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The Defense Contract Audit Agency (“DCAA”) recently made public its Fiscal Year 2017 Report to Congress, which, among other things, provides an update on incurred cost audits.  Specifically, the report explains that DCAA:

  • Closed “6,786 incurred cost years” using a variety of methods, namely reports and memos, but also for other reasons (e.g., per the FY 2016 NDAA, DCAA was prohibited “from providing audit support to non-DoD agencies”);
  • Sustained audit exceptions for incurred costs audits 28.6% of the time;
  • Reduced the backlog related to incurred cost audits “to an average age of 14.3 months;” and
  • Is “on track to eliminate the backlog by the close of FY 2018” as it now has “under 3,000 incurred cost years in [such] backlog….”
  • “[W]ill be current on incurred cost based on a two-year inventory of audits” by FY 2018 and “will move to one year of inventory as required” in the FY 2018 NDAA.

Continue Reading The End is Near: DCAA Projects End of Incurred Cost Backlog by FY 2018

Contractors looking for updates to the statutory allowable cost limits on employee compensation may be looking in the wrong place.  But what was once lost can easily be found, at least for the moment, by simply navigating to a different website.

The Cost Principles and the Compensation Cap

FAR 31.205-6(p)(4) governs the allowable compensation of contractor and subcontractor employees.  It promulgates section 702 of the Bipartisan Budget Act of 2013 (“BBA”), which set an initial limit on allowable contractor and subcontractor employee compensation costs at $487,000 per year.  “Compensation” is defined broadly to include the total amount of wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans.  According to the BBA, the cap is to be adjusted annually based on the Employment Cost Index calculated by the Bureau of Labor Statistics.  The BBA repealed the prior existing formula for determining the relevant compensation cap under 41 U.S.C. § 1127 and applies to contracts awarded on or after June 24, 2014.  It also provided agencies with the authority to establish “one or more narrowly targeted exceptions” for certain specialists.

Continue Reading Hidden in Plain Sight: Where, Oh Where, Have the Compensation Caps Gone?

The Small Business Administration (SBA) has seemingly slipped a noteworthy change into a technical correction published in the Federal Register on March 26, 2018.  Indeed, this “technical correction” actually appears to be an attempt to overturn the impact of a decision that the Office of Hearing and Appeals (OHA) issued in January 2018 – In The Matter of: Analytic Strategies, Inc., No. VET-268 – which held that under SBA’s recertification rules, a SDVOSB maintains its size and socio-economic status for the life of the multiple-award contract unless a contracting officer requests recertification in connection with a specific task order.

As discussed in more detail below, this change creates a degree of uncertainty with respect to a concern’s ability to receive task/delivery orders on a set-aside basis following a recertification of size or status on a contract.

The Recertification Requirement on Set-Asides

When a contract is awarded on a set-aside basis, the contractor is required to recertify as to its size and/or socioeconomic status within thirty days of contract novation, merger, or acquisition.  In other words, following one of the aforementioned events, the contractor must confirm that it is still small or retains the socioeconomic status it claimed for award, or notify the procuring agency that it is other than small or no longer qualifies for the chosen socioeconomic status.  The recertification requirements are generally similar regardless of the program.  See 13 C.F.R. § 121.404(g) (size recert requirement); 13 C.F.R. § 125.18(e)(1) (Service-Disabled Veteran-Owned Small Business (SDVOSB) recert requirement); 13 C.F.R. § 126.601(h)(1) (Historically Underutilized Business Zones (HUBZones) recert requirement); 13 C.F.R. § 127.503(h)(1) (Women-Owned Small Business (WOSB)/ Economically Disadvantaged Women-Owned Small Businesses (EDWOSB) recert requirement).

The Impact of a Recertification on a Set-Aside Contract

If a contractor has to recertify as to its size or socioeconomic status, it generally has been understood that the following occurred:

  • For contracts awarded on a set-aside basis, the contractor can continue to perform and the agency can exercise options, BUT, from that point forward, the agency cannot count the performance towards the agency’s small business and/or relevant status goals.

For multiple award contracts awarded on a set-aside basis:

  1. The contractor can continue to perform existing orders and the agency can continue to exercise options with respect to those orders, and
  2. The contractor can receive new set-aside orders against the contract so long as the contracting officer does not request a new size or status certification in connection with that specific order.

