SBA OHA’s decision highlights what I like to call the “individual size treatment rule,” a special regulation requiring the SBA to deem a joint venture “small” under certain circumstances, even when the combined sizes of the joint venture’s members exceed the applicable size standard.

SBA OHA’s decision in Size Appeal of Aerospace Engineering Spectrum, SBA No. SIZ-5469 (2013) involved an Air Force multiple-award Indefinite Delivery/Indefinite Quantity contract for engineering and related services.  The contract was set-aside for small businesses under a $27 million size standard.  Aerospace Engineering Spectrum, a joint venture comprised of four businesses, was one of the IDIQ awardees.

More than a year after contract award, the Contracting Officer filed a size protest, challenging AES’s small business eligibility (unlike competitors, who have five business days to file a size protest, a CO can file a size protest at any time).  AES argued that it qualified as small under 13 C.F.R. 121.103(h)(3)(i).  That regulation states that for certain procurements, a joint venture may submit an offer as a small business “without regard to affiliation . . . so long as each [venturer] is small under the size standard corresponding to the NAICS code assigned to the contract . . ..”

The SBA Area Office noted that the joint venture itself had received revenues in excess of the $27 million size standard.  For this reason, the Area Office held that “it does not matter whether or not each joint venturer is a small business.”  The SBA Area Office issued a size determination finding AES to be an ineligible large business.,

AES appealed to SBA OHA.  AES primarily argued that the SBA Area Office erred by failing to apply the individual size treatment rule in 13 C.F.R. 121.103(h)(1).

SBA OHA agreed with AES.  It held that “the applicable regulation requires that, for a joint venture to be small, each member of the joint venture must be small, and the procurement must satisfy certain conditions.”  SBA OHA concluded, “[i]f these criteria are met, it is not necessary that the joint venture itself also be small.”

Examining the record, SBA OHA found that it was unclear whether each of AES’s four members was individually below the $27 million size standard.  SBA OHA remanded the matter to the SBA Area Office with instructions to analyze each venturer’s individual size.

At first blush, the Aerospace Engineering Spectrum decision looks like a simple matter of an SBA Area Office ignoring the individual size treatment rule for joint ventures.  In my mind, though, it’s more complicated than that.

The individual size treatment rule says that a joint venture’s size is calculated “without regard to affiliation” between the members, but does not specifically address what happens when the joint venture, itself, has earned revenues in excess of the applicable size standard–which is not necessarily a question of affiliation.  In this light, the SBA Area Office’s decision seems reasonable, but SBA OHA opted for a broader interpretation of the individual size treatment rule.  It’s an interpretation that ought to make some joint venturers quite happy.

In a recent decision, the FAA’s Office of Dispute Resolution for Acquisition applied the ostensible subcontractor rule–and SBA Office of Hearings and Appeals decisions interpreting that rule–in arriving at the conclusion that a contract awardee was an eligible small business.

The FAA ODRA’s decision in Protest of Alutiiq Pacific LLC, No. 12-ODRA-00627 involved a FAA procurement for security officer services.  The solicitation (or “Screening Information Request,” in FAA parlance), called for a tiered evaluation system under which small business awards would be prioritized.

After the FAA awarded the contract to American Eagle Protection Services, or AEPS, a competitor, Alutiiq Pacific LLC, filed a protest with FAA ODRA.  Alutiiq’s protest contended, in part, that AEPS was not an eligible small business because its relationship with its subcontractor, Paragon Systems Inc., violated the ostensible subcontractor rule.

Addressing this allegation, the FAA ODRA noted, “[b]y law the FAA is exempted from the normal small business contracting rules for Government procurements.”  For this reason, “Small Business Administration (“SBA”) rules, regulations, and decisions are therefore not binding on the FAA.”  FAA ODRA continued, “[t]hey may, however, be viewed as persuasive authority as long as they do not conflict with the principles of the [Acquisition Management System].”

