Piliero Mazza & Pargament, PLLC Vol. 5, Issue 2
Second Quarter 2003
An Update for Federal Contractors and Commercial Businesses
COURT WATCH - Court Decision Upholds Enforceability of Teaming Agreement
SMALL BUSINESS - OFPP recommends Annual Small Business Recertification
GOVERNMENT CONTRACTS - Anti-Bundling Proposals Gain Momentum
Supreme Court to Hear Affirmative Action Case
Court Decision Upholds Enforceability of Teaming Agreement
On December 23, 2002, the Circuit of Virginia issued a decision in EG&G, Inc. v. The Cube Corporation, 202 WL 31950215 (VA.Cir.Ct. 2002) addressing the enforceability of teaming agreements typically used in competing for federal government contracts. The Court found that the teaming agreement in question was a binding agreement to allow EG&G, Inc. (EG&G) to perform as a subcontractor, notwithstanding the parties' inability to agree on a final subcontract.
The procurement that was the subject of the case was the Wallops Institutional Consolidated Contract (WICC), which was issued by the U.S. Department of the Navy and NASA. The solicitation called for operations and maintenance support services at NASA's flight facility on Wallops Island. A cost plus incentive fee/award term contract was contemplated. The solicitation was set aside for small businesses.
Cube Corporation (Cube) was a small business interested in competing as a prime contractor for the requirement. Cube selected EG&G as its proposed subcontractor. The parties entered into a teaming agreement under which EG&G agreed to work with Cube to prepare a response to the solicitation. The teaming agreement stated that "if the contract is awarded to the Cube Corporation, EG&G will be performing certain functional areas as a subcontractor to the Cube Corporation . . . with the functions to be determined once the RFP is released," and that EG&G would perform up to "49 percent of the contract dollar value." With respect to compensation, the teaming agreement stated that Cube would agree with EG&G "at the time of proposal submission on a fully loaded fee structure." In addition, an exhibit to the teaming agreement stated that if the WICC were awarded to Cube, the parties would "enter into a prime/subcontract agreement for the sole purpose of performing the contractual requirements."
Cube subsequently received the award. Thereafter, the parties attempted to negotiate a subcontract. However, because they were not able to definitize the subcontract, they entered into a series of letter agreements that provided for performance by EG&G for a limited period of time. Several months after the award, the parties continued negotiation of a definitive subcontract. Cube demanded that two issues not previously agreed upon be included in the subcontract. First, Cube insisted that a one-sided termination for convenience clause be included. Also, Cube insisted that EG&G cap its general and administrative (G&A) rate. Neither the termination clause nor the G&A ceiling had been discussed with EG&G prior to the submission of the final cost proposal.
Because the parties were unable to resolve these outstanding issues, EG&G filed suit seeking specific performance of the teaming agreement, which it contended was tantamount to a subcontract. In defense, Cube argued that the teaming agreement was unenforceable because it was nothing more than an "agreement to agree." Further, Cube argued that the parties "intended to be bound under a subcontract only if a formal subcontract was prepared and signed."
The Circuit Court of Virginia disagreed. The Court held that the teaming agreement between Cube and EG&G was not an "agreement to agree," and distinguished the facts from those in other cases in which courts have questioned the enforceability of teaming agreements (e.g., W. J. Shaffer Associates, Inc. v. Cordant, Inc., 254 Va. 541, 493 S.E. 2d 512 (1997) and Dual, Inc. v. Symbionics, Inc., No. 97-1228 1997 U.S. App. LEXUS 23959 (4th Cir. 1997)). The Court found that the facts supported a finding of mutual commitment between the parties with respect to the level of EG&G's involvement with the type of work it would perform if the WICC contract was awarded to Cube. In addition, the Court found that, unlike the Shaffer case, "everything was agreed to here except minor functional details."
