Federal Construction Contracting Blog : Federal Construction Contracting Law Firm : Cohen Seglias Pallas Greenhall & Furman PC : Construction Law, Dredging and Claims

By: Edward T. DeLisle & Maria L. Panichelli

Last year, after over a decade of discussion, the Small Business Administration (SBA) finally implemented a federal contracting program specifically designed to assist small businesses owned by women. This program authorizes contracting officers to set aside federal contracts for eligible WOSBs (woman-owned small businesses) and EDWOSBs (economically disadvantaged women-owned small businesses). As we previously discussed, this program became officially effective on February 4, 2011 and was scheduled for gradual implementation over a period of months. It was expected to assist federal agencies in achieving the previously existing statutory procurement goal of awarding five percent (5%) of federal contracting dollars to WOSBs.

A year after going into affect, it is clear that the program is off to a slow start. Only about 10,000 WOSBs have been self-certified via the WOSB Program Repository, though there are certainly many more businesses out there that meet the eligibility criteria. If you are one of those businesses, you could be missing out on huge opportunities. As such, it is important for you to determine whether you meet the eligibility criteria for participation in the program.

What are those criteria, you ask? As a threshold matter, the business must be considered “small” in its primary industry in accordance with SBA’s size standards for that industry. In addition, to be considered an eligible WOSB or EDWOSB, a firm must be at least 51% owned and controlled by one or more women, or economically disadvantaged women. 13 C.F.R. 127.200. “Ownership” must be direct; it cannot be through an affiliate or association with others. 13 C.F.R. 127.201. The SBA defines "control" as a situation where the business owner has long-term decision-making and the day-to-day, full-time management and administration responsibilities for business operations. 13 C.F.R. 127.202.

In order to avoid abuse of the program by companies not truly owned and controlled by women, the SBA has enacted additional safeguards. Specifically, the woman owners must have managerial experience of the extent and complexity needed to run the company. The woman manager need not have the technical expertise or possess a required license (if applicable), if she can demonstrate that she has ultimate managerial and supervisory control over those who possess the required licenses or technical expertise. However, the SBA has stated that if a man possesses the required license and has an equity interest in the firm, he may be found to control the concern. 13 C.F.R. 127.202.

For those businesses that meet the requirements above, the WOSB and EDWOSB programs offer huge advantages. Five percent of all federal spending is the procurement goal for WOSB/EDWOSBs, and there is also a five percent subcontracting goal to WOSBs. With only about 10,000 businesses out there registered to compete, your chances of securing a government contract are vastly improved if you and eligible and participate in the program. In addition, there is no term limit to the WOSB and EDWOSB programs, and mentor-protégé programs are available.

In short, if you meet the program requirements, you should get registered for participation in the program as soon as possible. In the alternative, if you are thinking of starting a business that might be eligible, don’t wait! The SBA has not set forth a minimum amount of time the firm must be in business; therefore, a woman may establish a business, meet the requirements, self-certify, and win a government contract under this program in a short period of time.

Once you have determined that your business is eligible, registration in the program is rather easy. First, in preparation for registration/certification, businesses should become familiar with the WOSB Program’s Compliance Guide. The next step is to register the business in the Central Contracting Registry (CCR) or in the System for Award Management (SAM) (the government’s new registration system previously discussed here), once it is implemented. Then, log onto the SBA’s General Login System (GLS), and access the WOSB Program repository. Upload/categorize all required documents (a complete list of required documents can be found in the WOSB Program’s Compliance Guide). Then, complete the applicable certification form(s) available on the SBA website and register the business’s status as either a WOSB or EDWOSB, through either the Online Representations and Certifications Application (ORCA), or SAM. Lastly, get out there and start bidding!

