If you participate in federal government procurement programs, either as a prime contractor or as a subcontractor, listen up!  Your small business size status may have changed on July 14, 2014 as a result of an interim rule issued by the SBA. The rule increased revenue-based size standards for numerous industries, including general and specialty construction. The SBA has estimated that approximately 480 additional firms will now be considered “small” under the new size standards. Federal contractors and subcontractors should visit the System for Award Management (SAM) and verify that all profile and certification information are up to date based upon the revised size standards. A summary of the changes to the construction NAICS codes is set forth below.

The SBA cited inflation as the reason for the change; the last time the size standards were adjusted for inflation was back in 2008.  These adjustments are in addition to the recent size standard revisions that were implemented following passage of the Small Business Jobs Act of 2010 (Jobs Act).

The rule made other changes as well, most notably:

  • An adjustment to program-based size standards, with the exception of the new alternative size standard for SBA’s 7(a) and 504 loan programs that was established under the Jobs Act.  The new alternative size standard will remain in effect until SBA establishes a permanent alternative size standard for the 7(a) and 504 loan programs.
  • Deletion of references to surety bond guarantee size standards for contracts awarded in Presidentially declared disaster areas following Hurricanes Katrina, Rita, and Wilma in 2005.
  • Deletion of the determination date for eligibility under the SBA’s Economic Injury Disaster Loan (EIDL) Program in connection with Hurricanes Katrina, Rita, and Wilma.

The SBA encourages contractors to review the new rule and provide feedback.  The comment period closes on August 11, 2014.  Additional information about small business size standards is available on the SBA’s website.

If you need assistance in determining whether you are a “small” business under these newly established NAICS codes, or in general, please do not hesitate to contact us.  Here are the new standards for general and specialty construction:

SECTOR 23—CONSTRUCTION
Subsector 236—Construction of Buildings

NAICS Code

NAICS U.S. Industry Title

New Standard
236115 New Single-family Housing Construction (Except For-Sale Builders) $36.5 million
236116 New Multi-family Housing Construction (Except For-Sale Builders). $36.5 million
236117 New Housing For-Sale-Builders $36.5 million
236118 Residential Remodelers $36.5 million
236210 Industrial Building Construction $36.5 million
236220 Commercial and Institutional Building Construction $36.5 million

Subsector 237 Heavy and Civil Engineering Construction

NAICS Code

NAICS U.S. Industry Title

New Standard
237110 Water and Sewer Line and Related Structures Construction $36.5 million
237120 Oil and Gas Pipeline and Related Structures Construction $36.5 million
237130 Power and Communication Line and Related Structures Construction $36.5 million
237210 Land Subdivision $27.5 million
237310 Highway, Street, and Bridge Construction $36.5 million
237990but Other Heavy and Civil Engineering Construction $36.5 million
237990 Dredging and Surface Cleanup Activities $27.5 million

 Subsector 238 Specialty Trade Contractors

NAICS Code

NAICS U.S. Industry Title

New Standard
238110 Poured Concrete Foundation and Structure Contractors $15 million
238120 Structural Steel and Precast Concrete Contractors $15 million
238130 Framing Contractors $15 million
238140 Masonry Contractors $15 million
238150 Glass and Glazing Contractors $15 million
238160 Roofing Contractors $15 million
238170 Siding Contractors $15 million
238190 Other Foundation, Structure and Building Exterior Contractors $15 million
238210 Electrical Contractors and Other Wiring Installation Contractors $15 million
238220 Plumbing, Heating and Air-Conditioning Contractors $15 million
238290 Other Building Equipment Contractors $15 million
238310 Drywall and Insulation Contractors $15 million
238320 Painting and Wall Covering Contractors $15 million
238330 Flooring Contractors $15 million
238340 Tile and Terrazzo Contractors $15 million
238350 Finish Carpentry Contractors $15 million
238390 Other Building Finishing Contractors $15 million
238910 Site Preparation Contractors $15 million
238990 All Other Specialty Trade Contractors $15 million
238990 Building and Property Specialty Trade Services $15 million

SECTOR 22—UTILITIES
Subsector 221 Utilities

NAICS Code

NAICS U.S. Industry Title

New Standard
221310 Water Supply and Irrigation Systems $27.5 million
221320 Sewage Treatment Facilities $20.5 million
221330 Steam and Air Conditioning Supply $15 million

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.

