February 2020 Small Business Roundup
Veteran-Owned Business Priority
In 2016, the U.S. Supreme Court surprised many by hearing a bid protest concerning the application of the "Rule of Two" for veteran-owned small businesses in procurements run by the U.S. Department of Veterans Affairs (VA). In Kingdomware Technologies Inc. vs. United States, the Supreme Court held that the VA was required to apply a Rule of Two analysis for all VA procurements to give priority to set aside competitions for service-disabled veteran-owned small businesses (SDVOSBs) and veteran-owned small businesses (VOSBs).
The Kingdomware decision has had unexpected ripple effects in VA procurement, including disrupting the priority previously enjoyed by the AbilityOne program under the Javits-Wagner-O'Day (JWOD) Act. In 2018, the U.S. Court of Appeals for the Federal Circuit found that VA's Rule of Two takes priority over the procurement of products or services found on the AbilityOne Procurement List and that VA contracting officers should apply the VA Rule of Two to determine whether a requirement should be awarded to SDVOSBs and VOSBs. See PDS Consultants Inc. v. U.S., 907 F.3d 1345 (Fed.Cir. 2018).
An AbilityOne contractor who intervened in the protest asked the Supreme Court to hear an appeal of the Federal Circuit's decision. The Supreme Court declined, which will bolster the primacy of the VA Rule of Two over other small business and socioeconomic contracting programs in VA procurements. It should also embolden SDVOSBs and VOSBs to protest, should the VA not rigorously apply the VA Rule of Two, knowing that the Supreme Court tacitly supported the Federal Circuit's application of the rule.
SBA's "Runway Extension" Regulations
In December, the U.S. Small Business Administration (SBA) issued its long-awaited final regulation amending its receipt-based size standard to adopt a five-year averaging period for calculating annual revenues of firms and revenues of their affiliates in all industries that are subject to SBA's receipts-based size standards. The regulation took effect on Jan. 6, 2020, and applies to size certifications made after that date. For rapidly growing small businesses, the new five-year lookback period for determining size should extend a contractor's small business eligibility by allowing them to include in their average annual receipts prior years when the business was much smaller.
However, a five-year lookback does not help everybody and could even adversely impact mid-tier contractors with declining revenues. For firms with declining revenues over the five-year period, SBA's regulations will provide a transition period until Jan. 6, 2022, allowing firms (and their affiliates, if any) to choose either a three-year averaging period or a five-year averaging period for calculating average annual receipts for size standards purposes.
Proposed Legislation for Small Business Contractors, Federal Prime Contracts
In January 2020, the U.S. House of Representatives passed legislation that could help small business contractors – a proposed "runway extension" for product contractors operating under employee-based size standards and a proposal to allow small business to utilize past performance from successful joint ventures and first-tier subcontracts.
First, the Capturing All Small Businesses Act, H.R. 5130, seeks to lengthen the time period used by the SBA to determine the average number of employees for size standard purposes. Size standards are measured generally in terms of average annual receipts or number of employees. These standards represent the largest size that a company may be and still remain small for purposes of SBA and federal contracting programs.
Under the existing statute, the size of a manufacturing concern is 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. 15 U.S.C. § 632(a)(2)(C)(ii)(I). The Capturing All Small Businesses Act proposes to amend the way a manufacturing concern's size is calculated, providing for a 24-month period as opposed to a 12-month period. According to Rep. Marc Veasey (D-Texas), "[b]y extending SBA's calculation period for employee-based size standards, Congress recognizes that the current 12-month timeframe can have detrimental effects on small business that experience temporary spikes in their employment size."1
Second, the Unlocking Opportunities for Small Businesses Act of 2019, H.R. 5146, aims to increase small business competition for federal prime contracts by requiring contracting officers to consider certain types of past performance. Specifically, with respect to an offer for a prime contract made by a small business that previously participated in a joint venture with another small business, the contracting officer would be required to consider the record of past performance of the joint venture when evaluating the past performance of the small business concern. Additionally, contracting officers would be required to consider a small business concern's record of past performance performing as a first-tier subcontractor on a covered contract (a contract relating to which a prime contractor is required to develop a subcontracting plan).
The purpose behind the Act is to allow small business contractors to gain past performance through experiences as part of a joint venture or first-tier subcontractor – the intended result being an increase in small business offerors competing for federal prime contracts.
Case Study: Spectrum Floors LLC, SBA No. BDPE-580, 2020 (Jan. 14, 2020)
Spectrum Floors LLC, an SBA 8(a) Business Development (BD) Program applicant, appealed the SBA's denial of its application, contending that the SBA double-counted the value of its majority owner's interest in a rental property she co-owned.
In its initial application, Spectrum Floors included a completed SBA Form 413 for its President and majority owner (the person claiming disadvantaged status) and later provided an amended form. Both versions of the SBA Form 413 indicated that the majority owner co-owned three rental properties in addition to her primary residence. The original SBA Form 413 reported the combined fair market value of her interests in the three rental properties as $782,500. The revised form amended this amount to $750,000.
To gain admission to the 8(a) BD program, a small business concern must be "unconditionally owned and controlled by one or more socially and economically disadvantaged individuals[.]" 13 C.F.R. § 124.101. In determining whether a small business concern is eligible for participation in the 8(a) BD program, SBA will examine factors relating to the personal financial condition of the individual claiming disadvantaged status, including income, personal net worth and the fair market value of all assets. 13 C.F.R. § 124.104(c). For initial 8(a) BD eligibility, a personal net worth exceeding $250,000 is not considered economically disadvantaged. 13 C.F.R. § 104(c)(2).
The SBA denied Spectrum Floors' 8(a) BD application, finding that the majority owner did not qualify as economically disadvantaged. After subtracting the allowed exclusions, SBA found that the owner had a personal net worth in excess of $250,000. The denial letter included a table detailing SBA's calculations, which showed the owner's "Other Real Estate" valued at $782,500.
Spectrum Floors requested reconsideration and submitted an updated SBA Form 413, which stated that one of the three rental properties had been sold and indicated the owner held interests in just two rental properties with a combined fair market value of $650,000. While the owner no longer held an interest in the third rental property, she co-owned a loan asset reflecting the proceeds from the sale. The updated SBA Form 413 reported her interest in the loan asset as $73,739.
The SBA denied Spectrum Floors' request for reconsideration. As part of its calculations, the SBA included the loan asset resulting from the sale of the third property. SBA continued to use a value of $782,500 for the owner's "Other Real Estate," as it had in prior calculations.
Spectrum Floors appealed to the Office of Hearings and Appeals (OHA), arguing that the key basis for SBA's error was the duplication of values from the sale of the third rental property. Spectrum Floors contended that SBA added the proceeds from the sale of the property to the owner's assets, but continued to value the owner's interest in her actual properties at $782,500.
OHA found that Spectrum Floors convincingly showed that the SBA double-counted the value of the owner's interest in the third rental property in determining her adjusted net worth. OHA noted that this error may have affected whether the owner's adjusted net worth exceeds the allowable $250,000 threshold. OHA remanded to the SBA field office for further review.
Key takeaway: When applying for admission to the 8(a) BD program, be sure to include documentation to support the assessed fair market value of any real estate. Diligently review any calculations provided by the SBA, and be sure to catch any errors or miscalculations.