Federal Construction Contracting Blog

OSDBU Seeks Guidance on Revisions to Verification Guidelines

Edward DeLisle — Tue, 21 May 2013 13:38:09 -0500

By: Edward T. DeLisle & Maria L. Panichelli

On May 13, 2013, the Department of Veterans Affairs’ (“the VA”) Office of Small Disadvantaged Business (“OSDBU”) published an advanced notice of proposed rulemaking, asking the public for guidance on how best to revise its verification regulations. Better late than never.

Since the verification program's inception, it has been hampered by issues and problems. The hope was that the verification process would address concerns regarding fraud, and create a system that assured that those attaining verified status were entitled to recognition. Instead, service-disabled veterans have been largely frustrated by the system. Well, if you are a service-disabled veteran with an opinion on how to make the system better, you are being given your chance to make your opinions known.

The recent announcement stated that the OSBDU plans to revise the regulations governing the VA’s veteran-owned small business (“VOSB”) and service-disabled veteran-owned small business (“SDVOSB”) programs in order to “provide greater clarity, to streamline the program, and to encourage more VOSBs to apply for verification.” The OSDBU is specifically seeking comment from the public on the following eight (8) topics:

What could be changed to improve the clarity of the regulations? Where might bright lines be drawn to more clearly indicate compliance with the regulations and reduce potential for misinterpretation? Where might the addition of bright line tests create unintended consequences?
It has been suggested that VA should develop a list that would clearly delineate what constitutes ownership and control and what constitutes lack of control or ownership. Should a list like this be included in the rule, and if so, what should be on the list?
Are there changes to VA's regulations that could be made to reduce the economic impact on VOSBs?
Are there changes to VA Form 0877 (the application) that could streamline the process?
What verification process improvements could help to increase efficiency and reduce burden for VOSBs?
What additional training tools or assistance might be offered to create more clarity for stakeholders and help them more efficiently and effectively navigate the verification regulations?
What documents, records, or other materials could the Office for the Center for Veterans Enterprise use to distinguish legitimate VOSBs/SDVOSBs from businesses that fraudulently seek contracts from the Government?
Would a special Hotline to report suspected ineligible VOSBs/SDVOSBs help the Government ensure that contracts are awarded to legitimate VOSBs/SDVOSBs.

Although the VA identified these eight topics for discussion, do not feel limited by this list. The OSDBU has emphasized that it is open to hearing any and all comments relating to the improvement of the process. As such, this is a rare opportunity to sound off in a very public way and make an impact on the processes that govern the verification program. We strongly urge you to make your voice heard!

Written comments should be submitted through www.Regulations.gov by mail or hand-delivery to Director, Regulation Policy and Management (02REG), Department of Veterans Affairs, 810 Vermont Ave. NW., Room 1068, Washington, DC 20420. Comments can also be faxed to (202) 273-9026. Comments should indicate that they are submitted in response to “RIN 2900-AO63—VA Veteran-Owned Small Business (VOSB) Verification Guidelines.” The comment period ends on July 12, 2013.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Ceiling Shattered for Women-Owned Small Businesses

Edward DeLisle — Wed, 15 May 2013 09:06:41 -0500

By: Edward T. DeLisle and Maria L. Panichelli

We’ve all heard about the “glass ceiling” experienced by women in the workplace. The term “glass ceiling” first appeared in an article published by the Wall Street Journal in 1986 and was used to describe the invisible barriers that women faced as they tried to climb the corporate ladder. While things seem to be better today than they once were, I think many would agree that barriers (in some cases substantial barriers) still exist. Certainly, the Small Business Administration agrees.

In October of 2010, after many years of delay, the SBA issued a Final Rule allowing for the implementation of its Women-Owned Small Business Program. The program was gradually introduced and, as originally constituted, was stricken with statutory caps that inhibited its intended effect. Ironically enough, for both Women-Owned Small Businesses (WOSBs) and Economically Disadvantaged Women-Owned Small Businesses (EDWOSBs) set-aside contracts were subject to “ceilings.” For manufacturing contracts, the ceiling was $6.5 million; for any other contract the ceiling was $4 million. Thanks to the National Defense Authorization Act of 2013, however, these ceilings are about to disappear.

On Tuesday, May 7, 2013, in accordance with directives set forth in the NDAA, the SBA issued an Interim Final Rule, removing the statutory cap on WOSB and EDWOSB set-aside contracts. As a result of this change, government agencies will now be able to set-aside contracts for WOSBs and EDWOSBs at any dollar level, providing WOSBs and EDWOSBs with access to much larger federal contracts. Hopefully, this change will also allow the federal government to better meet its statutory contracting goals for women-owned small businesses, which have been consistently missed.

Either way, the shattering of the WOSB “ceilings” promises to greatly increase the number of large-dollar WOSB and EDWOSB set-aside contracts. If you are a WOSB or EDWOSB, you will want to make sure that you are properly registered as soon as possible so that you can take advantage of these opportunities. We’ve posted the requirements in previous articles. For additional information on the SBA’s Women-Owned Small Business Program go to www.sba.gov/wosb.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Miles Construction, LLC v. United States, No. 12-597C (Feb. 14, 2013), A Primer on Due Process

Edward DeLisle — Fri, 03 May 2013 15:33:10 -0500

By Edward T. DeLisle and Maria Panichelli

Back in February, we provided readers with an overview of a case that we litigated at the end of last year, Miles Construction, LLC v. United States, No. 12-597C (Feb. 14, 2013). The major focal point of the decision was the court’s ruling that “a standard right of first refusal is a ‘normal commercial practice,’” which does not hinder an SDVOSB’s ability to comply with the VA’s “unconditional ownership” requirement. Before Miles, it was the VA’s position that a right of first refusal in an SDVOSB operating agreement prevented a veteran owner from “unconditionally owning” his or her company, rendering the company ineligible for verified status. So if, for example, you were a service-disabled veteran, who owned 51% of your company, but had in your operating agreement a provision that you were required to offer your minority shareholders the right to buy your shares at or above a price offered by a third party, you could not be verified by the VA. Sounds a little silly, right? Well, as set forth in Miles, the court thought it was silly as well.

This was a major victory for SDVOSBs, which ushered in a change in VA policy on transfer restrictions, generally. The VA has removed information from its website indicating that rights of first refusal, and other transfer restrictions, are impermissible barriers to verification. The VA has also publically acknowledged its about face on the issue. (See Testimony of Mr. Tom Leney, Executive Director of Veterans and Small Business Programs, March 19, 2013.) Despite all of the publicity on transfer restrictions, however, there are other aspects of the Miles decision that are just as disserving of discussion. The importance of due process is one of those issues.