Importantly, the Court also focused on the language of the teaming agreement itself, noting that the agreement stated that, if Cube were awarded the WICC contract as a prime contractor, EG&G "would be a subcontractor" and perform a substantial amount of the work. This was distinguished from the teaming agreements in the Shaffer and Dual cases, wherein the teaming partners were obligated to "negotiate in good faith" to arrive at a final subcontract upon award of a prime contract. Therefore, the agreement was not that EG&G "might" be a subcontractor "if" an agreement were worked out, but rather, that EG&G "would" be a subcontractor pursuant to previously agreed upon terms as to job responsibilities, compensation and duration of performance. Accordingly, the Court found that the intention of the parties was that EG&G would receive a subcontract upon award of the WICC prime contract to Cube.
The Court also found that the essential terms of contract performance were agreed upon between the parties. In general, the essential terms of a contract for services are: (1) the nature and scope of the work to be performed; (2) the compensation to be paid for that work; (3) the place of performance; and (4) the duration of the contract. The Court noted that there was never any disagreement as to EG&G's functional areas of work. In addition, the parties agreed how EG&G would be compensated for its work. At the time proposals were submitted, EG&G offered, and Cube accepted, EG&G's summary costs as representing its anticipated fully loaded costs projected over the life of the contract. The Court also considered that Cube had engaged in bad faith by interjecting new requirements (termination for convenience clause and G&A ceiling) into the negotiations well after the teaming agreement had been signed and performance of the contract had commenced. The Court cited evidence that Cube had raised those issues in an effort to save costs by avoiding its obligation to subcontract to EG&G.
This case gives important guidance as to how subcontractors can better ensure they will be entitled to perform as a subcontractor in the event a subcontract cannot be negotiated after award.
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OFPP recommends Annual Small Business Recertification
In an effort to address a perceived problem of larger businesses receiving work intended for small businesses, the Office of Federal Procurement Policy (OFPP) recently recommended an annual recertification requirement for small businesses. The OFPP recommendation affects government-wide agency contracts (GWACS) across four agencies - Commerce, NASA, NIH and GSA. However, there is a growing concern that this proposal could eventually spread to other types of contracts and other agencies.
In the past, the general rule has been that once a business certifies as small and wins a federal contract, it retains its size status for the life of the contract. As applied to General Services Administration schedule holders, this meant that those who obtained their GSA schedule contract as a small business could remain eligible as a small business under that contract for a period of up to 20 years (a five-year base period, plus three five-year options), regardless of how large the company has grown. To avoid this unintended effect, the GSA in November 2002 issued a new policy requiring GSA schedule holders to self-certify at the beginning of each option period of their GSA Schedule contracts (i.e., every five years). Previously, case precedent at the GAO and the SBA’s Office of Hearings and Appeals also required GSA schedule holders to self-certify at the time they submit a bid in response to a competitive request for quotations for a GSA Schedule buy (e.g., a GSA buy contemplating award of a blanket purchase agreement). The OFPP’s recommended annual recertification requirement represents a further expansion of this concept to GWACS.
Now that this issue has been brought to the forefront by these new policies, several reviews are underway. Senator Olympia Snowe, the chair of the Senate Committee on Small Business and Entrepreneurship, has requested a GAO investigation to determine if large businesses are receiving small business set-asides. Representatives Nydia Velazquez and Donald Manzullo have also requested a GAO investigation. In addition, the GAO is conducting its own investigation into the matter. Representative Barbara Boxer has asked the Small Business Administration’s acting Inspector General to investigate complaints that she has received on the issue.
In addition, the SBA is in the process of drafting a proposed rule that will address small business recertification. It is anticipated that this rule will be published in the next few months.
The OFPP recommendation was included in a letter from Director Angela Styles to Deputy Secretary Samuel W. Bodman of the Commerce Department. Ms. Styles stated: “. . . we intend for executive agents to require annual recertification of their contractors regarding their status as small businesses and types of small businesses (e.g., HUBZone, 8(a)).”
Although the various recertification policies seek to ensure that the small business set-aside contracts are actually being performed by small businesses, the OFPP recommendation, if it becomes policy, could have a chilling effect on the willingness of agencies to use small business set-asides, because of the uncertainty of the contract duration. In particular, under the new policies, the award of a multi-million dollar contract could affect a firm’s small status within the first or second year of the contract. If the firm outgrows the size standard, the procurement may have to be re-advertised well ahead of its expected renewal date. The prospect of a shortened contract period could deter agencies from pursuing small business set-asides. Moreover, if a contract is cut short in this fashion, the firm’s continued growth will be directly affected. Therefore, from the vantage point of some small businesses, the OFPP’s policy recommendation could significantly stifle their growth.
