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

By: Edward T. DeLisle

Senator Olympia Snowe, R-Maine, introduced a bipartisan bill on Thursday that is designed to combat fraud and abuse in the world of small business contracting. As we have reported, the General Accounting Office (GAO) has issued a number of reports over the last several years detailing the existence of fraud in the HUBZone, Service-Disabled, Veteran-Owned Small Business (SDVOSB) and 8(a) programs. These reports have generated much discussion about the need to revamp the system and, in certain circumstances, talk has led to action. The implementation of the current SDVOSB verification system is but one example of the government’s response to the current state of affairs. S. 633, entitled the “Small Business Contracting Fraud Prevention Act of 2011” (Fraud Prevention Act), is designed to take the government’s ability to respond to fraud and abuse in small business contracting to a new level.

As reported by Law360, the Fraud Prevention Act contains three key provisions:

     1. It calls for the development of an oversight structure within the Small Business Administration (SBA) that would allow for better enforcement of the rules governing small business contracting;

     2. It would allow for an increase in criminal prosecutions, suspensions and debarments for those who violate the rules; and

     3. It would require the SBA to issue annual reports to Congress regarding those who are suspended, debarred or referred to the Department of Justice for prosecution.

S. 633 is yet another step to close the loopholes that have developed in the federal government’s small business contracting system. We will track this legislation and report any further developments.

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

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By: Michael H. Payne and Edward T. DeLisle

The U.S. Small Business Administration published a package of final rules on February 11, 2011, that will revise the regulations of its 8(a) Business Development program to better ensure that the benefits flow to the intended recipients and help prevent waste, fraud and abuse. The rules were published in The Federal Register and will become effective on March 14, 2011.

The revisions are the first comprehensive overhaul of the 8(a) program in more than 10 years. The regulations incorporate technical, as well as substantive, changes that mirror legislation enacted since the last revision in June of 1998. The rules cover a variety of areas ranging from clarifications on determining economic disadvantage to requirements on Joint Ventures and the Mentor-Protégé program. Some of the components of the 8(a) program that the revised regulations will affect include:

Joint Ventures - The new rules require that the 8(a) firm must perform 40 percent of the work of each 8(a) joint venture contract that is awarded, including those awarded under a Mentor/Protégé agreement, to ensure that these companies are able to “build capacity.” In other words, the SBA has discarded the vague “significant portion” test in favor of a requirement for a protégé to perform 40 percent of the work performed by the joint venture partners.

Economic Disadvantage – The rules provide more clarification on factors that determine economic disadvantage as it relates to total assets, gross income, retirement accounts and a spouse of an 8(a) company owner when determining the owner’s ability to access capital and credit.

Mentor-Protégé Program – The rules add consequences for a mentor who does not provide assistance to its protégé, ranging from stop-work orders to debarment.

Ownership and Control Requirements – The rules provide flexibility on whether to admit 8(a) program companies owned by individuals with immediate family members who are owners of current and former 8(a) participants.

Tribally-Owned Firms – The rules require firms owned by tribes, Alaska Native Corporations, Native Hawaiian Organizations and Community Development Corporations to report benefits flowing back to their respective communities.

Excessive Withdrawals – The rules amend the regulations on what amount is considered excessive as a basis for termination or early graduation from the 8(a) program.

Business Size for Primary Industry – The rules require that a firm’s size status remain small for its primary industry code during its participation in the 8(a) program.

Other interesting changes include a revision to the prior practice of allowing a mentor-protégé joint venture to only submit bids or proposals on three solicitations in two years. Under the new regulations, instead of being limited to three bids or proposals over a two-year period, a mentor-protégé joint venture is limited to three contract awards. This is a far more reasonable way to limit participation. In addition, the new regulations also make it possible, with SBA approval, for joint venture partners who meet other small business requirements to form a second or a third joint venture, each with the ability to receive an additional three awards.

We will provide a more in-depth analysis of the new rules prior to the March 14, 2011 effective date and will also post a copy of the amended Code of Federal Regulations when it is published. The 8(a) program is a nine-year business development program for small businesses where the owner(s) fits the SBA’s criteria of being socially and economically disadvantaged and the same owners control the firm. The 8(a) program helps these firms develop their business and provides them with access to government contracting opportunities, allowing them to become solid competitors in the federal marketplace. It also provides specialized business training, counseling, marketing assistance and high-level executive development to its participants. In FY09, small businesses received $18.6 billion in 8(a) contract dollars.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters. Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group who represents contractors on a whole range of small business issues including teaming arrangements and compliance with the SBA’s rules and regulations.