In Miles, the Plaintiff, Miles Construction LLC, was a SDVOSB that had been previously verified by the VA. A few months after being verified, Miles submitted a bid on a VA solicitation set-aside for SDVOSB concerns. Miles was awarded the contract and a disappointed bidder filed an agency protest, challenging Miles’ eligibility. Specifically, the protestor alleged that Miles’ service-disabled veteran owner did not “unconditionally control” the company, as required by 38 C.F.R. § 74.4. Miles was notified of the protest and asked to “respond directly to the allegations made in the status protest.” Miles promptly responded and addressed each of the allegations. The VA accepted Miles’ position regarding each of the allegations lodged by the protesting party, yet sustained the protest anyway. Why? Not because of issues relating to “unconditional control,” but, rather, based upon an alleged failure of the service-disabled veteran to exhibit “unconditional ownership” over Miles, something never brought to Miles’ attention. Miles lost both the contract and its verified status based upon this decision.

Miles, of course, protested the decision. On the issue of process, Miles’ position was twofold. First, it argued that the VA violated 48 C.F.R. § 819.307 in rendering its decision. Under that regulation, the VA, through its Office of Small and Disadvantaged Business Utilization (OSDBU) “shall decide protests on service-disabled veteran-owned small business status whether raised by the contracting officer or an offeror.” It goes on to state that “[a]ll protests must be in writing and must state all specific grounds for the protest.” Miles’ interpretation of this regulation was that either a contracting officer or a disappointed offeror could advance an eligibility protest and that protest would have to be specific and in writing. The point is to provide the VA with something substantive to consider, which can then be read, understood and responded to by the person being protested. While the court deferred to OSDBU on the ability to look beyond information contained in a protest (despite the wording of the regulation), it had a problem with not providing the party being protested with notice and an opportunity to be heard.

Citing to the Administrative Procedures Act, the court stated that where an agency performs an investigatory function, as OSDBU did here, an interested party (like Miles) must be given notice of what’s happening such that he or she is permitted to meaningfully participate in the process. That did not happen. Miles was not given an opportunity to address the “unconditional ownership” issues that led to its immediate dismissal from the SDVOSB program. Simply put, you cannot do that. It’s a procedural due process problem, which Miles argued as part of its protest. You cannot issue what amounts to a death sentence without first allowing the accused a chance to defend herself. To that end, the court stated that “an interpretation of 48 C.F.R. § 819.307(c) that does not allow this basic procedural due process is plainly erroneous and cannot be upheld.”

Going forward, this ruling should mean less surprise and more process from the VA. This is a welcome change and another positive, yet less publicized, aspect of the Miles decision.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

SBA Provides Veteran Owners an Opportunity to Discuss Concerns about SDVOSB Programs

Edward DeLisle — Thu, 02 May 2013 13:01:33 -0500

By: Edward T. DeLisle & Maria L. Panichelli

Next week, the Small Business Administration (“SBA”) is giving SDVOSBs a rare opportunity to voice their concerns about government small business programs -- publicly, and directly to the SBA itself.

Yes, you read that correctly. The SBA recently announced that it will host a meeting of the Interagency Task Force on Veterans Small Business Development (“the Task Force”). The Task Force has been charged with various responsibilities in connection with SDVOSB programs. Its most recent focus has been the coordination of administrative and regulatory activities, and the development of proposals, related to several focus areas: (1) access to training, counseling and capital; (2) effective federal contracting verification; and (3) improved federal support. The upcoming meeting is meant to address not only these topics, but also various issues relating to agency efforts to improve business development opportunities for SDVOSBs. Also on the agenda: A discussion about ways in which the government can better meet its small business contracting goals.

The SBA has stated that the meeting will be open to the public, and that time will be set aside for public comment and presentations. This meeting will give service-disabled veteran small business owners a chance to speak out publicly about issues of concern and, based upon our experience, there is plenty to talk about.

The meeting will be held on May 10, 2013, starting at 9 a.m. and running through noon. The meeting will be held at the SBA’s Washington, D.C. District Office, located at 740 15th St., NW, Suite 300. Those planning to attend should provide advance notice by emailing vetstaskforce@sba.gov.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Is the VA Violating the Small Business Act?

Edward DeLisle — Mon, 15 Apr 2013 10:46:55 -0500

By: Edward T. DeLisle & Maria L. Panichelli

It’s not all that surprising when contactors question the Department of Veterans Affairs’ authority, especially those who are denied SDVOSB verification. It’s a little surprising, however, when members of Congress do it. Late last month, two congressmen explicitly challenged the VA’s management structure, which could have an impact on how the verification process operates in the future.

On March 28, 2013, Reps. Richard Hanna (R-N.Y.) and Mike Coffman (R-Colo.) penned a letter to VA Secretary Eric Shinseki, arguing that the VA had violated the Small Business Act by allowing the director of the department's Office of Small and Disadvantaged Business Utilization (OSDBU), Tom Leney, to also serve as director of the VA’s Center for Veteran’s Affairs (“CVE”). In theory, the CVE and the OSDBU are meant to carry out very different functions within the VA. The CVE is charged with the verification of SDVOSB entities – a responsibility delegated to the CVE by the Secretary of the VA under 38 U.S.C. 8127. In that role it is supposed to serve as an “auditor” for the agency; its job is to police the verification process. The OSDBU, on the other hand, is meant to serve as an advocate for SDVOSB entities, facilitating their participation in the program.

In their letter, the Congressmen explained that Section 15(k) of the Small Business Act, which created the position of OSDBU for every federal agency, specifically requires that the director of the OSDBU “carry out exclusively the duties enumerated in this Act, and shall, while the Director, not hold any other title, position, or responsibility, except as necessary to carry out responsibilities under [Section 15].” Given this definition, the Congressmen opined that Mr. Leney’s service as both the director of the OSBDU and head of the CVE presented a problem. As they coined it, the dual role constitutes an “inherent conflict,” given “the advocacy role assigned to the OSDBU and the auditing function now associated with CVE."

