Piliero Mazza & Pargament, PLLC   Vol. 5, Issue 1
January/February 2003

An Update for Federal Contractors and Commercial Businesses

 

   A R T I C L E S

GOVERNMENT CONTRACTS

NEW A-76 Rules Proposed by OMB

LEGISLATION

The Homeland Security Act of 2020

SMALL BUSINESS

GSA Changes Policy on Small Business Eligibility

SBA Set-Aside Requests on Decline

SBA Proposes New Affiliation and Size Rules


GOVERNMENT CONTRACTS

NEW A-76 Rules Proposed by OMB

The Office of Management and Budget has announced proposed revisions to OMB Circular A-76, which governs how federal agencies determine whether their commercial activities will be performed by federal employees or private contractors.

In summary, the revised circular requires agencies to: 

  • Perform "inherently governmental" activities with government personnel;
  • Presume all activities are "commercial" in nature unless  justified as "inherently governmental";
  • Use a competition or direct conversion process to determine who will be the providers of commercial activities;
  • Comply with the FAR when performing competition; 
  • Centralize oversight responsibility; and
  • Ensure full accountability of agency officials designated to implement and comply with the revised circular.

The proposed revised circular, however, no longer includes an exemption allowing federal agencies to directly convert an award to a " preferential procurement program."  Instead, the proposed revised circular allows federal agencies to directly convert awards of commercial activities, without a cost comparison, if the commercial activity meets any one of ten criteria. 

Among the ten criteria are: 

  • Small activities (i.e., activities that are or will be performed by an aggregate of 10 or fewer civilian employees); 
  • Activities performed by entities covered by Section 2 of the Javits-Wagner-O' Day Act (i.e., entities for the blind or severely handicapped); 
  • Activities for which a business case analysis has been performed and 
  • Activities with respect to which a direct conversion is otherwise " permitted by law."

According to the OMB, the proposed revisions would significantly expand the use of public-private competition by eliminating exceptions to the competition requirements and requiring periodic re-competition of commercial activities.

Significantly, the revisions  define "commercial activity" as a "recurring service that could be performed by the private sector and is resourced, performed and controlled by the agency through a contract." Under the proposal, federal agencies would be required to presume that all activities are "commercial" in nature unless they are justified as "inherently governmental."

The proposal would also require agencies to separate the team formed to write the solicitation from the team established to develop the agency's proposal, thereby avoiding the appearance of a conflict of interest.

Under the revised procedures, agencies would be required to implement a FAR-based competitive process.  For example, in-house offers (known as "tenders") would be required to be submitted within the same time frames required of private sector tenders.  All tenders -- whether public, public reimbursable, or private sector offerors -- would be evaluated simultaneously by a source selection board.  Agencies would be allowed to conduct cost-technical tradeoffs and to eliminate an agency tender from the competitive range.  Exchanges between public tenders and the government would be subject to the same FAR principles governing exchanges between the government and the private sector.  These changes are expected to make the process simpler and more understandable.

As is the case with contractors providing commercial services, the proposal would also require that in-house performance be monitored post award.  In particular, agencies using in-house providers would be required to document any deviations from the solicitation and track actual costs.  In-house providers would also be subject to termination for failure to perform.

Traditionally, the A-76 process has been perceived by some as involving a "cost only" selection decision.  To provide greater emphasis on "quality and innovation" in the evaluation process, agencies would be given three options when conducting "standard competitions."

First, an agency would be permitted to conduct a low price/technically acceptable competition.   In this instance, the award decision would be based on the low cost of offerors determined to be technically acceptable. 

Second, an agency would be able to conduct a "phased evaluation process," under which alternative performance standards would be proposed in the first phase.  Under the proposal, if the agency determines that the alternative process is valid and within its budget, the solicitation would be amended and revised submissions would be made.  The technically qualified offerors and the in-house offeror would then compete based on price against the revised performance standard. 

Third, the agency may conduct an "integrated evaluation process," which would permit cost-technical tradeoffs to be conducted and require that the rationale for the tradeoff be documented. This process would be limited to certain types of activities, e.g., IT activities currently performed by federal employees.

