Piliero Mazza & Pargament, PLLC Vol. 4, Issue 5
September/October 2002

An Update for Federal Contractors and Commercial Businesses


  A R T I C L E S

SMALL BUSINESS

  SBA Proposes New Industry Category for Information Technology Distributors


  SBA Revises OHA Appeal Procedures


  Tax Breaks Proposed for Small Businesses


GOVERNMENT CONTRACTS

  Administration Improves Past Performance Information System


  Administration Seeks to Improve Ability to Recover Overpayments


SMALL BUSINESS

SBA Proposes New Industry Category for Information Technology Distributors

The Small Business Administration recently proposed a new industry category and size standard for "Information Technology Value Added Resellers," which would fall under NAICS 541519, Other Computer Related Services. The size standard of 500 employees, if implemented, should create a vast number of IT procurement opportunities for growing small businesses. 

The new category is intended to provide an appropriate small business size standard to contracts involving the acquisition of a combination of services and computer hardware and software. Under the proposed rule, an IT value added reseller provides a total solution to IT acquisitions by provding multi-vendor hardware and software along with significant pre-sale and post-sale services. Significant value added services would include services such as configuration consulting and design, systems integration, installation of multi-vendor computer equipment, customization of hardware or software, training, product technical support, maintenance and other end user support. 

Currently, SBA rules do not specifically address the classification of contracts that combine IT services with supplies. Under existing SBA policy, these types of contracts are almost always viewed as manufacturing or supply contracts since the dollar value of the largest component of the contract will be associated with the acquisition of supplies. To be eligible as a "small business" for these types of contracts, a firm must be either the manufacturer of the end item being acquired, or if not, it must supply the product of a small business. This rule, known as the "non-manufacturer" rule, will applies unless SBA grants a waiver. SBA has determined that the manufacturer/non-manufacturer distinction does not adequately address contracting that combines IT supplies and services into a single procurement. Accordingly, the SBA is seeking to impose small business eligibility requirements that are similar to those for service contractors. The proposed rule provides that a federal procurement must be classified under the new category if it consists of at least 15%, but not more than 50% of value added services, as measured by the total price less the cost of IT hardware, software and profit. If such services are less than 15% of the contract price, then the procurement would be classified under a manufacturing industry. If the services constitute more than 50% of the total price, then the procurement would be classified under the computer services industry that best describes the predominate service involved.

SBA is the process of considering comments submitted in response to the proposed rule, and is expected to publish a final rule early next year.

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SBA Revises OHA Appeal Procedures

In a final rule published in the July 18, 2002 Federal Register, the SBA published changes to small business size determinations, 8(a) business development/small disadvantaged business status determinations, and rules governing cases before the SBA Office of Hearings and Appeals (OHA). The regulatory changes will take effect September 16, 2002.

While many of the amendments to the current regulations are minor word changes, such as changing "SIC code" to "NAICS code," there are several procedural changes that should be noted by small businesses and 8(a) firms in order to protect their rights in proceedings before SBA. According to SBA,"[t]his rule improves the appeals process by revising and clarifying procedures, particularly those on filing, service, and calculating deadlines that have proven to be stumbling blocks causing additional litigation and delays; expedites certain procedures; conforms the regulations and procedures developed by case law and prevailing practice; and makes plain language revisions." 

One of the more significant changes pertains to the calculation of the time period by which 8(a) firms must responds to, or appeal, letters of termination or early graduation, notices of suspension, or denials of waiver requests. Under the previous language, the relevant time period (30-days to respond to SBA's initial letter or termination or graduation, or 45 days to appeal certain SBA decisions to OHA) began to run at the time the documents were served.  However, the date of service could vary depending on the method used to send the documents.  For example, if a document were mailed, service would be deemed to have been made on the date the document was mailed. On the other hand, if the document were hand-delivered, service would have been deemed made on the date that it was delivered. The new rule eliminates this inconsistency by stating that, in all cases, the response/appeal time will begin on the date that the participant receives the letter or petition. This change should reduce the number of untimely appeals by firms who may have been confused by the previous regulatory language. 

The new regulations also exempt SBA from the 45-day deadline to file a petition with OHA. SBA may now commence a case at any time by issuing the respondent a show cause order and filing a copy with OHA.

Filing and service requirements at OHA have also been amended by the new regulations. The new rules lays out the filing and service requirements with greater clarity, including the methods by which documents may be filed, where to file them, office hours, and accepting copies of documents offered as exhibits. In addition, the procedures for requesting a more definite statement have been changed. The former rule allowed a party requesting a more definite statement to do so within 20 days of service; however, the new regulation allows only 15 days.

