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: Edward T. DeLisle

For those who regularly read our blog, you know that we have followed the government’s recent concern about fraud and abuse in the federal procurement process.  The GAO has issued reports that recite such abuse relative to the 8(a), HUBZone and SDVOSB programs.  As those reports indicate, companies have been awarded set-aside contracts through those programs, but were not qualified to receive them.  In certain circumstances, the apparent fraud was so blatant that the hubris, which certainly existed to think such abuses would go unnoticed, puts Charlie Sheen to shame.  Yet, as the GAO reports state, even when the abuses were uncovered, many of these contractors continued to receive government awards.  It appears that some contractors performing work overseas in places like Iraq and Afghanistan may also be receiving awards that they do not deserve.

As reported by Govexec.com, government agencies responsible for overseas contracts are not properly recording past performance history in the CPAR and PPIR electronic databases.  The biggest offenders appear to be the State Department, the Department of Defense and the U.S. Agency for International Development (USAID).  Based upon information supplied to the Commission on Wartime Contracting, congressionally mandated to investigate overseas contracting activities, these agencies have failed to properly report past performance history in up to 90% of the contingency contracts they have issued.  While the failure to report this information is problematic for many reasons, it certainly exposes the government to contractors who are less than ideal for important government contracts.  This is especially an issue as it relates to contractors in line for suspension or debarment.  As former Connecticut Congressman Christopher Shays, who is the chairman of the Commission, stated: “[I]f suspensions and debarments are impeded by bureaucratic decisions or inertia, then companies that have committed fraud may continue receiving taxpayer funds.  In either case, untrustworthy contractors can continue profiting from government work, responsible businesses may be denied opportunities, and costs to taxpayers can climb.”

Over the years, the government has increasingly relied upon “best value” procurement to let contracts.  Past performance is almost always an important factor in determining “best value.” In fact, in most cases, it is the most important factor.  If federal agencies intend to continue issuing contracts in this fashion, a practice that is highly questionable for the purchase of certain services, such as construction, then they must make it a point to create a system that allows those deserving of awards to receive them. In the case of small business set aside contracts, the government has started to slowly move in this direction.  The VA, for example, is now vetting those contractors on its on-line SDVOSB registry to verify eligibility.  If this function is performed correctly, it will greatly enhance the probability that contracts will be let to those who deserve them. With respect to past performance history, there is a system in place.  Federal agencies simply need to use it.  Hopefully, the findings exposed by the Commission on Wartime Contracting make this a reality.

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

On September 23, 2010, we wrote an article regarding the current status of the HUBZone priority fight between the GAO, the Court of Federal Claims and a number of federal agencies. That article followed another that we wrote on this issue on August 27, 2010. In a series of cases, the GAO and the Court of Federal Claims took the position that contracting officers were required to consider set-aside contracts for HUBZone entities, prior to considering set-asides for any other small or small, disadvantaged companies. In reaching this conclusion, the GAO and the Court of Federal Claims focused on the enabling legislation for the HUBZone program, which stated:

Notwithstanding any other provision of law…a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

Based upon this language, the GAO and the Court of Federal Claims took the position that contracting officers did not have any discretion in deciding whether to set-aside a contract for HUBZone entities. They had to do so, unless they could show that there were not at least two qualified HUBZone companies that would submit offers at a reasonable price. That has all changed.

On September 27, 2010, President Obama signed the 2010 Small Business Jobs Act. As part of the Act, the language of the HUBZone statute was changed. The legislation now states that “a contract opportunity may be awarded pursuant to this section”, eliminating the mandatory nature of the original version. Based upon this simple change, the HUBZone program has been placed on equal footing with all other small and small, disadvantaged business programs, including, but not limited to, those relating to Service-Disabled, Veteran Owned Small Businesses and 8(a) companies.

As we stated in our last article, it was not likely that Congress intended to establish a priority for HUBZone companies. The problem was borne out of sloppy drafting. That drafting problem has now been corrected. It will be interesting to see how this change impacts the HUBZone program in the months to come.

