May 2012 SAW Federal Set-Aside Contracts Presentation
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Transcript May 2012 SAW Federal Set-Aside Contracts Presentation
THE COMPANY YOU KEEP
Affiliation Implications For
Federal Set-Aside Contracts
May 2012
Presented by:
Gerald Ormiston
and
Jamie Ziegler
Liberty Mutual Surety
1
Presentation Goals & Disclaimer
Designed to provide information about the Federal
Set-Aside contract programs and raise awareness of
potential risks when large business enterprises work
with small business enterprises on these programs.
Presentation is not legal advice or risk management
advice for any individual or entity that is involved with
or is contemplating becoming involved with these
programs.
2
Topics for Discussion
I.
Why Understanding Risks in the Federal Set-Aside
Arena has Become Necessary
II. Overview of SBA Programs and Their
Administration
III. SBA Guidelines for Recognizing Improper
Affiliations
IV. Recognizing Improper Affiliations – You Be the
Judge
3
Goals for Allocating Federal Dollars
23% of Prime Contracts
For Small Businesses
77% Non-Qualified
Prime Contracts
Non-Qualified Prime
Contracts
Prime Contracts for Small
Business
21.7% S.D.B.
35.6% SB Set-Asides
SB Set-Asides
WOSB
HUBZone -SB
13% S.D.V.O-SB
SDVO-SB
SDBS
21.7% W.O.S.B
Source: SBA Website
www.sba.gov
13% HUBZone-SB
Congress Continues to Investigate
Fraud and Abuse in the Small
Business Set-Aside Arena
5
6
What are the Risks?
Direct (to Surety)
■ Default termination on bonded set aside project
Indirect (to Account)
■ Debarment
■ Forfeiture of affirmative claims
■ Civil/criminal penalties
7
Topics for Discussion
I.
Why Understanding Risks in the Federal Set-Aside
Arena has Become Necessary
II. Overview of SBA Programs and Their
Administration
III. SBA Guidelines for Recognizing Improper
Affiliations
IV. Recognizing Improper Affiliations – You Be the
Judge
8
II. Overview of SBA Programs and Their
Administration
8(a) Business Development – Minority Small
Business Development (8(a) BD)
Historically Underutilized Business Zone Program
(HUBZone)
Small Disadvantage Business (SDB)
Service-Disabled Veteran Owned Small Businesses
(SDVOSB)
Women-Owned Small Business (WOSB)
9
8(a) BD Program Basics
Small Business unconditionally owned (51%) and
controlled by one or more socially and economically
disadvantaged individuals
Subject to racial or ethnic prejudice due to
circumstances beyond their control
Ability to compete has been impaired due to diminished
capital and credit opportunities compared to others in
same or similar line of business
Good character
Citizens of the United States (residency added)
Demonstrate potential for success
13 CFR §§ 124.1-124.603
10
8(a) BD Program Basics
Interested business files application with the SBA
certifying that it is a small business under the
applicable size standard
8(a) Program personnel will verify qualifications prior
to award of a contract
SBA involvement in award of the contract
May sign primary contract with procuring agency and
subcontract with program participant
Or may delegate authority to procuring agency to enter
into contract directly with program participant
13 CFR §§ 124.1-124.603
11
8(a) BD Program Basics
Status awarded for 9 years from initial designation
Primary NAICS code determines size
Economically Disadvantaged
Spousal income & retirement income not included (*)
AGI = $250,000 initial & $350,000 continuing
Assets (FMV) = $4 MM initial & $6 MM continuing
Excessive Withdraws
Officers salaries generally not included
$250,000 if sales up to $1 MM
$300,000 if sales $1 MM - $2 MM
$400,000 if sales over $2 MM
13 CFR §§ 124.1-124.603
12
HUBZone Program Basics
Principal office must be located within a designated
historically underutilized business zone
35% of the business’ employees must reside in the
HUBZone
Represent that the business will maintain 35%
employee residence throughout the duration of the
contract
13 CFR §§ 126.100-126.900
13
HUBZone Program Basics
Apply to the SBA for certification
Must be small within the applicable size standard for
the industry
Important subcontracting guidelines for the HUBZone
participant
Required to spend at least 50% of labor costs on its
own employees
May subcontract 35% of the cost of the contract to
other HUBZone participants
May not subcontract more than 50% to non-qualified
HUBZone small businesses
13 CFR §§ 126.100-126.900
14
Small Disadvantaged Business Basics
Participants in 8(a) BD Program automatically eligible
Receive certification from the procuring agency
