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Small Business Committee Meeting With Ken Dodds

Small Business Committee Meeting With Ken Dodds. March 21, 2019. Many thanks to Holland & Knight LLP for hosting. Upcoming Events. Cyber and Supply Chain Security Committee, March 27 Legislative and Market Dynamics Breakfast Forum, April 2 VA NAC Industry Day “Member Reception”, April 3

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Small Business Committee Meeting With Ken Dodds

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  1. Small Business Committee Meeting With Ken Dodds March 21, 2019 Many thanks to Holland & Knight LLP for hosting

  2. Upcoming Events • Cyber and Supply Chain Security Committee, March 27 • Legislative and Market Dynamics Breakfast Forum, April 2 • VA NAC Industry Day “Member Reception”, April 3 • Spring Healthcare Forum, April 10 • Spring Training Conference, May 16 • Joe Caggiano Memorial Golf Tournament, Aug 21

  3. Guest Speakers:Ken Dodds, Government Contracting Industry Expert at Live Oak Bank (former SBA Director of Policy, Planning and Liaison) Mitchell Bashur, Associate from Holland & Knight LLP

  4. Coalition for Government Procurement Small Business Committee Meeting March 21, 2019

  5. Agenda • The Small Business Runway Extension Act • Regulatory developments • Proposed New Limitations on Subcontracting requirements and accompanying DoD Class Deviation • Proposed New Limitations on Small Business Subcontracting Plan requirements • Proposed rules to remake the HUBZone Program

  6. The Small Business Runway Extension Act of 2018 – Small Business Contracting

  7. Small Business Contracting • A powerful tool for helping small businesses compete for and win federal contracts • The government-wide statutory goals are as follows: • 23% for all small business classifications; • 5% for 8(a) / small disadvantaged businesses; • 5% for women-owned small businesses; • 3% for HUBZone businesses • 3% for SDVOSB • Methods to Meet Goals Include: • Sole Source Awards • Set-Aside Contracting • Evaluation Preferences • Subcontracting Requirements • Joint Ventures (exception to affiliation)

  8. Small Business Contracting • FY 2017 Small Business Spending

  9. Small Business Contracting • All classes of small business must qualify as “small” under the size standard corresponding to the NAICS code identified in the Solicitation • Revenue-based standards (historically a three-year average) • Employee-based standards (twelve-month average) • SBA Affiliation Rules • Offerors Self-Certify as to Size at Time of Proposal • Subject to SBA size protest

  10. Key SBA Compliance Issue – Calculating Size • Key SBA compliance issue – calculating size • Size certifications • Know your size! When and how size is calculated • Gross receipts for three* most recently completed financial years for services • Rolling 12 month average # of employees for manufacturing • Representations in SAM.gov – automatically calculated upon entering revenue

  11. Small Business Runway Extension Act of 2018

  12. SBREA – FULL Text SECTION 1.SHORT TITLE. This Act may be cited as the “Small Business Runway Extension Act of 2018”. SEC. 2. MODIFICATION TO METHOD FOR PRESCRIBING SIZE STANDARDS FOR BUSINESS CONCERNS. Section 3(a)(2)(C)(ii)(II) of the Small Business Act (15 U.S.C. 632(a)(2)(C)(ii)(II)) is amended by striking “3 years” and inserting “5 years”.

  13. SBREA – Current Legal Status • Is SBREA Immediately Effective? • View of Congress: • The SBREA directly amended the Small Business Act without providing that effectiveness was delayed until rulemaking was completed. • Under established principles of statutory construction, “the omission of an express effective date simply indicates that, absent clear congressional direction, it takes effect on its enactment date.” Johnson v. United States, 529 U.S. 694 (2000).

  14. SBREA – Current Legal Status • Is SBREA Immediately Effective? • Congress intended the SBREA to apply to SBA • “H.R. 6330 lengthens the time in which the Small Business Administration (SBA) measures size through revenue, from the preceding three years.” (S. Rep. 115-431 at 3-4 the average of the past 3 years to the average of the past 5 years.” (H.R. Rep. 115-939 at 2) • “The [SBREA] amends the Small Business Act by lengthening the time the SBA measures size through revenue, using the average of the preceding five years instead of)

  15. SBREA – Current Legal Status • Is SBREA Immediately Effective? • Legal Argument: The three-year standard in SBA’s current regulations (13 C.F.R. § 121.104(c)) was invalidated by the conflict with the amended Small Business Act, under well-established principles of administrative law: • “It is well-settled that when a regulation conflicts with a subsequently enacted statute, the statute controls and voids the regulation.” Farrell v. United States, 313 F.3d 1214, 1219 (9th Cir. 2002). • “A regulation, valid when promulgated, becomes invalid upon the enactment of a statute in conflict with the regulation.” Scofield v. Lewis, 251 F.2d 128, 132 (5th Cir. 1958).