Teaming is a concept much discussed in the world of federal contracting, yet it is often misunderstood.  

On May 7, 2014 Maria L. Panichelli hosted a webinar for Women Impacting Public Policy (“WIPP”) and Give Me 5 (“GM5”) entitled “There’s No “I” In Team – Understanding How to Effectively Team on a Federal Project.” In it, she discussed the benefits of teaming (from both a small business/prime contractor perspective, and a large business/subcontractor perspective), the proper procedures for forming a teaming agreement, important clauses, common pitfalls, and recent developments in the applicable regulations and case law.

Please visit the GM5 website for information about Maria’s additional upcoming WOSB/EDWOSB webinars.

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.

A little over a month ago, Rep. Sam Graves, Chairman of the House Committee on Small Business, introduced a pair of bills designed to increase the participation of small business contractors in federal contracting.

The first bill, the Greater Opportunities for Small Business Act (“GOSBA”), would raise the government’s small business contracting goal from 23% to 25%. GOSBA would also raise the government’s current goal for small business subcontracting from 35.9% to 40% percent. Government-wide goals for contracts awarded to small business concerns owned and controlled by service-disabled veterans (3%), HUBZone companies (3%), socially and economically disadvantaged individuals (5%), and small business concerns owned and controlled by women (5%) would remain the same.

Similar bills, such as the Government Efficiency Through Small Business Contracting Act have been proposed (and discussed on this blog) in the past, but have not yielded results. Critics of GOSBA cite to these past failures, and question the wisdom of an increase, pointing out that the government has routinely failed to meet the current goal of 23%. In fact, in 2012, the federal government fell short of its goal by a whopping $3 billion. Prior to that, the last time the government met its goal was 2005.

In response to these criticisms, proponents of GOSBA argue that recent legislative changes affecting small business programs, such as those authorized by the 2013 and 2014 National Defense Authorization Acts, have made it easier for the government to attain more aggressive small business contracting goals. There is some support for this argument and it came in 2013. Last year, the federal government awarded $83.2 billion in contracts to small businesses, which translates to 23.4% of all contracts issued.

The second bill introduced by Rep. Graves is known as the Contract Data and Bundling Accountability Act (“CDBAA”). This bill would update the way data is reported on bundled or consolidated contracts, by requiring the SBA and GAO to oversee agencies’ data collection and reporting. The CDBAA is a direct result of an October 2013 hearing held before the Small Business Subcommittee on Contracting and Workforce. Following that hearing, it was concluded that government agencies have routinely failed to conduct required analyses, or submit necessary data, concerning contract bundling; consequently, Congress has been unable to properly assess the impact that contract bundling has had on small companies. This is corroborated by recent GAO reports.

If passed, the CDBAA would require the SBA to work with other agencies to create and implement a data quality improvement plan aimed at promoting greater accuracy, transparency and accountability in the reporting of contract bundling and consolidation. It would further require the GAO to assess an agency’s success and offer suggestions for further improvement. The CDBAA would also impose certain consequences (unspecified in the bill) on any agency that failed to “properly identify contracts as bundled or consolidated.”

Rep. Graves expressed his hope for the new bills, stating that “[t]hese two pieces of legislation will go a long way towards increasing opportunities for small companies who want to grow and create jobs by doing business with the federal government . . . By increasing the federal-wide goal for contracts to small businesses, and requiring greater accuracy, transparency and accountability in contract bundling and consolidation, we make it easier for small businesses to enter this marketplace and compete for contracts. The federal government spends nearly half a trillion dollars on contracted goods and services, therefore, we must ensure that the money is being spent efficiently, and small businesses have proven that they can do quality work cheaper and often faster.”