8(a) criteria apply to determine whether a firm
qualifies as a SDB except demonstrating the potential
for success is not required
Entity can be a part-time entity but qualifying individual
must be full-time during part-time
Removed the good character requirement
13 CFR §§ 124.1001-124.1014
15
Service Disabled Veteran Owned Small
Business (SDVO SB) Basics
At least 51% unconditionally and directly owned by
one or more service-disabled veterans
Management and daily operations must be controlled
by one or more service-disabled veterans
Contractor self-certification
It is an SDVO SB
It is small under the applicable size standard
Will meet the percentage of work requirements
VetBiz Verification Program
13 CFR §§ 125.1-125.29
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SDVOSB Status Verification
- www.vetbiz.gov
Veterans Administration (VA) requirement to bid VA
SDVOSB set aside projects
Contractors must be approved by VA and listed in
the VetBiz.gov Vendor Information Pages (VIP)
database
Only applies to VA SDVOSB set aside projects
Program does NOT evaluate Teaming Agreements
or other similar arrangements
April 3, 2012
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Women-Owned Small Businesses
Economically Disadvantaged Women-Owned
Businesses (EDWOSB)
One or more women unconditionally and directly own at least
51% of the business
Management and daily operations controlled by one or more
women
EDWOSB
Economically disadvantaged plus limitation on net worth –
750K in assets (excluding ownership of the business and
primary residence)
Contractor self-certification
Verified by third-party entity
13 CFR §§ 127.100-127.700
18
Self-Performance Requirements for
SBA-Managed Programs - Construction
8(a) – perform 15% of the cost of the contract
(excluding materials) with its own employees
SDVOSBC – spend 15% of labor costs on own
employees or another SDVOSBC
HUBZone – spend 15% of labor costs with own
employees
WOSB/EDWOSB – spend 15% of the cost of the
contract (excluding materials) with its own employees
13 CFR § 125.6
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Calculating Average Annual Receipts for
SBA Size Determination
Receipts = total income + cost of goods sold
Receipts do not include:
Capital gains or losses
Taxes collected or remitted
Proceeds from transactions with affiliated entities
Period of measurement
In business for more than 3 years – 3 most recent
years divided by 3
In business for less than 3 years – total receipts during
period of business divided by number of weeks in
business, multiplied by 52
13 CFR § 121.104
22
Topics for Discussion
I.
Why Understanding Risks in the Federal Set-Aside
Arena has Become Necessary
II. Overview of SBA Programs and Their
Administration
III. SBA Guidelines for Recognizing Improper
Affiliations
IV. Recognizing Improper Affiliations – You Be the
Judge
23
Affiliation Determination
Affiliation Defined
An affiliation exists when an entity controls or has the
power to control the other, or a third party or parties
controls or has the power to control both
Totality of the circumstances analysis
(weighted averaging of several factors)
Particularly fact-intensive and may produce different
results on a case-by-case basis
April 3, 2012
24
Affiliation Determination–
Exceptions from an Affiliation Finding
Businesses will not be considered affiliated solely on
the basis of the following characteristics:
Businesses owned by investment / development
companies qualified under the Small Business
Investment Act
Businesses owned and controlled by Indian tribes,
Alaskan Native Corporations, Native Hawaiian
Organizations
Businesses which lease employees from a common
organization
Firms participating in the Federal Mentor / Protégé
Program
13 CFR § 121.103(b)
25
Consequences of an Affiliation Finding
The combined size of the SBC and its affiliates
determine whether the SBC falls within the size
classification for a project
Example: Project set-aside for businesses with $10 million
or less in annual revenue
SBC with $8 million in revenue for FY2009 = Eligible
SBC with $8 million in revenue but affiliated
with entity with $5 million in revenue for FY2009 = Ineligible
26
Consequences of an Affiliation Finding
At the time of bidding, contractors must represent their
status as an eligible small business or a participant in
an SBA program
Obtaining a small business set-aside by fraud or
misrepresentation may result in Inspector General
investigations, termination, debarment, suspension,
criminal or civil penalties [See, e.g., 15 U.S.C § 645]
27