The FAA ODRA proceeded to cite a number of SBA OHA decisions interpreting the ostensible subcontractor rule.  Applying these decisions, the FAA ODRA determined that “AEPS and not Paragon will exercise substantial control over management of the project.”  The FAA ODRA wrote that proposal references to AEPS and Paragon as a “team” did not establish a violation of the ostensible subcontractor rule, and found that AEPS would provide key personnel.

Based on these determinations, the FAA ODRA held that “Alutiiq has not demonstrated by substantial evidence that the use of Paragon by AEPS creates an ostensible subcontractor relationship.”  The FAA ODRA denied Alutiiq’s protest.

In the government contracts world, the FAA occupies a unique position, operating primarily under its own regulations and administrative authority.  However, as the Alutiiq Pacific case demonstrates, even in the FAA’s unique world, the SBA’s size regulations and policies–including the ostensible subcontractor rule–may play an important role in how the FAA and the FAA ODRA interpret and decide small business size matters.

Yesterday, the Department of Justice announced that a DOT DBE subcontractor had agreed to settle “pass-through” fraud claims for $936,000.  The DOJ’s announcement comes on the heels of a June 6 press release touting a settlement of nearly $3 million, also stemming from alleged DOT DBE fraud.

Let’s start with the case of the subcontractor, Kleinberg Electric, Inc.  The Kleinberg case arose out of a New York Metropolitan Transportation Authority design-build construction project, which was federally-funded.  The MTA set the DBE participation goal for the project at 10 percent, or approximately $12.7 million.

The prime contract was awarded to Slattery Skanska, which subsequently issued a subcontract to Kleinberg.  According to the DOJ, Kleinberg informed Skanska that it would contract with J&R Rey, a certified DBE, as a second-tier subcontractor to perform $600,000 of work.  In fact, J&R never performed any work on the contract, and its president later admitted that it “never performed a commercially useful function.”  Instead, Kleinberg paid J&R “commissions” for the pass-through use of J&R’s DBE status.

Under the settlement agreement reached yesterday, Kleinberg took responsibility for its actions and agreed to pay a $936,000 fine.  The Kleinberg case shows that just because a company is not performing at the prime contract level does not mean that it is safe from fraud allegations.  Fraudulent pass-throughs of the type the DOJ alleges Kleinberg committed are improper at the subcontract level, as well.

The June 6 settlement arose from a False Claims Act whistleblower lawsuit filed by a former employee of TesTech, Inc.  In the lawsuit, the whistleblower contended that TesTech falsely claimed that it was owned by Sherif Aziz, a minority, in order to obtain DBE certification.  TesTech then used its DBE certification to obtain numerous highway and airport construction projects.  In fact, TesTech was owned by CESO Testing Technology, Inc., CESO International, LLC, and CESO, Inc., three related companies referred to collectively as “CESO” by the DOJ.

Under the settlement, TesTech, CESO, Aziz, and the owners of CESO collectively agreed to pay $2,883,947 to resolve the False Claims Act allegations.  As for the whistleblower, Ryan Parker, he will not need to worry about finding a new job anytime soon: he will receive $562,370 as his share of the settlement.

The TesTech case provides a good contrast to the Kleinberg settlement.  Although pass-through fraud gets a lot of attention on this blog and elsewhere, it is not the only type of DBE fraud out there.  In TesTech’s case, hidden relationships with other companies and individuals were at the heart of the False Claims Act allegations.

The two settlements announced in the last week indicate that the DOT and DOJ are aggressively pursuing charges against DOT DBE fraudsters.  Kudos to the Government for working to maintain the integrity of the DOT DBE program.  And congratulations to Mr. Parker on his new found wealth.

In a bid protest filed by the excluded offeror, the GAO held that the procuring agency properly deemed the offeror unacceptable for failing to use Excel.

Somewhere, Bill Gates is smiling.

