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FEDERAL CONTRACTS PERSPECTIVE

Federal Acquisition Developments, Guidance, and Opinions

March 2011
Vol. XII, No. 3

CONTENTS

SBA Revises 8(a) Program,
Small Business Size Regulations

The Small Business Administration (SBA) has made the first comprehensive revision of its Section 8(a) Business Development program regulations in more than ten years. In addition, SBA revised its small business size regulations and its regulations affecting small disadvantaged businesses (SDBs). This revision reflects current practice and experience, implements statutory changes, clarifies various aspects of the regulations that have been prone to misinterpretation, and addresses situations that were not contemplated when the previous revisions to the 8(a) program were made.

The basic rules and requirements of SBA’s small business size regulations and its 8(a) program remain unchanged by this rule change; SBA proposed making changes to Title 13 of the Code of Federal Regulations, Part 121 (13 CFR Part 121), Small Business Size Regulations, and 13 CFR Part 124, 8(a) Business Development/Small Disadvantaged Business Status Determinations, to “fine tune” the regulations in the following subject areas:

13 CFR Part 121

• Exception to Affiliation for Mentor/Protégé Programs
  
  
• Joint Ventures
  
  
• Exclusion from Affiliation for Mentor/Protégé Joint Ventures
  
  
• Classification of a Procurement for Supplies
  
  
• Application of the Nonmanufacturer Rule
  
  
• Request for Formal Size Determination

13 CFR Part 124

• Completion of Program Term
  
  
• Definitional Changes
  
  
• Size for Primary North American Industry Classification System (NAICS) Code
  
  
• Economic Disadvantage
  
  
• Changes to Ownership Requirements
  
  
• Changes to Control Requirements
  
  
• Benchmarks
  
  
• Changes Applying Specifically to Tribally-Owned Firms
  
  
• Excessive Withdrawals
  
  
• Applications to the 8(a) Business Development Program
  
  
• Termination from the 8(a) Business Development Program
  
  
• Effect of Early Graduation or Termination
  
  
• Task and Delivery Order Contracts
  
  
• Barriers to Acceptance and Release From the 8(a) Business Development Program
  
  
• Competitive Threshold Amounts
  
  
• Bona Fide Place of Business
  
  
• Competitive Business Mix
  
  
• Administration of 8(a) Contracts
  
  
• Changes to Joint Venture Requirements
  
  
• Sole Source Limits for Native Hawaiian Organizations-Owned Concerns
  
  
• Changes to the Mentor/Protégé Program
  
  
• Reporting Requirement and Submission of Financial Statements
  
  
• Requirements Relating to Small Disadvantaged Businesses

(For more on the proposed rule, see the November 2009 Federal Contracts Perspective article “SBA Proposes Extensive Changes to 8(a) Program and Related Small Business Size Standards.”)

Two hundred and thirty-one (231) respondents submitted written comments on the proposed rule. In addition, SBA held hearings in Washington, DC; New York, NY; Seattle, WA; Boston, MA; Dallas, TX; Atlanta, GA; Albuquerque, NM; Miami, FL; Chicago, IL; and Los Angeles, CA. Finally, SBA conducted tribal consultations in Seattle, WA; in Albuquerque, NM; and via teleconference in Vienna, VA with representatives in Anchorage, AK. In response to the comments, many editorial changes were made to clarify the intent of SBA. The following are some of the more significant changes made to the final rule:

• Sections 124.2, For what length of time may a business participate in the 8(a) BD program?, 124.112, What criteria must a business meet to remain eligible to participate in the 8(a) BD program?, 124.301, What are the ways a business may leave the 8(a) BD program?, and 124.302, What is graduation and what is early graduation?, are revised to clarify that an 8(a) participant is considered to graduate only if it successfully completes the program by substantially achieving the targets, objectives, and goals contained in the concern’s business plan within the nine-year program term. If it does not substantially achieve the targets, objectives, and goals in its business plan within the nine-year program term, it will be deemed to have merely “completed” its program term. The language in the proposed rule was being misinterpreted as implying the SBA would extend the program term for 8(a) participants that had not achieved their targets, objectives, and goals within the nine-year program term. Instead, the final rule states that, at the end of the nine-year term, an 8(a) participant either “graduates” from the program or “completes the term.
  