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Factors to Weigh When Making an
Affiliation Finding
The SBA considers
Ownership Interest
Management Control
Newly Organized Concern Rule
Employee and Family Ties
Contractual Agreements (i.e. Teaming Agreements,
Joint Venture Agreements)
Ostensible Subcontractor Rule
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Ownership Interest /
Management Control
Owning a majority of stock
Power to control a majority of voting stock
Own or control a combination of minority voting blocks
Owning future stock interests
Sharing officers, directors, managing members or
partners
Profit-Sharing Agreements
13 CFR §§ 121.103(c)–(e)
30
Family Ties
Family Influence
Identity of Interest Rule
Rebuttable presumption that family members have
identical interests and will be treated as affiliates
– May be rebutted by evidence showing that the family
members are estranged or that they have independent
economic interests creating a clear line of fracture between
the two entities.
Key Point:
The rebuttable presumption that family members have identical
interests arises from the family relationship itself, not from the
members involvement with each other’s business transactions.
Gallagher Transfer & Storage Co., SBA No. SIZ-4295 (1998)
13 CFR § 121.103(f)
31
Employee Ties
Former Key Employee Influence
Newly Organized Concern Rule – when former officers,
directors, principal stockholders, managing members or
other “key employees” form new business and receive
assistance from former employer there is a rebuttable
presumption that entities are affiliates
May be rebutted by demonstrating “a clear line of
fracture” between the two entities
Key Point:
Prevents large businesses from creating “spin off” firms
which appear to be small and independent, but are, in fact,
an extension of the large business [Field Support Services
Inc., SBA No. 4176 (1996)]
13 CFR § 121.103(g)
32
Subcontracts
An affiliation is found under the ostensible
subcontractor doctrine when a small business is in
essence, performing as a subcontractor to a large
business that is nominally a subcontractor on the
project
The small business general contractor is therefore
“unusually reliant” on the large subcontractor
13 CFR § 121.103(h)(4)
33
Subcontracts
The large subcontractor performs “primary and vital”
requirements of the contract
Contract management
Control of Project Funds
Technical responsibilities
Large percentage of actual labor
Teaming Agreements
Financial and bonding assistance
Large subcontractor is the incumbent contractor
13 CFR § 121.103(h)(4)
34
Subcontracts
An Ostensible Subcontractor affiliation may be found
during contract performance
A new regulation closed a “loophole” in which a small
business contractor could submit an offer proposing
that it will perform primary and vital portions of the
contract and then subcontract the entire contract after
award
Now, a contractor no longer may annually certify it is
a small business when a subcontractor assumes
primary and vital tasks during contract performance
13 CFR § 121.404(g)(4)
35
Teaming Agreements
Defined in the Federal Acquisition Regulations (FAR)
as a potential prime contractor agreeing with one or
more other companies for them to act as a
subcontractor under a Government contract
The FAR recognizes teaming arrangements may offer
the best combination of performance, cost and
delivery
The Government will accept the validity of teaming
arrangements provided they are fully and timely
disclosed
FAR 9.601 – 9.603
36
Teaming Agreements
Teaming Agreements will be reviewed to determine whether it
creates an affiliation under the ostensible subcontractor rule
Issues Considered in the Affiliation Review
Delineation of the proposed division of work and compliance
with the performance thresholds
The proportion of skills, knowledge and experience brought
to the contract by each team partner
Who will manage the day-to-day functions
37
Teaming Agreements
Issues Considered in the Affiliation Review (continued)
Whether terminology is used in the agreement that would
indicate the parties have entered into an impermissible joint
venture (i.e., “we”, the “Team”)
The extent to which the subcontractor was involved in the
contract proposal
If, and how, profit is distributed (profit sharing is red flag for
an affiliation)
38
Joint Venture Agreements
Parties to a Joint Venture are considered affiliated with
each other
Three exceptions:
Each entity is “small” and the contract is greater than half
the assigned size standard