This is not the first time this issue has been raised. On March 19, 2013, Mr. Leney was questioned about his dual role during a joint subcommittee meeting. At that hearing, Mr. Leney testified that he did not feel that he was in a position of conflict. His explanation: “I personally do not have any issue with a conflict of interest because we are helping vets." Apparently, members of the legislature were not convinced. Congressmen Hanna (the chairman of the Small Business Committee's Contracting and Workforce Subcommittee) and Coffman (the chairman of the Veterans' Affairs Committee's Oversight and Investigations Subcommittee) were certainly not swayed. In their subsequent letter, they specifically directed VA Secretary Shinseki to document how the department intends to achieve compliance with the Small Business Act. Implicit in such a direction, of course, is the idea that the current structure is not compliant and, therefore, illegal.

To date, VA officials have not commented on the letter, but it is generally assumed that the VA will have to formally respond at some point soon.

The VA does appear to have a problem here and the problem is not going away. When two subcommittee chairmen send a letter to follow up on an issue raised during hearing, they are expecting an answer. Whatever the response, the real issue for SDVOSBs, and prospective SDVOSBs, is what does it all mean for them? I hope it means that the VA uses this as an opportunity to address some of the administrative issues at CVE that have generated so much frustration amongst veterans. While most veterans understand and appreciate the need to “police” the verification system, I have heard way too many stories from veterans who feel victimized by that system. We will keep our eye on this one as it could result in a real shake-up at the VA.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Supreme Court to Consider Contractor's Ability to Secure "Home Court" Advantage

Edward DeLisle — Tue, 09 Apr 2013 13:41:41 -0500

By: Edward T. DeLisle & Robert Ruggieri

Last week the U.S. Supreme Court announced that it will review an important Circuit Court case, which focuses on the enforceability of forum selection clauses. These contract clauses identify where parties must litigate claims in the event of a dispute. Contractors, especially federal contractors who perform work for the Government across the country and throughout the world, should, and most often do, include these clauses in their subcontract agreements.

Forum selection clauses can give a prime contractor a “home court” advantage if litigation should become necessary. Contractors, when forced to litigate, generally prefer to litigate where they are primarily situated for a variety of reasons, almost all of which pertain to cost. By litigating in a court near its home base, a prime contractor can likely save on travel costs for key personnel, have its case tried in a court familiar to its legal counsel and make an adversary come to it, escalating the costs incurred for that company. It’s a huge advantage. Further, for companies that conduct business over a broad geographic area, forum selection clauses provide more certainty. It allows them to anticipate costs better by avoiding litigation in multiple venues.

As evidenced by a recent decision of the U.S. Court of Appeals for the Fifth Circuit, however, forum selection clauses may not always be as iron-clad as they appear, and in some circumstances, may be ignored entirely. In In re: Atlantic Marine Construction Company, Inc., despite clear language in a subcontract that identified a specific federal court in Virginia to resolve disputes, the Fifth Circuit ruled that a plaintiff subcontractor could file suit in Texas, where the project and witnesses are located, as the forum selection clause represented but one factor to consider when determining whether the contractually specified forum could be enforced. This decision follows decisions in several other Circuit Courts, but remains the minority position among the Circuits. The majority of the U.S. Circuit Courts will enforce forum selection clauses, unless there is fraud or the chosen forum is unreasonable. The U.S. Supreme Court’s review of the Atlantic Marine decision will likely resolve the current split among the Circuits.

The Fifth Circuit did, however, suggest ways in which a contractor could draft a forum selection clause to improve its likelihood of being enforced, including identifying only specific state courts or arbitration tribunals, as opposed to federal courts, as appropriate forums. The wisdom of the Fifth Circuit’s decision will be scrutinized by the Supreme Court, which will hopefully provide some clarity to this increasingly cloudy issue.

As you can imagine, forum selection clauses, and the ability to enforce them, have important legal and business consequences. Contractors that have a national and/or international platform should include well thought-out and effective forum selection clauses in their subcontracts to give themselves the best chance of securing that home court advantage. You should certainly consult with a legal professional on how best to achieve this result, especially considering Atlantic Marine. We will keep you updated on this interesting and important case.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Robert Ruggieri is a Senior Associate in the firm's Federal Practice Group.

Should a Contractor Submit an REA or a Claim?

Edward DeLisle — Tue, 26 Mar 2013 09:37:14 -0500

By: Michael H. Payne

The question of whether to submit a Request for an Equitable Adjustment, commonly referred to as an “REA,” or a claim, is one that clients ask on a frequent basis. It is not always an easy question to answer and our advice depends upon the history of the dispute, and the nature of the relationship with the Contracting Officer and his, or her, representatives. At the outset, however, it is necessary to clear up the confusion between the terms “REA” and “Claim.”

A claim is defined in FAR § 2.101 as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. However, a written demand or written assertion by the contractor seeking the payment of money exceeding $100,000 is not a claim under the Contract Disputes Act of 1978 until certified as required by the Act.” Although the term “equitable adjustment” appears in the FAR in 111 places, and the term “request for equitable adjustment” appears in 11 places, there is no official definition, in the FAR or anywhere else, of the terms “Request for Equitable Adjustment” or “REA.” Nevertheless, an REA is commonly understood to be a request for compensation (time, money, or both) that falls short of a claim in terms of its procedural requirements.

A “Claim” must be certified pursuant to FAR § 33.207(c) when the claim amount exceeds $100,000, and it must be submitted to the Contracting Officer in a manner that clearly provides the factual, technical, and legal basis for an equitable adjustment to the contract. Whether the claim exceeds $100,000 or not, the best practice is to identify the request as a claim under the Contract Disputes Act of 1978, 41 U.S.C. 601-613, together with a request for a Contracting Officer’s Decision. Those procedural steps will assure that the clock starts running on the 60 day time limit for the issuance of a decision (or longer under some circumstances), and it further assures that interest starts to run from the date the claim was submitted. An REA does not require a certification under the Contract Disputes Act, but REAs submitted to Department of Defense agencies require the certification found in DFARS 252.243-7002.

There are a number of clauses that allow an equitable adjustment to the contract if the government is responsible for additional costs, or time, and the most significant clauses are: Variation in Estimated Quantity, FAR 52.211-18, Differing Site Conditions, FAR 52.236-2, Suspension of Work, FAR 52.242-14, Changes – Fixed-Price, FAR 52.243-1, and Termination for Convenience, FAR 52.249-2. In general terms, an equitable adjustment means that the contractor is entitled to his actual costs, plus reasonable profit (except for suspensions), overhead, and bond. It is also important to note that the additional costs must be allowable, allocable, and reasonable.

