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.


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.


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