A Joint Venture of at least one 8(a) participant and one or
more other small businesses
A Joint Venture consisting of a mentor and protégé
39
13 C.F.R 121.103(h)
Joint Venture Agreements
Temporary and Limited Purpose, Not on a Continuing
or Permanent Basis
Three Contracts over two-year span (SBA tracks)
The number of contracts is determined at the time of offer
Example - if a JV has had two contracts in two years and
then submits three offers, the JV will not violate the rule
even if it receives all three contracts for a total of 5 contracts
Permissible to Create More Than One Joint Venture
The same two (or more) entries may create additional
joint ventures, and each new JV may be awarded three
contracts
A long-standing inter-relationship between the same JV
partners increases the chances of an affiliation finding
40
13 C.F.R 121.103(h)
8(a) Joint Ventures
An 8(a) may partner with one or more other small
businesses to perform an 8(a) contract
JV Agreement must be approved by the SBA before
contract award
An 8(a) / SBC Joint Venture is permissible only:
When the 8(a) participant lacks the capacity to perform
the contract on its own
The agreement is fair and equitable
The 8(a) participant will substantially benefit from the Joint
Venture
41
13 C.F.R 124.513
8(a) Joint Ventures
The JV Agreement must state:
The purpose of the Joint Venture
The 8(a) is the managing partner
The project manager is an employee of the 8(a)
The 8(a) must own at least 51% of the JV if it is a
separate legal entity
8(a) must receive proportionate share of profits
Performance responsibilities
The equipment, facilities and resources contributed by
each partner
42
8(a) Joint Ventures
Size Requirements:
At least one 8(a) in the JV must be less than one-half the
size standard assigned to the contract, and
For a contract with a revenue-based size standard, the
contract exceeds one-half the size standard; or
For a contract with an employee-based size standard, the
contract exceeds $10 million
43
8(a) Joint Ventures
New Performance of the Work Requirements as of February 2011
The prior regulation required an 8(a) to perform “a
significant portion of the contract”
Current regulations require the 8(a) to perform 40%
of the work performed by the JV:
The 8(a) must do more than administrative functions
Unpopulated Joint Venturers - when both the 8(a) and non-8(a)
partners are technically subcontractors, the amount of work
performed by the partners will be aggregated and the work by the
8(a) must be at least 40% of the work done by all partners
Populated Joint Venturers - the non-8(a) JV partner, or any
affiliates, may not be a subcontractor to the JV, unless approved
by the SBA
44
13 C.F.R 124.513(d)
8(a) Joint Ventures
New Annual Reporting Requirement
The 8(a) partner must report annually to the
SBA how the performance of the work
threshold is being met for each contract
8(a) Mentor/Protégé Joint Ventures
A Feature of the 8(a) Program
Purpose
Enhance the capabilities of the protégé and improve its
ability to compete
No affiliation due to the mentor / protégé agreement
or assistance provided
Must enter into written agreement subject to SBA
review
Relationship will be annually reviewed by the SBA
13 CFR § 124.520
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8(a) Mentor/Protégé Joint Ventures
Mentors
Can be a non-profit or an 8(a) BD graduate
Generally only one protégé at a time, need SBA approval &
never more than three
Demonstrate favorable financial health
Protégés
Developmental stage OR never received 8(a) contract OR ½
applicable NAICS code (not during last 6 mos.)
Generally one mentor at a time (different NAICS code)
Approved written agreement, one point of contact, support for at
least one year & significant consequences
13 CFR § 124.520
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8(a) Mentor/Protégé Joint Ventures
New annual reporting requirements
Protégé must report to the SBA on the mentor’s assistance
each program year
Annual certification whether any changes to the agreement
New consequences of the mentor not providing the stated plan
of assistance
Termination of the mentor / protégé relationship
Firm will be ineligible to mentor for two years
SBA may recommend the procuring agency issue stop work
order for each mentor / protégé JV contract
SBA may consider failure to be a basis for debarment
13 CFR § 124.520(H)
Contractual Relationships–
Other Consequences
Will the rights and obligations of the “small business”
entity be enforceable if the entity was actually
ineligible for the set-aside contract?