The tug-of-war between big and small business on the federal landscape continues. One thing to keep in mind as these bills work their way through committee is the status of the federal workforce. There was an article in Government Executive a few days ago entitled, “Federal Agencies Shed 10,000 Jobs in March.” The article identified the fact that the federal workforce “has trended downward significantly in the last two years” due to sequestration and budget cuts, which were followed by hiring freezes and employee reductions through attrition. According the article, the government has shed about 85,000 jobs in the last year alone. This depletion of government personnel most certainly has had, and will continue to have, an impact on the procurement process. Contract bundling can alleviate stress on a taxed procurement system. However, it can adversely impact small business. Finding the correct balance will not be easy. Let us know your thoughts finding that balance.

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.

I have been inundated with questions about the SBA’s Mentor-Protege Program over the last six to eight months. That interest is being driven by what Congress included in the National Defense Authorization Act of 2013. After failing to implement changes to the Mentor-Protege Program following the passage of the Small Business Jobs Act of 2010, the SBA was given another push in 2013. As part of the NDAA of 2013, Congress authorized the SBA to expand its Mentor-Protege Program to include companies other than those that are 8(a) certified. I understand that the SBA is actively working on regulations to make this happen and may publish something later this year. For those interested in how the program is currently constituted and what changes may be in the works, please feel free to listen to the webinar that I gave to the Associated General Contractors of America a few months ago. If you have any questions, please feel free to call me.

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

Federal contractors and subcontractors will soon be subject to new regulations, which increase those contractors’ obligations to hire both veterans and individuals with disabilities (“IWDs”). On March 24, 2014, two final rules promulgated by the U.S. Department of Labor’s Office of Federal Contract Compliance Program (“OFCCP”) will go into effect. The veterans rule updates the Vietnam Era Veterans’ Readjustment Assistance Act of 1974 (“VEVRAA”), as amended by the Jobs for Veterans Act of 2002; the IWDs rule implements the nondiscrimination and affirmative action regulations of Section 503 of the Rehabilitation Act of 1973 (“Section 503”), which prohibits discrimination by covered federal contractors and subcontractors against individuals on the basis of disability, and requires affirmative action on behalf of qualified IWDs.

Vethireme.jpg The cornerstone of both rules is an adjustment to federal contractors’ and subcontractors’ affirmative action program requirements. As many contractors know, any contractor that meets the dollar threshold ($100,000 for VEVRAA and $50,000 for Section 503) and has 50 or more employees (“Covered Contractors”) is required to have an affirmative action plan (“AAP”). Pursuant to these new rules, Covered Contractors must now include in their AAPs a “hiring benchmark” for veterans and a “utilization goal” for IWDs. In other words, contractors must now set goals with respect to the number of veterans, and IWDs, they plan to hire for federal projects.

The veterans rule directs federal contractors to set this “hiring benchmark” in one of two ways. First, contractors can chose to set a hiring benchmark equal to the national percentage of veterans in the civilian labor force (currently, 8%). The OFCCP publishes this information, and updates it annually. Alternatively, a contractor may set a hiring benchmark by analyzing a combination of national, state and local data, including:

  • The average percentage of veterans in the civilian labor force in the state(s) where the contractor is located over the preceding three years, as calculated by the Bureau of Labor Statistics and published on the OFCCP website;
  • The number of veterans, over the previous four quarters, who were participants in the employment service delivery system in the state where the contractor is located, as tabulated by the Veterans’ Employment and Training Service and published on the OFCCP website;
  • The applicant ratio and hiring ratio for the previous year, based on the data collected by the contractor for its affirmative action plan data analyses;
  • The contractor’s recent assessments of the effectiveness of its external outreach and recruitment efforts; and
  • Other factors, including, but not limited to, the nature of the contractor’s job openings and/or its location, which would tend to affect the availability of qualified protected veterans.

