VA Using SBA SDVOSB Eligibility Rules As Of October 1, 2018

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This is a guest post by Steven Koprince of SmallGovCon.

The VA will begin using the SBA’s eligibility rules to verify SDVOSBs and VOSBs beginning October 1, 2018.

In a final rule published today in the Federal Register, the VA confirms that the SBA’s eligibility requirements will apply beginning next week–but in my eyes, one very important question remains unanswered.

As regular SmallGovCon readers know, the differences between the government’s two SDVOSB programs have caused major headaches for veterans. Because the two sets of regulations have different eligibility requirements, a company may be an eligible SDVOSB under one set of rules, but not the other.

In 2016, Congress addressed the problem. As part of the 2017 NDAA, Congress directed the VA to verify SDVOSBs and VOSBs using the SBA’s regulatory definitions regarding small business status, ownership, and control. Congress told the SBA and VA to work together to develop joint regulations governing SDVOSB and VOSB eligibility. The VA published a proposed rule earlier this year to eliminate its separate SDVOSB and VOSB eligibility requirements.

Now the VA has issued a final rule, set to take effect in just one week on October 1. The final rule broadly reiterates that the VA is eliminating its separate SDVOSB and VOSB eligibility requirements because “regulations relating to and clarifying ownership and control are no longer the responsibility of VA.” Instead, in verifying SDVOSBs and VOSBs, the VA will use the SBA’s eligibility rules set forth in 13 C.F.R. part 125.

The VA’s final rule answers a few questions from the public about the change. Among the VA’s answers:

  • Despite a common misconception, this final rule does not move the verification process from the VA to the SBA. The final rule states, “[a]lthough the authority to issue regulations setting forth the ownership and control criteria for SDVOSBs and VOSBs now rests with the Administrator of the SBA, the [VA] is still charged with verifying that each applicant complies with those regulatory provisions prior to granting verified status and including the applicant in the VA list of verified firms.”
  • The “VA and SBA will treat joint ventures the same way,” applying the SBA’s regulatory criteria. This is important because the VA currently does not treat joint ventures the same way as the SBA. Although the VA largely defers to the SBA’s joint venture rules, the VA has been requiring SDVOSB joint ventures to demonstrate that the SDVOSB managing venturer will receive at least 51% of the joint venture’s profits. This conflicts with the SBA’s current regulation, which allows the SDVOSB managing venturer to receive as little as 40% of the joint venture’s profits, depending on how the joint venturers split work.
  • Persons “found guilty of, or found to be involved in criminally related matters or debarment proceedings” will be immediately removed from the VetBiz database. Additionally, owing outstanding taxes and unresolved debts to “governmental entities outside of the Federal government” may be disqualifying, but won’t lead to an automatic cancellation.

As you may recall, the SBA proposed to revise its own SDVOSB regulations earlier this year. These proposed rules, when finalized, would apply to both the VA and SBA. The VA’s final rule indicates that the SBA’s final rule also will take effect on October 1. “VA and the SBA believe a single date on which all of the changes go into effect is the most effective path for implementation,” the VA writes. As I sit here today on September 24, I haven’t seen the SBA’s final rule yet, but I assume it will be published any moment. We’ll blog about it on SmallGovCon when that happens.

By consolidating the eligibility requirements for SDVOSBs and VOSBs, the SBA and VA will eliminate a lot of confusion. In that sense, these changes are good news. But I’m concerned about one important item that wasn’t raised in the VA’s response–that is, what happens to currently verified companies who no longer meet the eligibility requirements? In other words, what happens to companies that were verified under the VA’s “old” rules, but won’t qualify as SDVOSBs under the SBA’s “new” rules?

Remember, many companies were verified as SDVOSBs and VOSBs based on the VA’s eligibility requirements, which (until October 1) aren’t identical to the SBA’s. Perhaps most notably, the VA has long permitted companies to use reasonable “right of first refusal” provisions in their corporate governing documents. The SBA, on the other hand, has deemed such provisions impermissible–a position that a federal judge called “draconian and perverse,” but nonetheless within the SBA’s broad discretion.