Recent decision held that an affiliated large
subcontractor could not enforce provisions of its
agreement with a small business who obtained a setaside contract in violation of the SBA Regulations
Morris-Griffin Corp. v. C&L Serv. Corp., 731 F.Supp. 2d
488 (E.D. Va. 2010) order vacated (Dec. 7, 2011).
Potential implications for sureties
49
Weighing the Risks
Has there been a SBA certification approval?
Has the small business entity provided the
Government with documentation defining its
relationship with the larger entity?
Is the relationship between the small business entity
and the larger entity an approved relationship, i.e.
Mentor/Protégé?
50
Topics for Discussion
I.
Why Understanding Risks in the Federal Set-Aside
Arena has Become Necessary
II. Overview of SBA Programs and Their
Administration
III. SBA Guidelines for Recognizing Improper
Affiliations
IV. Recognizing Improper Affiliations – You Be the
Judge
51
IV. Recognizing Improper Affiliations
You be the Judge
Case 1
U.S. Air Force contract for mission hardware and
software training, support and logistics management.
The contract was set aside for SDVO SBC’s.
Company A, the low bidder, was a subcontractor on the
predecessor contract.
Company A is a SDVO SBC.
Company B, a large business, is the incumbent prime
contractor for the predecessor contract.
52
IV. Recognizing Improper Affiliations
You be the Judge
Case 1
Company A submits a proposal, self-certifying as an
SDVO SBC, identifying itself as the prime contractor,
and Company B, the large contractor, as a
subcontractor and teaming partner.
Company A’s proposal refers to A and B as a “team”
that offers a low-risk option because Company B’s
knowledge and personnel retention will offer a
seamless transition.
The logos of both companies appear on almost every
page of the proposal.
53
IV. Recognizing Improper Affiliations
You be the Judge
Case 1
Company A will adopt techniques and approaches developed
by Company B during the predecessor contract.
Company A plans to retain Company B’s incumbent
workforce, its facility lease, and Government furnished
equipment.
The Teaming Agreement provides that Company B must
consent to Company A soliciting employees.
Company A’s program manager will be primarily responsible
for managing the contract.
Company A will not receive financial assistance from
Company B.
Company B has the option to terminate the Teaming
Agreement to bid for the contract if the set-aside requirement
is removed.
54
IV. Recognizing Improper Affiliations
You be the Judge
Case 1
Holding
Company A is not affiliated with Company B
Company A will be performing primary and vital contract
requirements and will be primarily responsible for
managing the work.
Although Company A is adopting certain techniques and
approaches from Company B, Company A was already
acquainted with them from being the incumbent
subcontractor.
Company A is not usually reliant on Company B for its
workforce because Company A will be independently
retaining and managing the employees.
Spiral Solutions & Tech., Inc., SBA No. 5279 (Sept. 15,
2011).
55
IV. Recognizing Improper Affiliations
You be the Judge
Case 2
Solicitation issued by the Department of the Army for a
contractor to perform public works services at Fort
Hood, Texas.
The contract was set-aside for SDVO SBC’s.
Company A and Company B formed a joint venture to
bid on the project.
Company A is a SDVO SBC, Company B is not.
The Joint Venture Agreement indicates that Company
A and Company B will each appoint one managing
director and the two will make all decisions by mutual
agreement.
56
IV. Recognizing Improper Affiliations
You be the Judge
Case 2
The JV Agreement provides for an employee of
Company A to serve as project manager, but did not
state the name of that employee.
The JV Agreement also indicates that Company A will
share 51% of the net operating income and net
operating losses of the joint venture.
Lastly, the JV Agreement contains a statement that the
parties will comply with the SBA Regulations, rather
than delineating each party’s responsibilities.