The new procedures would also phase out an exception to the A-76 competitive process for reimbursable service providers working under pre-1996 commercial interservice support agreements (ISSAs).  Under a grandfather clause, these firms have been allowed in the past to perform work indefinitely without being subject to competition.  Agencies that rely on these providers would be required to develop plans for competing these commercial ISSAs within five years.  ISSAs would be subject to recompetition every five years, with the exception of ISSAs yielding revenues of $1 million or less to the provider, certain ISSAs that are inherently governmental.

Administrative changes being proposed include:

  • Designation of an assistant secretary or equivalent with responsibility for implementing the circular;
  • Centralization of agency oversight of the process; and 
  • Development and publication of lists identifying both commercial and inherently governmental functions.

Unions representing federal employees can be expected to submit comments on the proposed revisions in an effort to mitigate the impact of the proposed new rules on the outsourcing of federal jobs.  Thus, it is important for federal service contractors to present their views on the proposed changes as well.

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LEGISLATION

Homeland Security Act of 2002

The newly-created Department of Homeland Security (DHS), signed into law by President Bush on November 15, 2002, will rank fourth in discretionary spending with an expected budget of $37.5 billion for Fisca Year (FY) 2003.  Among other things, the Act authorizes the use of personal service contracts and raises the dollar thresholds for micropurchases, simplified acquisition proceedings and comercial item contracting.

For an overview of how DHS is expected to handle the purchasing of goods and services, visit the Resources page at pmplawfirm.com.

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SMALL BUSINESS

GSA Changes Policy on Small Business Eligibility

On November 15, 2002, the General Services Administration  announced a new policy that will change the circumstances under which GSA schedule holders are eligible as "small businesses" for purchases off their schedules. 

Firms will be required to certify their size status each time an option period is exercised under their GSA Schedule contract.  Under the GSA's previous policy, schedule holders that were "small" at the time they received their contracts would continue to be considered "small" throughout the terms of their GSA Schedule contracts.  Accordingly, vendors could keep their small business size status not only for the five-year term of the GSA Schedule contract, but also during each of the three five-year option periods.  As a result of that interpretation, schedule holders could continue to be considered "small" for up to 20 years, even though they may have far outgrown their size standards during that time.

This change means that contractors operating under Multiple Award Schedules in GSA's Federal Supply Service, or under any other multiple award contracts, such as the FAST program in GSA's Federal Technology Service, will have to re-certify that they qualify as a small business each time their contract or contacts are open for renewal.  Failure to re-certify could lead to exclusion from federal contracting.

The newly announced policy was designed to ensure that federal contracts intended for small businesses are available to contractors with legitimate small business status. 

This policy, however, falls short of completely clarifying size eligibility for GSA buys.  Both the General Accounting Office  and the SBA's Office of Hearings and Appeals (OHA) have recently ruled that, when an agency issues a competitive request for quotations to schedule holders (e.g., GSA buy contemplating award of a blanket purchase agreement), the agency may require each bidder to self-certify that it is "small" as of the time that it submits its quote.  Therefore, a firm that is considered "small" under the GSA's new policy (by virtue of having re-certified within the previous five years) may not be eligible to participate in a competitive request for proposals if it is unable to certify as "small" at the time it submits its response to the agency.

The SBA is in the process of considering regulatory changes to further address this issue.  However, at present, it appears that schedule holders will need to certify as "small" each time their GSA schedule contracts are renewed and each time an agency issues a competitive request for quotations for a GSA buy which requires bidders to self-certify as "small" as of the time of submission of their quotes.

This size eligibility issue is likely to increase in significance given the DoD's recently announced policy of using enterprise software agreements (ESAs) as a preferred means of acquiring commercial software and related services.  ESAs are blanket purchase agreements with contractors, usually established under the GSA's Federal Supply Schedules, that provide favorable terms and pricing for commercial software, software maintenance and related services.  The award of small business ESAs, therefore, would likely be subject to the above-stated rules.

