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

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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