The GAO’s bid protest decision in Herman Construction, Inc., B-408018.2, B-408018.3 (May 31, 2013) involved a Department of Homeland Security solicitation for tactical infrastructure maintenance and repair services.  The solicitation, which was set-aside for small businesses, called for the award of a hybrid cost-plus-fixed-fee and fixed-price contract.

The solicitation instructed offerors to submit their proposals both on paper and electronically.  The solicitation stated that electronic price proposals were to be submitted in “XLS file format (at a minimum, Microsoft Excel 2003), with “all formulas and calculations” included.  The solicitation included a cost template guide as an attachment.  The guide was prepared in Excel and included Excel spreadsheet formulas for the calculation of labor category and total prices.

Nineteen prospective contractors submitted proposals.  After an initial review, the DHS rejected six of the nineteen proposals for failing to comply with the solicitation’s Excel spreadsheet requirement.  Herman Construction, Inc. had submitted one of the rejected proposals.  Herman’s proposal provided the electronic pricing proposal in PDF format rather than Excel.

Herman filed a GAO bid protest.  Herman argued, in part, that its PDF files were an appropriate substitute for the Excel files and that Herman had provided all of the relevant information and formulas.

The GAO agreed with the DHS that even if Herman had provided all of the relevant information in PDF, reviewing the information in this format would “require a substantial amount of time . . . to either reformat the submission into Excel file format (to the extent that the evaluators could even do so), or manually adjust and add prices from up to 50 spreadsheets submitted by the protester for the fence and gates work category alone.”  The GAO denied the protest, writing, “[w]here proposal solicitation requirements are clear, an agency is not required to assume the risks of potential disruption to its procurement in order to permit an offeror to cure a defective proposal submission initiated by its failure to comply with mandatory solicitation requirements.”

To me, the most striking thing about the Herman Construction decision is that five other offerors made the same mistake as Herman.  I have to wonder just how “clear” the Excel requirement really was if almost a third of a large competitive field failed to comply.  That quibble aside, Herman Construction demonstrates the importance of carefully reviewing proposal submission requirements and scrupulously following them.  Even where, as in this case, the requirement could be viewed as a matter of form and not substance, failing to comply could cause the proposal to be excluded.

In dismissing the complaint on technical grounds, the Court’s message to the terminated company was, in essence, “tough luck.”

The decision of the U.S. Court of Federal Claims in Crewzers Fire Crew Transport, Inc. v. The United States, No. 11-607C (2013) involved a BPA issued by the Forest Service for the purchase of crew carrier buses.  The BPA specified that the placement of orders was “NOT GUARANTEED” but that if the Forest Service did place an order, the BPA holder was only required to provide the buses if it was willing and able to perform at the time.

In March 2011, the Forest Service awarded a BPA to Crewzers Fire Crew Transport, Inc.  The BPA had a three-year term.

In August 2011, the Forest Service notified Crewzers that its BPA was being suspended due to alleged breaches.  Crewzers responded to the Forest Service’s notice, disputing the alleged breaches.  However, in September 2011, the Forest Service terminated the BPA “for cause.”

Crewzers subsequently filed a complaint with the Court.  Crewzers’ complaint alleged that the Forest Service had acted in bad faith by terminating the BPA, interfered with Crewzers’ performance of the BPA, breached the covenant of good faith and fair dealing, and engaged in other improper actions.

The Government argued that because the BPA was not a contract, the Court lacked jurisdiction to hear Crewzers’ claim.  The Court agreed.

The Court noted that “[i]t is a settled matter of law that to invoke jurisdiction under the Tucker Act or [Contract Disputes Act], a plaintiff must allege all the requisite elements of a contract with the United States.”  The Court explained, “[t]he requisite elements include a mutual intent to contract including an offer, an acceptance, consideration, and facts sufficient to establish that the contract was entered into with an authorized agent of the United States who had actual authority to bind the United States.”