While the second method is more complex, it could yield a significantly lower “benchmark” if the contractor is located in a low-veteran area. Contractors will have to determine which “benchmark” derivation system is best for them. Regardless of how it is derived, the hiring benchmark will be calculated using the percentage of veterans among the employer’s hires, as opposed to current workforce. The benchmark can be applied to affirmative action job groups, EEO-1 categories, or the overall workforce, at the contractor’s election.

The IWDs rule requires contractors to set goals relating to the hiring of IWDs. Here, however, the OFCCP has not left the determination of that benchmark up to the individual contractor, but, rather, has set a blanket 7% “utilization goal” for the employment of qualified IWDs for each of the job groups established in the contractor’s AAP. Utilization is to be measured by job group, with the same seven-percent goal applying for each job group without regard to any data regarding the availability of individuals with disabilities who are qualified for the relevant jobs in the relevant geographic area. Unlike the “hiring benchmarks” required by the veterans rule, the IWDs rule’s “utilization goal” relates to the contractor’s entire workforce, not just new hires.

Other notable effects of these new rules include: periodic reviews of personnel policies and physical/mental job qualifications; the obligation to offer job applicants the opportunity to self-identify as a veteran or IWD; additional internal and external affirmative action policy dissemination requirements; new responsibilities relating to training employees involved in the hiring and disciplinary process; added requirements concerning specific subcontract language relating to federal contractors’ affirmative action responsibilities; and increased obligations concerning the collection and analysis of data relating to the hiring, and employment of, veterans and IWDs. If you have specific questions relating to the obligations imposed by these new rules, contact a legal professional.

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 including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Practice Group. 

A little over a week ago I had the privilege of speaking at the Associated General Contractors of America’s national convention in Las Vegas. I was asked by the Director of the Heavy Highway and Federal Division to address a number of “hot topics” in the world of federal contracting. Over the next several weeks, I will share these “hot topics” with you. The first involves the National Defense Authorization Act of 2014 (“NDAA of 2014”).

timeforaction.jpgOn December 19, 2013, the Senate passed the NDAA of 2014, which included several important reforms that affect the SBA’s small business programs. One of the most important changes was the amendment of Section 8(d) of the Small Business Act (15 U.S.C. § 637(d)) (“Section 8(d)”). This amendment will eventually allow prime contractors to count lower-tier small business contractors towards their small business goals where subcontracting plans are required.

Under Section 8(d) of the Small Business Act, there are times when prime contractors must establish “subcontracting plans” consistent with the SBA’s goal of providing “small business concerns, small business concerns owned and controlled by veterans, small business concerns owned and controlled by service-disabled veterans, qualified HUBZone small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, and small business concerns owned and controlled by women . . . the maximum practicable opportunity to participate in the performance of contracts let by any Federal agency.” The “subcontracting plan” must include “percentage goals for the utilization as subcontractors of small business concerns, small business concerns owned and controlled by veterans, small business concerns owned and controlled by service-disabled veterans, qualified HUBZone small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, and small business concerns owned and controlled by women.” Under the current version of Section 8(d), these “percentage goals” can be reached by counting first-tier subcontractors only. Section 1614 of the NDAA of 2014 changes this.

Under the new law, for purposes of determining whether or not a federal prime contractor has attained the percentage goals set forth in a “subcontracting plan,” one must consider the following:

“(i) if the subcontracting goals pertain only to a single contract with the executive agency, the prime contractor shall receive credit for small business concerns performing as first tier subcontractors or subcontractors at any tier pursuant to the subcontracting plans required under paragraph (6)(D) in an amount equal to the dollar value of work awarded to such small business concerns; and

(ii) if the subcontracting goals pertain to more than one contract with one or more executive agencies, or to one contract with more than one executive agency, the prime contractor may only count first tier subcontractors that are small business concerns.”