  16. SBREA – Current Legal Status • Is SBREA Immediately Effective? • View of SBA: • Three-year average will continue to apply until SBA completes its rulemaking. • Congress did not intend SBREA to apply to SBA because it amended 15 U.S.C. 632(a)(2)(C) rather than 632 (a)(2)(A). • There is no “conflict” with SBA’s regulations because Subsection (C) applies to other Federal agencies with small business size standards, but not SBA.

  17. SBREA – Current Legal Status • Is SBREA Immediately Effective? • 15 USC 165(a)(1)-(2) • (a) Small business concerns • (1) In general • For the purposes of this chapter, a small-business concern, including but not limited to enterprises that are engaged in the business of production of food and fiber, ranching and raising of livestock, aquaculture, and all other farming and agricultural related industries, shall be deemed to be one which is independently owned and operated and which is not dominant in its field of operation.

  18. SBREA – Current Legal Status • Is SBREA Immediately Effective? • 15 USC 165(a)(1)-(2) • (2) Establishment of size standards • (A) In general • In addition to the criteria specified in paragraph (1), the Administrator may specify detailed definitions or standards by which a business concern may be determined to be a small business concern for the purposes of this chapter or any other Act. • (B) Additional criteria • The standards described in paragraph (1) may utilize number of employees, dollar volume of business, net worth, net income, a combination thereof, or other appropriate factors.

  19. SBREA – Current Legal Status • Is SBREA Immediately Effective? • 15 USC 165(a)(1)-(2) • (C) Requirements • Unless specifically authorized by statute, no Federal department or agency may prescribe a size standard for categorizing a business concern as a small business concern, unless such proposed size standard- • (i) is proposed after an opportunity for public notice and comment; • (ii) provides for determining- • (I) the size of a manufacturing concern as measured by the manufacturing concern's average employment based upon employment during each of the manufacturing concern's pay periods for the preceding 12 months;

  20. SBREA – Current Legal Status • Is SBREA Immediately Effective? • 15 USC 165(a)(1)-(2) • (C) Requirements . . . • (ii) provides for determining- . . . • (II) the size of a business concern providing services on the basis of the annual average gross receipts of the business concern over a period of not less than 5 years; • (III) the size of other business concerns on the basis of data over a period of not less than 3 years; or • (IV) other appropriate factors; and • (iii) is approved by the Administrator.

  21. SBREA – Current Legal Status • Is SBREA Immediately Effective? • View of SBA: • Although SBA's position is that the amended section does not apply to it, it understands Congress's intent and is in the process of rulemaking to amend its regulations • This process will likely be through a proposed and final rule process

  22. Impact on Contractors • Impact of SBREA on Contractors with declining revenues • Certain businesses may become large, which was not intended by Congress • Business concerns with higher revenues in its 4th and 5th years, which may have been large, but declining recent years resulted in them becoming small, including those more successful previous years could have their average revenues above the size threshold

  23. Possible Legislative Fix

  24. Possible Fix: Clarifying Legislation • To quickly resolve legal uncertainty, one fix is additional legislation that would: • Clarify the SBREA and subsection (C) applies to SBA • Establish a transition period that really does take effect immediately: Starting now and until the end of 2020, contractors can choose either the three-year or the five-year standard, whichever makes them small. • After transition period, move permanently to the five-year standard effective January 1, 2021. • Hearings set by the House Small Business Committee for March 26, 2019

  25. Regulatory developments Limitations on Subcontracting

  26. Limitations on Subcontracting • FAR Proposed Rule (FAR Case 2016–011) • Comments closed and being reviewed by Acquisition Small Business with draft final FAR rule report due April 17, 2019 • Amend FAR IAW section 1651 of the 2013 NDAA which revised and standardized the limitations on subcontracting, including the nonmanufacturer rule • Standardize the FAR rule to be consistent with SBA’s regulations it revised in 2016 • Implements similarly situated entity exception in the FAR • However, does not include amendments current proposed by SBA to the LOS

  27. Limitations on Subcontracting • FAR Proposed Rule (FAR Case 2016–011) • “Similarly situated entity” means a first-tier subcontractor, including an independent contractor, that has the same small business program status as that which qualified the prime contractor for the award; and is considered small for the NAICS code the prime contractor assigned to the subcontract the subcontractor will perform. An example of a similarly situated entity is a first-tier subcontractor that is a HUBZone small business concern for a HUBZone set-aside or sole-source award under the HUBZone Program. 83 FR 62540 (December 4 2018) • Non-Manufacturer Rule FAR Clause 52.219-XX

  28. Limitations on Subcontracting • FAR Proposed Rule (FAR Case 2016–011) • 19.103 Nonmanufacturer rule. • (a) Application. (1) The nonmanufacturer rule applies to small business set-asides above $150,000; it does not apply to small business set-asides at or below $150,000. The nonmanufacturer rule applies to all set-aside and sole-source awards under the 8(a), HUBZone, Service-Disabled Veteran-Owned Small Business, Women-Owned Small Business programs regardless of dollar value.

