The Contract You Never Had—If Your Contract is Voided Ab ... · the contract void ab initio. In the absence of a valid contract, ABS had no contractual basis for additional pay-ment

12 Contract Management ∕ March 2019

COUNSEL COMMENTARY

JACK HORAN, JD

� Partner, Drinker Biddle & Reath LLP

� General counsel for NCMA

The Contract You Never Had—If Your Contract is Voided Ab Initio, Are You Entitled to Any Compensation?BY Jack Horan, JD

If a company materially misrepresents its capabilities to win a U.S. government con-tract, and even begins performance, is it entitled to compensation for the work per-formed or liquidated damages incurred if the government later voids the contract?

Background and Pertinent FactsIn the summer of 2010, the U.S. Army Corps of Engineers (USACE) issued a solicitation for construction work to be performed at an Israeli Navy shipyard in Haifa, Israel. The solicita-tion explicitly stated that “‘[t]his procurement is restricted to United States firms’ only,”1 and that “[o]ffers from non-U.S. firms would be rejected.”

ABS Development Corporation made the following representations in response to the solicitation:

§ ABS is a Delaware corporation based in New York;

§ ABS is a subsidiary of Ashtrom International, Ltd., which “is fully owned by Ashtrom Group Ltd.”;

§ Ashtrom Group is an Israeli company;

§ “Only two project personnel [the chief executive officer of ABS and a purchasing man-ager] would be ABS personnel, neither of whom would be on-site in Israel”; and

§ “[T]he remaining 39 personnel on an organizational chart would be Ashtrom Group personnel, subcontractors, or independent consultants.”

On September 2, 2010, the contracting officer informed ABS that it was in the competitive range, but identified as a weakness that “ABS has no presence in Israel.” The contracting officer also informed ABS that the U.S. government “does not negotiate with subcontrac-tors,” presumably referring to ABS’ use of Ashtrom Group’s employees on-site in Israel. Two weeks later, on September 16, 2010, the contracting officer again informed ABS that “[t]he [U.S. g]overnment remains concerned that the prime contractor does not have a management presence on-site in key positions [in Israel] and as previously noted, the government does not negotiate with subcontractors.”

On September 19, 2010, ABS responded to the government’s concerns in its revised proposal. As part of its “Technical proposal-Management approach,” ABS stated that it

“will directly prequalify and employ all construction management personnel.” ABS prom-ised that construction management personnel “[led] by the project manager will report directly to [the] ABS Development CEO and be the source of communication with the USACE.” ABS identified in its revised proposal, and within a new organizational chart, ABS employees as the project manager and two assistant project managers on-site in Israel. The revised proposal also indicated that other ABS employees, as well as Ashtrom Group employees, would report to the ABS project managers. According to the revised proposal,

“twenty management and design-level positions that the original proposal indicated

13Contract Management ∕ March 2019

COUNSEL COMMENTARY

would be filled by Ashtrom Group person-nel would be filled by ABS personnel who would be on-site in Israel.”

The Basis for the DisputeDespite its revised proposal, ABS appar-ently never intended to perform the con-tract. ABS believed “the project was ‘too big’ for it, and wanted Ashtrom [Group] to carry it out.” ABS did not intend, despite its representations, to hire the project manager, assistant project managers, or any on-site personnel in Israel. Unaware of ABS’ true intent, and apparently satisfied with ABS’ response in its revised proposal, the U.S. government awarded a contract in the amount of $26,956,562 to ABS on September 30, 2010, for the construction work in Haifa. If ABS had responded to the government’s discussion questions

“by confirming that it would perform as originally proposed (that is, with no ABS personnel on-site), ABS would not have obtained the contract.”

During performance, Ashtrom Group em-ployees or its subcontractors performed all of the on-site work under the contract. ABS did not hire any on-site employees and did not employ or pay any of the personnel listed on its organizational chart below the level of the CEO. Instead, ABS transferred all payments received from the U.S. government each month directly to Ashtrom Group, which paid its on-site employees and subcontractors.

The DisputeDuring performance, the U.S. government increased the contract price to approxi-mately $46 million. Despite the price in-crease, ABS (or more accurately, Ashtrom Group) apparently suffered delays and incurred costs greater than the contract price. The government assessed liqui-dated damages against ABS for schedule delays and declined to increase the price above $46 million. ABS filed claims with the Armed Services Board of Contract Ap-peals (ASBCA) for:

§ Additional compensation,

§ An extension of the schedule, and

§ Recovery of the liquidated damages paid to the government.

The case is noted as ABS Development Corp., ASBCA Nos. 60022-23, 61042-46, 61164 (January 7, 2019).