With that brief background, there are some practical considerations about whether to file an REA or a claim. If the contractor has a good working relationship with the agency, and particularly with the government personnel assigned to the project at hand, an REA is usually the best way to begin. This is particularly true when the government has indicated flexibility on the issue and a willingness to reach an amicable resolution. On the other hand, if there is animosity, or a clear indication in prior discussions and correspondence, that the government does not believe that the contractor is entitled to an equitable adjustment, it is best to file a claim. Unlike an REA, a claim starts the clock ticking on the time when the Contacting Officer must issue a decision (there is no time limit on an REA), and interest begins to run. It should be noted, however, that in cases where there is doubt, there is no harm in starting out with an REA. If progress is not made within a reasonable time, an REA can easily be converted to a claim under the Contract Disputes Act.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.

Feds Weigh in on Texting

Edward DeLisle — Mon, 25 Mar 2013 14:26:19 -0500

By: Edward T. DeLisle & Maria L. Panichelli

Our last blog article focused on the ability of an SDVOSB to control his company remotely thanks to the advancements of technology. Well, technology can be both a blessing and a curse. It can allow you to work from pretty much anywhere, but, as we all know, there are certain places where you should simply avoid using the technology available to you, such as when you are behind the wheel. The hazards of texting while driving has become a major problem and, as a result, it's been rendered illegal in many states. Based upon recent changes to the FAR, now the federal government is getting into the act.

Pursuant to FAR Subpart 23.11 (incorporated into every government contract through clause 52.223-18) a government contractor should adopt and enforce a policy banning employees from texting whenever an employee is: (1) driving a vehicle owned or rented by the company; (2) driving a vehicle owned by the government; or (3) driving a privately owned vehicle when performing any work on behalf of the government. Moreover, contractors are required to “flow down” this anti-texting clause to all of its subcontractors, if the value of the subcontract exceeds the “micro-purchase threshold” (currently $3,000).

More importantly, 52.223-18 requires federal contractors to “conduct initiatives” to educate employees about the dangers of texting while driving; these initiatives should be “commensurate with the size of the business.” If you are a large government contractor, this likely means that the government will expect some sort of training in addition to a written policy or employee handout covering this topic. If you are conducting periodic ethics training (and you should be), you can likely incorporate any necessary training on anti-texting as part of those sessions. If you do not conduct periodic ethics, and other government contracting, training to refresh yourself regarding what the government requires of its contractors, you should certainly consider doing so. If you have any questions, please feel free to contact us.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Remote Control

Edward DeLisle — Wed, 20 Mar 2013 13:18:32 -0500

By: Edward T. DeLisle & Maria L. Panichelli

In today’s world, it is not at all uncommon for employees, or even owners of companies, to “telecommute” or “work remotely” from time to time. It's one of the many great things that technological advancement has provided. In fact, many say that it's too easy to stay connected to the office, making it impossible ever really get away. As I walk down Market Street in Philadelphia every day, I see person after person glued to their phone, checking messages and responding to email incessantly (present company included). In fact, I'm on a flight to Phoenix at this very moment writing this article, which I will email to my assistant and have posted for all of you to read. It's incredibly easy to work from anywhere at any time. Until recently, however, the Veterans Administration did not subscribe to this theory. It interpreted its regulations to mean that a service-disabled veteran could not manage his or her business remotely. A few weeks ago, the Court of Federal Claims issued an opinion that changed all that. KWV, Inc. v. United States, No. 12-882C (2013) should provide much more flexibility to service-disabled veterans in our ever-changing world.

KWV involved a Rhode-Island based service-disabled veteran-owned business (“SDVOSB”) that was owned and managed by a Korean War veteran with more than thirty years of construction experience. KWV was awarded a contract set-aside for SDVOSBs by the VA, and drew an agency protest from a disgruntled competitor, Alares LLC (“Alares”). Alares challenged KWV’s SDVOSB status, arguing that the service-disabled veteran did not actually “control” the company within the meaning of 38 C.F.R. § 74.4 because he lived in Florida for part of the year. Alares claimed that the veteran's sons, both of whom worked for the company in Rhode Island, actually controlled the company.

The VA's Office of Small and Disadvantaged Business Utilization (“OSDBU”) agreed with Alares; it found that, because the service-disabled veteran resided in Florida for a portion of the year, he could not maintain sufficient control over the day-to-day management of KWV. The OSDBU therefore held that KWV was ineligible for the contract, and revoked KWV’s SDVOSB status, rendering it unable to bid on future SDVOSB set-aside contracts issued by the VA. KWV then appealed this decision to the United States Court of Federal Claims, seeking injunctive relief, and got it.

The Court found that the service-disabled veteran's decision to live in Florida for part of the year did not preclude him from “controlling” KWV within the meaning of 38 C.F.R. § 74.4. Judge Lettow (the same judge that presided over the Miles case, a case that we won on behalf of an SDVOSB, and wrote about last month) stressed that the veteran “employs various electronic means to keep track of the day-to-day business of KWV," which was revealed during the proceeding. The court concluded that this was an acceptable means of controlling KWV's operations, per the requirements of 38 C.F.R. § 74.4.

Based upon this finding, the Court issued a preliminary injunction, setting aside the VA's decision to sustain the protest. The Court also ordered the VA to restore KWV’s SDVOSB eligibility.

This case represents a very important development for SDVOSB owners. The VA must now recognize that “control” under 38 C.F.R. § 74.4 is not dependent upon an owner’s physical presence at an office or site. Rather, service-disabled veterans can remotely manage the day-to-day affairs of their SDVOSBs, provided that they fulfill the other prerequisites regarding “control.” This is great news for SDVOSB owners, who, like many of us, must manage our affairs far from afar sometimes...even at 37,000 feet.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

FAR Counsel Expected to Finalize Proposed Rule Requiring Accelerated Payment to Small-Business Subcontractors

Edward DeLisle — Mon, 18 Mar 2013 09:44:53 -0500

By: Edward T. DeLisle & Maria L. Panichelli

The Federal Acquisition Regulatory Council (“FAR Council”) is expected to finalize as many as nine regulations in the upcoming year. One of the most interesting of the proposed rules would require prime contractors to accelerate payments to small business contractors.