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SBA Set-Aside Requests on Decline

According to GAO findings issued in a letter dated November 1, 2002, the number of small business set-asides recommended by the Small Business Administration  has fallen dramatically over the past 10 years. 

The GAO letter was issued in response to an inquiry by Senator John Kerry, Chairman of the Senate Committee on Small Business and Entrepreneurship.   Senator Kerry asked the GAO to identify the number of small business set-asides issued over the past 10 years, as well as the number of times the SBA has challenged the agency's refusal to set-aside.  The Small Business Act establishes a government-wide goal of awarding at least 23 percent of the total dollar value of prime contract awards to small businesses each year.  To help achieve this goal, SBA Procurement Center Representatives (PCRs) work with federal agencies to help identify requirements that may be set-aside for small businesses.  If the contracting agency rejects an SBA set-aside recommendation, the SBA may appeal to the head of the contracting agency.

The GAO found that the number of PCR-recommended small business set-asides has declined by one-half since fiscal year 1991.  However, the percentage of recommendations that have been rejected has remained relatively constant, ranging from 16% in 1991 to as high as 35% in 2000. In 2001, contracting agencies rejected 19% of the PCRs' set-aside recommendations. 

On average over the 10-year period, the GAO found that:

  • Contracting officers accepted 76% of the PCRs' set-aside recommendations;
  • The SBA appealed 15% of those rejections to the head of the contracting agency; and
  • 26% of theSBA's appeals were successful. 

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SBA Proposes New Affiliation and Size Rules

On November 22, 2002, the Small Business Administration issued a proposed rule to amend the small business size regulations.  The proposed rule would, among other things, amend the definitions of affiliation, annual receipts and employees.  The SBA has requested that interested parties file comments on or before January 21, 2003.

One of the more significant proposed changes is to comprehensively address the various situations in which "affiliation" can result.  Specifically, the SBA proposes to revise the regulations to state:

  • "Control" of a firm by a third party may be affirmative or negative;
  • "Control" may be exercised indirectly; and
  • "Affiliation" will be determined by the totality of the circumstances.

The SBA also proposes to clarify the exceptions to affiliation coverage that apply to Indian tribes, including Alaska Native Corporations (ANCs), Community Development Corporations (CDC) and Native Hawaiian Organizations (NHO).  Specifically, the general exception to affiliation due to common ownership would apply whether the tribe, ANC, CDC or NHO owns a concern directly or indirectly, i.e., through another entity that is wholly-owned by the tribe, ANC, CDC or NHO.

Significantly, under the proposed rule, affiliation could not be found among tribally-, CDC-, ANC-, or NHO-owned concerns based on "common management."    This is viewed as an extension of the current regulations, which preclude affiliation based solely on common ownership.  According to the SBA, this change is needed in the context of tribally-owned concerns in which tribal board members are also board members of tribally-owned concerns.  The SBA appears to be receptive to broadening the scope of the exception in 13 C.F.R. § 121 to reflect the broader exception that applies to ANC-owned and tribally-owned participants under the 8(a) program rules.

In addition, the SBA's treatment of how stock ownership is viewed for affiliation purposes would be revised.  Specifically, the SBA proposes to amend the regulations to indicate that only "voting stock" will be considered in determining affiliation.  Under the proposal, the SBA will deem the concern's board of directors and its CEO or president to have the power to "control" the firm if the concern's voting stock is widely held and no single block of stock is large as compared to all other stock holdings.

The SBA also proposes to amend the regulations governing stock options, convertible debentures and agreements to merge.  Currently, the SBA gives present effect to all such arrangements in determining affiliation.  However, the SBA proposes to create exceptions to the "present effect rule."    For example, agreements to open or continue negotiations toward a possible merger or sale of stock would be excepted.  Also, options, debentures and agreements that are subject to conditions that are incapable of fulfillment or are speculative, conjectural, remote or unenforceable under state or federal law would not be given present effect.