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

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By: Joseph A. Hackenbracht

From August 2, 2002 until July 14, 2004, Todd Construction, a general contractor located in Oklahoma, was awarded five indefinite delivery/indefinite quantity (ID/IQ) contracts by the Savannah District of the Corps of Engineers for design and construction of projects in Georgia, North Carolina, and South Carolina. Each contract was for a period of up to three years and together the task orders issued under the contracts could have added up to $65,000,000. On two of the task orders, each of which was for less than $500,000, Todd received unsatisfactory performance evaluations; it challenged those ratings.

Back in 2008, we reported (see our earlier blog article) about a decision by the U.S. Court of Federal Claims, Todd Construction, L.P. v. U.S., 85 Fed.Cl. 34, 2008, where the Court held that it had jurisdiction to hear a challenge to a performance rating. In that case, Todd submitted a CDA claim asserting that it received an erroneous performance evaluation. The Court concluded that the challenge constituted a “claim” within the meaning of the Contract Disputes Act, thereby giving the Court jurisdiction of what amounted to a non-monetary dispute.

In the years that followed, Todd proceeded on a legal odyssey in what came to be known as Todd I, Todd II, and Todd III. Todd’s counsel battled with government attorneys in written brief and after written brief over nuances regarding one’s ability to challenge a performance evaluation. In 2009, the Court issued Todd II, finding that plaintiff’s must “do more than recite the elements of a cause of action; they must make sufficient factual allegations to ‘raise a right to relief above the speculative level.’” Todd v. U.S., 88 Fed.Cl. 235 (2009). The Court then granted Todd the opportunity to amend its pleadings. In Todd III, decided in 2010, the Court of Federal Claims concluded that, even after revising its complaint, Todd failed to state a claim upon which relief could be granted, and dismissed Todd’s challenge of its rating. The Court also found that Todd lacked standing to bring the action because there was no discernable injury from the alleged errors in the evaluation. Todd v. U.S., 94 Fed.Cl. 100 (2010).

Once Todd’s journey in the Court of Federal Claims came to an end, Todd had two choices: abandon pursuit of its claim or appeal the decision to the United States Court of Appeals for the Federal Circuit. Todd chose to appeal. On August 29, 2011, the Circuit Court issued its decision. The Circuit Court agreed with the lower court’s finding that, in the absence of a showing of prejudice or injury in fact, Todd lacked standing to challenge the alleged procedural violations in the agency’s evaluation. Furthermore, the Court of Appeals agreed with the lower court’s dismissal of the case for failure to state a claim. Todd Const. L.P. v. U.S., 656 F.3d 1306, C.A.Fed. 2011. The Court noted that the complaint did not “state a claim to relief that is plausible on its face,” and that Todd failed to “plead factual content that allows a court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” The Court of Appeals did confirm the jurisdiction of the Court of Federal Claims to hear challenges of performance ratings since, it concluded, the ratings are “related to” the contract and the challenge is a claim under the Contract Disputes Act.

So, on a contract that was performed between 2003 and 2005, concerning a performance evaluation issued on July 23, 2006, that was challenged in a claim submitted in August, 2006, which was denied in a Contracting Officer’s decision dated April 25, 2007, that was the subject matter of the Complaint filed on May 25, 2007, Todd learned on August 29, 2011, that the merits of the government’s evaluation of its performance would go unchallenged and unreviewed. Although Todd could appeal to the Supreme Court of the United States, there is no indication that Todd pursued the matter any further.

Decisions of the Court of Appeals for the Federal Circuit are precedent for both the Court of Federal Claims and the boards of contract appeals. Going forward, therefore, contractors can expect that both the boards and the Court will hear challenges of adverse performance ratings. However, in order to avoid the negative result suffered by Todd, contractors must plead the facts specifically and in detail, and identify individually which ratings are arbitrary and capricious and why they are erroneous. Contractors must also allege what the ratings should have been and that the outcome would have been different if the errors had not been made. In order to avoid dismissal based on standing, contractors must be ready to provide evidence that the negative rating has caused injury, or has prejudiced the contractor.

Based upon the above, contractors should consult with a professional to the extent that they wish to challenge a performance rating to assure themselves that the prerequisites of Todd I, II and III have been met.