FAR council issued notice of this proposed rule on December 19, 2012. The proposed rule is the latest step toward implementing policies put in motion by the July 2012 “M-12-16” memo, issued by Jeff Zients, the acting director of the Office of Management and Budget (“OMB”). In that memo, OMB asked agency heads to accelerate payments to small business contractors, by, inter alia, encouraging prime contractors to promptly pay their small-business subcontractors. Following issuance of the M-12-16 memo, several agencies issued directives instructing their Contracting Officers to begin inserting a new clause into all contracts – a clause which requires prime contractors, upon receipt of accelerated payments from the government, to pay small business subcontractors on an accelerated timetable to the maximum extent practicable.

The proposed rule would compel ALL agencies to include this new prompt-payment language into any new solicitations and resultant contracts. In its current form, the proposed clause (as set forth in the notice) provides no specific guidance concerning the definition of “accelerated.”

The sad fact of the matter is that the proposed rule does not provide subcontractors any new rights under the Prompt Payment Act, nor does it affect the application of the interest provisions of the Prompt Payment Act. Under current Prompt Payment Act provisions, interest begins to run when an agency does not pay a contractor an amount due “by the required payment date.” This new accelerated payment policy will not change the “required payment date” for purposes of calculating the interest penalty. Nonetheless, if it goes into effect, the proposed rule would at least provide small businesses with the ability to demand accelerated payment if the appropriate circumstances present themselves.

Comments on the proposed rule were required by February 19, 2013. Stay tuned for updates.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

The SDVOSB Verification Process is Changing

Edward DeLisle — Thu, 07 Mar 2013 11:44:49 -0500

By: Edward T. DeLisle

Since 2010, when the VA instituted its process to verify service-disabled, veteran-owned small businesses, we have received call after call from companies that have been denied verification. Denial, of course, can have a devastating effect. Without receiving verified status, a company cannot qualify for contracts set-aside by the VA for SDVOSB companies. Many times, when we receive these calls and then review the basis for denial, all we can do is shake our collective heads in disbelief. A simple phone call would have very likely paved the way to verified status. Instead, the company is stuck with attempting to fix the problem through the reconsideration process, which is uncertain and never quick, and must consider the distinct possibility that it will have to wait six (6) months from a final decision to reapply. This has raised the ire of many a veteran. Well, for those veterans who have advocated for change, help appears to be around the corner.

On Tuesday afternoon, Business Wire reported that on May 1, 2013, the VA will begin providing SDVOSB applicants the opportunity to correct “minor deficiencies” found in their documentation prior to a denial being issued. The idea is to add an element of common sense to the process and avoid denying applicants who really do deserve verification. The new process will work as follows:

Firms determined to have problematic issues that are easily corrected will be contacted by the Center for Veterans Enterprise and informed of CVE’s preliminary findings. The applicant will then have 48 hours to respond, indicating a willingness to correct the issues and provide revised documentation addressing the preliminary findings. As part of this new process, the applicant will be referred to verification-assistance counselors to enhance the probability that any deficiencies are overcome.

This is great news for our veterans and it is our understanding that other changes may be in the works. As we hear about what the VA intends to introduce, we will pass along that information to you.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

NDAA Makes Important Improvements to Women-Owned Business Program

Edward DeLisle — Fri, 22 Feb 2013 14:26:32 -0500

By: Edward T. DeLisle & Maria L. Panichelli

We recently posted an article discussing changes to the limitations on subcontracting rules for small business federal contractors. The changes were marshaled in by Congress as part of the 2013 National Defense Authorization Act (“NDAA” or “the Act”), which actually includes a number of other changes affecting small business contractors. Several of those changes are designed to assist women-owned small businesses (“WOSB”) and economically disadvantaged women-owned small businesses (“EDWOSB”) in securing more federal work.

The current Woman-Owned Federal Contract Program, which became effective on February 4, 2011 after being mired in political red tape for years, allows contracting officers to set aside contracts for certified WOSBs and EDWOSBs (see our previous blog post concerning how to get certified). By statute, the federal government must attempt to steer five percent (5%) of all federal contracting dollars to WOSBs and EDWOSBs. Under the current law, however, reaching this goal has been elusive. This is, in part, due to the caps in place that govern set-aside contracts for women-owned businesses. Manufacturing contracts in excess of $6.5 million, and any other contract exceeding $4 million, cannot be set-aside for WOSBs or EDWOSBs. The NDAA removes this ceiling, allowing women-owned businesses greater access to federal contracts, and, hopefully, enabling the government to actually reach its 5% goal.

The NDAA also includes a provision requiring the SBA to further study and identify those industries in which WOSB and EDWOSBs are “underrepresented.” Currently, eighty-three (83) NAICS codes have been recognized as those where women have been historically underrepresented. Contracting officers are permitted to set aside contracts in industries falling within those classification codes, as long as that contract can be awarded at a fair and reasonable price, and the contracting officer has a reasonable expectation that two or more WOSB or EDWOSBs will bid or submit offers. The identification of additional industries should result in more contracts being set aside for women-owned concerns.

SBA Administrator Karen Mills, who will be stepping down very soon, described the potential benefits of these changes, explaining that women currently own approximately thirty percent (30%) of all small businesses, making women one of the fastest-growing sectors of business owners in the country. As such, Mills said, “opening the door for women to compete for more federal contracts is a win-win.” If you are a woman-owned, small business contractor and want these new changes to result in a “win” for you, check your eligibility, and get registered as soon as possible!

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Cohen Seglias Wins Big Case for Service-Disabled Veteran-Owned Small Businesses

Edward DeLisle — Tue, 19 Feb 2013 15:41:06 -0500

By: Edward T. DeLisle

For many Veterans and Service-Disabled Veterans attempting to do business with the Department of Veterans Affairs, the hope outlined in the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the “Act”) has largely been elusive. The Act called for the VA to give “priority to [] small business concern[s] owned and controlled by veterans” when soliciting work. As the program developed, it was left to the VA to devise a system to verify companies as veteran owned small businesses (“VOSBs”) and service-disabled veteran owned small businesses (“SDVOSBs”), the latter of which were to receive first priority in contracting opportunities with the VA. The verification system that took root in 2010 has frustrated many a veteran, as it has prevented legitimate companies from obtaining verified status and resulted in many others to lose their status. In an important decision published last week, which we argued, the Court of Federal Claims has attempted to right the ship.