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

On August 27th, we posted an article regarding the recent Court of Federal Claims case, DGR Associates, Inc. v. United States. In that case, the protesting contractor took the position that the government agency, the Air Force, failed to follow the direction of Congress in determining how to set aside contracts for small and small, disadvantaged businesses. It proffered that the legislation which created the HUBZone program clearly gave HUBZone companies priority over other small and small, disadvantaged businesses. The statute reads in relevant part:

Notwithstanding any other provision of law...a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

In agreeing with the GAO's position regarding this issue, the Court reached the following conclusion:

On the issue of statutory interpretation, the language of the Small Business Act granting priority to the HUBZone program could not be more clear. By using the phrases "notwithstanding any other provision of law...a contract opportunity shall be awarded on the basis of competition to qualified HUBZone small business concerns, "Congress established a priority for the HUBZone program over other competing small business programs.

The Court then proceeded to set forth the remedy associated with its finding:

By this decision, the Court enters a permanent injunction requiring the Air Force and the Small Business Administration to terminate the unlawful contract awarded to General Trades & Services, and to determine whether the criteria of 15 U.S.C. § 657a(b)(2)(B) are met, such that the contracting opportunity at issue must be set aside and awarded on the basis of restricted competition to a qualified HUBZone small business concern. Defendant is enjoined from awarding the contract in a manner that is inconsistent with this decision.

The Court could not have been clearer. The Air Force was required to assess whether the contract could have been set aside for HUBZone concerns. If the Air Force reached the conclusion that at least two HUBZone companies could perform the work at a fair price, then the contract had to be set aside for HUBZones. While at this point it is not clear what happened following the Court's decision, based upon two recent GAO decisions, it is obvious that the Air Force and at least one other government agency don't intend to follow the Court's directive in other cases.

Matter of: Rice Services, Inc. B-403746, issued by the GAO on September 16, 2010, involved a decision by the Air Force to set aside a contract for 8(a) small business concerns. The protester took the position that the contract should have been set aside for HUBZone companies. In response to the protest, the GAO asked the Air Force "whether it had acted in reliance on the DOJ Memorandum Opinion." In DGR Associates, Inc., the Air Force based its position on a memorandum issued by the Department of Justice, which concluded that the Small Business Act did not require HUBZone prioritization. The GAO, and then the Court of Federal Claims, disagreed with the DOJ's position. Nonetheless, in response to the GAO's question in the Rice Services matter, it is clear that the Air Force refused to budge:

[Consistent] with our prior position, the Air Force intends to follow the Memorandum Opinion issued by the Office of Deputy Assistant Attorney General, Office of Legal Counsel, Department of Justice, concluding that there is no statutory requirement to prioritize the HUBZone small business program.

Undeterred, the GAO sustained the protest. Following the reasoning set forth in DGR Associates, Inc., the GAO stated that the language of the HUBZone statute clearly mandated that HUBZone's were to be given priority over other small and small, disadvantaged businesses. As a result, it issued a recommendation to the Air Force that it "undertake reasonable efforts to ascertain whether it will receive offers from at least two HUBZone concerns...at a fair market price."

In Matter of: Rice Services, Inc. B-402966.2, also issued by the GAO on September 16, 2010, the same protester made an identical challenge, this one involving the Defense Commissary Agency. The DCA attempted to set aside a contract for service-disabled, veteran-owned small businesses and, in doing so, took the same position as the Air Force, that is, that it could do so without first considering whether the contract should be set aside for HUBZone contractors. The DCA suffered the fate as the Air Force. The GAO sustained the protest.

The above illustrates the current tug-of-war between certain executive agencies, as well as the judicial branch, of our government. While one can guess as to what Congress may have intended when it established the HUBZone program, the language of the statute is clear. The Court of Federal Claims and the GAO had no choice but to rule as they did in the cases cited above. If Congress was simply sloppy in drafting the HUBZone program's enabling legislation, which was probably the case, then only Congress can fix the problem. It will be interesting to see how this battle plays out in the weeks and months to come.