  
• Section 124.4, What restrictions apply to fees for applicant and Participant representatives?, is added to provide that the compensation received by any agent or representative of an 8(a) applicant or participant for assisting the applicant in obtaining 8(a) certification or for assisting the participant in obtaining 8(a) contracts must be reasonable in light of the service(s) performed by the agent or representative. Compensation that is a percentage of the gross contract value is prohibited, and compensation that is a percentage of profits may be found to be unreasonable. The final rule sets out procedures by which SBA will suspend or revoke an agent’s or representatives privilege to assist applicants.
  
  
• Proposed Section 124.102, What size business is eligible to participate in the 8(a) BD program?, stated that “SBA may graduate a participant prior to the expiration of its program term where the firm exceeds the size standard corresponding to its primary NAICS code for two successive program years.” The period is changed to three successive program years in the final rule.
  
  
• Proposed Section 124.104, Who is economically disadvantaged?, would have presumed that an individual is not economically disadvantaged if his or her adjusted gross income averaged over the past two years exceeds $200,000 for initial 8(a) eligibility and $250,000 for continued 8(a) eligibility. The final rule adjusts the gross income amount to $250,000 averaged over the past three years for initial 8(a) eligibility and $350,000 for continued 8(a) eligibility. In addition, Section 124.104 would have presumed that an individual is not economically disadvantaged if the fair market value of all his or her assets (including his or her primary residence and the value of the applicant/participant firm) exceeds $3,000,000 for initial 8(a) eligibility and $4,000,000 for continued 8(a) eligibility. The final rule adjusts the fair market value to $4,000,000 for initial 8(a) eligibility and $6,000,000 for continued 8(a) eligibility.
  
  
• Proposed Section 124.106, When do disadvantaged individuals control an applicant or Participant?, would have required that the manager of the 8(a) concern “must reside in the United States, and must generally spend at least part of every month physically present in the primary offices of the applicant or participant.” While the United States residency requirement is retained in the final rule, the requirement that the manager must spend part of every month physically present at the primary offices of the applicant or participant is eliminated.
  
  
• Proposed Section 124.112, What criteria must a business meet to remain eligible to participate in the 8(a) BD program?, would have defined withdrawals as excessive if during any fiscal year of the participant they exceed: (i) $200,000 for firms with sales up to $1,000,000; (ii) $250,000 for firms with sales between $1,000,000 and $2,000,000; and (iii) $400,000 for firms with sales exceeding $2,000,000. The final rule adjusts the thresholds to: (i) $250,000 for firms with sales up to $1,000,000; (ii) $300,000 for firms with sales between $1,000,000 and $2,000,000; and (iii) $400,000 for firms with sales exceeding $2,000,000.
  
  
• Proposed Section 124.504, What circumstances limit SBA’s ability to accept a procurement for award as an 8(a) contract?, would have been amended to state that the SBA will not accept a procurement for award through the 8(a) program where “the procuring activity issued a solicitation for or otherwise expressed publicly a clear intent to reserve the procurement as a small business set-aside or a HUBZone or service disabled veteran-owned award prior to offering the requirement to SBA for award as an 8(a) contract.” The final rule amends this to add women-owned small business (WOSB) awards to the list of small business programs that would limit SBA’s ability to accept a requirement for the 8(a) program.
  
  
• Proposed Section 124.506, At what dollar threshold must an 8(a) procurement be competed among eligible participants?, would have adjusted the competitive threshold amounts from $5,000,000 to $5,500,000 for manufacturing contracts and from $3,000,000 to $3,500,000 for all other contracts to align with those in the Federal Acquisition Regulation (FAR). However, Federal Acquisition Circular (FAC) 2005-45 amended FAR 19.805-1, General, to increase the threshold for competitive 8(a) solicitations from $5,500,000 to $6,500,000 for manufacturing, and from $3,500,000 to $4,000,000 for all other acquisitions. Therefore, this final rule adjusts the thresholds accordingly. (NOTE: For more on the changes made by FAC 2005-45, see the September 2010 Federal Contracts Perspective article “Federal Acquisition-Related Thresholds Adjusted for Inflation.”)