BUT, again, from that point forward, the agency cannot count performance on already-awarded or newly-awarded contracts towards the agency’s small business and/or relevant status goals.

The old version of the SDVOSB recertification requirement states:

(1) A concern that represents itself and qualifies as an SDVO SBC at the time of initial offer (or other formal response to a solicitation), which includes price, including a Multiple Award Contract, is considered an SDVO SBC throughout the life of that contract. This means that if an SDVO SBC is qualified at the time of initial offer for a Multiple Award Contract, then it will be considered an SDVO SBC for each order issued against the contract, unless a contracting officer requests a new SDVO SBC certification in connection with a specific order. Where a concern later fails to qualify as an SDVO SBC, the procuring agency may exercise options and still count the award as an award to an SDVO SBC. However, the following exceptions apply:

  1. Where an SDVO contract is novated to another business concern, the concern that will continue performance on the contract must certify its status as an SDVO SBC to the procuring agency, or inform the procuring agency that it does not qualify as an SDVO SBC, within 30 days of the novation approval. If the concern is not an SDVO SBC, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its SDVO goals.
  2. Where a concern that is performing an SDVO SBC contract acquires, is acquired by, or merges with another concern and contract novation is not required, the concern must, within 30 days of the transaction becoming final, recertify its SDVO SBC status to the procuring agency, or inform the procuring agency that it no longer qualifies as an SDVO SBC. If the contractor is not an SDVO SBC, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its SDVO goals. The agency and the contractor must immediately revise all applicable Federal contract databases to reflect the new status.

13 CFR § 125.18(e)(1).

It should be noted, however, that if, following a recertification as other than small or ineligible for the relevant socioeconomic status, a particular contract requires off-ramping or termination, or renders a holder ineligible to compete on future set aside task orders, those opportunity-specific provisions will apply.

This scheme historically has allowed a degree of certainty as to a potential work stream under a multiple award contract, which impacts valuation of small businesses.

SBA Took the Opposite Position In Analytic

In a recent case regarding a task order competition under a One Acquisition Solution for Integrated Services (OASIS) contract, SBA articulated a different position regarding the impact of a SDVOSB recertification.

Specifically, in April 2014, GSA awarded Analytic Strategies, Inc. (Analytic) an OASIS Small Business (SB) Pool I contract.  As part of its proposal submitted in October 2013, Analytic represented itself as an SDVOSB.

In July 2016, a non-veteran owned concern acquired Analytic.  Analytic updated its registration in the System for Award Management to reflect this change, and notified GSA of the change in its status (i.e., that it no longer qualified as an SDVOSB).  The GSA contracting officer responded that Analytic “will still be considered” an SDVOSB for purposes of OASIS orders.

In June 2017, DHS issued a Request for Quotations, which was set aside for SDVOSBs that were OASIS SB Pool I holders.  This RFQ did not request recertification in connection with the order.  DHS ultimately awarded the order to Analytic.  One of the unsuccessful offerors filed a protest, which apparently raised concerns that Analytic misrepresented its socioeconomic status.  GAO subsequently requested SBA’s opinion on GAO’s jurisdiction over this allegation and SBA, in turn, asked GAO to dismiss the allegation.  Thereafter, SBA initiated its own status protest of Analytic in November 2017, arguing that Analytic was no longer an SDVOSB and, thus, not eligible for orders set aside for SDVOSBs following the recertification: “There is no authority permitting a concern that loses [SDVOSB] status after a merger or acquisition to continue to receive [SDVOSB] set-aside orders.”

The SBA Director of Government Contracting (D/GC) agreed and determined that Analytic was not an eligible SDVOSB for the set-aside task order.

OHA Rejected SBA’s Reading of its Regulation in Lieu of a Plain Reading of the Rule

“Appellant maintains the provisions under § 125.18(e)(1)(i-iii) have the limited effect of preventing the procuring agency from counting options and orders issued to unqualified concerns toward its socioeconomic procurement goals. (Id., at 6.) In Appellant’s view, these are not exceptions to the general rule that a concern retains its SDVO SBC status for the life of the contract. (Id.) These provisions come immediately after another rule related to counting as stated in the regulation (i.e., “Where a concern later fails to qualify as an SDVO SBC, the procuring agency may exercise options and still count the award as an award to an SDVO SBC.”) and, therefore, are exceptions to that rule. (Id.) Appellant stresses, the remedy provided in the three exceptions is that “the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards it SDVO [SBC] goals,” not that the agency can no longer issue orders. (Id., at 7.)”