Based upon the new law, contractors will be able to count not only their first-tier subcontractors, but any tier subcontractor, toward their total small business percentage goals to determine compliance with most “subcontracting plans.” Prime contractors will still need to make a good faith effort to issue subcontracts to small, and small disadvantaged, businesses at the first-tier level. However, the change in the law will make compliance much easier.

This reform will not go into effect until the fiscal year after the SBA issues final regulations to implement the law, so it will be a while before we see any real change, but change is coming. We will keep you posted on any new developments.

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.

Thanks to a recent decision by the Court of Appeals for the Federal Circuit, in Metcalf vs. U.S., the protection afforded by the Differing Site Conditions clause has been reaffirmed. Although the Court primarily addressed the requirement that federal agencies must demonstrate good faith and fair dealing in the administration of federal contracts, the Court also made an important ruling on the meaning and purpose of the Differing Site Conditions clause. Reversing a decision by the U.S. Court of Federal Claims that had been vigorously opposed by federal construction contractors and industry groups, the Court of Appeals ruled that:

“Requirements for pre-bid inspection by the contractor have been interpreted cautiously regarding conditions that are hard to identify accurately before work begins, so that the duty to make an inspection of the site does not negate the changed conditions clause by putting the contractor at peril to discover hidden subsurface conditions or those beyond the limits of an inspection appropriate to the time available.”

It is not uncommon for federal agencies to attempt to write the Differing Site Conditions clause out of the contract by discouraging contractors from relying upon representations of subsurface conditions in the solicitation. We have seen solicitations that tell contractors that borings are not to be interpreted as representative of subsurface materials beyond the individual bore holes; that bidders should make their own determinations of subsurface conditions; or, that information in the solicitation is for “informational purposes only.” What these agencies overlook is that the purpose of the clause is to allow all contractors to compete on the same basis, and without the need to put contingencies in their bids.

Fortunately the Court recognized the importance of maintaining the protection afforded by the Differing Site Conditions Clause, stating that “[i]t exists precisely in order to take at least some of the gamble on subsurface conditions out of bidding.” The Court further stated that “instead of requiring high prices that must insure against the risks inherent in unavoidably limited pre-bid knowledge, the provision allows the parties to deal with actual subsurface conditions once, when work begins, more accurate information about them can reasonably be uncovered.” This is great news for federal construction contractors who, prior to this decision, may have been misled into believing that the risk of differing site conditions had shifted entirely to them.

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 including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.

Here we are and it’s already the middle of February, 2014. We’ve gotten off to a bit of a slow start on our blog this year, but that’s about to change. The delay in posting new information has, in large part, been due to the tremendous up-tick of activity in the world of federal government contracts. We have been incredibly busy trying cases, attempting to settle others and traveling across the country speaking about issues of importance in our industry. In an effort to keep all of you abreast of what’s hot in our world (and yours) and, at the same time, keep on top of things in-house, we decided that we are going to begin using our blog to tell you about what we are seeing first hand. We have certainly done this from time to time in the past, but we intend to more frequently use the blog to share our first-hand experiences with the idea of teaching you about federal government contracting in a different, more personal way. You will still see articles that discuss cases that are not our own and regulatory changes that we feel you should know and understand, but an added emphasis on what we’re not just seeing, but actually experiencing, is something you will see a lot more this year.

