In SBA News – Updates from an Expert

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Gosh, it seems like yesterday that the Mid-Tier Advocacy group held their Business Focused Breakfast around the legislative update with some regulatory issues thrown in (but it’s already almost time for the next one).

Our speaker on July 30th was Pam Mazza of Piliero Mazza – true experts in this legal and regulatory thicket we all have to plow through as GovCons…

We talked about the new Small Business Runway Extension Act, passed in December 2018. It turns out that the legislation had some flaws in it, so instead of new regulations flying for the 5-year average replacing the old 3-year average, they’re working on some adjustments.

It was somewhat over my head, to be sure, but it hinges on whether SBA was actually authorized, and Administrator vs. Administration. OK, I’m not kidding. However, it did pass bi-partisanly, so these changes should get made fairly quickly. Of course some places are implementing it, and I can hear the protests rumbling. My advice is to ask the question, do not assume.

Second was the SBA’s preliminary rule on inflationary adjustments to the size standards. By the way, a 10% rise from 27.5 million is going to 30 million, not to 30.25 million, because I guess bureaucrats like round numbers. These adjustments will take effect in August, but then you’ll have to be sure SAM Reps and Certs catches up, so things might take a while for these changes to actually change your size status. FYI, this is NOT the “re-evaluation” of Sector 54 and 236 still to come, someday…

There’s a bipartisan bill circulating to extend 8a sole sourcing to SDVOSB, HubZone, and WOSB/EDWOSB, and to raise the thresholds – these have not been adjusted in decades. The thicket of rule-of-2 rules and regulations for non-8a sole sourcing has got to be made easier, so we’ll see if this gains traction.

DoD issued a class deviation letter, allowing similarly situated entities on all DoD contracts.

DoD also issued a letter limiting LPTA contract evaluation types, but beware of “fake best value” where they have fewer factors and call it best value when price is really the issue.

Finally, SBA is looking at working some early termination graduation for 8a’s – more will be revealed.

And that’s the news report… These breakfasts are often a good place to hear and discuss the real issues, so if you can, attend them in your area wherever that may be. The next Mid-Tier Advocacy Business Focused Breakfast is on Tuesday, August 27th at the Tower Club in Vienna, VA, featuring SBA Associate Administrator Mr. Robb Wong. Learn more and get your tickets now.

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OMB Acquisition Reform Proposal 2 – Repeal Defense CAS

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The Office of Management and Budget (OMB) has proposed six ways to help streamline the acquisition process and improve the acquisition environment, intended to be included in the FY 2020 National Defense Authorization Act (NDAA).

The second proposal is to do away with the Defense Cost Accounting Standard Board (CASB). The issue here is that there is a Defense CASB, and there’s a federal one as well. The result is, unfortunately, is that the two different sets of cost accounting standards created can often be, well, different. So what this OMB initiative is going to try and do is eliminate the Defense CASB and consolidate everything into this one place under the federal board.

Of course, not everyone is going to be happy about this. There will be differences between the standards, and things from the Defense CASB that somebody’s been taking advantage of and doesn’t want to give up, or conversely, anything changed from the Federal CASB will have proponents and systems that cater to that function. We’ll have to figure out what those things are. Reconciling these two will be a nightmare, but it’s always better to have one rather than two things carrying out the same function.

And don’t forget that there are computer systems that handle acquisition and contract issues and cost accounting, and those will need to be adjusted.

What this demonstrates is that nothing in contracting and acquisition is ever as simple as “just do this.” So much of our regulated activity gets caught up in the very regulations being implemented; it’s never simple to change.

But, we’ll keep working on it…


Beyond the Size Standards – Business Focused Breakfast, Jul 30, 2019

Mid-Tier Advocacy, Inc. presents the next Business Focused Breakfast on July 30, 2019 from 7:00-9:00 a.m. at the Tower Club – Tysons Corner, 8000 Towers Crescent Drive, Suite 1700, Vienna, Va.

Topic: “Beyond the Size Standards” – SBA to Increase Size Standards with Inflationary Adjustment

Featured Guest Speaker: Ms. Pamela Mazza, Managing Partner, PilieroMazza PLLC.

Click here to learn more and register now!


OMB Acquisition Reform Proposal 1 – Acquisition Test Programs

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The fundamental problem with acquisitions is that they take too long, by whatever standards people may be applying. The Office of Management and Budget (OMB), who oversees the performance of federal agencies, has proposed six ways to help streamline the acquisition process and improve the acquisition environment – changes they intend to be part of the FY 2020 National Defense Authorization Act (NDAA).