Analytic appealed to OHA, arguing that the exceptions under § 125.18(e)(1)(i)-(ii) did not impact the general rule that a concern retains its SDVOSB status for the life of the contract.  According to Analytic, the exceptions only applied to the portion of the rule related to an agency’s ability to count spend against its SDVOSB goal since the exceptions immediately follow that rule.  Analytic argued that there was nothing in the text of the rule suggesting that a recertification as result of an acquisition will render a contractor ineligible to compete for new orders.

SBA disagreed with Analytic’s interpretation of the impact of the exceptions.  According to SBA, the exceptions (e.g., the occurrence of a merger or acquisition) not only impacted an agency’s ability to count spend towards its goals, but also were an exception to the general rule that a concern retains its status for the life of the contract.  Under its interpretation, SBA noted that a contracting officer retains discretion to award other task orders to the concern for which it is eligible (i.e., openly competed, small business set asides where the concern recertifies as small) instead of terminating the contract.  In other words, SBA pointed out that a contractor is not necessarily precluded from winning future task orders, but instead, the preclusion is limited to orders for a particular socioeconomic category for which the concern has already recertified as ineligible.

“SBA disputes Appellant and DHS’ construction of the recertification rule following “however,” arguing the proper construction applies the exceptions following “however” to the entire provision, rather than to solely counting toward procurement goals. SBA argues that counting and consideration are linked. If one of the exceptions following “however” applies, a concern is not considered an SDVO SBC at task order award and a procuring agency cannot claim credit for a task order award to the concern. (Id., at 8.)”

SBA also recognized that its interpretation of “however” in the SDVOSB recertification requirement would impact the requirement across the different programs since “the word ‘however’ appears in the same place in all of its recertification rules, including the small business set aside program.”  (Citing 13 C.F.R. §§ 121.404(g), 121.704(b), 126.601(h), 127.503(h).)

On January 29, 2018, OHA vacated the determination that Analytic did not qualify as an SDVOSB.  In doing so, OHA explained that SBA’s recertification rules state that, if a contractor no longer qualifies as small as a result of a merger or acquisition, the agency cannot count any options or orders made pursuant to the contract moving forward.  An agency can, however, still award those options and orders to the contractor as a set-aside because the regulations do not explicitly preclude it from doing so.

According to OHA, the plain language of the regulation dictated this conclusion—the exceptions for novations, mergers, acquisitions only related to the part of the rule discussing an agency’s ability to count spend against its goals and not to the general rule about when size is determined:

The regulation specifically contemplates that this retention of eligibility extends to Multiple Award Contracts, such as the OASIS SB Pool I contract at issue here. The only exception to this general rule occurs if the contracting officer requests recertification in connection with a specific order. See 13 C.F.R. § 125.18(e)(1). This exception is articulated immediately following the regulation’s statement of the general rule, and there are no other exceptions enumerated at this point in the regulation.

….

The regulation then contains an intervening sentence dictating that when a concern no longer qualifies as an SDVO SBC, a procuring agency may exercise options and still count the award as an award to an SDVO SBC toward meeting the agency’s socioeconomic contracting goals. See id. The regulation plainly contemplates the award of an option or order to a subsequently-unqualified concern, and nonetheless permits the procuring agency to count the option or order toward its socioeconomic goals so long as the concern satisfies the general rule. The regulation then states that “However, the following exceptions apply” and discusses exceptions for novation, merger and negative status determination. See 13 C.F.R. § 125.18(e)(1)(i-iii). For each of these exceptions, the remedy articulated in the regulation is that “the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, toward its SDVO [SBC] goals.” Id.