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

On August 13th, the Court of Federal Claims temporarily ended a controversy regarding how agencies go about setting aside contracts for certain qualified small businesses. DGR Associates, Inc. v. United States involved a decision by the Air Force to issue a set aside contract for qualified 8(a) companies. The project involved housing maintenance, inspection services and repairs at Eielson Air Force Base in Alaska. The solicitation was challenged by a HUBZone contractor who claimed that the Air Force violated the Small Business Act by failing to give priority to HUBZone contractors. Specifically, the protesting contractor claimed that when the HUBZone program was established in 1997, the legislation required agencies to consider setting aside contracts for HUBZone contractors prior to considering any other small and/or disadvantaged companies for such contracts.

The enabling statute for the HUBZone program states the following:

Notwithstanding any other provision of law ... a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

Given this language, the protesting contractor took the position that Congress intended to give priority to HUBZones over other small and small, disadvantaged businesses, where government agencies make the decision to issue set aside contracts. The GAO agreed. In May of 2010, the GAO issued a recommendation to the Air Force that it follow clear Congressional authority and set aside the solicitation for HUBZone contractors, if further research suggested that two or more HUBZone contractors could perform the work at a reasonable price.  The Air Force refused to follow this recommendation, taking the position that Congress did not intend such a result. The protesting contractor then took action in the Court of Federal Claims.

Considering the same arguments made before the GAO, the Court of Federal Claims agreed with the conclusion reached in that forum. In rendering its decision, the Court stated as follows:

On the issue of statutory interpretation, the language of the Small Business Act granting priority to the HUBZone program could not be more clear. By using the phrases "notwithstanding any other provision of law ... a contract opportunity shall be awarded on the basis of competition to qualified HUBZone small business concerns," Congress established a priority for the HUBZone program over other competing small business programs.

The Court went on to state that "Congress must alone enact an appropriate amendment" if its intent was something other than to provide priority to HUBZones.

Based upon this decision, until such time as Congress acts, if a contracting officer is prepared to set aside a contract, he or she must determine whether two or more HUBZone contractors can perform the work for a fair price. If the answer to that query is "yes", then the contract must be set aside for HUBZone contractors to the detriment of other small and small, disadvantaged businesses. While one can reasonably expect Congress to take action at some point in the near future, in the short term this could mean more opportunities for HUBZone contractors.

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

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By: Lane F. Kelman

On May 3, 2010, the SBA's definition of the term "employee" of a Historically Underutilized Business Zone ("HUBZone") was amended. The new definition establishes a more definitive but stringent reading of when a person is considered an employee for HUBZone eligibility purposes. (See the SBA's HUBZone regulations). The construction industry in particular will be impacted. The amended definition states:

Employee means all individuals employed on a full-time, part-time, or other basis, so long as that individual works a minimum of 40 hours per month. This includes employees obtained from a temporary employee agency, leasing concern, or through a union agreement or co-employed pursuant to a professional employer organization agreement. SBA will consider the totality of the circumstances, including criteria used by the IRS for Federal income tax purposes and those set forth in SBA's Size Policy Statement No. 1, in determining whether individuals are employees of a concern. Volunteers (i.e., individuals who receive deferred compensation or no compensation, including no in-kind compensation, for work performed) are not considered employees. However, if an individual has an ownership interest in and works for the HUBZone SBC a minimum of 40 hours per month, that owner is considered an employee regardless of whether or not the individual receives compensation.

13 CFR § 126.103

Among other criteria, in order to qualify as a HUBZone, at least 35% of the firm's employees must reside in a designated HUBZone. Previously, when calculating the 35% threshold, only "full-time" or "permanent" employees were considered. In many industries, such as manufacturing, the distinction between a "permanent" and "temporary" employee is clear. In other industries, such as construction, the distinction wasn't always quite as clear. As a result, construction companies did not include its temporary, project specific field labor when calculating the percentage of its employees residing in a HUBZone. Now, however, if "that individual works a minimum of 40 hours per month" then the person is considered an employee.

It is anticipated that the amendment will result in many construction companies being unable to meet the 35% threshold and therefore ineligible as a qualified HUBZone. The change also creates a new dynamic between a contractor and a trade union that supplies manpower, as the contractor, if certified as a HUBZone SBC, will want to draw from a labor pool that resides in a HUBZone. Although the proposed change was made in November of 2009, the construction industry did not provide substantive comments to the proposal.

See the SBA's HUBZone website for more details.

Lane F. Kelman 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

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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