  29. Limitations on Subcontracting • FAR Proposed Rule (FAR Case 2016–011) • 19.508(e) The contracting officer shall insert the clause at 52.219-14, Limitations on Subcontracting, in solicitations and contracts for supplies, services, and construction, if any portion of the requirement is to be set aside or reserved for small business and the contract amount is expected to exceed $150,000, and in any solicitations and contracts that are set aside or awarded on a sole-source basis in accordance with subparts 19.8, 19.13, 19.14, or 19.15, regardless of dollar value. This includes multiple-award contracts when orders may be set aside for small business concerns, as described in 8.405-5 and 16.505(b)(2)(i)(F).

  30. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • § 125.6 What are the prime contractor's limitations on subcontracting? • (a)(1) * * * Other direct costs may be excluded to the extent they are not the principal purpose of the acquisition and small business concerns do not provide the service, such as airline travel, work performed by a transportation or disposal entity under a contract assigned the environmental remediation NAICS code (562910), cloud computing services, or mass media purchases. In addition, work performed by an independent contractor under a contract that was awarded pursuant to the Foreign Assistance Act of 1961 may also be excluded. • (c) * * * A prime contractor may no longer count a similarly situated entity towards compliance with the limitations on subcontracting where the subcontractor ceases to qualify as small or under the relevant socioeconomic status.

  31. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • § 125.6 What are the prime contractor's limitations on subcontracting? • (e) (3)(i) For contracts assigned a NAICS code with an employee-based size standard, where an independent contractor is not otherwise treated as an employee of the concern for which he/she is performing work for size purposes under § 121.106(a) of this chapter, work performed by the independent contractor shall be considered a subcontract. Such work will count toward meeting the applicable limitation on subcontracting where the independent contractor qualifies as a similarly situated entity.

  32. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • § 125.6 What are the prime contractor's limitations on subcontracting? • (ii) For contracts assigned a NAICS code with a revenue-based size standard, work performed by an independent contractor shall be considered a subcontract, and will count toward meeting the applicable limitation on subcontracting where the independent contractor qualifies as a similarly situated entity. A firm's treatment and reporting of an individual for tax purposes governs whether that individual should be treated as an employee or independent contractor for limitations on subcontracting purposes.

  33. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • § 125.6 What are the prime contractor's limitations on subcontracting? • (4) The contracting officer may require the contractor to demonstrate its compliance with the limitations on subcontracting, if the information regarding such compliance is not already available to the contracting officer (e.g., invoices).

  34. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • § 129.300 What small business goaling credit do agencies receive for awarding an emergency response contract to a small business concern under this part? • If an agency awards an emergency response contract to a local small business concern through the use of a local area set aside that is also set aside under a small business or socioeconomic set-aside (8(a), HUBZone, SDVO, WOSB, EDWOSB), the value of the contract shall be doubled for purposes of determining compliance with the goals for procurement contracts under section 15(g)(1)(A) of the Small Business Act (15 U.S.C. 644(g)(1)(A)).

  35. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • Clarify that a concern must recertify its status on full and open contracts. In addition, SBA is proposing to add new language to reflect the status recertification requirements for 8(a) participants and SDB concerns, which are already present in the SDVO, HUBZone, and WOSB regulations. • A prime contractor relying on similarly situated entities (an SDVOSB prime with an SDVOSB subcontractor, for example) to meet the applicable performance requirements may not count the subcontractor towards its performance requirements if the subcontractor recertifies as an entity other than that which it had previously certified

  36. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • Amend § 121.406 (non-manufacturer rule) by: • Removing kit assembler exception • The size standard for non-manufacturers is 500 employees, (or 150 employees for the Information Technology Value Added Reseller exception to NAICS Code 541519, which is found at § 121.201, footnote 18)

  37. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • Accepting 8(a) sole source for nominated Participant • (v) The Participant is performing the primary and vital requirements of the service contract, or of an order, and is not unusually reliant on a subcontractor that is not similarly situated, as that term is defined at § 125.1. • Eligibility determination for competitive 8(a), is the Participant • (vi) Performing the primary and vital requirements of the service contract, or of an order, or is unusually reliant on a subcontractor that is not a similarly situated entity, as that term is defined at § 125.1.