Miles Construction, LLC v. United States, No. 12-597C (2013) involved a construction contract set aside for SDVOSBs. Our client, Miles, a verified SDVOSB, was the prospective awardee. A competitor protested the award, raising issues of control by the minority shareholder of Miles, a non-service disabled company. While the VA decided that the issues raised by the protestor had no merit, it nonetheless upheld the protest following an independent review of Miles’ governing documents. According to the VA, three provisions of Miles’ operating agreement violated the VA’s verification regulations. The most important provision involved a “right of first refusal.” That provision required the service-disabled veteran to offer the minority shareholders of Miles the right to purchase the veteran’s shares prior to any sale. The VA took the position that such a provision denied the service-disabled veteran unconditional ownership, a prerequisite to verification. On that basis, not only did the VA sustain the protest, eliminating Miles from competition, but it also removed Miles from its verified list of SDVOSB companies. Miles would not be eligible for any further contracts set aside for such concerns. Following our challenge of this decision on behalf of Miles, the court saw it differently.

The court determined that the VA’s interpretation of its own regulations was arbitrary and capricious. While the regulations did, in fact, require “unconditional ownership” by the service-disabled veteran, that requirement did not preclude standard “right of first refusal” language. The court concluded that such provisions fall within the ambit of “normal commercial practice” and do “not affect the veteran’s unconditional ownership.” Further, the court found that Miles was not provided with an adequate opportunity to respond to the allegations that led to the VA sustaining the protest. On this point, the court opined that “[a]n agency should not act without affording the entity whose award or projected award is protested with notice of an alleged defect and an opportunity to respond.” Calling such a position lacking in “basic procedural due process,” the Court held that the VA’s decision to sustain the protest was “plainly erroneous.”

Miles is a major victory for veterans and service-disabled veterans, who have been stung by a lack of common sense and fair play at the hands of the very agency that is supposed to be there to assist them. Many have questioned the VA’s position on “rights of first refusal,” including members of Congress. Now, a court has ruled that such provisions in an SDVOSB’s operating agreement cannot, in and of themselves, prevent one from being verified by the VA. The ruling makes practical sense and is certainly consistent with the governing regulations. As the decision is extremely important to SDVOSBs, expect to see further comment from us in the days and weeks to come.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Congress Enacts Major Changes Regarding Limitations on Subcontracting

Edward DeLisle — Mon, 11 Feb 2013 09:46:04 -0500

By: Edward T. DeLisle & Maria L. Panichelli

On January 3, President Obama signed into law the 2013 National Defense Authorization Act (“NDAA” or “the Act”). The Act seeks to change a number of acquisition provisions applicable to contractors doing business with the federal government.

One important change involves the limitation on subcontracting rules relating to small businesses. The NDAA calls for changes to those rules when it comes to supply and service contracts. Moreover, while the NDAA does not seek to change the current limitations on small business subcontracting in the construction context, its implementing regulations will add new provisions, applicable to all government contracts, which could make it easier for all small business contractors to issue subcontracts.

Under the NDAA, a small business contractor in the service context “may not expend on subcontractors more than 50 percent of the amount paid to the concern under the contract.” The current rule, as set forth at 13 C.F.R. § 125.6(a)(1), provided that “the [small business] concern will perform at least 50 percent of the cost of the contract incurred for personnel with its own employees.” The key distinction is the modification of the way in which costs are calculated. Currently, only personnel costs matter; 50% of the personnel costs must be borne by the small business prime. Once the regulations implementing the NDAA are enacted, the rule will be modified to reflect “total cost." Small business contractors will have to perform 50 percent of the total cost themselves.

Supply contracts will change in a similar manner. Currently, a small business supplier to the government must perform at least 50 percent of the cost of manufacturing its supplies or products, not including the cost of materials. 13 C.F.R. § 125.6(a)(2). The new rule will provide that a small business contractor cannot expend more than 50 percent of the amount paid to it by the government (less the cost of materials).

The NDAA does not alter the limitations on subcontracting already in place for general or specialty construction. A small business prime contractor will still be required to perform at least 15 percent of the cost of the contract with its own employees (not including the costs of materials) in the context of general construction. 13 C.F.R. § 125.6(a)(3). In the case of specialty trade contractors, a small business prime must still perform at least 25 percent of the cost of the contract with its own employees (not including the costs of materials). 13 C.F.R. § 125.6(a)(4).

Despite the above, the NDAA seeks to add an entirely new provision, applicable to all small business contracts, which may allow a small business construction contractor to exceed the regulatory subcontracting limits. Apparently fearing that certain small contractors would be adversely affected by the new rules concerning self-performance, Congress included a provision pertaining to “similarly situated entities." Under this provision, a small business prime contractor may be able to satisfy its own performance requirements through subcontracting if the subcontractor is, itself, a small company.

This provision could cause big changes in the way small contractors do business. Because the NDAA left the specific details concerning this provision to the SBA, much will depend on the specific nature of the implementing regulations, so stay tuned. Those regulations should be in place later this year.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Ties that Bind: Be Careful the Person Directing Your Work Has Authority to Bind the Government

Edward DeLisle — Fri, 08 Feb 2013 13:12:26 -0500

By: Edward T. DeLisle & Maria L. Panichelli

We’ve warned you before against relying on informal, or oral, directives from a Contracting Officer; get it in writing! A recent case before the Armed Services Board of Contract Appeals reminds us that contractors also need to be wary about who from the government is giving those directives.

In EEC International, ASBCA No. 55781 (Dec. 28, 2012), the contractor asserted claims against the government, alleging that constructive changes to the contract resulted in higher performance costs. Specifically, the contractor alleged that the government’s construction representative, as well as the contracting officer's representative, interfered with its means and methods and directed the contractor to make many changes to its scope of work. According to the contractor, the construction representative and contracting officer representative also constructively accelerated its performance.

The Board did not address the merits or credibility of the contractor’s claims. It instead concluded that even if events occurred as the contractor claimed, it was barred from entitlement because neither the construction representative nor the contracting officer’s representative was authorized to modify the contact. The Board concluded that only the contracting officer had such authority, and the contractor had not alleged that the contracting officer directed it to take the actions at issue. Although the contractor argued that the acts of the construction representative and contracting officers representative were implicitly ratified by a higher authority who had knowledge of the facts, as well as the authority to bind the government, the Board rejected this argument.