In a series of posts, we’ll look at each of these six proposals. First up, is to establish acquisition test programs.

You may remember our discussion about other attempts to streamline acquisitions through other transactional authorities and consortia. What the OMB is saying here is let’s set up some innovation in procurement and acquisition and allow individual agencies to test stuff out and cultivate the kind of innovation you might see in Silicone Valley and other high-tech areas.

Someone will still need to approve you to try out your idea, but then you can do so even if it’s not entirely in compliance with the FAR. The idea is to test stuff out, see whether it works, and then that would result in recommendations for future actual changes.

This all fits into the concept of agile development that so many are people are into right now. One example is the Air Force Kessel Run program (for all you Star Wars fans). It’s essentially a place where they’re doing software development in small bits – what they call agile scrums – and they can literally run from requirements to testing, fielding, etc. in months rather than years.

Establishing acquisition test programs is a really good idea. It will fit within what the 809 panel was doing, and it will also fit the government’s move toward innovation.


SBA to Change Measurement for Receipts-Based Size Calculation

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This is a guest post by Megan C. Connor of PilieroMazza, PLLC.

On June 24, 2019, the Small Business Administration (SBA) published its long-awaited proposed rule changing the period of measurement for a receipts-based size calculation from three years to five years. This change was prompted by the Small Business Runway Extension Act (the Runway Act), which became law on December 17, 2018.

SBA was slow to implement this change because SBA believes that the Runway Act amended a section of the Small Business Act that does not apply to SBA. “Nevertheless,” SBA says, “to promote consistency government-wide on small business size standards, SBA proposes to change its own size standards to provide for a 5-year averaging period for calculating annual average receipts for all receipts-based size standards.” Smaller and larger small businesses industry wide could be impacted in terms of gaining access to government contracts. PilieroMazza will be submitting comments to the proposed rules on behalf of our small business clients before the August 23, 2019, deadline.

The proposed rule changes the references to three fiscal years to five fiscal years in 13 C.F.R. §§ 121.104 and 121.903. The proposed rule does not, however, address how contractors should calculate their size in the period between December 17, 2018, and when SBA’s rule becomes final. Presumably, SBA’s position is that contractors must use a three-year calculation until SBA issues its final rule. But this position, of course, does not address the fact that the five-year calculation became federal law in December.

SBA also does not address a transition period, for firms that are small under a three-year calculation but other-than-small under a five-year calculation. The latest version of the House of Representatives’ National Defense Authorization Act for Fiscal Year 2020 (the NDAA) is requiring SBA to implement a transition plan that would allow firms to use a three-year calculation, if such calculation renders the firm a small business, for the period beginning on December 17, 2018, and ending on the date that is six months after the date on which SBA issues final rules implementing the Runway Act. (The House is also making clear in the NDAA that, from Congress’ perspective, the Runway Act became effective on December 17, 2018.)

The deadline for submitting comments is August 23, 2019. SBA specifically seeks feedback on whether SBA should calculate annual average receipts over five years for all industries subject to receipts-based size standards or on whether it should use a five-year annual receipts average for businesses in services industries only and continue using a three-year annual average for other businesses. SBA also invites input on how the use of annual average receipts over five years instead of three years would impact both smaller small businesses and more advanced, larger small businesses in terms of getting access to federal opportunities for small businesses.

Members of PilieroMazza’s Government Contracts and Small Business Programs & Advisory Services Groups will be preparing comments to this rulemaking. If you have feedback you want them to include in their comments, visit this page for further instructions: https://www.pilieromazza.com/blog-sba-issues-proposed-rule-changing-receipts-calculation-to-5-years-implementing-small-business-runway-extension-act. This post was reprinted with permission.


Cost Pools in Federal Contracting

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When you price a government contract, some of your costs are considered direct costs and others are considered indirect costs. The most basic direct cost is labor – specifically the cost of paying the employees who work directly on that contract. Those costs are billable to the government agency who hired your company.

You also have labor costs that aren’t billable to the government because those employees aren’t working directly on that contract. Some of these indirect costs include paying the salaries of your company president, your HR person, or your reception staff.

There are other indirect labor costs, known as fringe benefits, which are things like vacation pay and sick time. You are responsible for these costs as an employer but they are not directly billable to the government.

A cost pool is a calculation that combines these different but related types of indirect costs, and provides you with a percentage, e.g., 2X base salary, that you can include in your bid price to make sure those indirect costs are accounted for.

You would go through this same calculation for overhead costs, such as office space for billable versus non-billable employees, and direct versus indirect general and administrative costs.