After Hiatus, DOD Resumes Rampage Through DFARS

After a one month respite from the continual overhaul of the Defense FAR Supplement (DFARS), the Department of Defense (DOD) decided pick up where it left off , issuing six final rules, two proposed rules, one request for comments, and one policy memorandum.

• Marking of Government-Furnished Property: This final rule adds a new clause, DFARS 252.245-7001, Tagging, Labeling, and Marking of Government-Furnished Property, to require contractors to tag, label, or mark items of government-furnished property identified in the contract when the government-furnished material and government-furnished property are subject to serialized item management [a “serially-managed item” means “an item designated by DOD to be uniquely tracked, controlled, or managed in maintenance, repair, and/or supply systems by means of its serial number”]. This clause is required in solicitations and contracts that contain FAR 52.245-1, Government Property.
  
  In addition, paragraph (4) is added to DFARS 245.102, Policy, to provide the complete list of exceptions to the policy requiring tagging, labeling, and marking of property.
  
  Three respondents submitted comments on the proposed rule, and the following changes are made to the final rule in response to those comments:
  
  
  • The proposed clause was to be identified as DFARS 252.211-70YY, and the list of exceptions was to be included in DFARS 211.274-5. However, FAR Part 45 addresses government property, so DFARS Part 245 is considered a more appropriate location for this rule change than DFARS Part 211, Describing Agency Needs. Therefore, DFARS 252.211-70YY becomes DFARS 252.245-7001, and DFARS 211.274-5 becomes DFARS 245.102(4).
    
    
  • The list of exceptions have been removed from the proposed DFARS 252.211-70YY and included in DFARS 245.102(4). In addition, the list of exceptions has been expanded to include exceptions based on determinations by the agency.
    
    
  • DFARS 252.211-70YY provided a definition for “government-furnished property.” However, since a definition for “government-furnished property” in included in both FAR Part 45 and FAR 52.245-1, the definition is deleted from DFARS 252.245-7001.
    
    
  • The prescription in DFARS 211.274-6, Contract Clauses, would have required that the clause be included in solicitations and contracts that contain either FAR 52.245-1 or FAR 52.245-2, Government Property Installation Operation Services. However, the use of the clause is not dependent on the presence of FAR 52.252-2, so the new clause prescription at DFARS 245.107, Contract Clauses, now refers to FAR 52.245-1 only.
  
  For more on the proposed rule, see the June 2010 Federal Contracts Perspective article “DOD Publishes Five Proposed Rules, Two Deviations.”
  
  
• Reporting of Government Property Lost, Stolen, Damaged, or Destroyed: This final rule amends DFARS 245.102, Policy [for Government Property], and adds an associated clause at DFARS 252.245-7002, Reporting Loss of Government Property, to require contractors to report loss, theft, damage, and destruction (LTDD) of government property to the Defense Contract Management Agency (DCMA) “eTools” application available at http://www.dcma.mil/aboutetools.cfm. This change facilitates DOD’s migration from paper-based processes to a greater use of automation, and provide a single repository of all LTDD data to improve accountability and control of DOD assets and contractor oversight.
  
  Three respondents submitted comments on the proposed rule. As a result of these comments, the proposed title of the clause, “Reporting Loss, Theft, Damage, or Destruction of Government Property,” is changed to “Reporting Loss of Government Property” to maintain simplicity and consistency. Also, a new definition of “loss of government property” is added to the clause. For more on the proposed rule, see the May 2010 Federal Contracts Perspective article “DOD Rolls Out More Policies and Regulations.”
  
  
• Award-Fee Contracts: This final rule amends DFARS Subpart 216.4, Incentive Contracts, to revise guidance for award-fee evaluations and payments, eliminate the use of provisional award-fee payments, incorporate DOD policy guidance on the use of objective criteria (DFARS 216.401-71, Objective Criteria), and to revise guidance for award-fee evaluations and payments (DFARS 216.405-2, Cost-Plus-Award-Fee Contracts). Also added is new clause DFARS 252.216-7005), Award Fee, which detail the use of award fees.
  