Although it is uncertain whether the OFPP recommended solution will become the government-wide standard for all small business set-asides, the possibility has generated concern among many members of the small business community. Several of our clients have contacted us and intend to take action. If you too would like to be heard, we invite you to visit the Resources page on our Web site where we have posted a point paper and a proposed letter to members of Congress and the the Administration. You may also contact us by e-mail at or by phone at 202-857-1000.
The Legal Advisor will continue to monitor the issue and report on the latest developments in future issues.
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Anti-Bundling Proposals Gain Momentum
On January 31, 2003, the Small Business Administration, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council issued proposed regulations to implement the recommendations of the Office of Management and Budget in its October 30, 2002, report entitled, “Contract Bundling, A Strategy For Increasing Federal Contracting Opportunities for Small Businesses.” Although the proposed regulations have been welcomed by the small business community, there is consensus that more needs to be done to ameliorate the significant impact that bundling has had, and continues to have, on small businesses.
Previously, on March 13, 2002, President Bush unveiled a “Small Business Agenda” that proposed several substantive steps towards increasing contracting opportunities for small businesses. Part of the president’s plan included proposals to improve the access of small businesses to federal contracting opportunities. At the time, the president called upon OMB to prepare a strategy for unbundling federal contracts.
On October 29, 2002, OMB issued a nine-point action plan designed to require federal agencies to eliminate unnecessary contract bundling and mitigate the effects of necessary contract bundling. Several of the action items, such as the plan to increase accountability of senior agency management, and the collection and dissemination of best practices to maximize prime subcontracting opportunities for small business, are to be implemented through separate agency initiatives involving OMB, the SBA and the agency Offices of Small Disadvantaged Business Utilization (OSDBU). The remaining five actions items, however, would involve modification of SBA regulations and the Federal Acquisition Regulation. The proposed regulations issued in January, which are designed to implement those action items, are summarized below.
OMB Action Item — Require contract bundling reviews of tasks and delivery orders under multiple award contract vehicles — To implement this action item, the proposed rule would require a bundling review of task orders issued under multiple award contracts, multi-agency contracts, Government-Wide Acquisition Contract (GWACs) or a General Services Administration Multiple Award Schedule Contract.
OMB Action Item — Require agency review of proposed acquisitions above specified thresholds for unnecessary and unjustified contract bundling — Under the proposal, the regulations would be revised to establish agency-specific acquisition dollar thresholds, within the range of $2 million and $7 million, that would trigger bundling reviews by agency OSDBUs. The bundling reviews would occur if the estimated contract or task order value is: (1) $7 million or more for the Department of Defense; (2) $5 million or more for NASA, the GSA or the Department of Energy; and (3) $2 million or more for all other agencies.
OMB Action Item — Require identification of alternative acquisition strategies for the proposed bundling of contracts above specified thresholds and written justifications when alternatives involving less bundling are not used — The proposed regulations provide that, if an agency’s contemplated strategy or plan exceeds the applicable acquisition thresholds and the requirement is not set aside for small businesses, the agency must coordinate the acquisition strategy or plan with the cognizant Small Business Specialist (SBS). The proposed regulations would also require the SBS to notify the agency OSDBU if the proposed acquisition strategy or planning includes bundled requirements that the agency has not identified as bundled or includes unnecessary or unjustified bundling of requirements. To ensure that there is a consultative process at an early stage in the acquisition planning process, agencies are required to coordinate their actions with the SBS as early in the planning process as possible but no later than 30 days before the issuance of the solicitation.
OMB Action Item — Mitigate the effects of contract bundling by strengthening compliance with subcontracting plans — The proposed rule would require an assessment of a contractor’s compliance with the goals identified in its small business subcontracting plan on contracts that require a subcontracting plan. The objective is to minimize adverse impacts of contract bundling by encouraging large businesses to implement their small business subcontracting plans.