Joseph A. Hackenbracht is a Partner in the firm and a member of the Federal Contracting Practice Group.

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By: Edward T. DeLisle & Maria L. Panichelli

Be careful what you ask for, or, in the context of federal government contracting, be careful how you ask and how the government responds. If you're not careful, you may get what you ask for, but lose a contract. That's the lesson learned in NCI Information Systems, Inc.

In NCI Information Systems, Inc., the Department of Defense, U.S. Transportation Command (“USTRANSCOM”) issued an RFP, seeking IT administrative and management support services. The RFP incorporated FAR § 52.215-1(c)(3)(i), which states that if no time is specified in the solicitation, the deadline for receipt is 4:30 p.m., local time on the date identified.

Following the initial submittal of proposals, discussions ensued. After three rounds of discussions, the agency requested that those companies remaining in contention for award submit final proposal revisions “by close of business on 31 August 2011.” It did not specify what time constituted “close of business.” The agency’s failure to specify a time created some confusion, because USTRANSCOM employees work flextime schedules, with different hours on different days. Because of this, its office would "close" at different times on different days.

Knowing this, on August 31, at 4:21 p.m., Harris IT Services (“Harris”), one of the prospective contractors, sent an e-mail to the Contracting Officer, asking whether the government would extend “close of business” until after 4:30 PM CST. The Contracting Officer responded to Harris stating: “[u]ntil 5:00 PM Central Time is acceptable as meeting the close of business deadline.” Harris’ final proposal revisions reached the agency’s central server at 4:57 p.m. CST and arrived at the Contracting Officer’s computer at 4:59 p.m. CST on August 31. Harris was ultimately awarded the contract.

Thereafter, a protest was initiated by a competitor, NCI Information Systems, Inc., which claimed that Harris was ineligible for award because its final proposal revisions were untimely. Specifically, NCI argued that the agency set the due date for Final proposal revisions as the close of business on August 31, and that because the Contracting Officer’s notice did not provide a specific time, the time for receipt of FPRs was 4:30 p.m. pursuant to FAR § 52.215-1(c)(3)(i). The GAO agreed.

Though Harris argued that “close of business” should be interpreted as “any time prior to when the office closed for the day . . . so long as an employee remained in the office during that employee’s regularly scheduled duty hours,” the GAO declined to adopt such a rule. It reasoned that “[a]doption of such a rule would result in confusion and a lack of uniformity." Instead, the GAO held that where an agency, such as USTRANSCOM, lacks official working hours, FAR § 52.215-1(c)(3)(i) will govern, and 4:30 p.m. local time will be considered to be the close of business. The GAO was not persuaded by Harris’ argument concerning the Contracting Officer’s extension of the time for submission, concluding that “an offeror acts unreasonably when it relies on the informal advice of a contracting officer rather than following the solicitation’s instructions.” Accordingly, the protest was sustained, and Harris was divested of its contract.

The lesson is not to rely on informal advice from a Contracting Officer, even if it is in writing. If the advice you receive was not given to all potential bidders, or incorporated into a formal modification of some kind, the terms of the most recent instructions provided to all will govern, despite what the Contracting Officer told you.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

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By: Edward T. DeLisle

If a government agency terminates a construction contractor for default, it cannot then sit on its hands. The agency must re-procure and complete that project within some reasonable amount of time. Failure to do so may result in the dismissal of any subsequent claim for excess costs to reprocure and finish the work. That was one of the very important messages delivered by the Court of Federal Claims last month in M.E.S., Inc. and Traveler’s Casulty & Surety Company of America v. The United States.

In September of 1998, the United States Postal Service (USPS) retained MES to build a new postal facility for it at a cost of $3,954,000. Prior to completion of the work, the USPS terminated plaintiff for failure to timely perform. The contractor disputed the termination, taking the position that defective plans and specifications prevented timely performance. While the parties attempted to amicably resolve their differences, their efforts failed, requiring the USPS to reprocure. The termination was issued on June 2, 1999.