The hard lesson: taking direction from someone other than the contracting officer is done at a contractor’s peril. We certainly feel that the Board's decision was harsh here. Contracting officers are most often not those with whom the contractor has regular communications and there are situations where directives from others may be binding. However, as budgets shrink and possible sequestration looms, anticipate that agencies will rely more and more heavily on defenses such as this. We're already seeing it happen. So contractors should avoid taking direction from anyone but the individual explicitly vested with authority to bind the government. If you find yourself in a difficult position, where you feel compelled to proceed without proper written authorization, contact an experienced legal professional for assistance.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

National 8(a) Association 2013 Winter Conference

Michael Payne — Tue, 29 Jan 2013 09:43:41 -0500

Michael Payne & Ed DeLisle will be presenting at the National 8(a) Association 2013 Winter Conference in Orlando, FL on February 5th. They will be speaking on the topic How to Win Federal Contracts and Make a Profit. The conference is being held at the Disney World Yacht Club Resort and tickets are still available.

For more information, or to register, please visit the National 8(a) Association website.

Presentation & Networking Cocktail Reception - Avoiding the Pitfalls in Federal Construction Contracting

Michael Payne — Wed, 03 Oct 2012 10:20:40 -0500

Please join our Federal Contracting Practice Group for a Networking Cocktail Reception preceded by a precise presentation on Avoiding the Pitfalls in Federal Construction Contracting.

This networking event will facilitate interaction between large and small businesses that are looking to understand how to win federal construction contracts. The presentation, led by Federal Contracting Chair, Michael Payne, will provide an overview of the following topics:

• Top 10 list of pitfalls to avoid
• Tips on how to deal with the hazards
• Understanding how to protect your rights

The Federal construction market is accountable for over $100 billion worth of spending annually. If you are interested in learning more about federal contracting opportunities, this networking event is a great place to connect with other companies and learn inside tips from our Federal Contracting Partners, who boast years of experience working with Federal agencies.

Date:
November 8, 2012

Time:
4:00pm-4:30pm Registration
4:30pm-5:30pm Seminar
5:30pm-7:30pm Cocktail Reception

Location:
The Union League of Philadelphia
140 South Broad Street
Philadelphia, PA 19102

Cost:
$50 per person

Please register early as space is limited.

To register, please use this link. For questions, contact Rachel McNally at (215) 564-1700.

Can a Contractor ever ask the Government for Attorney's Fees?

Edward DeLisle — Mon, 24 Sep 2012 13:00:06 -0500

By: Edward T. DeLisle

We are frequently asked whether attorneys fees are recoverable as part of the federal claims procedure. The answer is sometimes. A case just decided by the Court of Appeals for the Federal Circuit assists in explaining when such a recovery is possible.

In Tip Top Construction v. Donahue, the United States Postal Service required a contractor to perform additional work to complete an air conditioning repair project in the Virgin Islands. While it approved a change order to perform the additional work, the contractor incurred other additional costs, including attorneys fees, to convince the USPS to accept its request for additional money. Those monies were submitted in the form of a claim and denied.

The U.S. Postal Service Board of Contract Appeals upheld the denial stating that the costs included in the claim "had nothing to do with the performance of the changed work or genuine contract administration." The Federal Circuit disagreed.

The Federal Circuit took the position that the monies included in the claim reasonably flowed from negotiations associated with the change order process. This conclusion was important, for the Federal Circuit framed the issue as follows: "If a contractor incurred the cost for the genuine purpose of materially furthering the negotiating process, such cost should normally be a contract administration cost allowable under FAR 31.205-33, even if negotiation eventually fails and a CDA claim is later submitted." Here, the facts revealed that the parties were, in fact, making attempts to negotiate an amicable resolution regarding price for a number of months prior to submission of the claim. Consultants and attorneys were used by the contractor to assist it in its presentation to the Postal Service. Because the evidence suggested that the contractor's underlying purpose was to resolve the dispute, the Federal Circuit held that these costs were recoverable.

Tip Top illustrates the fine line one must walk when it comes to the collection of attorneys fees. Certainly, once an actual claim is submitted by a contractor, there can be no expectation to collect fees from that point forward. The dispute has traveled too far down the road of dispute resolution. Prior to that point, however, if a contractor can prove that the costs incurred for counsel stemmed from a desire to negotiate an amicable resolution to a change order dispute, recovery of fees is possible.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Comment Period on Revised Small Business Size Standard for Dredging Ends Monday, September 17, 2012

Joseph Hackenbracht — Fri, 14 Sep 2012 16:06:45 -0500

By: Joseph A. Hackenbracht

On July 18, 2012, the Small Business Administration published a proposed increase in the small business size standard for “Dredging and Surface Cleanup Activities” from $20 million to $30 million in average annual receipts. 77 FR 42197. The average annual receipts are calculated by averaging a concern’s receipts for the last three fiscal years. 13 CFR 121.104(c). Receipts means “total income.” 13 CFR 121.104(a).

In order to qualify as small on a Federal procurement, a concern must also perform at least 40 percent of the volume dredged with its own equipment or equipment owned by another small dredging concern. 13 CFR 121.201; note 2. This requirement, sometimes referred to as the “40 percent rule,” has been in SBA’s size standards for small business since 1974. Before 1974, the Department of Defense’s Armed Services Procurement Regulations (ASPR’s) had contained such a requirement for many years. (ASPR 1-701.1(A)(2)). In 1974, it was determined that DoD was exceeding its authority because the obligation to set size standards for small business was within the jurisdiction of the SBA.

When the SBA proposed to increase the size standard for Dredging in July, 2012, it also sought comments regarding the requirement that in order to qualify as small that a concern must perform at least 40 percent of the dredging with its own equipment or equipment owned by another small dredging concern. SBA has heard from small dredging firms that believe they should be able to lease equipment from any size firm as long as employees from the small firm perform the work on the contract.

At this time, however, SBA has proposed to continue requiring small dredging concerns to comply with the “40 percent rule,” in order to ensure that these firms perform a significant and meaningful portion of a dredging project set aside for small business. SBA has asked for comments from the industry and the public concerning (1) whether there continues to be a need for the current 40 percent equipment requirement; (2) whether there is a rationale for a different percentage; and (3) whether a different and more verifiable requirement based on an alternative measure (such as value of contract or personnel involved) may achieve the same objective of ensuring that small businesses perform significant and meaningful work.

The following methods can be used for the submission of comments: (1) the Federal eRulemaking Portal: www.regulations.gov, by following the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier to Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416. Please note that SBA will not accept comments to this proposed rule submitted by email. Also, be sure to refer to “RIN 3245-AG37” when submitting comments, so that SBA correctly attributes your comments to the proposed rule in question.