The Case—ABS Development Corp.

The Government’s ArgumentsThe government took an aggressive posi-tion against ABS’ claims, arguing that ABS did not have a valid contract because “ABS misrepresented that it would have on-site ABS project managers in Israel in order to obtain the contract, but, subsequently, did not hire anyone to work in Israel.” Ac-cording to the government, ABS’ material misrepresentations rendered the contract void ab initio (or “from the beginning”).


COUNSEL COMMENTARY

The government relied on the same defense illustrated by Vertex Construction & Engineering2—finding that a contract obtained by fraud is void and not binding on the government.

ABS’ ArgumentsABS apparently did not dispute that its representations were inaccurate, but instead relied on a procedural argument. The contracting officer had retired and the government did not call her as a witness at the hearing. ABS argued that the Board should conclude from the absence of tes-timony that the contracting officer did not rely on the misrepresentations. The Board declined to “draw that adverse inference [because] ABS does not demonstrate that [the contracting officer], who was retired at the time the hearing was held, was pecu-liarly within the power of the government to produce as a witness.” In short, ABS could have called the contracting officer as a witness itself if it wanted to present testimony on her reliance on the misrepre-sentations.

The Board’s AnalysisThe Board distinguished between a typical failure to perform, which creates breach of contracts liability, and a failure to perform that results in a void contract:

When a contractor makes a promise of future performance in a pro-posal and later fails to perform, this generally will be a basis for liability for breach of contract but not for misrepresentation; to also prove mis-representation, the government must prove a misrepresentation at the time of proposal, such as that the contrac-tor did not intend to perform or knew it could not perform. Where an appel-lant has obtained a contract through a material misrepresentation, with no realistic intention of performing in accordance with that representation, the contract is void ab initio, resulting in denial of the appeal.

Assessing ABS’ conduct, the Board found material misrepresentations.

“[T]he contracting officer twice expressed

concerns to ABS that its proposal showed no ABS management presence in Israel,” which demonstrated to the Board that the government viewed a prime contrac-tor presence in Israel as “material.” The government also explained to ABS why its presence in Israel was material—“twice indicat[ing] to ABS that the government would only be negotiating on the project with the prime contractor.” ABS submit-ted false representations in response to the questions, promising “that it would directly hire 20 personnel to perform on-site work, including the project’s manager and assistant managers, instead of relying upon its Israeli parent company to fill those positions and perform that on-site work.” Shortly after receiving these misrepresen-tations, the government awarded ABS the contract. Thus, ABS submitted material misrepresentations, and the government relied on them.

The DecisionABS never filled its promise to hire employ-ees to perform the work in Israel, instead relying on Ashtrom Group to perform the on-site work with its employees. The Board concluded that “ABS never intended to hire any on-site personnel, and had it not misrepresented to the contracting officer that it would hire ABS personnel to fill key, on-site management positions, the con-tracting officer would not have awarded ABS the contract.” Because of these mate-rial misrepresentations, the Board found the contract void ab initio.

In the absence of a valid contract, ABS had no contractual basis for additional pay-ment or a revised schedule. The Board de-nied these claims. On the bright side, ABS would not have to complete performance and its claim against liquidated damages was sustained “as no valid contract ever came into existence.”

Counsel CommentaryThe ABS case illustrates one danger of knowing misrepresentations on future performance in a proposal—a board or court could later void the contract ab initio for fraud. When this happens, the contrac-tor may very well be left with no payment

under the contract for work performed and be forced to use far less reliable equitable theories to obtain some compensation for its services. In addition, the government could terminate a contract for default based on the contractor’s failure to perform as promised, as it did in the Vertex case.

The ABS and Vertex cases demonstrate that the government will not hesitate to void a contract well into performance if the facts support it. Moreover, a terminated or voided contract could be the least of the government’s remedies against fraud. A contractor could be subject to suspension and debarment, civil fraud remedies, or criminal prosecution based on fraud in its proposal.

The lesson to contract managers is a fundamental one—do not misrepresent your company’s capabilities or the method by which it will perform the contract. Even if the misrepresentations work and the government awards your company the contract, the victory may be temporary. The contract may later be voided from the beginning. CM

ENDNOTES1. All quotes in this article are to the Armed Services

Board of Contract Appeals (ASBCA) decision (ABS Development Corp., ASBCA Nos. 60022-23, 61042-46, 61164 (January 7, 2019)) unless other-wise noted.

2. Vertex Construction & Engineering, ASBCA No. 58988, 14-1 B.C.A. 35804 (November 7, 2014)—dis-cussed in this column in the November 2015 issue of Contract Management.

