Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

On Wednesday, Congressman Bill Owens (D-NY) introduced the Small Business Growth and Federal Accountability Act of 2012 (H.R. 3779). The bill is designed to ensure that government agencies provide more work for small business concern by authorizing blanket preferences and providing for monetary sanctions for the failure to meet annual goals. Owens is the bill’s lone sponsor. 

A congressionally mandated goal requires that federal government agencies award at least twenty-three percent of all prime contracts to small businesses annually and establishes additional goals for other categories of small business concerns, and each federal agency is allowed to set individual small business contracting goals in consultation with the Small Business Administration (SBA). As it stands, however, there are no existing penalties for agencies that do not meet their annual goals. 

Under H.R. 3779, this would change. The bill would authorize agencies to give “preference” to small business concerns when procuring goods or services to help reach each agency’s small business contracting goals. Although the term “preference” is not defined, arguably it is intended to include the application of status-based evaluation preferences in full and open competitions in addition to the issuance of small business set asides. The bill would also decrease an agency’s procurement budget by ten percent each year it failed to meet its annual goals. By rule the Appropriations Committee is responsible for rescissions of appropriations and unspent balances from federal agencies, and in a statement Owens called on the Committee to use any such lost funding towards paying down the national debt.

Several questions and implications of the bill are (1) how agencies will weigh cost savings from awarding contracts to large business versus any potential penalties for shortcomings on small business goals; (2) since the penalty is a one-size-fits-all approach, will agencies further decrease efforts at awarding small business contracts if they know they will not be able to achieve one of the applicable goals; and (3) will this lead to the imposition of similar monetary penalties for prime contractors who fail to meet their own annual small business subcontracting goals.

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A memorandum issued by the Office of Management and Budget on Wednesday, September 14, 2011, establishes a new Executive Branch policy that agencies should pay small business government contractors within 15 days of receiving proper invoicing documents. Currently, agencies are required to pay contractors within 30 days of receiving proper documentation under the Prompt Payment Act (“PPA”), or they are subject to late-payment interest penalty provisions. For cash flow purposes, agencies generally do not pay contractors earlier than seven days in advance of the 30-day PPA requirement. However, the PPA does not prevent agencies from paying contractors earlier if it is “necessary,” and current OMB regulations allow agencies to pay small businesses “as quickly as possible.” 

This new policy provides that agencies are required to use their PPA authority and establish an “earlier, accelerated date for their making payments to small business contractors” and that the goal should be to pay small business contractors within 15 days of receiving all required documentation necessary for payment. In outlining this new policy, OMB explains that the “acceleration of payments to small businesses is necessary because. . . .this acceleration improves cash flow. . . .and provides them with a more predictable stream of resources.” 

Noticeably absent from the OMB memorandum, however, is any sort of carrot or stick to ensure agencies implement the spirit and letter of this new policy. Indeed, the policy does not change the operation of the PPA, so agencies will only be liable for late-payment interest if they fail to pay contractors by the required payment date which is usually 30 days after the receipt of all invoicing documents. As such, early payment to small businesses is a goal, and nothing more.

Thus, while this new policy is a first good step toward ensuring small businesses are promptly paid, it will be interesting to see how many agencies actually start paying small businesses on an accelerated basis. 

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There have already been a number of high profile small business enforcement actions this year, an enforcement trend we discussed in our April 7 webinar, and a conviction from a federal jury in New York is the latest sign that this trend is continuing. 

Between June 2007 and June 2010, John Raymond Anthony White’s company, Mitsubishi Construction Corp., obtained four contracts set aside for veterans or service-disabled veterans with the Department of Veterans Affairs for construction work in New York, Pennsylvania, and Maryland. Mr. White used his alleged military status as a service-disabled veteran to establish Mitsubishi Construction Corp.’s eligibility for competing for and receiving these contracts. 

However, there was one problem—Mr. White never served in the military and lied about his status as a service-disabled veteran. When the contracts came under investigation, Mr. White compounded the problem by trying to hide the fraud by claiming that an Army veteran actually owned 51% of Mitsubishi Construction Corp. In doing so, not only did Mr. White fail to cover up the fraud, but he found himself facing additional charges for lying. On April 20th, he was convicted of fraud and lying for his actions and now faces a maximum of 75 years in jails and a possible fine of $3.75 million. He will be sentenced on July 20, 2011. 

Although this is a case of egregious fraud, it is worth noting that companies should always take care to verify their size and eligibility status for every contract they bid on. Even making an innocent incorrect certification can have devastating consequences. 

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Women-owned small businesses (WOSBs) should now have greater access to federal contracts as a result of a long-awaited interim rule, published April 1, 2011, which provides guidelines for the WOSB program and allows contracting officers to set aside contracts for certified WOSBS and economically-disadvantaged WOSBs. To qualify for this new program, which helps agencies achieve the statutory goal of awarding five percent of federal contracting dollars to WOSBs, a WOSB must be more than 51% owned and controlled by women and must meet the regulatory definitions of a small business. In a March 31 web chat, Michele Chang of the SBA said that agencies are “teeing up opportunities” and the SBA expect contracts to be awarded in the fourth quarter, which is historically when the majority of small business contracts are awarded.

However, despite the momentum from these new regulations and the Small Business Administration's (SBA) intent to provide WOSBs "with the oxygen they need to take their business to the next level," until the SBA approves third-party certifiers, access to government contracts for non-8(a) WOSBs will be limited to a self-certifying entities and contingent upon the submission of a laundry list of corporate and other documentation for each procurement, thus imposing burdens on WOSBs and contracting officers.
 