Thus, OHA found SBA’s interpretation of the recertification rule “flatly contradict[ed] the plain language of § 125.18(e)” as well as “SBA’s application of the similar recertification rule for size status.”  OHA also pointed out that SBA’s intent when promulgating the regulation was “specifically to afford the contracting officer discretion in exercising options and issuing orders to a subsequently-unqualified concern pursuant to an on-going procurement.”  See 78 Fed. Reg. 61114, 61126 (Oct. 2, 2013) (stating “SBA believes that it would be a decision of the contracting agency as to whether and how a business would move to the non-set-aside portion of a multiple award contract if it did not initially submit an offer for the non-set-aside portion”).

SBA’s Revised the Recertification Requirements Seemingly in Response to OHA’s Decision

The SBA’s technical correction requires that the SDVOSB certification (copied in full above) be revised as follows:

Amend § 125.18 by revising the last sentence of paragraph (e)(1) to read as follows:
§ 125.18 What requirements must an SDVO SBC meet to submit an offer on a contract? * * * * *
(e) * * *
(1) * * * However, the following exceptions apply to this paragraph (e)(1):

Less than two months after OHA issued its decision in Analytic, SBA issued the aforementioned “technical correction” to clarify the recertification requirements for each of the socioeconomic programs so that the referenced exceptions would “be applied to the entirety of the preceding paragraph.”  SBA added just four words to each of the recertification requirements, namely that the exception applies to the entirety of the referenced paragraph.

The Impact of the Addition of the Four Words to the Recertification Requirements

The key issue in Analytic was whether the exceptions (regarding novation, acquisition, mergers) applied to both the rule on size/eligibility and on counting in the preceding paragraph or to merely the rule on how the agency can count spend against its goals (which is contained in the sentence immediately preceding the introduction to the exceptions).  In light of the extensive briefing by the parties on how the exceptions should be read and OHA’s rejection of SBA’s reading, it is difficult to read SBA’s “technical corretion” as anything other than a response to OHA clarifying that the exception applies to the entire preceding paragraph as opposed to merely the last sentence (which was OHA’s reading).

Read in this light, should a company recertify as other than small (or that it no longer qualifies for a certain socioeconomic status) following a novation, merger, acquisition or other event, it will be ineligible to compete for orders set-aside under its former size or status.

Questions and Concerns Raised by SBA’s “Technical Correction”

First, SBA’s “technical correction” lacks clarity both as to the reason why SBA issued it and the intended result.  Notwithstanding that it is difficult to read SBA’s revision to the recertification requirements as anything other than a response to OHA (even in light of the lack of any reference to the Analytic case), the revisions are not a model of clarity.  Stated otherwise, SBA could have revised the regulations to expressly prohibit contractors from competing for set-aside task orders for a size or particular socioeconomic category for which the concern has already recertified as ineligible.  Instead, SBA seemingly obscured why it published this “technical correction”—noting only that “[i]t has been brought to SBA’s attention that as drafted, it is not clear which sentence or clause the final sentence is referencing”—as well as its impact.

Second, SBA has not engaged in the expected notice and comment rulemaking.  Indeed, in its decision, OHA twice stressed that it would not allow SBA to revise its regulations by adjudication because such a change to SBA’s regulatory scheme should be subject to “notice and comment rulemaking.”  But, rather than issue a proposed rule for comment, SBA revised the recertification requirements via what it called a “direct final rule,” which would become effective May 25, 2018 assuming SBA received no “significant adverse comment” on or before April 25, 2018.  It would not be surprising to see a challenge to the method by which SBA enacted this change.

Finally, precisely what this “technical correction” means for previously awarded contracts is unclear.  Contractors should expect that recertification provisions, as revised, will apply to new solicitations for contracts issued on or after May 25, 2018.  But, what about task/delivery order solicitations issued after that date under already-awarded multiple award contracts?  SBA states in the rule that the “action does not have retroactive or preemptive effect,” but SBA also deemed this aspect of the rule to be merely a “technical clarification” that aligns the paragraph with SBA’s intent and was “not intended to make any substantive change to the paragraphs.”  This question will linger until we better understand how contracting officers and the SBA will implement the rule come May 25, 2018.

Crowell & Moring has issued its Regulatory Forecast 2018: What Corporate Counsel Need to Know for the Coming Year.

The section focusing on government contracts, Will Purchasing Be Streamlined?” provides an overview of how the procurement process might be made more efficient, and this time, government contractors might be able to weigh in on the changes.