  38. Limitations on Subcontracting • SBA Proposed Rule (RIN 3245–AG86) • 125.2(a)(2) If the contracting officer receives only one acceptable offer from a responsible small business concern in response to any small or socioeconomic set-aside, the contracting officer should make an award to that firm.

  39. Limitations on Subcontracting • DOD Class Deviation 2019-O0003 • Issued December 3, 2018 • Limitations on Subcontracting for Small Business • Deviates from existing FAR clauses such as 52.219-6, 52.219-14

  40. Regulatory developments Small Business Subcontracting Plan

  41. Small Business Subcontracting Plan • SBA Proposed Rule (RIN 3245–AG86) • Investigating and enforcing SB Subcontracting Plan compliance • It will be a material breach of a contract when the contractor with a subcontracting plan fails to make a good faith effort to comply with a small business subcontracting plan. Good faith may be shown by failing to achieve its goal in one socioeconomic category, but over-achieved its goal by an equal or greater amount in one or more of the other categories

  42. Small Business Subcontracting Plan • SBA Proposed Rule (RIN 3245–AG86) • Failure to show good faith to comply include: • (A) Failure to submit the acceptable individual or summary subcontracting reports in eSRS by the report due dates or as provided by other agency regulations within prescribed time frames; • (B) Failure to pay small business concern subcontractors in accordance with the terms of the contract with the prime; • (C) Failure to designate and maintain a company official to administer the subcontracting program and monitor and enforce compliance with the plan;

  43. Small Business Subcontracting Plan • SBA Proposed Rule (RIN 3245–AG86) • Failure to show good faith to comply include: • (D) Failure to maintain records or otherwise demonstrate procedures adopted to comply with the plan including subcontracting flow-down requirements; • (E) Adoption of company policies or documented procedures that have as their objectives the frustration of the objectives of the plan; • (F) Failure to correct substantiated findings from federal subcontracting compliance reviews or participate in subcontracting plan management training offered by the government;

  44. Small Business Subcontracting Plan • SBA Proposed Rule (RIN 3245–AG86) • 125.3(c)(1)(iv)A contractor authorized to use a commercial subcontracting plan must include all indirect costs in its subcontracting goals and in its SSR;

  45. Small Business Subcontracting Plan • SBA Proposed Rule (RIN 3245–AG86) • Failure to show good faith to comply include: • (G) Failure to conduct market research identifying potential small business concern subcontractors through all reasonable means including outreach, industry days, or the use of federal database marketing systems such as SBA’s Dynamic Small Business Search (DSBS) or SUBNet Systems or any successor federal systems; • (H) Failure to comply with regulations requiring approval by the contracting officer to change small business concern subcontractors that were used in preparing offers; or • (I) Falsifying records of subcontracting awards to SBCs.

  46. Regulatory developments HUBZone Program

  47. HUBZone Program • Direct Final Rule 83 FR 12849, effective May 25, 2018 • Amends § 126.200 by removing the words "unconditionally and directly" in paragraph (b)(1)(i) from the requirement that applicant must be at least 51% owned by U.S. citizens • Section 1701 of NDAA 2018 • Map will not change until 2020 or later • Map will be adjusted every five years • Areas that lose status remain eligible for 3 years a/k/a re-designation

  48. HUBZone Program • 83 FR 54812, comment period ended February 14, 2019 • Addresses requirement that firm must be eligible at time of offer and award • Defines attempt to maintain HUBZone residency employment requirement during contract performance as no less than 20% • Defines employee as working 40 hours during 4-week period prior to review

  49. HUBZone Program • 83 FR 54812, comment period ended February 14, 2019 • (1) In general, the following are considered employees: • (i) Individuals obtained from a temporary employee agency, leasing concern, or through a union agreement, or co-employed pursuant to a professional employer organization agreement; • (ii) An individual who has an ownership interest in the firm and who works for the firm a minimum of 40 hours during the four-week period immediately prior to the relevant date of review, whether or not the individual receives compensation;

  50. HUBZone Program • 83 FR 54812, comment period ended February 14, 2019 • (1) In general, the following are considered employees: • . . . • (iii) The sole owner of a firm who works less than 40 hours during the four-week period immediately prior to the relevant date of review, but who has not hired another individual to direct the actions of the concern's employees; • (iv) Individuals who receive in-kind compensation commensurate with work performed.

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