The USPS did not reprocure until April 26, 2004, almost five years later. When questioned about the reason why it took so long to reprocure, the Contracting Officer for the USPS merely stated that there was “no reason” for the delay. In the meantime, the costs of completion escalated due to site deterioration, changes in the applicable construction codes and postal department standards, as well as certain “betterments” that the USPS desired upon reflection five years later. While, as part of its excess cost calculation, the agency’s experts attempted to eliminate certain costs that could not have reasonably been assessed to the defaulted contractor, the Court determined that the undue delay in reprocurement eliminated the USPS’s ability to demand any excess costs. Those costs were initially identified as $803,909 and later adjusted to $727,707.

In her opinion, the judge specifically stated that “a claim for excess reprocurement costs must be dismissed where an agency unreasonably delayed reprocurement and if that delay resulted in higher costs or otherwise prejudiced the contractor.” All of these elements were present in MES. Moreover, the USPS made no attempt to explain the basis for the delay, or rebut evidence provided by the contractor that the delay was unreasonable. For these reasons, the court threw out the government’s claim.

If anyone is interested in how not to properly terminate and then complete a project, I encourage you to read this opinion. As the court made a number of interesting rulings, stay tuned for more on MES.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

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By: Edward T. DeLisle & Maria L. Panichelli

SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012), a recent Small Business Administration Office of Hearings and Appeals (“OHA”) decision that we discussed previously, demonstrates how a company’s internal corporate structure can impact that company’s eligibility to participate in the Service-Disabled Veteran Owned (“SDVO”) small business program.

SDVOSB Appeal of Rush-Link One concerned a joint-venture, Rush-Link One, which was 51%-owned by Link Contracting, Inc. (Link), a purported SDVO small business concern. Mr. George Carpenter, a service-disabled veteran, owned 55% of Link. Following the award of a SDVOSB set-aside contract to Rush-Link One, a competitor challenged the joint-venture’s eligibility for the SDVO program.

Pursuant to 13 C.F.R. § 125.10(a), a small business concern may qualify as an eligible SDVO only if the management and daily business operations of that concern are “controlled” by one or more service-disabled veterans. The regulations define “control” differently, depending upon the type of corporate structure employed. In the case of a partnership, one or more service-disabled veterans must serve as general partners, with control over all partnership decisions. 13 C.F.R. § 125.10(c). A limited liability company (LLC) is “controlled” by a service-disabled veteran only if one or more service-disabled veterans serve as managing members, with control over all decisions of the LLC. 13 C.F.R. § 125.10(d). In the case of a corporation, such as Link, the service-disabled veteran must prove that he or she has “control” over the corporation’s Board of Directors, thereby allowing him or her to make all major decisions on the company’s behalf. 13 C.F.R. § 125.10(e). Service-disabled veterans control the Board of Directors when either: (1) one or more service-disabled veterans own at least 51% of all voting stock of the concern, are on the Board of Directors and have the percentage of voting stock necessary to overcome any super majority voting requirements; or (2) service-disabled veterans comprise the majority of voting directors through actual numbers or, where permitted by state law, through weighted voting. 13 C.F.R. § 125.10(e).

Applying the above in Rush-Link One, the OHA concluded that the supermajority requirements in Link’s shareholders’ agreement abrogated the service-disabled veteran owner’s “control” of the corporation under 13 C.F.R. § 125.10, and rendered the concern and, therefore, the joint-venture, ineligible for participation in the SDVOSB program. The OHA found that, although Link was 55% owned by a service-disabled veteran, its shareholders executed a formal shareholders' agreement which stated that “[e]xcept as otherwise provided herein or in [Link’s] bylaws, all decisions of the Shareholders shall be made by a majority vote. “Majority vote” was defined as one in which “seventy percent (70%) of the issued shares of the Corporation vote to pass the issue or matter.” The same paragraph of the shareholders' agreement indicated that “[t]his provision shall supersede any contrary provision of [Link’s] bylaws or Articles of Incorporation (as they stand now or may subsequently be amended).” Accordingly, the OHA found that Mr. Carpenter’s 55% ownership of Link was insufficient to overcome the supermajority requirement set forth in the shareholders’ agreement, and, consequently, that he did not “control” Link’s board of directors or Link as a whole. Therefore, OHA concluded that Link was not a SDVOSB, and that Rush-Link one was not an eligible SDVOSB joint-venture.