  Three respondents submitted comments on the proposed rule. As a result of these comments, the following changes were made to the final rule:
  
  
  • In paragraph (e) of DFARS 216.401, General, is added a cross-reference to Procedures, Guidance and Information (PGI) 216.401(e) “when planning to award an award-fee contract.”
    
    
  • In DFARS 216.405-2(1), “held for” has been replaced by “available for” to better reflect DOD policy in the following: “The contracting officer shall perform an analysis of appropriate fee distribution to ensure at least 40% of the award fee is available for the final evaluation so that the award fee is appropriately distributed over all evaluation periods to incentivize the contractor throughout performance of the contract” (emphasis added).
    
    In addition, the following is added to DFARS 216.405-2(1): “The percentage of award fee available for the final evaluation may be set below 40% if the contracting officer determines that a lower percentage is appropriate, and this determination is approved by the head of the contracting activity (HCA). The HCA may not delegate this approval authority.”
    
    
  • In DFARS 216.405-2(2), “the contracting officer’s final evaluation” is replaced by “the fee-determining official’s final evaluation'' in the following: “The final award-fee payment will be consistent with the fee-determining official’s final evaluation of the contractor's overall performance against the cost, schedule, and performance outcomes specified in the award-fee plan” (emphasis added).
    
    
  • In DFARS 252.216-7005, “contracting officer” replaces “government” in the following sentence: “The contracting officer may unilaterally revise the award-fee plan prior to the beginning of any rating period in order to redirect contractor emphasis” (emphasis added).
  
  For more on the proposed rule, see the May 2010 Federal Contracts Perspective article “DOD Rolls Out More Policies and Regulations.”
  
  
• Publication of Notification of Bundling of DOD Contracts: This finalizes, without changes, the interim rule that added DFARS 205.205-70, Notification of Bundling of DOD Contracts, to require the publication of a notification of the intention to bundle a DOD procurement at least 30 days prior to the release of a solicitation or placing an order without a solicitation. DFARS 205.205-70 implements Section 820 of the National Defense Authorization Act for Fiscal Year 2010 (Public Law 111-84), which states, “A contracting officer of the Department of Defense carrying out a covered acquisition shall publish a notification consistent with the requirements of paragraph (c)(2) of 10.001 of the Federal Acquisition Regulation [Policy (for market research)] on the website known as FedBizOpps.gov (or any successor site) at least 30 days prior to the release of a solicitation for such acquisition and, if the agency has determined that measurably substantial benefits are expected to be derived as a result of bundling such acquisition, shall include in the notification a brief description of the benefits.”
  
  No comments were submitted on the interim rule, so it is finalized without changes. For more on the interim rule, see the August 2010 Federal Contracts Perspective article “More Guidance and Regulatory Changes from DOD.”
  
  
• Limitations on Procurements With Non-Defense Agencies: This finalizes, without changes, the interim rule that amended DFARS Subpart 217.78, Contracts or Delivery Orders Issued by a Non-DOD Agency, to expand the limitations placed on procurements by non-DOD agencies by exempting such procurements that are: (a) entered into by a non-DOD agency that is an element of the intelligence community; and (b) when the procurement is for the performance of a joint program conducted to meet the needs of DOD and the non-DOD agency.
  
  No comments were submitted on the interim rule, so it is finalized without changes. For more on the interim rule, see the July 2010 Federal Contracts Perspective article “A Plethora of Changes to DFARS in June.”
  
  
• Repeal of the Small Business Competitiveness Demonstration Program: This final rule deletes DFARS Subpart 219.10, Small Business Competitiveness Demonstration Program, to comply with Section 1335 of the Small Business Jobs Act of 2010 (Public Law 111-240), which repealed the Small Business Competitiveness Demonstration Program (for more on Public Law 111-240, see the October 2010 Federal Contracts Perspective article “Parity Among Small Business Programs Mandated by Statute”). This action mirrors the deletion of FAR Subpart 19.10 by Federal Acquisition Circular (FAC) 2005-48 (for more on FAC 2005-48, see the January 2011 Federal Contracts Perspective article “Competitiveness Demonstration Program Removed”).
  