As I read the SBA’s proposed rules, anyway, the SBA hasn’t changed its position on this issue. And while it sounds wonky, it’s actually very important: right of first refusal provisions are commonplace in operating agreements, bylaws, and shareholders’ agreements prepared by good corporate counsel. It’s a virtual certainty that hundreds, if not thousands, of verified SDVOSBs and VOSBs have such provisions in their governing documents.

Are these companies now vulnerable to protest? Will the VA CVE propose them all for cancellation? Are they somehow grandfathered in? (I highly doubt that, but I suppose you never know). It’s a very important question and I hope one that the SBA and VA will answer soon.

My colleagues and I will keep you posted.

Update (September 28, 2018): The SBA has published its SDVOSB final rule, available here.

This post originally appeared at http://smallgovcon.com/service-disabled-veteran-owned-small-businesses/va-will-use-sba-sdvosb-eligibility-rules-starting-october-1-2018/ and was reprinted with permission.


H.R. 4754, the Change Order Transparency for Federal Contractors

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Amends the Small Business Act to provide prospective construction contractors with information about an agency’s policies on the administration of change orders to allow such contractors to make informed business decisions regarding the pricing of bids or proposals. This legislation is meant “to help businesses plan by increasing transparency on federal construction projects.”

While this seems simple, be aware that since there’s a LOT of construction work done for the Federal Government, this bill really adds to the potential for success by small businesses.

A change order is a document signed by both contractor and customer, and is used to record an amendment to your original construction contract. It usually contains:

• A revised scope of work (usually an addition to the original agreement)
• Pricing for the new work
• Additional modifications, e.g., an extended delivery schedule to accommodate new scope of work

We know that change orders happen all the time, and we want to be sure that small businesses which may not be able to wait or retool, can also continue to work and be successful in this field.

“Many times, small contractors are already cash strapped, U.S. Rep. Steve Chabot (R-OH), chairman of the U.S. House Small Business Committee noted, so major construction changes that result in delayed payments can put them out of business. ‘H.R. 4754 safeguards these contractors and requires agencies to publish their change order process up front, in their solicitations, so they have all of the information they need that can affect their bottom line,’ he said.” (Source)

We don’t write as often about construction projects in this blog; we write about services because that is what we know. But the reality is, a LOT of money is spent on construction so take heed, small businesses, this means YOU.


H.R. 2333, the Small Business Investment Opportunity Act

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This bill amends the Small Business Investment Act of 1958 to increase the maximum amount of outstanding leverage (i.e., borrowing power) made available to any licensed small business investment company from $150 million to $175 million. This bill was signed into law on June 21, 2018.

According to a press release from the Small Business Investor Alliance (SBIA), “Small Business Investment Companies (SBICs) are highly regulated private equity funds that invest exclusively in domestic small businesses. Created in 1958, the small businesses backed by SBICs have created 3 million new jobs and supported an additional 6.5 million jobs, according to a recent Library of Congress study.

The individual fund limit was last raised in 2009 to $150 million; the current push to $175 million keeps pace with inflation and increases the amount of capital fund managers can deploy to small businesses nationwide.”

While this may not seem like much, remember that many of the small businesses that are being invested in by these funds are fairly small, and the investments are correspondingly small. Also, it is worth remembering that these SBICs are not singular companies, but multiple entities that are available for small business investment start-up capital.

This is a case of Congress remembering that small businesses are the engine of job growth, and although larger businesses create numbers, this is how the economy grows.

If you’re looking for investment capital, particularly if your business model seeks outside capital, these SBICs are a good alternative to private equity or even outside investors.


House Small Business Committee Calls for a Status Update on FAR Revision of Limitations on Subcontracting

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This post was reprinted from the PilieroMazza Weekly Report for September 21, 2018.

Last week, House Small Business Committee Chairman Steve Chabot and Ranking Member Nydia Velázquez sent a letter to the acting administrator of the Office of Federal Procurement Policy requesting a status update of Federal Acquisition Regulation Case Number 2016-011, titled “Revision of Limitations on Subcontracting.”

Section 1651 of Public Law 112-239, the National Defense Authorization Act for Fiscal Year 2013 (2013 NDAA), made significant changes to the limitations on federal subcontracting, which were reflected in corresponding regulations made by the Small Business Administration (SBA) on May 31, 2016.