Let this case serve as a reminder that internal corporate governance is critically important to SDVOSB eligibility. In our practice, it represents the single, most frequently cited basis for the loss or denial of SDVOSB status.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

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By: Edward T. DeLisle & Maria L. Panichelli

Many contractors know that there is a six-year statute of limitations on claims brought under the Contract Disputes Act (“CDA”) and Section 33.206 of the Federal Acquisition Regulations (“FAR”). However, most contractors incorrectly assume that for claims pertaining to delay, or acceleration, the six-year statutory period begins to run only upon project completion or at some point in close proximity to completion, when the contractor is able to more accurately quantify its loss. This assumption is incorrect and can have severe consequences: once the limitations period expires, a claim is forever waived. As such, it is critically important to accurately assess the time at which the six year limitations period begins to run.

Pursuant to the CDA and the FAR, a claim must be submitted to the Contracting Officer within six years of the date upon which that claim “accrues.” Accrual occurs when all events that fix liability are known, or should be known, by the contractor. For liability to be fixed, an injury, or some type of impact or harm, must have occurred. However, monetary damages need not have been incurred, or do not have to be known, for accrual of a claim to take place (See FAR § 33.201). As such, events that result in delay, or acceleration, are likely to occur well before project completion, especially on large, complex projects and, even though the extent of the harm may not be known at that time, a “claim” has been born. To most contractors, this is rather counterintuitive -- it seems almost nonsensical to require a contractor to pursue, or even certify, a claim before a project is complete and the full range of excess costs are known. While this might be true, courts and agency review boards regularly rule against contractors who wait too long to assert a claim and attempt to make such an argument. (E.g. In Re Robinson Quality Constructors, ASBCA No. 55784, 09-1 B.C.A. (CCH) ¶ 34048 (Jan. 6, 2009)).

Contractors have attempted to argue that the six-year limitations period should be “equitably tolled” based on government misconduct. Equitable tolling essentially means that the limitations period stops running based upon issues of fairness. Historically, these arguments have been premised on the notion that the clock should stop ticking if a litigant can establish: (1) that he had been pursing his rights diligently; and (2) that some extraordinary circumstance stood in his way that was not his fault. (E.g. Arctic Slope Native Association, Ltd. v. Sebelius, 583 F.3d 785, 798 (Fed Cir. 2009); Menominee Indian Tribe of Wisconsin v. United States, 2012 WL 192815 (D.D.C. 2012)). However, in a recent opinion, the United States Court of Appeals for the Federal Circuit held that 28 U.S.C. § 2501 (the statutory provision defining the CDA’s limitations period) creates an absolute bar of any claim submitted beyond 6 years, if that claim is pursued in the United States Court of Federal Claims (“CFC”), thereby eliminating the equitable tolling argument in that forum. FloorPro, Inc. v. United States, 2012 WL 1948997 (May 31, 2012). While other opinions suggest that the CDA’s statute of limitations might, nonetheless, be subject to equitable tolling if the contractor’s claim is pursed before an agency or board of contract appeals (see, e.g. Arctic Slope, supra), the CFC is often viewed as a more favorable forum. Therefore, contractors should, if at all possible, avoid triggering the limitations bar, which would preclude adjudication of their claim before the CFC. This can only be accomplished if the contractor acts promptly and accurately determines when liability was “fixed.”