The SBA also proposes to codify certain affiliation rules that Office of Hearing and Appeals had applied in deciding size appeals.  For example, the SBA proposes to articulate the "identity of interest" rule in the regulations.  Under this rule, two or more persons with an identity of interest, such as members of the same family or with common investments in more than one concern, may be treated as a single party for size determination purposes.  The SBA also proposes to address the "newly organized concern rule" in the size regulations.  Under this rule, affiliation may arise when:

  • Former officers, directors, stockholders, managing members or key employees of one concern organize a new concern in the same or related industry;
  • Those individuals serve in similar capacities in the new concern; and
  • The new concern receives contractual, financial or other assistance from the former concern.

Also for size purposes, concern would be required to include in its calculation of revenues or number of employees its proportionate share of joint venture receipts or employees, as the case may be.  The SBA would only exclude the proportionate share of receipts/employees of true joint venture partners -- parties found to be de facto joint venturers under the ostensible subcontractor rule would not be entitled to exclude any portion of the other=s revenues or employees.  

One of the more significant changes would address ongoing relationships between joint venturers.  In general, the SBA regards joint ventures as short term relationships which enable two or more concerns to enter into a business relationship to perform a specific contract.  Under the proposed rules, the SBA is considering allowing two or more small businesses to form a joint venture relationship that would go beyond the specific contract and still afford them an exclusion from affiliation, provided other requirements are met.

Further, the regulations pertaining to calculation of annual receipts would be revised. At present, the SBA calculates average annual receipts (AAR) based on information contained in federal income tax returns over the past three completed fiscal years, with "receipts" consisting of "total income" and "gross income" plus "the cost of goods sold."    The SBA is proposing to remove the words "total income" and "gross income" and add in their place "gross receipts," "gross sales" and "other income."    In addition, the SBA is proposing to include interest, dividends, rent and royalties received by partnerships, S-Corporations and sole proprietorships in the definition of "receipts."    The SBA's goal is to eliminate the impact of the different treatment of revenues on different tax forms for corporations, partnerships, S-Corporations, sole proprietorships and limited liability companies.

The SBA is also proposing to expand its exclusion of receipts received by an agent for another.  Under the proposed rule, the SBA may find agency-type situations like those currently identified in the regulations (e.g., travel agents) to be subject to the affiliation exclusion.  The SBA would exclude amounts collected from another only when a specific type of business (or industry) demonstrates that it is a practice in the industry.

Also, the SBA revisions would preclude a concern that has been the subject of a size determination from providing revised federal tax returns to the SBA while the size determination or its appeal is pending.  If a concern has not filed a federal income tax return, the SBA may rely on audited financial statements or other information.  The new rule would also clarify that the SBA would be permitted to apply the same criteria that the Internal Revenue Service uses in determining whether individuals are employees.

The SBA also proposes to change the size regulation that impacts environmental service contractors.  Specifically, the SBA proposes to add language to clarify that federal procurement programs involving a range of environmental services to restore contaminated environments do not need to include remedial actions as one of three activities to be classified under the standard.  According to the SBA, it has learned that several federal agencies have interpreted the footnote to require remedial action to be part of a procurement before it could classify the procurement under "Environmental Remediation Services." 

According to the SBA, to be classified under "Environmental Remediation Services," a procurement must satisfy two requirements:  (1) the general purpose of the procurement must be to restore contaminated environments; and (2) the procurement must require tasks to performed in a range of activities which can be classified in three or more NAICS industries or sub-industries which have separate size standards, and no industry or sub-industry would account for more than 50% of the procurement.  To clarify the intent, the footnote is being revised to state that "the general purpose of the procurement must be to restore or directly support restoration of the contaminated environment."    The SBA is also adding a list of activities usually associated with environmental remediation or related activities.

In addition, the propose rule would create exceptions to the general rule that the size status of a concern is determined as of the date the concern submits its self-certification that it is small to the procuring agency as part of its initial offer including price.  An exception would apply where a solicitation is modified so that initial offers are no longer responsive.  A concern would be required to re-certify that is "small" at the time that it submits a responsive offer which includes price to a modified solicitation.