Section 1651 of the 2013 NDAA and SBA regulations require that the limitations on subcontracting for full or partial small business set-aside contracts, HUBZone contracts, 8(a) contracts, service-disabled veteran-owned small business contracts, women-owned small business, and economically disadvantaged women-owned small business contracts be evaluated based on the amount paid by the federal government, rather than the previously used cost of labor, or cost of manufacturing calculation.

Significantly, the 2013 NDAA and SBA regulations exclude from the limitations on subcontracting the work performed by first-tier subcontractors that are considered “similarly situated entities.” It has been 6 years since the 2013 NDAA was signed into law and Congress has respectfully requested a status update and timeline. You can find the article here.


H.R. 2056, the Microloan Modernization Act

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The SBA’s Microloan Program is designed to provide small amounts of capital across a broad spectrum of small businesses mostly owned by low-income individuals. Think of businesses that can be started for a 25-50k sum, and this is where the SBA gets the lending authority, as those borrowers may have less collateral.

H.R. 2056 amends the Small Business Act to increase from $5 million to $6 million the total amount of loans outstanding and committed to any particular intermediary (excluding outstanding grants) from the SBA business loan and investment fund for the remaining years of the intermediary’s participation in the program.

There is some complicated terminology in this aspect, but basically an intermediary is a lending agency (like a bank). So the amount each lending intermediary can have outstanding is increased, which allows for more loans. Yay! More loans means more businesses start up.

SBA-designated microloan intermediary lenders may expend up to 50% (currently, 25%) of the intensive marketing, management, and technical assistance grant funds they receive from the SBA to provide information and technical assistance to small business concerns that are their prospective borrowers.

This provision allows funds to be set aside for essential help and consulting to these borrowers in cases where they need assistance getting started with basics like marketing, management, or technical assistance. Yay again, because this allows for more recipients to get more assistance, and that’s always a good thing.

The SBA shall:

  • compare the operations of a representative sample of eligible intermediaries that participate in the microloan program and of eligible intermediaries that do not,
  • study the reasons why the latter do not participate,
  • recommend how to encourage increased participation by intermediaries in the microloan program, and
  • recommend how to decrease the associated costs for intermediary participation.

The Government Accountability Office shall evaluate:

  • SBA oversight of the microloan program, including oversight of participating intermediaries; and
  • the specific processes the SBA uses to ensure program compliance by participating intermediaries and overall microloan program performance.

These two sections basically set up studies (this is a very typical action in the world of the NDAA). The SBA shall study what’s working and some things that Congress felt might not be working, and the GAO shall study the SBA’s processes. These are good things, as long as the studies get done and published. There are no deadlines or due dates here, something I wish would get added in more often.

This may not seem like much, but this is the engine of people leaving low-income situations by starting up their own businesses. YAY – more and more good!


NDAA FY 2019 – What’s Ahead for Small Business

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On May 24, 2018, the House passed H.R. 5515, the National Defense Authorization Act FY2019. This bill authorizes FY2019 appropriations and sets forth policies for Department of Defense (DOD) programs and activities, including military personnel strengths. It does not provide budget authority, which is provided in subsequent appropriations legislation.

Rep. Mac Thornberry’s (Chair, Armed Service Com.) comments on included reforms:
“For the 58th year, the House has passed an NDAA, one that puts the men and women in uniform first and is another large step in rebuilding and repairing our long-neglected military. Our service members selflessly fight for our freedom every day, and in return, we must ensure that they have the best training, equipment, and support our nation can provide. This bill also continues to reform the Pentagon to help speed up decision-making and get equipment to our warfighters faster.”

The provisions set ahead in the NDAA for 2019 in regards to small business(es) are promising. Rep. Steve Chabot’s (Chair, Small Business Committee) comments regarding small business protections:

“Small businesses play an immeasurable role in keeping America safe and strong. Not only are they the lifeblood of the economy, but they also the lifeblood of our nation’s industrial base. The common sense reforms in this bill will open new avenues for small businesses to flourish in our economy.”