The Court pointed out that the BPA provided no guaranteed work and that Crewzers was only required to accept an order if it wished to, something the Court deemed “a classic illusory promise.”  Citing prior court decisions and FAR provisions, the Court wrote that under a BPA like this one, “a contract is not formed between a contractor and the Government until two conditions are met: an order must be placed under the BPA; and the contractor must accept that order.”  Thus, the Court concluded, “Crewzers’ BPA did not itself establish a contract with the Forest Service.”  The Court dismissed Crewzers’ complaint.

Although it is hard to find fault with the Court’s legal analysis, it seems to me that an improperly terminated BPA holder ought to be entitled to some form of legal recourse.  Although there is no way to know what would have happened had the Court heard Crewzers’ claims on their merits, the Government should not be able to hide behind legal technicalities if it treats contractors unfairly.  For now though, BPA holders are forewarned: the Crewzers Fire Transport case demonstrates the real-life implications of the oft-repeated saying, “a BPA is not a contract.”

According to a recent decision of the SBA Office of Hearings and Appeals, these factors should play no bearing on an agency’s NAICS code designation.  Instead, in most cases, the agency must select the NAICS code that best describes the principal purpose of the product or service being acquired.

SBA OHA’s decision in NAICS Appeal of Pacific Shipyards International, LLC, SBA No. NAICS-5464 (2013) involved a Navy solicitation for maintenance, operations and logistical support services at Joint Base Pearl Harbor Hickam, Hawaii.  The Navy set aside the procurement for small businesses under NAICS code 488310 (Port and Harbor Operations), which carries a $33.5 million size standard.

Pacific Shipyards International, LLC filed a NAICS code appeal with SBA OHA.  Pacific Shipyards alleged that the correct NAICS code was 336611 (Ship Building and Repairing), which carries a 1,000-employee size standard.  Among its arguments, Pacific Shipyards contended that selecting NAICS code 488310 restricted competition and increased the risk of unsuccessful performance of the contract.

SBA OHA rejected this argument, deeming it “meritless.”  SBA OHA wrote that Pacific Shipyards had offered no evidence to support its allegation that NAICS code 488310 would reduce competition and increase performance risks, and “even if [these arguments] were shown to be valid, OHA has held that such considerations are not part of the criteria for selecting the NAICS code.”  Rather, “by regulation, the CO must designate the NAICS code that best describes the principal purpose of the product or service being acquired.”  SBA OHA denied Pacific Shipyards’ NAICS code appeal.

SBA OHA’s conclusion in Pacific Shipyards makes sense.  After all, if Contracting Officers were permitted to consider which NAICS code would increase competition, they would be motivated to select the NAICS code carrying the largest possible size standard, to the potential detriment of smaller businesses.

Not always.  As demonstrated in a recent SBA Office of Hearings and Appeals decision, when it comes to picking a NAICS code for a GSA Schedule task order, a Contracting Officer’s choices can be quite limited–and the “best” NAICS code might not be chosen.

SBA OHA’s decision in NAICS Appeal of Global Dynamics, LLC, SBA No. NAICS-5470 (2013) involved a VA solicitation for a task under under Federal Supply Schedule 621-I (Professional and Allied Healthcare Staffing Services).  The successful offeror was to provide approximately 30 Certified Nurse Assistants at the Michael E. DeBakey VA Medical Center in Houston.

The VA set aside the task order procurement for small businesses, and initially designated the solicitation with NAICS code 621399 (Offices of All Other Miscellaneous Health Practitioners), with a corresponding $7 million size standard.  However, after noting that NAICS code 561320 (Temporary Help Services) is the only NAICS code available under FSS 621-I, the Contracting Officer switched the NAICS code to 561320.  That NAICS code carries a corresponding $13.5 million size standard.