Accurately assessing when a party’s liability becomes “fixed” in relation to a claim can involve a complicated analysis, and is very fact specific. Accordingly, contractors should track any increased costs as they are incurred, and seek professional advice as soon as it appears that there is a basis for a claim, regardless of when the project may attain completion.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

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By: Joseph A. Hackenbracht

For many years, the boards of contract appeals have considered challenges to performance evaluations and declined, for various reasons, to hear those cases. Then, in 2008, the U.S. Court of Federal Claims held that it possessed jurisdiction to address a contractor’s challenge of the performance rating it had been given by the Corps of Engineers. Todd Construction Company, Inc. v. U.S., 85 Fed.Cl. 34, 2008. (see our earlier blog article) Todd had submitted a “claim” pursuant to the Contract Disputes Act (CDA) challenging its performance rating and the Court concluded that submission of the claim satisfied its “jurisdictional prerequisite.”

In 2010, after the Todd decision was issued by the Court of Federal Claims, the Armed Services Board of Contract Appeals decided that it also could address challenges to performance ratings based on the board’s jurisdiction to determine the rights and obligations of parties under the terms and conditions of their contract. Appeal of Versar, Inc., ASBCA No. 56857, 10-1 BCA ¶ 34437, May 6, 2010. Also in 2010, in a case where the contractor submitted a CDA claim challenging the performance rating, the Board held that under the CDA, it has jurisdiction to “decide any appeal” involving a claim “relating to a contract.” Appeal of Colonna’s Shipyard, Inc., ASBCA No. 56940, 10-2 BCA ¶ 34494, June 24, 2010.

Last month, the Board issued a follow-up decision in Versar addressing the merits of claimant’s position that its performance rating was issued in error. The Board found that Versar had failed to show that its performance rating was arbitrary and capricious, the requisite standard, and, therefore, denied Versar’s claim. In so doing, the Board stated that “bare or insufficient allegations cannot sustain a claim that the government issued an unjustified performance rating.”Appeals of Versar, Inc., ASBCA Nos. 56857 et al., 2012 WL 1579539, April 23, 2012. In its discussion, the Board referenced a decision of the United States Court of Appeals for the Federal Circuit, Todd Const. L.P. v. U.S., 656 F.3d 1306, C.A. Fed. 2011, where the Circuit Court affirmed the decision of the Court of Federal Claims to dismiss a challenge to a performance rating on the basis that the contractor failed to state a claim upon which relief could be granted. In its decision, the Circuit Court affirmed the lower court’s determination that it had jurisdiction to hear cases involving challenges of performance ratings issued by the government.

Decisions of the Court of Appeals for the Federal Circuit are precedent for both the Court of Federal Claims and the boards of contract appeals. Going forward, therefore, contractors can expect that both the boards and the Court of Federal Claims will address challenges of performance ratings in accordance with the Circuit Court’s decision in Todd Const. L.P. v. United States. Contractors can be encouraged that it is now settled that both the boards and the court have jurisdiction to hear challenges of adverse performance ratings.

Upon receipt of an unacceptable performance rating, a contractor should submit a claim under the Contract Disputes Act challenging the rating as arbitrary and capricious. The contractor needs to raise specific objections to individual ratings and demonstrate the errors in the government’s evaluation. After receiving a decision, or in the event a decision is not issued, the contractor should file an action in either the appropriate board of contract appeals or the Court of Federal Claims.

Contractors must be prepared to plead the facts specifically and in detail, and identify individually, which ratings are arbitrary and capricious and why they are erroneous. Contractors also need to be sure to allege what the ratings should have been and that the outcome would have been different if the errors had not been made. In order to avoid dismissal based on standing, it may also be necessary to establish that the negative rating has caused injury, and has prejudiced the contractor. One way to demonstrate the prejudice and injury may be to present facts that the negative rating resulted in the contractor not receiving a contract.

As the ASBCA noted in Versar, the contractor did not provide the board with “specifics of the rating, ratings process, categories, and details,” as well as evidence of what the rating should have been. If contractors want the court to step into the fray, they must furnish the court with the specifics to establish that the government’s evaluations are erroneous and the subsequent ratings are arbitrary and capricious. Unsupported allegations and conclusory statements will not win the day.