OMB Action Item — Mitigate the effects of contract bundling by facilitating the development of small business teams and joint ventures — The proposed regulations would require Procurement Center Representatives (PCRs), SBSs and the agency OSDBUs to recommend the restructuring of acquisitions as necessary to increase small business prime contract participation through small business teams. Where a requirement is to be bundled, acquisition strategies would be structured to increase the probability of participation by small businesses, including small business contract “teams,” as prime contractors. If small business participation as prime contractors is unlikely, then the SBSs and PCRs would be required to facilitate small business participation as subcontractors and suppliers.
The anti-bundling campaign has made slow but steady progress over the past several years. Although there is general agreement that significant steps need to be taken to minimize the impact of bundling on small businesses, many of the proposals in recent years lack the “teeth” needed to make that a reality. Although, the current proposal represents another step in the right direction for small businesses, a greater level of agency accountability is needed to implement meaningful change in this area.
Note: On March 18, 2003 the Senate Committee on Small Business and Entrepreneurship held a hearing on the impact of contract bundling on small businesses. The prepared statements of Angela Styles, Hector Barreto, Deidre Lee and others are available at http://sbc.senate.gov/hearings/031803witnesslist.html. The Legal Advisor will continue to report on contract bundling developments in future issues.
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Supreme Court to Hear Affirmative Action Case
The U.S. Supreme Court will hear oral arguments in the coming weeks in an affirmative action case that could impact federal contracting set-aside programs.
The case stems from a federal district court decision in Grutter v. Bollinger, 137 F.Supp.2d 821 (2001), which found that the admissions policy of the University of Michigan, which assigns point values based on race and ethnicity, violated the Equal Protection Clause of the Fourteenth Amendment and Title VI of the Civil Rights Act. Last year, the United States Court of Appeals for the Sixth Circuit reversed the district court’s decision, holding that the school’s admissions policy is narrowly tailored to serve the school’s compelling interest to promote diversity on its campus. Grutter v. Bollinger, 288 F.3d 732 (2002)(en banc). Subsequently, the U.S. Supreme Court agreed to hear the case.
The law school contends that it has a compelling interest in diversifying their student body under Regents of the University of California v. Bakke, 438 U.S. 265 (1978), and has narrowly tailored the policy to serve that interest. The school’s policy, drafted in 1992, was written with Bakke in mind. Officials maintain it provides the school with an opportunity to matriculate a student body with a variety of different backgrounds and experiences. The law school did not intend the policy to be a remedy for past discrimination, but rather, a tool to promote different perspectives in the classroom. Opponents to the school’s policy claim that the system, which encourages a “critical mass” of diversity, is tantamount to a quota and facially unconstitutional.
The Appeals Court, applying the rationale from the Bakke opinion, found that the objective of having a diverse student body that can contribute to the robust exchange of ideas is a constitutionally permissible goal. In Bakke, Justice Powell declared the University of California’s admissions system to be unconstitutional because it was not narrowly tailored to meet the school’s interests. The school operated a dual-track system that maintained a separate applicant review process for minorities.
However, the Grutter case involves an admissions process that mirrors the Harvard plan, discussed as a model by Justice Powell in Bakke. The Harvard plan, which many schools have emulated, accounts for race as a factor in the decision-making process, but does not make decisions based solely on the basis of race. The plan considers each applicant separately and weighs a variety of characteristics, a system Justice Powell found to be more narrowly tailored to meet the school’s interests.
Chief Justice Boggs of the Sixth Circuit offered a dissent, finding that the case involved a straightforward instance of discrimination. Chief Justice Boggs conceded that the school’s admissions system may make for good public policy, but he noted that public policy does not trump the Equal Protection Clause of the Constitution.
As noted, the Supreme Court granted the petition for certiorari, 123 S. Ct. 617 (2002), and is scheduled to hear the case in April. The widespread interest in the case is apparent by the number of “friend of the court” briefs that have been filed. The Court’s decision will likely include a discussion of affirmative action principles that could affect government contracting set-aside programs, some of which also employ race as an eligibility factor in the award decision. The Legal Advisor will provide an update on this important case once the opinion is rendered.
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