Joseph A. Hackenbracht is a Partner in the firm and a member of the Federal Contracting Practice Group.

FAR Council Implements Final Rule; Contractors Now Required to Report Subcontractor Awards and Executive Compensation

Edward DeLisle — Fri, 14 Sep 2012 14:05:52 -0500

By: Edward T. DeLisle & Maria L. Panichelli

On August 27, 2012, FAR council issued a final rule entitled Reporting Executive Compensation and First-Tier Subcontract Awards (“the Rule”). Although this Final Rule was implemented just last month, it has been a topic of discussion on Capitol Hill for over six years.

In 2006, the Federal Funding Accountability & Transparency Act of 2006 (Pub. L. 109-282, 31 U.S.C. § 6101 note) (“FFATA”) was enacted, with a two fold purpose: (1) to reduce “wasteful and unnecessary spending;” and (2) to ensure that the public can access financial information on entities and organizations receiving federal funds, which included federal government contractors and their subcontractors. FFATA required all federal contractors to divulge, through the use of a website set up by the Office of Management and Budget (“OMB”), contract and subcontract award information for all contracts over $25,000. Contractors’ reporting responsibilities were further expanded by the Government Funding Transparency Act of 2008 (“GFTA”). GFTA amended the FFATA to provide that contractors report, in addition to contract and subcontract award information, the names and total compensation of the five most highly compensated officers of those entitities. On July 8, 2010 an interim rule was put in place, requiring Federal contractors to comply with the new reporting requirements.

It was this interim rule (with a few minor modifications) that was ultimately implemented on August 27, 2012. Under the Final Rule, prime contractors must report contract and first-tier subcontract awards, and the names and executive compensation of the five most highly compensated officers of both the prime contractor, and its first-tier subcontractors. The information must be reported by the end of the month following the month of a contract award, and annually thereafter, in the Central Contactor Registration system (“CCR”)(now the “System of Award Management” or “SAM”). All of the information is to be made accessible to the public through www.usaspending.gov.

Compliance with the rule requires that contractors fully understand the reporting requirements, which can be rather complicated. Accordingly, some guidance concerning the reporting requirements is set forth below.

Subcontract Award Reporting

This requirement is applicable to all Contracts with value of $25,000 or more, but there is no requirement to disclose classified information. This represents a change from the interim rule, which included language stating that it did not apply to classified contracts; the Final Rule expands this provision to state that nothing in the statute requires disclosure of “classified information.” The Final Rule deleted an additional exception that had been contained in the interim rule, namely that the rule did not apply to contracts with individuals. There is no such exemption in the Final Rule. There is also no exemption for COTS or commercial items.

A “First-Tier Subcontract” is defined as a subcontract “entered into by the [Prime] Contractor to furnish supplies or services for performance... It includes, but is not limited to, purchase orders and changes and modifications to purchase orders, but does not include contracts that provide supplies or services benefiting two or more contracts.” FAR 52.204-10(a). This too represents a change from the interim rule. The interim rule’s definition of “first-tier subcontracts” has been modified slightly, to clarify that the definition does not include long-term contracts for supplies and materials that are not solely related to a single, applicable contract. According to the preamble of the Final Rule, this change is meant to give contractors “greater flexibility” in determining what type of company qualifies as a “first-tier subcontractor.”

An extensive list of the information contractors must report regarding first-tier subcontract awards can be found at FAR 52.204-10(a).

Executive Compensation Reporting

Contractors and applicable Subcontractors must comply with this requirement only if that contractor or subcontractor, in the preceding fiscal year, received eighty percent (80%) or more of its annual gross revenues and twenty-five million or more in annual gross revenues from federal contract awards, AND if the public did not otherwise have access to this executive compensation information from other publically available sources (for example, through SEC or IRS filings).

The category of subcontractors required to report executive compensation is limited to “First-Tier Subcontractors,” which is defined in the same manner as set forth above. The Subcontractor is required to report to the prime contractor names and total compensation of each of the five most highly compensated executives for that subcontractor’s preceding completed fiscal year. The Prime Contractor, in turn, is required to report this information, along with its own executive compensation information to the extent that it falls within the parameters of the Rule.

For purposes of disclosure under the final Rule, both “executive” and “compensation” are defined broadly. Compensation includes not only salary, but also:

– (1) bonus;
– (2) awards of stock, stock options, and stock appreciation rights;
– (3) earnings for services under non-equity incentive plans;
– (4) change in pension value;
– (5) above-market earnings on deferred compensation which is not tax-qualified; and
– (6) other compensation, if the aggregate value of all such other compensation (e.g., severance, termination payments, value of life insurance paid on behalf of the employee, perquisites or property) for the executive exceeds $10,000.

“Executive” is defined as any officer, managing partner, or any employee in a management position.

The prime contractor must report executive compensation information in two different locations. For subcontractors, the information is entered into the FFATA Sub-award Reporting System (“FSRS”). For contractor information, primes must use the Federal Procurement Data System (“FPDS”), where certain required information will be pre-populated by the government. Prime Contractors must note two things here: First, as to first-tier subcontractors, the prime is responsible for notifying its subcontractors that the required information will be made public. Second, regarding its own information, under the Final Rule it is the prime’s responsibility to check and correct any inaccurate information pre-populated in FPDS.

This Rule places prime contractors in the precarious position of collecting and reporting not simply their own information, but information from others. How can a prime assure itself that it is collecting and reporting the full extent of the subcontractor information required? How can it ensure that the information it receives from its subcontractors is accurate? These are troubling issues and prime contractors will have to develop risk management systems to assist with compliance. Specifically, prime contractors should establish a mechanism, through their subcontracts, for example, to notify subcontractors of the reporting requirements and what information must be provided. However, since the reporting obligation applies to the prime contractor and not subcontractors, it will not be sufficient to merely “flow down” the actual reporting responsibilities. Having subcontractors certify the information provided may also assist prime contractors in protecting themselves from the risks associated with the Rule. And primes must not forget about reporting their own information. Systems for collecting, reporting and updating this information must be established to remain compliant. Oh, the joy of dealing with the federal government…

Edward T. DeLisle & Maria L. Panichelli has been closely following the development of this Rule since its inception, and has advised many contractors with regards to compliance. For further information, or for a short slide presentation concerning the Rule, please contact Mr. DeLisle at edelisle@cohenseglias.com.