For subcontracting purposes, a concern would need to qualify as "small" as of the date that it certifies it is "small" for the subcontract.  The date of offers for, or the award of, the prime contract would be irrelevant.  The applicable size standard would be the standard in effect at the time the concern self-certifies that it is "small" for the subcontract, not the size standard that may have been in effect when the prime contract was awarded.

The SBA also proposes a final exception which would apply to two-step sealed bidding.  The proposed rule would require that a concern qualify as "small" as of the date that it certifies that it is "small" as part of step one of the proposal.

The new regulations would also codify a long-standing policy concerning the eligibility of small businesses to perform contracts throughout the life of the contract even though they may no longer be "small" during the option years.  Under the proposed regulations, when a concern grows to be other than "small," the procuring agency would be allowed to exercise options and still count the award as an award to a small business.  However, the SBA is considering a rule that would place a limit on the amount of time that a concern would be deemed a small business.  Specifically, the SBA is considering initiating a separate rule that would permit a procuring agency to treat a concern as a small business for no more than five years from the date of award.

The non-manufacturing rule would also be revised under the new rules.  Under this rule, a non-manufacturer must normally sell items being supplied to the general public.  The SBA does not believe that a firm that sells only to the government should be excluded from being considered a small business solely because it does not sell items to the general public.  Accordingly, under the new rule, as long as a firm normally sells the item either to the public or private entities, it may qualify as a small business non-manufacturer under the SBA's size regulations.

Under the new regulations, language would be added to explain what a firm must do in order to qualify as an eligible small business manufacturer if it makes changes to an item and then resells it.  Under current regulations, a firm that performs only minimal operations on an item being procured will  not qualify as a manufacturer.  Under the proposed rule, a firm that adds substance, parts or components to an existing end item to modify its performance will not be considered the end-item manufacturer if those identical modifications can be performed by and are available from the manufacturer of the existing end-item.

With regard to subcontract awards, the SBA also proposes to eliminate the special size eligibility rules for subcontracts of $10,000 or less.  At present, to be considered small for such contracts, the subcontractor must have 500 or fewer employees averaged over the previous year.  The elimination of that rule would mean that, to be considered small under all subcontracts, the firm must be within the size standard corresponding to the NAICS industry that best represents the scope of work of the subcontract.

The SBA also proposes to add regulations concerning the time period within which size protests may filed.  For example, the SBA proposes to add a new regulation to cover instances in which notification of a contract award is posted on the Internet, as authorized under the Simplified Acquisition Procedures.  In such cases, the SBA proposes that a size protest must be made to the contracting officer within five business days after the posting.  Because no written notification is required, the SBA proposes that either prior to or after the time of award, a protestor will be considered timely if the protest is filed within five (5) days of receipt of verbal notification from the contracting officer or other agency representative.  The SBA also proposes to amend the rules which describe the process after the SBA receives a size protest or request for a formal size determination.

The foregoing briefly summarizes some of the more significant changes the SBA has proposed to the regulations.  Given the scope and breadth of the proposed changes, many small business will be impacted.  We recommend that you consider submitting comments if the proposed rule will impact your business or if you believe the SBA should address a particular issue that may be helpful to you.  As noted above, comments are due no later than January 21, 2003.

In summary, many of the proposed changes would re-incorporate into the SBA's regulations certain long-standing "affiliation" rules, some of which were previously removed as a result of prior regulatory streamlining.  Inclusion of these rules in the regulations should increase the level of understanding of affiliation rule among small businesses.  Some proposed changes should also promote small business opportunities.  For example, the proposed exemption from affiliation for certain joint ventures that involve more than one contracting opportunity would represent a positive change.  Other proposed changes could have a detrimental effect on small business opportunities.  The SBA's suggestion that a five-year limit should be placed on the amount of time a concern would be deemed a "small business" is particularly troubling given the increasing use of contract vehicles that extend beyond five years. 

We strongly encourage the small business community to submit their views on the proposed regulations.  Again, the deadline for submission of comments is January 21, 2003.  We will be happy to discuss these issues with you and/or assist you in the preparation of comments.

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