Joint Ventures – SBA must approve agreement prior to award of 8(a) contract

JV may not be awarded more than 3 contracts over a 2 year period without a finding of general affiliation

Mentor-Protege Program changes – mentor can have as many as 3 proteges at once, protege can have another mentor for a secondary NAICS code, mentor must demonstrate financial health, non-profit mentor is okay, cannot be a mentor and a protege at the same time, assistance must be tied to protege’s approved business plan.

Mentor and protege may JV as a small business provided the protege qualifies as small for the procurement.

The SBA must approve the Mentor Protege Agreement before the two firms submit an offer as a JV in order to receive exclusion from affiliation.

Once protege leaves the M/P program, only ongoing contracts are protected by affiliation exclusion

Consequences to mentor for failure to provide assistance agreed to in plan – termination of agreement, ineligible to be Mentor, possible substitution of Protege firm for JV on the contract.

Economic disadvantage rules – total personal assets cannot exceed $4 million initially/$6 million for continuing eligibility.  IRAs the only excluded asset, residence and business are included.

Economic disadvantages rules – net worth $250k initially; $750k continuing eligibility.  Excludes IRAs (new exclusion); excludes FMV of primary residence, excludes value of business. Personal income – $250k initially, $350k continuing.  Averaged over previous 3 years. Income received from S Corp, LLC or partnership excluded from net worth where used by owner to pay taxes or funds reinvested into company.

SBA can consider spouse financial condition if spouse has a role in the busines, or has loaned money or provided credit support to, or guaranteed a loan to business.  Must submit separate financial information for spouse unless legally separated.

Excessive withdrawals – withdrawal excludes officer salaries (unless firm circumventing regulations by payment of salaries).  Firms with sales up to $1 million – $250,000; firms with sales of $1 million – $2 million – $300,000; firms with sales over $2 million – $400,000

8(a) Joint Ventures – “populated” or “unpopulated”:

• If a populated JV, JV must demonstrate how performance of the contract is controlled by the 8(a) managing venturer, and the non-8(a) JV partner may not act as subcontractor
• If an unpopulated JV (or has only administrative personnel) – project manager must be employee of 8(a) managing venturer, 8(a) partner must perform at least 40% of the work performed by the joint venture (compare “significant portion” prior language).  8(a) must receive profits commensurate with work performed

NAICS Code and Size Standard – 8(a): if participant exceeds size standard for its primary NAICS for 3 successive program years, SBA may graduate the firm from the 8(a) program.

Can avoid graduation by changing to a secondary NAICS code in adjusted business plan if the firm demonstrates that through growth its primary industry is changing.

Military call-up of 8(a) owner: owner can elect suspension if called to active duty to preserve full 9-year program term

Review/audit rules – new thresholds

Contact Hindson & Melton LLC for more information.

The construction contract award was made to DQSI, Corporation, which was the 8(a) entity approved by SBA. However, the proposal had been submitted by DQSI, LLC. It is undisputed that the award was made to a legal entity other than the entity that submitted the proposal.

The protester alleges that DQSI, Corporation no longer exists because it converted to a LLC in 2009. Further, the protester alleged that DQSI, Corporation did not receive advance SBA approval of the change in business structure or ownership. SBA confirmed that DQSI, Corporation was the 8(a) eligible participant.

The protest against the 8(a) award to DQSI, LLC was sustained by GAO, and the Army instructed to terminate the contract for convenience if DQSI, LLC is not eligible for the 8(a) award.

Joint Ventures – SBA must approve agreement prior to award of 8(a) contract

JV may not be awarded more than 3 contracts over a 2 year period without a finding of general affiliation

Mentor-Protege Program changes – mentor can have as many as 3 proteges at once, protege can have another mentor for a secondary NAICS code, mentor must demonstrate financial health, non-profit mentor is okay, cannot be a mentor and a protege at the same time, assistance must be tied to protege’s approved business plan.

Mentor and protege may JV as a small business provided the protege qualifies as small for the procurement.

The SBA must approve the Mentor Protege Agreement before the two firms submit an offer as a JV in order to receive exclusion from affiliation.

Once protege leaves the M/P program, only ongoing contracts are protected by affiliation exclusion

Consequences to mentor for failure to provide assistance agreed to in plan – termination of agreement, ineligible to be Mentor, possible substitution of Protege firm for JV on the contract.

Economic disadvantage rules – total personal assets cannot exceed $4 million initially/$6 million for continuing eligibility.  IRAs the only excluded asset, residence and business are included.

Economic disadvantages rules – net worth $250k initially; $750k continuing eligibility.  Excludes IRAs (new exclusion); excludes FMV of primary residence, excludes value of business. Personal income – $250k initially, $350k continuing.  Averaged over previous 3 years. Income received from S Corp, LLC or partnership excluded from net worth where used by owner to pay taxes or funds reinvested into company.

SBA can consider spouse financial condition if spouse has a role in the busines, or has loaned money or provided credit support to, or guaranteed a loan to business.  Must submit separate financial information for spouse unless legally separated.

Excessive withdrawals – withdrawal excludes officer salaries (unless firm circumventing regulations by payment of salaries).  Firms with sales up to $1 million – $250,000; firms with sales of $1 million – $2 million – $300,000; firms with sales over $2 million – $400,000

8(a) Joint Ventures – “populated” or “unpopulated”:

• If a populated JV, JV must demonstrate how performance of the contract is controlled by the 8(a) managing venturer, and the non-8(a) JV partner may not act as subcontractor
• If an unpopulated JV (or has only administrative personnel) – project manager must be employee of 8(a) managing venturer, 8(a) partner must perform at least 40% of the work performed by the joint venture (compare “significant portion” prior language).  8(a) must receive profits commensurate with work performed

NAICS Code and Size Standard – 8(a): if participant exceeds size standard for its primary NAICS for 3 successive program years, SBA may graduate the firm from the 8(a) program.

