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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: November 18, 2002

SUBJECT: General Services Administration (GSA); Federal Acquisition Regulation (FAR) Deviation Requiring Small Business Certification for Option Exercise

SOURCE: GSA Press Release #9991, November 15, 2002

AGENCIES: General Services Administration (GSA)

ACTION: Notice

SYNOPSIS: GSA has approved a FAR class deviation requiring contractors to recertify that they qualify as small businesses upon option exercise.

EFFECTIVE DATE: October 10, 2002.

FOR FURTHER INFORMATION CONTACT: Deborah K. Ruiz, 202-501-1231.

SUPPLEMENTAL INFORMATION: On October 10, 2002, GSA's Senior Procurement Executive David Drabkin issued a FAR class deviation requiring its contractors, particularly those participating in its Federal Supply Schedule (FSS) program, to recertify that they qualify as a small business each time their contract is open for renewal or an option to extend the term of the contract is about to be exercised. "This new policy is intended to address a loophole in federal contracting that has allowed businesses to retain their status as 'small' (and all the sub-categories) even after they no longer meet the requirements for being classified as small," said the November 15, 2002, GSA press release announcing the action.

Previously, GSA and the Small Business Administration (SBA) have interpreted the FAR to allow contractors to keep their small business status for the length of the contract, including option periods. FSS schedule contracts are for five years, and have three options to extend the FSS contract for an additional five years each. This means a FSS contractor could initially certify that it is small and then, for the next 20 years, retain its small business size status even though it has grown into a large business.

"We found that some GSA schedules contract holders that were small when originally awarded a schedules contract, are now large, and in some cases may have been purchased by larger companies but are still listed as small on GSA contracts," said Boyd Rutherford, GSA Associate Administrator for Enterprise Development. "This is not how the small business programs were intended to function and results in lost opportunities for those businesses intended to be helped by these programs."

EDITOR'S NOTE: So this was a big surprise to GSA? Not hardly! In fact, GSA and its FSS contractors were happy to tell agencies that, even though their favored contractor is now a large business, the agencies could still get credit for awarding to a small business if they issued an order against the favored contractor's FSS contract, one which the favored contractor entered into many years ago when it was small! So this "loophole" was no secret.

SBA liked the loophole because awards to large businesses were counted as awards to "small" businesses and it looked like they were doing good work encouraging small business awards. GSA liked the loophole because it earns 1% on every FSS order, so it earns money every time an agency issues an order against an FSS contract to get small business credit!

Actually, GAO surfaced this "loophole" in a recent protest decision: B-290541, CMS Information Services, Inc., August 7, 2002. The Missile Defense Agency (MDA) issued a Request for Quotations (RFQ) for automated information systems support services. The RFQ contemplated the award of an order under the successful offeror's FSS contract. The RFQ specifically stated that MDA was conducting a "streamlined competitive procurement among small business sources," and required offerors to certify as small businesses.

CMS protested the RFQ's small business certification requirement. CMS certified its small business size status in 1997, at the time it submitted its initial offer to GSA for award of its FSS contract, and it maintained that its small business status for purposes of receiving orders under the FSS contract was established by that certification, and that the certification should remain for the duration of its contract -- up to 21 years if all options are exercised, according to CMS. "If it is required to recertify its status as of the time it submits its quote, it will in essence be improperly excluded from participation in the acquisition because it cannot currently represent itself as small," CMS argued.

GAO asked GSA to provide its views. In its submission, "GSA argues that the appropriate time to determine whether a small buSiness set-aside is warranted is prior to issuance of the solicitation for the multiple FSS contracts, not at the time an ordering agency issues a specific task or delivery order."

GAO found nothing wrong with the recertification requirement. "The purpose of the Small Business Act as it relates to government acquisitions is to ensure that a fair proportion of all government contracts be placed with small business concerns. Implicit in this is the notion that the work under the contract will actually be performed by a small business. Toward this end, the Federal Acquisition Regulation (FAR) is designed, for example, to ensure that small businesses perform a majority of the work under a set-aside contract. FAR 52.219-14 [Limitations on Subcontracting]. The self-certification requirement in the RFQ is consistent with these purposes."

After GAO's decision, some Congressmen started sniffing around, so GSA thought it prudent to discover this "loophole" and take matters into its own hands -- hardly a GSA "eureka!" moment like the press release makes it appear!

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2002 by Panoptic Enterprises. All Rights Reserved.

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