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Recent Changes to the Small Business Administration’s 8(a) Program took effect on March 14, 2011. This is the First major revision to the 8(a) program since 1998. Per the SBA, the goal of the rule changes were to better ensure that the benefits of the SBA flow to the intended recipients and to help prevent waste, fraud, and abuse. Read below for highlights of some of the key changes!

The new changes include additional restrictions on Joint Ventures. The 8(a) partner of the Joint Venture must now perform at least 40% of the work, including those awarded through a mentor-protégé agreement. The previous requirement was only that the small business perform a “significant portion of the work.” In addition, Joint Ventures awarded to an 8(a) firm will not be allowed to win more than 3 contracts during a 2-year period, and cannot subcontract work to a non-8(a) Joint Venture partner. The new rules also hold mentor firms more accountable: mentors who do not provide assistance to their protégés could face consequences ranging from stop-work orders to debarment. New record-keeping provisions will require the protégé firm to submit information reflecting the work breakdown within the Joint Venture.

The new rules also clarify the income & asset determination needed for 8(a) eligibility. For instance, the new rules exclude individual retirement accounts from the strict net worth calculations that are used to determine eligibility for the program. With regard to income requirements, the new rules raise the adjusted gross income to enter into the program from $200,000 to $250,000, and increase the adjusted gross income for continued eligibility for the program from $300,000 to $350,000. The total value of the participant’s assets necessary to enter the program has been raised from $3 million to $4 million, and the total assets necessary for continued eligibility has increased from $4 million to $6 million.

The rule changes limit the type and amount of fees an agent or representative can charge for assisting an 8(a) firm. Specifically, the language of this part of the new rule prohibits unreasonable fees as well as arrangements in which the fees are a percentage of the contract award or revenue.

The new rules also enhance SBA opportunities for military personnel, allowing owners of 8(a) firms called to active military status to elect to be temporarily suspended rather than lose any of their nine-year term in the program.

In addition to some of the items listed above, the new rules primarily focus on reforming and enhancing the transparency of Alaska Native Corporations (ANCs), 8(a) sub-entities that can win sole-source contracts of any size. For the first time, firms owned by ANCs or by Indian tribes, native Hawaiian organizations and community development corporations will be required to report financial benefits flowing back to their communities.  Firms must now submit information relating to: funding of cultural programs, employment assistance, jobs, scholarships, internships, and subsistence activities. (The Final Rule, published in the Federal Register on February 11, 2011, provides an additional six months for the SBA to work with the ANCs to implement these particular provisions.)

The Small Business Administration provides a number of additional resources regarding the rule changes, including the text of the final rule. These are available at: http://www.sba.gov/content/revised-8a-regulations.

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Last November, we reported on the impact that SBA’s suspension of GTSI had on the government contracting community.  We wondered if the GTSI suspension was the beginning of a new enforcement trend by the SBA. Now, almost six months after that suspension, it is clear that the GTSI suspension was just the beginning.

The SBA has made enforcement a priority and we have seen clients come into the SBA’s crosshairs for what have historically been trivial violations of regulations. As a result, contractors are now scrambling to both understand and address a broad range of small business compliance issues. We want to share our knowledge and experience with these small business compliance matters and help you navigate the issues and associated risks that your company might be facing.

We hope that on Thursday, April 7, 2011, from 2:30-3:45 EDT, you can join Amy O’Sullivan, Richard Arnholt and Gunjan Talati from Crowell & Moring’s Government Contracts Group, and Jacob Blass, the President of Ethical Advocate, to discuss:

• The current environment of SBA “enforcement”
• How will recent changes to SBA regulations impact small business compliance?
• Heightened risk areas for small businesses
• Heightened risk areas for large companies working with small businesses
• Compliance - what does the law require?
• How important is an ethical cultural?
• How can attention to compliance increase the value of a small business?

The webinar will be interactive and we will answer your questions as time allows. To register, please click here.  We look forwarding to seeing you on April 7!
 

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A recent settlement by a construction company highlights the need for government contractors to ensure compliance with small business subcontracting requirements. Federal contractors with contracts over a certain size have long been required to put in place and implement a plan to subcontract a certain percentage of work to small and disadvantaged businesses. While the procurement regulations provide for liquidated damages where a company fails to make a good-faith effort to comply with its approved plan at FAR 19.705-7, the government has, until now, not focused its enforcement efforts on small business subcontracting compliance. This recent settlement (see press release), which has not yet been filed with the court, suggests that may change (the U.S. Attorney’s Office for the Eastern District of New York has said a civil complaint that mirrors the non-prosecution agreement will be filed next week) .

According to public reports, between 2002 and 2007 former employees of Schiavone Construction Company falsely certified they were using minority subcontractors on major public works projects in New York City. Those federally-funded public works contracts required Schiavone to use good-faith efforts to retain a certain percentage of disadvantaged and women or minority-owned subcontractors. Some former employees reportedly filed false reports with the Metropolitan Transit Authority and New York City’s Department of Environmental Protection claiming a certain percentage of that work had been performed by qualified subcontractors.

The government launched both criminal and civil probes. The investigations were resolved by a nonprosecution agreement, which reportedly requires Schiavone to pay $20 million, hire an ethics and compliance officer, designate a dedicated minority contractor compliance employee, assist the government in its continuing investigation, and discharge employees involved in the false reporting. The contractor was also required to reimburse the MTA’s Inspector General and the New York City Department of Investigation for investigation costs of $2.4 million.

Combined with the federal Small Business Administration’s increased scrutiny of prime contractor compliance with limitations on subcontracting requirements and willingness to suspend or debar non-compliant contractors, matters previously discussed on this blog, the investigation into Schiavone’s small business subcontracting practices provides further confirmation that government entities, both state and federal, are paying increased attention to compliance with small business contracting requirements. We will continue to monitor and report on these developments in the coming weeks.
 

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