  
• Passive Radio Frequency Identification (RFID): This proposed rule would revise DFARS 211.275, Radio Frequency Identification, to:
  
  
  • Clarify that the RFID requirement pertains solely to “passive RFID”;
    
    
  • In DFARS 211.275-2, Policy, supply a link to a website in lieu of individually listing ship-to addresses (http://www.acq.osd.mil/log/rfid/), and enable contracting officers to add tagging requirements to contracts shipping to DOD Activity Address Codes (DODAACs) not specifically listed at the website;
    
    
  • Also in DFARS 211.275-2, make pharmaceuticals subject to the Class VIII RFID tagging requirements; and
    
    
  • Revise the title of DFARS 252.211-7006 to “Passive Radio Frequency Identification” (it is currently “Radio Frequency Identification”), and revise the clause to reflect these changes.
  
  Comments on the proposed rule must be submitted no later than April 25, 2011, identified as “DFARS Case 2010-D014,” by any of the following methods: (1) the Federal eRulemaking Portal: http://www.regulations.gov; (2) e-mail: dfars@osd.mil; (3) fax: 703-602-0350; or (4) mail: Defense Acquisition Regulations Council, Attn: Meredith Murphy, OUSD (AT&L) DPAP (DARS), 3060 Defense Pentagon, Room 3B855, Washington, DC 20301-3060.
  
  
• Rules of the Armed Services Board of Contract Appeals: This proposed rule would amend DFARS Appendix A, Armed Services Board of Contract Appeals, Part 2, Rules, to implement statutory increases in the thresholds relating to the submission and processing of contract appeals, and to update statutory references and other administrative information.
  
  The following are the changes being proposed:
  
  
  • In the Preface, Section II(a) would be amended to update the Board’s address and telephone number (Skyline Six, Room 703, 5109 Leesburg Pike, Falls Church, VA 22041-3208, telephone 703-681-8500 (receptionist), 703-681-8502 (Recorder)).
    
    
  • In Rule 1, Appeals, How Taken, paragraphs (b) and (c) would be amended to increase, from $50,000 to $100,000, the threshold relating to certification, decision, and notification requirements for contractor claims.
    
    
  • Rule 12.1, Elections to Utilize Small Claims (Expedited) and Accelerated Procedures, paragraph (a), and Rule 12.3, The Accelerated Procedure, paragraph (b), would be amended to increase, from $10,000 to $50,000, the threshold for applicability of small claims procedures for disposition of appeals. Also in Rule 12.1, paragraph (a), after the revised $50,000 threshold would be added the following: “or, in the case of a small business concern (as defined in the Small Business Act and regulations under that Act), $150,000 or less.”
    
    
  • Rule 12.1, paragraph (b), would be amended to increase, from $50,000 to $100,000, the threshold for applicability of accelerated procedures for disposition of appeals.
    
    
  • Rule 28, Decisions, paragraph (b) would be amended to update statutory references relating to payment of claims (31 USC 1304), and to bring it into consistency with the judgment fund certification process specified in the Treasury Financial Manual, Financial Management Service, Department of the U.S. Treasury.
  
  Comments on the proposed rule must be submitted no later than March 14, 2011, identified as “DFARS ASBCA Rules,” by any of the following methods: (1) the Federal eRulemaking Portal: http://www.regulations.gov; (2) e-mail: dfars@osd.mil; (3) fax: 703-6818535; or (4) mail: Armed Services Board of Contract Appeals, Attn: Catherine Stanton, Skyline Six, Room 703, 5109 Leesburg Pike, Falls Church, VA 22041-3208.
  