Contract Management ∕ March 201916

Alone Again—Naturally?

How to Properly Justify Sole-Source AwardsBy Susan L. Turley



you not only need good reasons for not doing so, but you have to be able to articu-late a clear and compelling rationale for your acquisition strategy.

In his 1972 hit, “Alone Again (Naturally),” singer Gilbert O’Sullivan bemoans his in-ability to escape the solitary life.1 Perhaps O’Sullivan should have become a federal government contractor, where he might have found it rather rewarding to be all alone as a sole source. In fiscal year 2017, for example, the Department of Defense (DOD) awarded about 56% of its $319.8 billion in contract obligations through pro-curements that lacked any real competi-tion, according to one study.2

The frequency of sole-source awards persists, despite more than a century of policy and regulatory direction otherwise, beginning with 1809 legislation dictating that “all purchases and contracts for sup-plies or services…shall be made by open purchases, or by previously advertising for proposals.”3 In 1984, the Competition in Contracting Act4 mandated that agencies

“obtain full and open competition through the use of competitive procedures” when buying goods or services.5 Both the Fed-eral Acquisition Regulation (FAR) Part 6 and the Defense FAR Supplement (DFARS) Part 206 incorporate this policy, making full and open competition the preferred acquisi-tion method. Why? Because “healthy com-petition is the lifeblood of commerce—it increases the likelihood of efficiencies and innovations.”6

That said, this article is not about why com-petition is generally good, because many others have already made that argument very persuasively.7 Instead, it focuses on how to properly justify a noncompetitive procure-ment, emphasizing four critical points:

§ Consider Competition—The default starting point for all acquisitions should be to compete;

§ Research the Market—You must do market research to determine whether competition is feasible;

§ Justify the Decision—If you decide you can’t compete, you must justify your decision; and

§ Provide the Details—Bare assertions that no one else can or should do the work are insufficient.

Step 1. Consider CompetitionToo often, the presumptive strategy from the get-go—especially in procurements with well-performing, well-established incumbents—seems to be that competition is pointless. However, because the acquisi-tion planning stage is the best (frequently the only) opportunity to build competi-tion into a procurement, every acquisition strategy should consider whether “full and open competition” is appropriate.

The FAR defines full and open competition as occurring when “all responsible sources are permitted to compete.”8 In this context, it further defines a responsible prospec-tive contractor (or responsible source) as a “contractor that meets the standards in 9.104.”9 FAR Part 9 clarifies that a “respon-sible source” must have:

§ The required financial, technical, pro-duction, and operational resources to perform;

§ Adequate experience and a satisfac-tory record of both performance and business ethics; and

§ The necessary management, organi-zational and operational controls to ensure safety, quality, and other critical aspects of performance.10

In other words, full and open competition doesn’t actually mean that every would-be supplier or contractor that wants to com-pete will get the opportunity to do so. Sup-pliers who recently declared bankruptcy, have horrendous past performance records, or are under indictment are probably not

“responsible sources,” and you may exclude them from your procurement without forgo-ing full and open competition.

The flip side, however, is that you can’t as-sume only the incumbent or preferred sup-plier is a “responsible source.” You must do market research to help shape and validate your acquisition strategy.

Step 2. Research the MarketFAR Part 10 governs market research. It’s one of the FAR’s shortest parts, covering less than three pages in the hard-copy ver-sion.11 And only a few lines—10.002(b)(2)(i)–(viii)—address how to do market research. The rest of the section tells acquisition personnel why they have to do market research and what to do with the results.

The scarcity of detailed FAR guidance does not correspond, however, to any lack of importance or difficulty connected with market research:

Market research—the process used to collect and analyze data about capa-bilities in the market that could satisfy an agency’s needs—is a critical step in the acquisition process, informing key decisions about how best to acquire goods and services.12

In my experience, market research can also be of the most challenging step in the process and certainly one that engenders significant anxiety for inexperienced acqui-sition personnel.13

If you’re not competing your sources,


ALONE AGAIN—NATURALLY? HOW TO PROPERLY JUSTIFY SOLE-SOURCE AWARDS

Part of the difficulty may stem from our tendency to isolate common activities in our personal lives from similar undertak-ings in our careers. Market research is literally something most people do on a regular basis, if not every day. Think about the last time you or someone you know bought a car. Most of us—even if we’re highly satisfied with every aspect of the car we currently drive—don’t quickly decide that we’re going to buy the same exact car from the very same dealer, with the only differences being a newer model and a higher price. Instead, we explore our options, using research techniques very similar to those for researching a govern-ment-funded purchase. Review the follow-ing suggestions from DOD14 and compare them to what you have done or would do before purchasing a vehicle:

§ Read trade journals;

§ Engage knowledgeable people (government and industry) in specific markets;

§ Identify and engage known sources of services;

§ Employ and review market surveys to obtain information from potential sources;

§ Conduct vendor and customer site vis-its to assess capabilities and practices;

§ Attend trade shows, conferences, and symposia;

§ Perform web searches;

§ Review results of recent market re-search on similar or identical require-ments;

§ Seek feedback via formal requests for information and sources sought synopses;

§ Obtain source lists of similar services from other contracting activities or agencies, trade associations, or other sources; and

§ Review catalogs and literature pub-lished by providers.

