements for ODCs (“Other Direct Costs”).
  • OLMs potentially eliminate the need for Government Furnished Equipment (GFE), and anything that reduces the burden on the customer/contracting officer to track things is HIGHLY desirable.
  • Contracting officers like the fact that MAS terms and conditions apply to OLMs, which ensures customer buys are compliant with FAR and other guidelines.

As a contractor, how do you include OLMs under a Schedule order?

The special ordering procedures are contained in General Services Administration Acquisition Regulation (GSAR) clause 552.538-82 Special Ordering Procedures for the Acquisition of Order-Level Materials, which may be incorporated into contracts under OLM-authorized Schedules. This clause, along with a dedicated Special Item Number (SIN) for Order-Level Materials, allows ordering activities to include OLMs in Schedule orders.

It is important to remember:

  • Prices for OLMs are not established in the Schedule contract or BPA.
  • OLMs are established and acquired at the order level, and the ordering activity contracting officer is responsible for making the determination that prices for all OLMs are fair and reasonable.
  • OLM procedures may be used to purchase OLM products or services to support delivery orders (products) or task orders (services) under authorized GSA Schedules.
  • OLMs may be added to any order-type, i.e. Firm Fixed-Price, Time & Materials (T&M), or Labor Hour. However, the OLM CLIN (contract line item number) must be T&M, but it can be the only T&M CLIN on the order. i.e., OLMs may be added to a Firm Fixed-Price order, but the OLM CLIN itself must be T&M.

Current Authorized OLM Schedules

  • 00CORP – Professional Services Schedule
  • 03FAC – Facilities Maintenance and Management
  • 56 – Buildings And Building Materials / Industrial Services and Supplies
  • 70 – Information Technology
  • 71 – Furniture
  • 84 – Security, Fire, & Law Enforcement
  • 738X – Human Capital Management and Administrative Support Services

A GSA OLM Ordering Guide is coming soon. In the meantime, check out these resources:


H.R. 5337, the Accelerated Payments for Small Businesses Act

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This bill, which applies only to the Department of Defense, will amend section 3903 of title 31, United States Code, to establish accelerated payments applicable to contracts with certain small business concerns. This bill would require the government to establish a goal of paying all small business contractors within 15 days of receiving a proper invoice. The bill also establishes a similar goal for government contractors that have small business sub-contractors.

This bill is a win-win-win for small businesses, taxpayers, and the community.

For small businesses: “Small business contractors rely on a consistent and reliable flow of income in order to keep their operations running smoothly. The Accelerated Payments for Small Businesses Act will help ensure these businesses receive their payments in a timely and accountable manner. This consistency will enable businesses to focus on improving their services and expanding production.” – Representative Steve Knight (R-CA)

“The Accelerated Payments for Small Businesses Act [will] ensure that all transactions among small business contractors are treated with the respect and equity they deserve. Making this commitment will yield a tremendous return further incorporating small businesses including those that are women-owned, minority-owned, veteran-owned, and HUBZone contractors.” – Representative Adriano Espaillat (D-NY)

For the taxpayers: “[This bill means that] small business prime contractors and prime contractors that subcontract with small businesses can continue to do business and not pass on any unnecessary costs to the taxpayer” – House Small Business Committee Chairman Steve Chabot (R-OH)

For the community: “For small companies, payment delays can mean cash flow problems, constraining their expansion and slowing job growth. By accelerating payments to small companies, this legislation will help small contractors meet payroll, reinvest in their operations and create good paying jobs along the way.” – House Small Business Committee Ranking Member Nydia Velázquez (D-NY)

It also affects a company having the resources in time to pay subcontractors and even our 1099 consultants and SMEs, increasingly used in this rapidly innovating economy. We’ve talked in other venues about financing options, but anything which reduces the cost of credit and makes payments better, also saves money for the contractor.


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