I’m making this very simple (here’s a blog post that goes into more detail), but government cost accounting requires you to have these pools and rates established in order for your bid to have appropriate approval by a government cost analyst who might be evaluating the bid. Not to mention protecting yourself in case of an audit by the DCAA (Defense Contract Audit Agency – your processes could be also audited by the Defense Contract Management Agency).

As a small business in the federal contracting space, it’s important to understand cost accounting, cost analysis, indirect rates, cost pools, and all of these concepts in order to understand where you can cut costs and be more price competitive. You’ll still definitely want to consult legal and accounting experts, but educating yourself upfront will help save you time and money along the way.


SBA Changes to Size Determinations

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There are often cases where a small business that’s been awarded a contract has grown bigger. This is especially common in the case of multi-year contracts, but can happen with any contract. At TAPE we’re currently awaiting award on contracts we proposed a year or as many as two years ago, and we’ve definitely grown since then.

It takes awhile for the government to evaluate proposals and in that time a company can grow and might no longer be considered small. That’s theoretically a problem if the contract was set-aside for a small business.

As Sam Finnerty explains in this post about changes to SBA’s small business regulations, SBA is proposing to amend 13 C.F.R. § 121.404(a) to make it clear that the size determination is made at the time of initial offer, OR the first formal response that includes price – this is not always the same time, the price discussion might happen later than the initial offer.

There are some other exceptions and special rules, but the important thing is that size is determined on the date of the proposal submission or the initial offer. This is a very important point because it provides more options and opportunities for substantial growth.

A small business, let’s say, could have a size standard of $15 million when they make an offer and a few years later could be $20 million or even $30 or $40 million. If it’s a five-year contract they could be a $100 million company by the end! With this change, none of that will affect the size standard that was applied at the moment of offer.

For all growing, successful companies, this is a wonderful thing and we want to applaud the SBA for doing this. This change creates a runway or a ramp for companies who’ve won contracts as a small business and meanwhile have grown into a large business.


Ostensible Subcontractor

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In his post outlining SBA’s significant changes to its small business regulations, Sam Finnerty had this to say about a change to when you can protest an award that involves an ostensible contractor:

“SBA is proposing to amend its regulations to allow an unsuccessful offeror, SBA, or a contracting officer to protest a socioeconomic set-aside or sole source award to a prime contractor that is unduly reliant on a small, but not similarly situated subcontractor (i.e., ostensible subcontractor affiliation). By way of background, an ostensible subcontractor is a subcontractor that is not a similarly situated entity (e.g., not a small business, SDVOSB, HUBZone, or 8(a)) and performs primary and vital requirements of a contract or a subcontractor upon which the prime contractor is unusually reliant. In such cases, assuming that an exception to joint venture affiliation does not apply, SBA will treat the small business prime contractor and its ostensible subcontractor as joint venturers and, therefore, affiliates. And, if the “joint venture” is other than small, the prime contractor is ineligible for award due to this affiliation.

Notably, however, under SBA’s recently enacted joint venture regulations, a joint venture receives an exception from affiliation if both venturers are small under the applicable NAICS code. This means, for example, that if an SDVOSB contract is awarded to an SDVOSB company and that company subcontracts most or all of the actual performance to a business that is small for the applicable NAICS code, but not an SDVOSB (e.g., a generic small business, HUBZone, 8(a), or WOSB), there is currently no way to protest the awardee on the basis of ostensible subcontractor affiliation. Indeed, since both the prime and the subcontractor are small businesses, even if they are deemed a “joint venture,” they are exempt from a finding of affiliation.

To address this type of outcome, under the proposed rule, an interested party would now be able to protest the status of such an awardee, and SBA would evaluate the relationship between the prime and its subcontractor under the ostensible subcontractor rule. To that end, if SBA found that the subcontractor was an ostensible subcontractor, it would treat the arrangement between the contractors as a joint venture that is not subject to an exemption from affiliation.”

Bill’s comments: So in an ordinary circumstance, a set-aside vendor who bid on a job that’s been set aside can protest if the vendor who won will be subcontracting the work to another company that does not meet the set-aside requirements – in particular, a large subcontractor.

What’s been happening up until now, however, is that because of the joint venture rules about what’s called affiliation, members of a joint venture become immune to this form of protests if they have an ostensible subcontractor affiliation.

These new rules will essentially bring the subcontractor relationships underneath the much more stringent new rules and regulations applying to joint ventures. By doing so the SBA is allowing more opportunities for protest, and this will be a significant change.


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.


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