Global Dynamics, LLC, filed a NAICS code appeal with SBA OHA.  Global Dynamics contended that the original NAICS code, 621399, was the correct NAICS code for the solicitation because it best described the services to be acquired.  Global Dynamics argued that NAICS code 561320 was inappropriate because it is used for “temporary” services of an extremely short duration.  Global Dynamics noted that the task order in question contemplated performance for up to three years.

SBA OHA wrote that a procuring agency “ordinarily must designate the NAICS code which best describes the principal purpose of the product or service being acquired . . ..”  SBA OHA’s use of the word “ordinarily” is critical,  because “SBA regulations recognize an exception to this general rule for orders placed under the FSS and other long-term contracts.”  For these orders, under 13 C.F.R. 121.404(g)(3)(iv), “[t]he NAICS code and size standard assigned to the order must correspond to a NAICS code and size standard assigned to the underlying long-term contract.”

In this case, “NAICS code 561320 is the only NAICS code available on the underlying Schedule 621-I.”  Accordingly, “the CO did not err in selecting NAICS code 561320.”  In fact, the Contracting Officer had no discretion, because no other NAICS codes were available under the underlying FSS contract.  SBA OHA denied the NAICS code appeal.

The Global Dynamics NAICS code appeal decision illustrates an important exception to the ordinary rule that the “best fit” NAICS code must be designated.  As the case demonstrates, when it comes to GSA Schedule orders, the NAICS code chosen must be one that has been designated for the underlying Schedule contract–even if that NAICS code is not necessarily the best fit for the particular goods or services to be procured under the task order solicitation.

According to the Court, even though the amount to be subcontracted was small in any event, the ambiguity meant that the procuring agency reasonably questioned whether the offeror understood the requirements of the solicitation.

The decision of the U.S. Court of Federal Claims in Davis Boat Works, Inc., v. The United States, No. 13-58C (2013) involved a Coast Guard solicitation for inspection, maintenance and other related services to support Coast Guard cutters.  After evaluating competitive proposals, the Coast Guard awarded the contract to BMT Designers & Planners, Inc. (not to be confused with the Italian B.M.T.)

Davis Boat Works, Inc., an unsuccessful competitor, filed a bid protest with the U.S. Court of Federal Claims.  Davis alleged, in part, that the Coast Guard had improperly downgraded it for proposing to subcontract one percent of its electronics work, even though the solicitation did not prohibit such subcontracting.

The Coast Guard countered that it had not downgraded Davis for proposing to subcontract the work, but because Davis’s proposal appeared to misunderstand the work required by the solicitation.  The Coast Guard noted that Davis’s proposal stated that it would subcontract “100% of the necessary electronics work,” but “less than 1% of [the] total contract.”  Because electronics work accounted for more than 1% of the total contract value, the Coast Guard believed Davis’s proposal demonstrated a “less than perfect understanding of the contract’s requirements,” and downgraded Davis for that reason.

At the Court, Davis argued that it “always intended to perform the remaining electronics work itself, and that it has the necessary capacity to do so.”  The Court, however, found that this was not clear from Davis’s proposal.  It wrote, “the Court agrees with the Government . . . that because the solicitation required Davis to state its capabilities in its proposal, the adverse consequences of an omission are properly Davis’s responsibility.”  The Court denied Davis’s protest.

Although small business status was not at issue in Davis Boat Works, the case is an important one for small government contractors to note.  In the world of set-aside solicitations, small prime contractors are often asked to explain exactly how much work will be subcontracted and to whom, if for no other reason than to demonstrate compliance with the limitations on subcontracting.  Davis Boat Works demonstrates that when a contractor makes representations about the percentages of work that will be subcontracted, it must avoid ambiguities and make sure the math works.  If not, the agency may determine that the contractor lacks a full understanding of the solicitation’s requirements, as happened to Davis.

According to a Department of Justice press release, the 8(a) and DBE fraud netted the contractor upwards of $9 million–and the Government wants its money back.