The exact methodology may differ, but these are tools that most of us employ on a regular basis. We do ourselves a disservice when we fail to apply the experiences and skills gained in our personal lives to our professional activities. One of my organiza-tion’s hiring managers always asks candi-dates for subcontract management jobs to describe the last time they made a major personal purchase because he thinks the answer offers significant insight into the capabilities they would bring to work.

Another suggestion that may improve and facilitate market research is to focus not on the incumbent or desired source, but on the other potential competitors. Return to the car-buying analogy: If you’re satisfied with your current vehicle, how much data do you really need to determine that your existing ride is a “responsible source?” Instead, the better course of action might be to concentrate on identifying and as-sessing other options.

Translated to the contracting arena, the point is to avoid spending time and energy on validating the incumbent’s superiority. This can prove problematic for those who don’t regularly work in procurement (e.g., engineers or program managers), because they frequently think that the purpose of a sole-source justification is only to “justify” why the desired contractor is a “sole source.” Admittedly, that’s a legitimate argument, given that FAR Part 6 requires the justifica-tion to demonstrate

“that the proposed contractor’s unique qualifications or the nature of the acquisition requires” a sole-source pro-

curement.15 The problem with an incumbent-centric approach is that it glosses over the requirement that the contractor’s qualifica-tions be unique—in other words, not shared by any other potential offeror.

The issue isn’t solely why or whether the preferred vendor can do the work—because of course they can, or you shouldn’t be con-sidering an award to them at all, let alone a sole-source award. The emphasis should be to determine whether anyone else can meet your requirements. To drive home this point, my organization has begun rebranding sole-source justifications as “noncompeti-tive” justifications. Focusing on the inability to compete helps focus the market research on establishing the lack of other contrac-tors with the needed skills, which in turn bolsters the resulting justification.

Start by identifying the crucial qualifica-tions a potential contractor would need to fulfill your requirements. This will guide your market research, and you should end up with one of two outcomes:

§ You will determine that truly no other source can meet your needs, with solid supporting evidence for your justifica-tion; or

Law offices ofAubrey Mitchell PLLC

• 10% discount on hourly rate with mention of NCMA

• Temporary, part-time, or full-time engagements accepted

• Sole practitioner

6092 Franconia RoadAlexandria, Virginia

PHONE 571.257.6102FAX [email protected]



§ You will identify possible alternative sources, and you’ll already have out-lined the bulk of your source-selection criteria.

Step 3. Justify the DecisionFAR 6.302 lists seven circumstances per-mitting other than full and open competi-tion:

§ Only one responsible source and no other supplies or services will satisfy agency requirements;

§ Unusual and compelling urgency;

§ Industrial mobilization; engineering, developmental, or research capability; or expert services;

§ International agreement;

§ Authorized or required by statute;

§ National security; and

§ Public interest.

After briefly reviewing a few others, the following discussion will focus on the first—and most common—rationale.16

“Unusual and compelling urgency” seems highly attractive at first blush, given that acquisition professionals seldom have adequate time to award contracts and the program or customer almost always needed the suppliers or services yesterday. Unfortunately, FAR 6.301(c) makes it very clear that such situations are really neither unusual nor compelling: “Contracting with-out providing for full and open competi-tion shall not be justified on the basis of [a] lack of advance planning by the requiring activity.” In 2015, the Government Ac-countability Office (GAO) emphasized the same point, sustaining the protest of a sole-source award based on the “agency’s failure to engage in reasonable and ad-equate advance planning.”17 GAO wrote:

[U]nder no circumstances may non-competitive procedures be used due

to a lack of advance planning…. [C]ontracting officials must act affir-matively to obtain and safeguard com-petition; they cannot take a passive approach and remain in a sole-source situation when they could reasonably take steps to enhance competition.18

So, the fact that competing a procurement would delay award seldom qualifies as “ur-gent and compelling.” An example of what does qualify would be a recent justification and approval (J&A) on FedBizOpps19 to obtain “emergency lockdown meals” for a federal prison in West Virginia “[d]ue to the institution being immediately and unex-pectedly being placed on lockdown, [and] an order was needed immediately in order to feed the inmate population.”20