In a series of posts, we will look into six NDAA FY19 bills that will impact small business, summarized below:

H.R. 2056, the Microloan Modernization Act

(Sec. 3) This bill amends the Small Business Act, with respect to the Small Business Administration (SBA) Microloan Program (assisting low-income individuals to start and operate a small business), to increase from $5 million to $6 million the total amount of loans outstanding and committed to any particular intermediary (excluding outstanding grants) from the SBA business loan and investment fund for the remaining years of the intermediary’s participation in the program.

(Sec. 4) SBA-designated microloan intermediary lenders may expend up to 50% (currently, 25%) of the intensive marketing, management, and technical assistance grant funds they receive from the SBA to provide information and technical assistance to small business concerns that are their prospective borrowers.

(Sec. 5) The SBA shall:
● compare the operations of a representative sample of eligible intermediaries that participate in the microloan program and of eligible intermediaries that do not,
● study the reasons why the latter do not participate,
● recommend how to encourage increased participation by intermediaries in the microloan program, and
● recommend how to decrease the associated costs for intermediary participation.

(Sec. 6) The Government Accountability Office shall evaluate:
● SBA oversight of the microloan program, including oversight of participating intermediaries; and
● the specific processes the SBA uses to ensure program compliance by participating intermediaries and overall microloan program performance.

H.R. 4754, the Change Order Transparency for Federal Contractors

Amends the Small Business Act to provide prospective construction contractors with information about an agency’s policies on the administration of change orders to allow such contractors to make informed business decisions regarding the pricing of bids or proposals.

This bill was received in the Senate and read twice and referred to the Committee on Small Business and Entrepreneurship on May 9, 2018.

H.R. 2333, the Small Business Investment Opportunity Act

(Sec. 2) This bill amends the Small Business Investment Act of 1958 to increase the maximum amount of outstanding leverage (i.e., borrowing power) made available to any licensed small business investment company from $150 million to $175 million. This bill was signed into law on June 21, 2018.

H.R. 2364, the Investing in Main Street America Act

(Sec. 2) This bill amends the Small Business Investment Act of 1958 to increase from 5% to 15% of its capital and surplus, the amount a national bank, a member bank of the Federal Reserve System, a nonmember insured bank (to the extent permitted under applicable state law), or a federal savings association may invest in one or more small business investment companies (SBICs), or in any entity established to invest solely in SBICs. The increase is subject to the approval of the appropriate federal banking agency.

H.R. 5337, the Accelerated Payments for Small Businesses Act (applies only to the Department of Defense)

To amend section 3903 of title 31, United States Code, to establish accelerated payments applicable to contracts with certain small business concerns. This bill was referred to the House Committee on Oversight and Government Reform on March 20, 2018.

H.R. 2763, the Small Business Innovation Research and Small Business Technology Transfer Improvements Act (significant portions)

This bill amends the Small Business Act to require:
● the Small Business Administration’s (SBA’s) annual report on the Small Business Information and Research (SBIR) and Small Business Technology Transfer (STTR) programs to be submitted by December 31, and
● each federal agency required to establish an SBIR program to submit its annual report on such program by March 30.

The bill requires (current law authorizes) the Department of Defense (DOD), for any contract under the Commercial Readiness Program with a value of at least $100 million, to:
● establish goals for the transition of Phase III technologies in subcontracting plans, and
● require a prime contractor to report the number and dollar amount of contacts entered into for Phase III SBIR or STTR projects.

The bill authorizes all agencies participating in the SBIR program, during FY2018-FY2022, to provide SBIR Phase II awards for a project to a small business concern without regard to whether such concern was provided a Phase I award for such project.

The bill changes the temporary pilot program that a covered agency may establish for the allocation of SBIR and STTR program funds for awards for technology development, testing, evaluation, and commercialization assistance for SBIR and STTR phase II technologies, or to support the progress of research, research and development, and commercialization conducted under such programs to phase III, to a permanent Civilian Agency Commercialization Readiness Program.

The bill extends until September 30, 2022, the deadline until which the SBA shall allow each agency required to conduct an SBIR program to use not more than 3% of program funds for administrative, oversight, and contract processing costs.


Bills Seek to Increase Opportunities for Women-Owned and Other Minority-Owned Businesses

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On July 18, 2018, the House Small Business Committee approved H.R. 6369, the Expanding Contracting Opportunities for Small Business Act, and H.R. 6382, the Clarity on Small Business Participation in Category Management Act. Among other provisions important to women, the bills seek to increase opportunities for women-owned and other minority-owned businesses.