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By: Michael H. Payne and Edward T. DeLisle

In order to qualify as a Historically Underutilized Business Zone (“HUBZone”) contractor, a firm must be a “small business” based on the size standards provided by the North American Industry Classification System (NAICS); the firm must be at least 51% owned and controlled by citizens of the United States; the firm's principal office (where the greatest number of employees perform their work, excluding contract sites) must be located in a designated HUBZone; and at least 35% of the firm's total workforce must reside in a designated HUBZone. In construction, a company does not need to include its temporary, project specific, field labor force among the 35% of its employees who must reside in a HUBZone.   (See the SBA's HUBZone regulations).

The program encourages small businesses to locate in and hire employees from economically disadvantaged areas. Small firms participating in the program can receive competitive advantages in winning federal contracts. The government generally expects approximately three percent (3%) of all federal contracting dollars to be awarded to HUBZone firms annually. As reported by the HUBZONE Contractors National Council, as of January 8, 2010, there were 9,255 HUBZone-certified small business concerns specializing in the following major industries:

• Construction - 2,984 firms (32% of total)
• Services - 4,176 firms (45.1%)
• Research & Development - 879 firms (9.5%)
• Manufacturing - 1,675 firms (18.1%)
(Numbers total more than 9,255 because some firms appear in more than one industry category.)

Many HUBZone-certified firms are also certified in other set-aside programs. 12.2% of HUBZone firms are also 8(a) small businesses (minority-owned); 8.0% are Service Disabled Veteran-owned firms; and 0.9% are qualified in all three set-aside programs.

The mission of the HUBZone program, as expressed by the SBA, is “to promote job growth, capital investment, and economic development to historically underutilized business zones by providing contracting assistance to small businesses located in these economically distressed communities.” See the SBA’s HUBZone website for more details. In order to apply for HUBZone status, companies are encouraged to apply using the electronic application on the SBA website.
 

Michael H. Payne is the Chairman of the firm's Federal Practice Group. Edward T. DeLisle is a Partner in the firm and a member of the Federal Practice Group. He is a available to assist federal contractors on a whole range of small business issues including HUBZone certification, 8(a)compliance issues, Service Disabled Veteran-Owned Small Business formation, and teaming arrangements.

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By: Edward T. DeLisle

In recent testimony provided to the House of Representative’s Committee on Small Business, a disturbing fact was revealed: millions of dollars earmarked for Service-Disabled Veteran-Owned Businesses (“SDVOSBs”) have been paid to companies that do not qualify for the program. Compounding the problem is the fact that insufficient fraud-prevention programs exist to effectively combat such abuses. This was the conclusion reached by United States Government Accountability Office (the “GAO”) following a case study that included an investigation of ten (10) companies claiming SDVOSB eligibility.

In 2008 alone, $6.5 billion in federal contracts were awarded to companies that self-certified themselves as SDVOSBs. While this figure only represents 1.5% of all government contracts paid in that fiscal year, it is still a very large number. If the federal government ever attains its mandated goal of 3%, many more billions will become available to qualified SDVOSBs. Given the paucity of work in the private sector over the course of the last eighteen (18) months, many companies are attempting to tap into this potential source of revenue. As the GAO pointed out, however, a number of these companies have misrepresented their credentials, effectively taking contracts away from those that truly qualify to receive them.

The companies identified in the GAO case study received approximately $100 million in SDVOSB contracts, and over $300 million in additional 8(a), HUBZone and other non-SDVOSB contracts through the federal government. Certainly, none of these monies should have been paid to the companies in question. Notwithstanding the same, because there are no requirements to terminate contracts when a firm is deemed ineligible, in certain circumstances, companies were permitted to continue performing, despite the government’s determination that the firm did not qualify as an SDVOSB. Many more were not debarred from receiving federal contracts, even though the transgressions noted were obvious and seemingly blatant.

The GAO did note that Department of Veteran’s Affairs (the “VA”) has taken steps to address this problem by introducing an SDVOSB validation process. That process includes confirming an owner’s status as a disabled veteran, as well as his or her control over day-to-day operations. The problem, however, is that the VA’s certification and validation process is not a government-wide system. It is limited to those contracts issued directly by the VA. Because many other federal agencies issue contracts that are earmarked for SDVOSBs, there are considerable gaps in the SDVOSB program.

If your company is an SDVOSB, or if you are interested in forming a company that qualifies for participation in the program, it is very important for you to comply with applicable SBA and procurement regulations. The fierce competition for federal government contracts exposes many companies to size status protests which, if successful, can cause an SDVOSB to lose an award. Our Federal Contracting Practice Group is available to assist you with these important compliance issues.

Edward T. DeLisle is a Partner in the firm and is a member of the firm’s Federal Contract Practice Group. He is extensively involved in the representation of construction contractors on small business issues.

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