The DOJ press release states that Elaine Martin was the president and majority owner of Marcon, Inc., an Idaho-based contractor.  According to the DOJ, beginning in 2000 and continuing for the next 12 years Martin “took steps to lower her personal net worth” in order to qualify Marcon for the 8(a) Program and DBE Program.  These “steps” allegedly included transferring assets into the names of others and filing false tax returns with the IRS.  Martin then submitted the false tax returns, along with other false documents, to the SBA and DOT in support of Marcon’s applications.

The DOJ alleges that once Marcon was admitted to the 8(a) Program, Martin violated the “excessive withdrawal” rule, under which in some cases the SBA can penalize 8(a) participants for withdrawing too much money from the company for certain purposes.  According to the DOJ, Martin covered up her excessive withdrawals by arranging sham loans with family members and other entities she controlled.

Martin has been charged with four counts of tax fraud, two counts of conspiracy, five counts of wire fraud, one count of making a false statement, five counts of mail fraud, four counts of interstate transportation of property taken by fraud, one count of conspiracy to commit money laundering, one count of conspiracy to obstruct justice, and one count of obstructing justice.  In other words, Martin is in some big trouble.  In addition to other criminal penalties, the DOJ is seeking the forfeiture of $9,237,722.10, which it says represents the proceeds that Martin obtained as a result of her crimes.

Like any criminal defendant, Martin is presumed innocent and entitled to her day in court.  However, if the allegations are true, she deserves jail time for defrauding programs intended for legitimate disadvantaged businesses. We’ll see if she cops a plea, like Michael Dunkel just did in another 8(a) fraud case.

It is good to see the SBA, DOT and DOJ cracking down on fraud within the disadvantaged business programs.  Perhaps Elaine Martin’s indictment will convince other potential fraudsters to leave the small government contracting programs alone.

The SBA Office of Hearings and Appeals upheld the termination, writing that the SBA had properly terminated the 8(a) contractor for “willfully violating SBA regulations.”  SBA OHA rejected the contractor’s argument that it was exempt from the subcontracting limits under the so-called non-manufacturer rule.

SBA OHA’s decision in Reality Technologies, Inc., SBA No. BDPT-488 (2013) involved the SBA’s termination of Reality Technologies, Inc. from the 8(a) Program.   The SBA terminated Reality, in part, based on the conclusion that Reality had violated the applicable subcontracting limitations under several 8(a) contracts.  The SBA found that Reality had failed to perform at least 50% of the labor costs under 8(a) services contracts.

Reality appealed its 8(a) termination to SBA OHA.  Reality argued that the limitations on subcontracting did not apply to its 8(a) contracts because those contracts were for supplies, not services.  Reality argued that it had complied with the non-manufacturer rule, which governs small business status under such contracts.

SBA OHA disagreed with Reality.  It wrote that many of the 8(a) contracts in question were assigned NAICS code 541519 (Other Computer Related Services), which falls under NAICS Sector 54 (Professional, Scientific, and Technical Services).  SBA OHA concluded that because the procuring agencies had assigned services-based NAICS codes to the 8(a) contracts in question, these contracts were services contracts, and Reality was required to comply with the 50% subcontracting limit.

SBA OHA wrote that even if the contracts had been supply contracts, Reality had not demonstrated that it had complied with the non-manufacturer rule because it was not aware of whether its manufacturer was a domestic small business.  Because “Reality cannot attest to complying” with the non-manufacturer rule, it could not rely on that rule to qualify as a small business.

The Reality Technologies illustrates the critical importance of complying with the limitations on subcontracting in the performance of 8(a) contracts.  As the case demonstrates, the SBA can terminate a contractor from the 8(a) program for subcontracting limit violations.

Reality Technologies should also serve as a warning to companies that rely on the non-manufacturer rule to exempt them from applicable subcontracting limits.  As the case shows, the non-manufacturer rule does not apply to all contracts–and even if it does, the contractor relying on the rule must obtain the supplies from a domestic small business (unless a waiver has been issued).