  
• Efficiency Initiative Effort to Reduce Non-Value-Added Costs Imposed on Industry by DOD Acquisition Practices: This request for comments asks the industrial base to identify DOD mandates, reporting requirements, and other acquisition practices that encourage industry to adopt processes and make investments that increase costs, especially overhead costs, but do not contribute to value added in systems and services delivered to DOD. This request is in response to the September 14, 2010, memorandum from Under Secretary of Defense (Acquisition, Technology, and Logistics) Dr. Ashton Carter, “Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending,” in which he stated, “Unnecessary and low-value added processes and document requirements are a significant drag on acquisition productivity and must be aggressively identified and eliminated.” (For more on the September 14, 2010, memorandum, see the October 2010 Federal Contracts Perspective article “USD(AT&L) Directs DOD to 'Do More Without More'.”)
  
  “Submissions should specifically identify policies and practices that increase industry's non-value-added costs. They should draw on a reasonable definition of ‘non-value-added,’ understanding that statutes and defense policies reflect persistent American values, including but not limited to, a clear focus on warfighting performance. It is not reasonable to count all costs associated with core laws governing defense acquisition as non-value-added, but data on the costs of technical and administrative decisions within the statutory framework and on particular aspects of the laws would help the Efficiency Initiative move forward...The supporting data should give a clear indication of the magnitude of the cost, so that DOD can evaluate and prioritize the information. Submissions should also explain how the data were collected and the relevant costs were counted or estimated...DOD will use these submissions as part of its internal deliberations on the Better Buying Power Initiative. We expect to seek further industry comment at a public meeting where we hope that industry experts in contract management and finance will offer comments on the topic areas raised through this request for comments, ensuring that the results of this submission process are not idiosyncratic or overly influenced by particular companies’ cost structures.”
  
  Information provided in response to this request should be submitted no later than March 31, 2011, either by e-mail to: efficiency.ip@osd.mil; or by mail to: Deputy Assistant Secretary of Defense for Industrial Policy, 3330 Defense Pentagon, Washington, DC 20301.
  
  
• Improving Contractor Past Performance Assessments: This memorandum from Defense Procurement and Acquisition Policy Director Shay Assad forwards to the services’ senior procurement executives the memorandum from the Office of Federal Procurement Policy (OFPP) Administrator Daniel Gordon “Improving Contractor Past Performance Assessments: Summary of the Office of Federal Procurement Policy’s Review, and Strategies for Improvement.”
  
  “The importance of completing past performance assessments in a timely manner is crucial to the integrity of the past performance system,” writes Assad. “Contracting officers and source selection information on contractors’ performance when determining responsibility and deciding to award new contracts. The quality of the reports is also important in providing useful and meaningful information to source selection officials. To improve the collection of useful and timely contractor past performance information, past performance reporting guidance and controls must be improved...
  
  “According to the OFPP review, it was found that DOD had 53% of reports with sufficient narrative for quality of product/service, 51% of reports with sufficient narrative for schedule control, 22% of reports with sufficient narrative for cost control, 50% of reports with sufficient narrative for business relations, and DOD has conducted past performance evaluations on approximately 50% of eligible awards. Significant improvement must be made in all areas of reporting. We will follow up on your plans to improve compliance with performance assessments.”

SBA Revises Small Business Status Protest Regulations

The Small Business Administration (SBA) is amending its regulations to clarify the effect, across all small business programs (that is, small business, small disadvantaged business, HUBZone, and service-disabled veteran owned small business programs), of initial and appeal eligibility decisions on the procurement; increase the amount of time SBA has to render formal size determinations (15 business days); require that SBA's Office of Hearings and Appeals (OHA) issue a size appeal decision within 60 calendar days of the close of the record, if possible; increase the amount of time SBA has to file North American Industry Classification System (NAICS) code appeals; alter the NAICS code appeal procedures to comply with a Federal Court decision; clarify that contracting officers must reflect final agency eligibility decisions in federal procurement databases and goaling statistics; clarify how a contracting officer assigns a NAICS code and size standard to a multiple award procurement; and make other changes to size status protest and appeal rules.

Government Awards $537 Billion in FY10

The federal government spent slightly less money on contracts in Fiscal Year (FY) 2010 than it did in the previous year – $537 billion vs. $541 billion in FY 2009, a -0.7% reduction. This can be attributed largely to the fact that the wars in Iraq and Afghanistan were winding down, and that much of the Recovery Act funds had already been dispersed.

The following are the largest agencies’ FY 2010 spending totals: