President Obama signed the Small Business Jobs and Credit Act of 2010 (H.R. 5297) into law on September 27, 2010. The new law converts “shall” into “may” for HUBZone set-aside contracts, thus relieving contentions that HUBZone entities are entitled to a priority over other small business entities (e.g., 8(a), service-disabled veteran-owned, and women-owned small businesses).
In addition, the law addresses contract bundling, subcontracting integrity, acquisition process relating to small businesses, and small business size and status integrity. Although many of these new requirements relate to specific obligations for small business contractors, there are also many new requirements for all government contractors when working with small business contractors.
The End of HUBZone Priority
The GAO protest decision, Rice Services, Inc., B-403746, September 16, 2010, and the Court of Federal Claims decision DGR Associates, Inc. v. United States, No. 10- 396C, August 13, 2010, reflect both GAO and the Court of Federal Claims’ interpretation that 15 U.S.C. § 657a(b)(2)(B) specifically provides priority for HUBZone set asides over all other small business set-asides.
The specific statutory basis for GAO and the COFC’s position was that 15 U.S.C. § 657a(b)(2)(B) stated “[n]otwithstanding any other provision of law . . . a contract opportunity shall” be awarded to a HUBZone contractor as a HUBZone set-aside, provided that the rule of two is met. The rule of two is the two part prerequisite for setting-aside a procurement that there is a reasonable expectation that: (1) at least two HUBZone contractors will submit offers and (2) that award can be made at a fair market price.
For context, the GAO and Court of Federal Claims’ position was in direct conflict with the executive branch interpretation, articulated in a Memorandum Opinion by the Office of the Deputy Assistant Attorney General, Office of Legal Counsel, Department of Justice (“DOJ Memorandum”). As described in Rice Services, Inc. the GAO went so far as to specifically indicate that any protest where the single issue was HUBZone set-aside priority and the procuring agency’s defense was reliance on the DOJ Memorandum, GAO would treat these protests in an expedited and summary manner.
The new law addresses this conflict and removes HUBZone set-aside priority by replacing shall with may in 15 U.S.C. ¡± 657a(b)(2)(B). Thus, bringing the HUBZone language into conformity with the other small business setaside statutory language. This change will create an adjustment period during which HUBZone contractors are subjected to increased competition and other types of small businesses may experience some increased opportunities.
Other Changes Affecting Small and Non-Small Businesses
In addition to now resolving the issue of HUBZone set-aide priority, the new law also implements a series of important changes.
- Contract Bundling: Section 1313 of the law reduces the bundling threshold to $2 million and specifies new reporting requirements for agencies if they intend to bundle contracts to exceed $2 million. The law specifies what the agency must perform or consider: market research; alternative contracting approaches; a written determination that bundling is ¡§necessary and justified¡¨; negative impact on contracting with small businesses; certification that steps will be taken to include small business in the bundled procurement. In making the determination that bundling is ¡§necessary and justified¡¨ the agency may not consider savings in agency administrative and personnel costs alone, without additional justification.1 These new detailed procedural and substantive requirements for bundling will provide contractors with ample specific grounds for challenging improper or insufficient agency bundling decisions.
- Subcontracting Integrity: Section 1322 requires prime contractors to ¡§make a good faith effort¡¨ to fulfill the small business subcontracting plans submitted with a prime contractor¡¦s proposal. Additionally, the prime contractor is obligated to ¡§provide the contracting officer a written explanation¡¨ if the prime contractor fails to fulfill its proposed small business subcontracting plan.
- Payment of Subcontractors: Section 1334 requires prime contractors, in contracts requiring small business subcontracting plans, to report in writing to the contracting officer when they pay subcontractors a reduced amount or when they do not pay subcontractors within 90 days, when the prime contractor has been paid by the federal government. The new law also gives teeth to this obligation by calling for regulation to record in the Federal Awardee Performance and Integrity Information System (FAPPIS) any contractors with a ¡§history of unjustified, untimely payments to subcontractors.¡¨ This will add yet another complex issue for contractors to ensure that their FAPIIS records are accurate and complete. Additionally, the threat of negative past performance for the prime contractor will provide subcontractors with potential leverage in these payment situations.
- Small Business Certification ¡X Presumptions and Deemed Certifications: Section 1341 first creates a ¡§presumption of loss to the United States¡¨ in the value of any contract, agreement, or grant that was intended for award to a small business and was ¡§willfully sought¡¨ and awarded ¡§by misrepresentation¡¨ to a non-small business. Next, Section 1341 deems a series of actions ¡§affirmative, willful, and intentional certifications of small business size and status.¡¨ Such actions include submission of a bid or proposal for a set-aside procurement, submission of a bid or proposal that ¡§encourages¡¨ the federal agency to classify award to that bid or proposal as an award to a small business, or registration in any federal database to be considered a small business. This has the net effect of automatically deeming a proposal a “willful” representation, which would then meet the “presumption of loss” language if the proposal was inaccurate as to size and status. The law does provide that regulations will be promulgated to protect companies who have violated these provisions through “unintentional errors” or “technical malfunctions.” The bottom line is that small businesses must now be even more diligent in making size and status representations — including any bids or proposals.
- Annual Certification: Section 1342 requires small businesses to recertify their size status annually on the Online Representations and Certifications Application (ORCA), which is a significant increase over the prior regime which was only triggered in situations of contracts longer than five years. When combined with the new legal presumptions applied to size and status certifications, this increased requirement for annual certification could have wide reaching implications, even beyond the direct impact of increased administrative burden on small businesses to annually review and determine their size and status.
- Updated Size Standards: Section 1344 directs the Small Business Administration to conduct hearings and full scale analysis to review and revise small business size standards.
Many of the new changes discussed will be felt immediately, but many will also need to be implemented through additional regulation. The new law settled some controversies in the small business community (e.g., HUBZone priority), but it is yet to be seen how many of the other aspects will be enforced.