Joseph A. Hackenbracht is a Partner in the firm and a member of the Federal Contracting Practice Group.

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By: Edward T. DeLisle & Maria L. Panichelli

In a recent opinion, SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012), the United States Small Business Administration (“SBA”) Office of Hearings and Appeals (“OHA”) used two 8(a) program regulations, namely 13 C.F.R. § 124.106(g) and 13 C.F.R. § 124.3, to determine whether a joint-venture met the eligibility requirements for the Service-Disabled Veteran Owned (SDVO) Small Business Program. Specifically, the OHA found that the joint-venture was not eligible for participation in the program; certain loans from minority owners imposed impermissible restrictions on the service-disabled veteran/majority-owner’s ownership.

Rush-Link One Joint-Venture (“Rush-Link”) was a joint-venture between Link Contracting, Inc. (Link), which held a 51% interest in the joint-venture, and Rush Construction, Inc. (Rush). Following the award of a SDVO set-aside contract to Rush-Link, a competitor challenged the joint-venture’s eligibility for the SDVO program.

For a small business concern to qualify as an eligible SDVO, a service-disabled veteran must directly and unconditionally “own” at least 51% of the firm. 13 C.F.R. § 125.9. The service-disabled veteran also must “control” both the long-term decision-making and the day-today management of the firm. 13 C.F.R. § 125.10(a). For a joint-venture to be SDVO-eligible, the joint-venture agreement must contain a provision designating an SDVO participant as the managing venturer, and designating an employee of the managing venturer as the project manager. 13 C.F.R. § 125.15(b)(2)(ii).

Applying these provisions to Rush-Link, the SBA Director for Government Contracting (“DGC”) concluded that Mr. George A. Carpenter, the president and 55%-owner of Link, was a service-disabled veteran. However, he found that Carpenter did not “own” Link within the meaning of the SDVO Program regulations, based on the existence of several promissory notes that divested Carpenter of certain ownership rights. More specifically, the terms of these promissory notes – given to three minority-owners of Link in exchange for critical loans provided to the company – restricted Carpenter’s ability to transfer his interest or receive dividends or distributions. Therefore, in reliance upon 13 C.F.R. § 124.106(g), which states that a person “controls” a company if he or she “provides critical financing” to the company or exercises control “through loan arrangements,” the DGC concluded that Carpenter’s ownership was impermissibly restricted by the promissory notes. The DGC reached this conclusion, even though 13 C.F.R. § 124.106(g) is an 8(a) regulation intended to govern small-disadvantaged businesses, and is not part of the regulations governing the SDVO program.

On appeal, Link cited 13 C.F.R. § 124.3, another 8(a) regulation, for the proposition that “ordinary” loans following “normal commercial practices” should not be the basis for finding that a small business owner does not control his or her company. The OHA acknowledged this was correct, but concluded that the loans in question here were “commercially irregular” because the holders of the promissory notes were not banks or other commercial lenders, but minority owners of the company itself. Based on this conclusion, the OHA determined that the promissory notes impermissibly restricted Carpenter’s ownership, and that Link was therefore not an eligible SDVO business. The necessary result of such a finding was that the joint-venture between Link and Rush (which is not itself a SDVO business) was also ineligible for the SDVO program pursuant to 13 C.F.R. § 125.15(b)(2)(ii).

Oddly, neither the DGC nor the OHA addressed the propriety of using 8(a) regulations to determine eligibility under the SDVO program. Therefore, going forward, participants in all the various SBA small business set-aside programs should be aware, not only that loans that result in restrictions on ownership rights might invalidate “ownership” for the purposes of eligibility, but also that regulations may be utilized and interpreted across programs to determine a business’ eligibility.

In addition to the above, SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012) provided some interesting insights concerning how a company’s internal corporate structure might affect the “control” requirements relating to SDVO eligibility under 13 C.F.R. § 125.10(a). Stay tuned for an update on what an SDVO should and should not include in its corporate governance documents.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.
 

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