57
IV. Recognizing Improper Affiliations
You be the Judge
Case 2
Holding
The bidding Joint venture is ineligible for the project
because the JV Agreement did not meet the
requirements of the SBA Regulations in the following
ways:
1) Company A is not designated as the managing venturer,
and in fact, splits the decision-making between the
venturers;
2) A specific project manager for Company A was not
named;
3) While the JV Agreement addressed net operating income
losses, it did not establish Company A would receive 51%
of net profits, as required;
4) The agreement did not specifically define the
responsibilities of each venture partner.
Hana-JV, SBA No. VET-227 (February 22, 2012).
58
IV. Recognizing Improper Affiliations
You be the Judge
Case 3
Invitation for bids issued for the production of marine
deck cranes set aside for small businesses.
This procurement is the third in a series of prior
purchases of identical cranes. Company A was
previously awarded the second procurement.
Company B was a subcontractor of Company A on the
second procurement and performed approximately 55%
of that contract’s value.
59
IV. Recognizing Improper Affiliations
You be the Judge
Case 3
Company A has been in the same line of business for
28 years. It has its own shop and engineering
personnel.
Company A prepared its own bid.
Company A will be manufacturing cranes with
Company B’s design. Company A and Company B
have a licensing agreement which allows Company A
to utilize and manufacturer the cranes and provides for
Company B to lend Company A its personnel to assist
with the manufacturing and installation.
60
IV. Recognizing Improper Affiliations
You be the Judge
Case 3
The licensing agreement also provides Company B with
first preference to sell components to Company A
which Company A chooses to purchase rather than
manufacturer itself.
Company A and Company B will not be sharing profits
and do not have a teaming agreement.
Company B agreed to indemnify the bond for Company
A for a fee. In the event of liability, Company A and
Company B will contribute in proportion to their
respective manufacturing levels.
61
IV. Recognizing Improper Affiliations
You be the Judge
Case 3
Holding:
Company A and Company B are NOT affiliated.
Company A and Company B have a legitimate contractorsubcontractor relationship. Company A is capable of
controlling the contract and performing the work with its
own resources. The companies will not be sharing
profits. Company A had the autonomy to either create its
own design or deal with and obtain the design of any firm
it so chose. With respect to the bonding assistance,
Company A is using its own financial resources to obtain
the bond and entered into an arms-length transaction to
obtain assistance from Company B. Lake Shore, Inc.,
SBA No. 2632, 1987 WL 93594 (S.B.A. 1987).
62
IV. Recognizing Improper Affiliations
You be the Judge
Case 4
Army Corps of Engineers small business set-aside
contract for dredging.
Company A, a small business, was the successful
bidder.
Company B is owned and controlled by the brother and
adult son of Company A’s majority shareholder.
Company A leases office space from Company B at fair
market value in an arm’s length transaction.
63
IV. Recognizing Improper Affiliations
You be the Judge
Case 4
The two companies do business together. For example,
Company B accounted for about 10% of Company A’s
gross receipts in the previous year.
Both companies use the same NAICS codes, which
encompasses civil engineering construction, dredging,
and surface cleanup.
However, each company works in a different subset of
that code and each has a different specialty. Company
A works mainly in marine contracting and mechanical
dredging, while Company B largely performs tunneling
and underground work.
64
IV. Recognizing Improper Affiliations
You be the Judge
Case 4
The two companies do not share common
management or common directors and are distinct
corporate entities. The family members are not officers
or directors of each others’ companies.
The majority shareholder of Company A is the sole
indemnitor for the company’s bonds.
Company A owns all of its own equipment.
None of the family members live in the same
household.
65
IV. Recognizing Improper Affiliations
You be the Judge
Case 4
Holding:
The two companies are affiliated under the identity of
interest rule. Company A did not present evidence that
sufficiently rebuts the presumption of identical interests
from the familial relationship between owners of
Company A and Company B. Company A was also
heavily dependent on Company B for work, which is also
an indicia of affiliation. L&S Industrial & Marine, Inc., SBA
No. SIZ-4978, 2008 WL 3995863 (S.B.A. 2008).
66
Questions?