So, what have we been up to most recently? Glad you asked. I’m actually on a plane right now returning from sunny Orlando, where Michael Payne and I presented at the National 8(a) Association’s Winter Conference. The conference was very well attended and the staff of the Association did a great job taking care of all that participated. While at the conference, Michael and I spoke about how contractors can enhance their ability to obtain government contracts through effective proposal preparation and teaming. I also spoke to the group about the SBA’s Mentor-Protege Program and the changes that are likely to be seen later this year. I was able to speak to the attendees about the changing economic climate in 2014 and what to expect in the world of federal government contracts this year based upon what we learned from 2013. If anyone has any questions about the topics that we discussed, please let us know. Next from us on the speaking circuit will be the Associated General Contractors National Conference in Las Vegas, where I’ll be providing the group with a rundown of the hot topics to watch for in 2014 when it comes to federal government contracting.

From a substantive standpoint, Michael and I have been dealing with a plethora of sticky issues. Those issues include: what constitutes a constructive change? When under the law can specifications be deemed defective? Under what circumstances can a termination for default be converted to a termination for convenience? Can an established small business concern successfully avoid a finding of affiliation where the principal of that concern was a former employee of another company that it does occasional business with and is no longer small? These and many other issues are those that we will discuss on the blog in the coming year. We look forward to sharing our experiences with you and hope that you will provide feedback in return. If there are issues of importance to you that you’d like us to discuss as part of this forum, please let us know. We would like to make our blog as interactive as possible to make your experience as worthwhile as possible. Thanks for reading and hold on tight for all the possibilities that 2014 has to offer!

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

On November 25th, the DOD, GSA and NASA issued a final rule incorporating a new clause into the FAR regarding accelerated payments to small business subcontractors on Government projects. The new rule, which takes effect December 26, 2013, requires large business prime contractors receiving accelerated payments from the Government to, in turn, accelerate payments to all of their small business subcontractors. The purpose of the new clause is to ensure that small business subcontractors are paid as promptly as possible.

The clause will be inserted into all new solicitations and resulting contracts issued after the effective date, including those contracts for the acquisition of commercial items. Unfortunately, the rule does not create any new remedies, where accelerated payments must be issued and they are not. Under such circumstances, the Government can discontinue accelerated payment to the prime contractor, but nothing more.

One interesting aspect of the new rule is that large business prime contractors cannot prevent their small business subcontractors from speaking to the contracting officer about the status of payment. Subcontract Agreements often state the exact opposite. Prime contractors typically do not want their subcontractors asking the contracting officers questions of any kind, let alone questions regarding payment. While this is certainly understandable, by virtue of the new rule, large business prime contractors will not have the same legal support for their position.

There’s not a lot to sink your teeth into here. However, the fact that small business subcontractors can go right to the contracting officer about payment issues without fear of legal retribution is at least something. If you have any questions about this, or other, aspects of the new rule, please contact us. The information contained above was reported yesterday by Law360.

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

Amy Kirby is an Associate in the firm’s Federal Practice Group.

Miles Construction, LLC v. United States, No. 12-597C (2013) has been a very important case for SDOVSBs and VOSBs. Our victory in Miles not only resulted in a big win for our client, but it also caused the VA to change its policy regarding transfer restrictions generally, benefitting all veteran-owned companies. Before Miles, the VA had taken the position that a right of first refusal in a VOSB/SDVOSB operating agreement prevented a veteran owner from “unconditionally owning” his or her company pursuant to 38 C.F.R. § 74.3. The Court of Federal Claims rejected this notion in Miles. It held that standard rights of first refusal constituted “normal commercial practices,” which did not hinder an SDVOSB’s ability to comply with the VA’s “unconditional ownership” requirement.   In recognition of this holding, the VA has since changed its official policy regarding transfer restrictions.