In short, the new regulations seek to make it easier for firms to understand and comply with SBA appeal protocol. However, even with these changes, OHA's regulations remain complex, and firms are best advised to consult counsel if an appeal to OHA is being considered. The rule encompassing these changes takes effect on September 16, 2002. However, it will not apply to any case already pending before OHA on that date. 

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Tax Breaks Proposed for Small Businesses

Earlier this month, Senate Finance Committee Chairman Max Baucus (D-Mont.) introduced a tax relief plan that includes measures to assist small businesses. The Committee is currently working on the proposal, which includes numerous tax breaks for small businesses. Among the tax breaks under consideration are:

An increase in Section 179 small business expensing from $25,000 to $30,000 beginning in 2003

  • a shortened depreciation period (i.e., a reduction from 39 years to 25 years) for certain leasehold improvements placed in service after September 11, 2004;
  • modernization and simplification of S corporation tax treatment; and
  • a tax credit to encourage the use of broadband technology.

We will report on the progress of this proposal in future issues.

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GOVERNMENT CONTRACTS

Administration Improves Past Performance Information System

The Past Performance Automated Information System (PPAIS) has been upgraded to a newer, more efficient system known as the Past Performance Information Retrieval System (PPIRS). This is one of the first successes of the Administration's e-Government initiative. The new system, which is found at www.ppirs.gov, will improve access to past performance reports by federal agencies, which use such information to evaluate contractors= past performance during the source selection process.

For the past several years, past performance information has been compiled into a single database, the PPAIS, which was operated by the Department of Defense. The database contained reports evaluating contractor performance on DOD contracts.  These reports, however, were used only within DOD. Similar systems were used in other agencies. NASA had its own past performance information system, and the National Institutes of Health (NIH) maintained a systems that was used by many other federal agencies. Last year, the Office of Federal Procurement Policy established a working group to look into ways of sharing past performance information across federal agencies. It was determined that the most effective means of streamlining access to such information would be to expand DOD's system, the PPAIS.

The new system should significantly improve the flow of information among the federal agencies, as well as increase the number of past performance reports that are available to them electronically. Access to past performance information in the PPIRS will be restricted because of its use in the source selection process. 

The new system will also greatly enhance access by contractors to their own past performance reports. To obtain such access, however, contractors must obtain a Marketing Partner Identification Number (MPIN). Contractors may obtain a MPIN by updating their registration in the Central Contractor Registration System (www.ccr.gov).  The contractor's MPIN, as well as its DUNS number, are needed to access their own past performance reports under the PPIRS. Presently, more than 11,000 contractors have obtained their MPIN and are capable of accessing their past performance reports under the PPIRS. 

The new system should help streamline the procurement process by avoiding delay in agency retrieval of contractor past performance information. It should also be of significant benefit to contractors, which oftentimes must submit Freedom of Information Act requests in order to obtain their own past performance reports. By enhancing access by contractors to their own past performance reports, the new system  should also lead to correction of inaccurate information contained in the reports.

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Administration Seeks to Improve Ability to Recover Overpayments

Federal regulations being proposed by the Administration would impose an affirmative obligation on federal contractors to notify the government of its receipt of an overpayment prior to receiving a demand letter. Contractors should be aware of the obligations imposed by these regulations, if it is implemented.

The proposed regulations (Federal Register, Vol. 67, No. 168, Aug. 29, 2002) were published in response to a July 1999 report by the General Accounting Office entitled "Greater Attention Needed to Identify and Recover Overpayments." In that report, GAO concluded that there was no requirement in existing regulations for contractors who have been overpaid to notify the government of overpayments or to return overpayments prior to the government issuing a demand letter. As a result, the burden was on the government to discover the overpayment if corrective action was to be taken.

Since the GAO report was issued, the Administration has revised FAR clauses pertaining to Prompt Payment to affirmatively require a contractor to notify a contractor officer if the contractor becomes aware of an overpayment. This regulatory change was implemented on December 18, 2001. During the course of the rulemaking process, suggestions were made that the same policy applicable to invoices should be applicable to financing payments. Accordingly, the Administration has proposed these new regulatory changes.

The proposed regulations would further modify the FAR to extend the policy regarding overpayments to contract financing payments. In addition, the proposed regulations would make the policy applicable to both contract financing and invoice payments under contracts for commercial items. Comments on the proposed rule have been requested by October 28, 2002.

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