Can avoid graduation by changing to a secondary NAICS code in adjusted business plan if the firm demonstrates that through growth its primary industry is changing.

Military call-up of 8(a) owner: owner can elect suspension if called to active duty to preserve full 9-year program term

Review/audit rules – new thresholds

Contact us for more information or for details on the new regulation.

The Court was concerned about circumstances where small business concerns enter teaming agreements, with their primary contribution to the team effort being their 8(a) eligibility. In this case, an 8(a) janitorial service firm (C & L) obtained a multi-million dollar contract for mortgage loan servicing.

C & L’s subcontractor MGC in actuality performed more than 50% of the contract work, which violates the requirement that the 8(a) contractor perform at least 50% of the work. MCG wanted to be paid for the work under its subcontract. C & L and MGC wound up in a dispute, with C & L essentially trying to take over the HUD contract and cut its subcontractor out after using the subcontractor’s qualifications to get the contract award. The subcontractor sued C & L to enforce it’s subcontract and the Court refused to enforce it.

The Court found the subcontract unenforceable because it is against public policy – it hindered the 8(a)’s control of its contract and discouraged the development of the 8(a) firm. The Court also found the subcontract unenforceable as an agreement in furtherance of a unlawful purpose – the unlawful performance of a set-aside HUD contract. Finally, the Court found the subcontract unenforceable because under SBA regulations at 13 CFR Section 121, CLS as contractor could not be unduly reliant on its subcontractor. The subcontract yielded joint management to the subcontractor and gave the subcontractor the right to be paid for labor expenses in excess of the 50% limit. The Court quoted Quinn v. Gulf & Western Corp., 644 F.2d 89, 94 (2d Cir. 1981), stating “A court of law will not enforce an agreement which is illegal for the parties to make.”

The Court concluded that both parties contributed to the fraud and wrongdoing of the subcontract and that this tainted the HUD contract, rendering it void from the beginning. The Court declared that both parties had “unclean hands” and refused to enforce the subcontract, declared the HUD contract void, and notified the agency contracting officer of its decision.

Prior to entering its ruling, the Court tried to get the parties to settle their dispute, and expressed its concerns about the contract. The parties failed to resolve their issues and insisted that the Court rule. As a result, both parties lost their contract.

For more information about 8(a) contracts and subcontracts, contact government contract attorney Karen Hindson at Karen S. Hindson PC, government contract lawyers in Charleston and Atlanta.

DGR previously filed a GAO protest and prevailed, but the Air Force refused to follow GAO’s recommendation, so DGR filed for declaratory and injunctive relief in the Court of Federal Claims.

There is an ongoing dispute as to the relative priority of the 8(a) and HUBZone programs. The GAO and Court of Claims have both held that the plain meaning of the Small Business Act mandates a priority to the HUBZone program, but the executive agency has issued memoranda to the contrary. An appeal has been docketed on this issue in the case of Mission Critical Solutions v. United States, 91 Fed. Cl. 386 (2010), appeal No.2010-5099 (Fed.Cir. Apr. 2, 2010).

In the DGR decision, the Court of Federal Claims states “the language of the Small Business Act granting priority to the HUBZone program could not be more clear”, and “Congress established a priority for the HUBZone program over other competing small business concerns.” 15 U.S.C. Section 657a(b)(2)(B). “The executive agency memoranda reflecting disagreement with this interpretation, more than anything, simply express disbelief that Congress could have intended a priority for the HUBZone program.” The memoranda referenced include an OMB July 2009 memo, a DOJ Office of Legal Counsel memo August 2009 memo, and an Office of the Under Secretary of Defense, Director, Defense Procurement and Acquisition Policy memo dated May 2010.

Significantly, in the DGR opinion, the United States Court of Federal Claims “permanently enjoins [the United States] from proceeding with the contract unlawfully awarded to [the 8(a) firm], and from awarding any contract that is not in compliance with the Small Business Act as interpreted herein.”

For further information about HUBZone or 8(a) set asides, or to discuss your government contract bid protest questions, contact Karen S Hindson PC.

The government tried to get K-Lak’s complaint in the Court of Federal Claims dismissed on jurisdictional grounds, arguing that the failure to exercise the option was a contract dispute that was not “ripe” for the Court’s jurisdiction because no contracting officer final decision had been made. There is a line of cases holding that a plaintiff cannot bypass the Contract Disputes Act process by claiming it is challenging a procurement decision when in fact the objection goes to contract administration. The Court distinguished the K-Lak case from the case precedents by saying K-Lak was challenging more than just a failure to exercise its option — it was challenging the removal of the requirement from the 8(a) program as well.

The other issue raised by the government was whether the plaintiff had standing to bring the case. The Air Force argued that plaintiff was not an actual or prospective bidder, but rather a successful bidder on the contract it had been awarded. This argument was rejected; K-Lak was an actual or prospective bidder on the contract for credit report checks which was awarded by the Air Force to Equifax. The fact that K-Lak was not on the Federal Supply Schedule is not fatal to it’s standing as it is challenging the agency’s decision to change course in the procurement and acquire the services through the Schedule.

K-Lak is an “interested party” within the meaning of the United States Court of Federal Claims bid protest jurisdiction to challenge the Air Force decision to procure credit report check services from the Federal Supply Schedule in lieu of continuing the requirement in the 8(a) program. The motion to dismiss was denied.

Contact  Karen Hindson for your government contract law or Federal Supply Schedule questions.