For the first time, the Miles decision also confirmed the due process that veteran-owned firms can expect and that the VA must employ, if the VA wishes to cancel a concern’s VOSB/SDVOSB status. In Miles, the VA had begun an investigation regarding Miles’ SDVOSB status because of a protest filed by a competitor. That protest alleged that Miles was not “unconditionally controlled” by a veteran owner, as required by 38 C.F.R. § 74.4. Though the VA ultimately determined that Miles was, in fact, unconditionally controlled by its service-disabled veteran owner, the VA nonetheless summarily canceled Miles’ SDVOSB status. It found that there was no “unconditional ownership” of the company. In other words, the VA canceled Miles’ SDVOSB status based entirely on an issue that was never brought to Miles’ attention and to which Miles never had an opportunity to respond. The Court concluded that, in doing so, the VA deprived Miles of its right to due process. The Court ruled that the Administrative Procedures Act requires that VOSBs/SDVOSBs be given notice of, and an opportunity to respond to, any and all challenges to their VOSB/SDVOSB status, prior to cancellation.
Miles was a game-changer in the VOSB/SDVOSB world. Now, in an equally important opinion (“Miles II“), the Court of Federal Claims has held that the government must pay Miles’ attorneys’ fees in connection with the underlying litigation.
The Miles II decision was issued in response to Miles’ petition for fees and costs under the Equal Access to Justice Act, otherwise known as “EAJA.” EAJA allows small businesses to recover their attorneys’ fees and costs from the government in certain situations, as long as the government’s position was not “substantially justified.” Surprisingly, a party’s underlying win on the merits does not automatically preclude a Court from finding that the government was “substantially justified.”  To the contrary, the government’s position can be considered “substantially justified” even though it is ultimately determined by the Court to be incorrect.  As the Court pointed out, the inquiry is not what the law now is, but whether the [g]overnment was substantially justified in believing what the law was. In Miles II, in support of its position that it was “substantially justified,” the government offered two arguments.
First, the government proffered that the VA’s interpretation of 38 C.F.R. § 74.3(b) made sense given the state of the law at the time. The government stated that the VA relied upon SBA Office of Hearings and Appeals decisions, which had held that right-of-first-refusal provisions defeat “unconditional ownership” under the SBA’s SDVOSB regulations. The Court didn’t buy it.  It reasoned that the government’s position assumed that the SBA regulation to which it referred was identical to the VA’s regulation. It is not.  As the court pointed out, the SBA regulation is a “more categorical provision,” that “simply uses the term ‘unconditional ownership’ without explanation or qualification.” On the other hand, the VA’s SDVOSB ownership regulation “contains an extended explanation of ‘unconditional ownership'” that “substantially alters ‘unconditional’ to accommodate practical commercial arrangements while preventing ownership benefits from falling into the hands of non-veterans.” Therefore, the Court concluded that these two regulations were distinct and different. The government erred in treating them otherwise.
The government’s second argument concerned due process. Specifically, the government argued that the VA had been “substantially justified” in the level of due process it afforded Miles, because it had no guidance concerning the level of notice it was required to give. The Court quickly dismissed this argument. It found that “subsection 555(b) of the APA is universally understood to establish the right of an interested person to participate in an on-going agency proceeding.” The court concluded, “the fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.” The VA should have known that Miles was entitled to timely, substantive notice, such that it could respond to any potential challenges to its SDVOSB eligibility.
So, what do Miles and Miles II mean for veteran-owned companies? First, they have clarified the scope of a VOSB/SDVOSB concern’s rights in connection with the VA’s cancellation procedure.  In the wake of the Miles decisions, it is clear that the VA must strictly adhere to the cancellation procedures set forth in 38 C.F.R. § 74.22. The VA must be sure to provide VOSB/SDVOSBs with timely notice of any potential issues concerning their eligibility and it must afford them a real opportunity to respond prior to cancellation. In short, they are entitled to due process. Second, the Miles II decision highlights that there are differences between the regulations governing the SBA SDVOSB program and those governing the VA SDVOSB program. After Miles, contractors and agencies alike would be wise to remember that these regulations, no matter how similarly worded, are separate and distinct; the interpretation of terms is not necessarily consistent and it need not be. While there have been several proposals concerning the consolidation of the two SDVOSB programs, it has not happened. Unless and until it does, Miles and Miles II will help veteran-owned companies protect their interests before the VA.

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.