Regarding the news, Vivian Ling, House Small Business Committee – Majority stated:

“This is a very, very modest proposal to update the size formula from a 3-year look-back to a 5-year look-back. I discussed a number of alternatives with SBA, and after much discussion, this was the only option they were comfortable with.”

H.R. 6369 essentially takes three major actions. The first action is that option years are no longer included in the award price for sole source contracts.

To account for this fact, the maximum award prices were changed from $5M to $7M for contract opportunities assigned an SIC code for manufacturing and from $3M to $4M for all other contract opportunities. Exclusion of option years was applied to sole source contracts, those controlled by service-disabled veterans, women, and women in substantially underrepresented industries.

The second action is that the SBA is to notify the House Small Business Committee and the Senate Small Business and Entrepreneurship Committee when it has established two programs: one to certify concerns of female small business owners, and one to certify concerns of service-disabled veteran small business owners.

This is a significant change requiring certification of “real” WOSBs. Right now the program is self-certified, except in cases using sole source contracts when the contracting officer is required to verify that the business is certified by one of the four designated WOSB certifiers.

The third program is that the GAO will carry out a study to ensure that sole source awards are properly classified and are being awarded to eligible firms. This report is to be delivered to Congress within 18 months after the certification programs begin. The SBA must also report to Congress with the actions it took following the GAO study.

H.R. 6382, otherwise known as the “Clarity on Small Business Participation in Category Management Act of 2018,” amends the Small Business Act to require the Administrator of the Small Business Administration to report certain information to the Congress and to the President, and for other purposes.

Specifically it requires reporting on:

(i) the total amount of spending government wide in such designation;

(ii) the dollar amount of contracts within such category awarded to each of the following—

(I) HUBZone small business concerns;

(II) small business concerns owned and controlled by women;

(III) small business concerns owned and controlled by service-disabled veterans; and

(IV) socially and economically disadvantaged small business concerns.

These changes are a big deal for small firms, especially WOSBs.


WOSB Sole-Source Authority Dispute

This is a guest post by Alice Lipowicz, editor, Set-Aside Alert.

A recent federal audit that found nearly 90% of sole-source contracts awarded to Women-Owned Small Businesses (WOSBs) were improper is getting significant pushback from the Small Business Administration.

The report by SBA’s Acting Inspector General (OIG) Hannibal Ware said four of the five recommendations it made were left unresolved by the SBA.

Most significantly, the SBA and the OIG aired more broadly their disagreement on whether WOSB sole-source awards currently are allowed at all.

While Congress approved authority for such awards in the 2015 National Defense Authorization Act, the SBA and OIG interpretations of the law clash.

The OIG says Congress authorized such awards on the condition that a formal WOSB certification program would be in place.

The SBA, on the other hand, “disagrees with the view that the NDAA of 2015 expressly or implicitly required SBA to establish a certification program concurrently with the sole source authority set forth in the NDAA,” Robb Wong, SBA’s associate administrator for government contracting and business development, wrote to the OIG.

Legal risks

The ongoing conflict about the current legality of the WOSB sole-source awards potentially is risky for small business contractors.

The disagreement may discourage contracting officers from making WOSB sole-source awards. The dispute potentially could be raised in a protest or a court case in an attempt to overturn a WOSB sole-source award.

The SBA currently plans for a formal WOSB certification program to be launched in January 2020. The OIG is urging strongly that the deadline be moved up to June 2019, which the OIG said was previously the launch date set by SBA.

The SBA also accused the OIG of errors in its data and also went on to describe “unique and complex” problems and “structural issues” in the WOSB program, owing to requirements in the law that created the program.

OIG report

The audit found that 50 out of 56 sole-source WOSB contracts reviewed–or 89%–were non-compliant. Those improper contracts totaled $52 million. Irregularities included companies with incomplete or no documentation and contracts awarded in incorrect industries.

As a result, the government’s WOSB achievement may be “overstated,” the report said.

The inspector general made five recommendations for improvements. SBA resolved only one.