It is clear digital technology is driving the future of business across a wide range of industries while Washington, as well as state and global regulators, is forging the appropriate balance between fostering innovation and protecting consumers. This report is the companion piece to the firm’s 2018 Litigation Forecast, which was published in January and also focused on the opportunities and challenges general counsel face in navigating the Big Data revolution.

Be sure to follow the conversation on Twitter with #RegulatoryForecast.

This week’s episode covers commercial items and the 809 report, and is hosted by Peter Eyre, Chris Haile, and Elizabeth Buehler. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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During the past year, we have continued to see developments on cost and pricing issues, particularly with respect to the 2017 National Defense Authorization Act (“NDAA”). On May 5, 2017 from 11:00 am – 12:00 pm, Crowell & Moring attorneys Terry Albertson, David Bodenheimer, Chris Haile, Steve McBrady and Liz Buehler will highlight some of the cost and pricing issues that government contracts are currently encountering with respect to commercial acquisitions, management of subcontractors, statute of limitations, intersegment pricing and DCAA audits, as well as the following regulatory developments:

  • 2017 NDAA Provisions Affecting DCAA and the Cost Accounting Standards (“CAS”) Board
  • Creation of a Defense CAS Board
  • 2016 NDAA Section 809 Panel Update, including CAS and other accounting issues.

For more information and to register for OOPS, please click here.

Join us today for our webinar Building a Border Wall: Opportunities, Contractual Risks, and Business Considerations. The Trump administration published two contract solicitations for the design-build of a “border wall” between the U.S. and Mexico. The RFPs (linked here and here) contemplate a multiple-award, multiple-phase approach for acquiring prototypes and, eventually, full construction.  A team of Crowell & Moring government contracts and labor & employment attorneys will discuss key nuances of the solicitations, opportunities, and major contractual risks that may accompany the Trump administration’s large-scale border project. Please click here to register.

Continuing his trend of fulfilling the promises set forth in his Contract with the American Voter, President Trump, on January 30, 2017, issued an Executive Order mandating the elimination of at least two existing regulations for every new regulation issued.  In particular, the order explains that “whenever an executive department or agency…publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.”  In this way, the Administration intends to offset “any new incremental costs associated with new regulations….” Notably, however, the definition of regulation does not include: (1) “regulations issued with respect to a military, national security, or foreign affairs function of the United States”; (2) “regulations related to agency organization, management, or personnel;” or (3) “any other category of regulations exempted by the Director.”

Continue Reading Trump Administration Seeks to Reduce Regulatory Burdens

On Saturday, January 28, President Trump issued an Executive Order setting forth the ethics regulations governing current and future executive agency appointments, which is both more restrictive and less restrictive than the 2009 Obama Executive Order addressing the same issue.  Specifically, and with respect to the former, President Trump’s order bans all executive agency appointees from engaging in “lobbying activities” with respect to the particular agency in which the appointee served for a period of five years after leaving the Administration, and further prohibits such appointees from lobbying on behalf of a foreign government or political party during the remainder of their lifetimes (if such activities would require registration “under the Foreign Agents Registration Act of 1938”).  See §§ 1.1, 1.4.  These two prohibitions were absent from the Obama-era counterpart and mirror two of Trump’s promises outlined in his Contract with the American Voter.

Continue Reading Trump’s Ethics Executive Order More Concerned with Post-Government Employment Activities

In Lockheed Martin Integrated Systems, Inc. (ASBCA Dec. 20, 2016), a case involving a $100 million breach of contract claim stemming from purportedly unallowable direct subcontractor costs, the Board granted Lockheed Martin’s motion to dismiss the Army’s untenable claim “for failure to state a claim on which relief could be granted,” concluding that the government had “gone forward with a claim for over $100,000,000…based on nothing more than a plainly invalid legal theory.”

Specifically, the Board held that final decisions based solely on an audit report’s “conclusory assertions” and “unsupported conclusions” failed to satisfy the standards required by the Board’s rules for a valid claim and that although prime contractors have a generalized responsibility to manage subcontractors, the Army failed to establish that Lockheed Martin had breached any particular contractual obligation, express or implied, and specifically that Lockheed Martin had no obligation to (1) obtain or audit incurred cost submissions from subcontractors; or (2) to retain documentation supporting prime contractor billings for longer than the contract’s “applicable records retention” period.