On the OIG’s advice to initiate debarments of WOSB firms that violated rules, the SBA said it would complete those actions by September 2020. OIG said that is too late.

Also unresolved was a recommendation for SBA to take a more active role in correcting errors in procurement data from other agencies. Wong said that recommendation was “vague” and not likely to help.

The OIG also wanted SBA to conduct quarterly eligibility reviews of all newly-certified WOSBs and EDWOSBs. That was unresolved. The Women Impacting Public Policy group said they found that recommendation “demeaning” because it applies only to women-owned firms.

SBA’s comments

Wong, in his OIG letter, was critical of the report’s reliance on Federal Procurement Data System-NextGen data, which he said is prone to human error. “SBA’s OIG has not verified that the actions recorded in FPDS are actual contract award actions, or actual sole source awards,” he wrote.

SBA reviewed the OIG’s data for 17 contract actions for which allegedly no documents were on file. Of those, five contracting officers acknowledged they had misclassified the vendor as a WOSB, Wong added.

Furthermore, Wong said the OIG had not taken into account the multi-faceted problems and “structural issues” of the WOSB program, as established by law and regulation.

He noted that WOSB and EDWOSBs set-asides are the only ones limited by NAICS industry codes. Also, it is the only program that, by law, requires participants to provide documents to three government databases certifying their eligibility as WOSBs or EDWOSBs. Contracting officers must review the documents.

These rules have been confounding, Wong wrote, adding that most firms and contracting officers are not aware of the need to submit or review such documents.

Those issues have contributed to “limited success” in the WOSB program, and should have been given more weight in the OIG’s evaluation, according to Wong. Wong did not respond to Set-Aside Alert’s request for further comment.

More information:
OIG report
WIPP statement

Copyright © 2018 by Business Research Services Inc. Story reprinted with permission from June 20 edition of Set-Aside Alert. Founded in 1992 Set-Aside Alert is the only comprehensive news and information source focused solely on small business federal contractors. Check them out at www.setasidealert.com. The publisher Business Research Services is a veteran-owned small business.


Intellectual Property and the NDAA 2018

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Early in 2018, Edmund Amorisi of Smith Pachter McWhorter PLC and and Bill Walters of Dixon Hughes Goodman LLP presented a comprehensive summary of the key provisions of the FY 2018 NDAA. As they explained, Sec. 802 emphasizes DoD’s ongoing interest in intellectual property issues.

It directs DoD establish a “cadre of intellectual property experts” to “ensure a consistent, strategic, and highly knowledgeable approach to acquiring or licensing [IP] by providing expert advice” to the acquisition workforce. Sec. 802 also authorizes DoD to contract with a private-sector entity for “specialized expertise” to support the cadre.

Currently there are FAR and DFAR provisions to protect intellectual property, both the portion that the government should own after something new is developed, and the portion that the contractor brings to the table. However, this expertise does not exist in the regular contracting workforce. So this provision really goes into detail about intellectual property and directs the DoD to establish some intellectual property expertise that they can use.

Any company with an innovation will have a real issue about bringing their innovation into the contracting community because they may not be properly protected to keep their IP. Too often contractors don’t pursue their innovative ideas because they don’t want their innovation to become the property of the government.

So this provision is really about allowing innovation to play a part, and that’s a very good thing.


Commercial Item Contracting Changes in NDAA 2018

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While we at TAPE provide services, other companies provide products, or a combination of the two. In terms of federal contracting, commercial items are all the things that are stuff, for example office supplies like pencils and paper clips.

What Sec. 846 of NDAA 2018 is trying to do is establish Amazon-like online portals where contracting officers and authorized people can simply go online and order their products and commercial items.

That would replace the current process, which in many cases is ordering these supplies off GSA schedules, and will make it easier and more efficient for government buyers to do their job. The problem is whether this takes away opportunities for competition. How do you regulate all of these things?

There is still work to be done to determine who is included in the portal, how search results are delivered, what kind of e-commerce portal do you create, and how this relates to the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS).

Until we figure out these things, I don’t think this portal will happen immediately. There doesn’t seem to be a rush to implement this, and this might be partially because GSA sees this as a competitor to their own portal. But I also don’t think we’ll be waiting too long.


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