For government agencies, “authorized or required by statute” is relatively easy, as it deals with statutorily directed acquisitions from sources such as Federal Prison Indus-tries or the Government Printing Office.21 It seems unlikely a defense contractor would ever use this exception, but occasionally someone claims that the government customer “directed” the use of a certain source. However, if that direction is not in the contract or in writing from the con-tracting officer, it almost certainly fails to support a sole-source award.22

The “international agreements” excep-tion allows noncompetitive procurements when required by the terms of such an agreement or by written direction from a foreign government that will reimburse the U.S. agency for the acquisition costs.23 During my tenure as a DOD attorney, I saw this most frequently with foreign military sales, where the receiving country direct-ed the acquisition to go to an in-country contractor. DFARS 206.302-4(c) allows DOD to substitute a written description of the agreement terms or directions that require the noncompetitive acquisition for a full-blown J&A.

Another application is directed subcon-tracting under cooperative agreements, which is not explicitly referenced in DFARS Part 206 but instead in DFARS Part 225 on foreign acquisitions. DFARS 225.871-5(a) authorizes the “direct placement of sub-contracts with particular subcontractors…[when] specifically addressed in the cooper-ative project agreement.” For North Atlantic Treaty Organization (NATO) cooperative projects,24 DFARS PGI 225.871-5 states that the “cooperative project agreement is the authority for a contractual provision requir-ing the contractor to place certain subcon-tracts with particular subcontractors,” and no separate J&A is required.

“Only One Responsible Source”As previously mentioned, FAR 6.302-1(a)(2) is the most common rationale for sole-source procurements. It states:

When the supplies or services required by the agency are available from only one responsible source…and no other type of supplies or ser-vices will satisfy agency requirements, full and open competition need not be provided for.25

The FAR then offers several examples of the exception, the most common of which is in 6.302-1(a)(2)(ii):

Supplies may be deemed to be avail-able only from the original source in the case of a follow-on contract for the continued development or pro-duction of a major system or highly specialized equipment, including major components thereof, when it is likely that award to any other source would result in—(A) Substantial duplication of cost

to the government that is not ex-pected to be recovered through competition; or



(B) Unacceptable delays in fulfilling the agency’s requirements.26

Ever helpful, the FAR goes on to explain that this authority may apply in situations such as the following:

§ When there’s “a reasonable basis to conclude” that only “unique supplies or services available from only one source or only one supplier with unique capabilities” can satisfy the agency’s minimum needs27;

§ When agency standardization require-ments dictate that only specified makes and models of technical equipment and parts, available from only one source, will satisfy the agency’s needs for addi-tional units or replacement items28; or

§ When one source owns the intellec-tual property (data rights, patents, copyrights, or secret processes) or controls basic raw materials—although

“the mere existence of such rights or circumstances does not in and of itself justify the use of these authorities.”29

The caveat to this last example seems to be intended to drive agencies and prime con-tractors to do a better job of acquiring the needed rights to second-source a product. A DOD guide on preparing J&As says:

If the justification is based upon the absence of required data or the existence of limited rights in data, the justification must thoroughly docu-ment the actions taken to obtain miss-ing data or to validate, challenge, or otherwise remove this impediment.30

For data rights, such actions might include negotiating the “purchase of unlimited rights, royalty provisions, government purpose license rights, or other ar-rangement.”31 For patents or copyrights, overcoming this “impediment” could include the “authorization and consent” procedures under FAR 27.201, “Patent and Copyright Infringement Liability.”32

For those awards based on “unacceptable delay” or unrecovered “duplicated costs,” GAO cases provide some insight into what does and doesn’t work:

§ A U.S. agency properly purchased only Glock firearms for Pakistan’s military when Pakistan had a logistics system in place to support the weapons and

“supporting a new firearm would be overly burdensome”33;

§ A sole-source follow-on award to the incumbent contractor for a highly spe-cialized, automated, centralized, naval command-and-control and weapons control system was appropriate be-cause award to any other offeror would lead to unacceptable delay34; and

§ When a second source “has made sig-nificant progress towards becoming an approved source under the agency’s source approval rules, and the remain-ing time required for approval is not long,” a sole-source award with a justification that does not consider the viability of the second source was improper.35

Not only do poor justifications carry the risk of a sustained protest for government agencies, justifications performed by defense contractors face significant scru-tiny during contractor purchasing system

reviews (CPSRs). During 2017 CPSRs, the Defense Contract Management Agency found substandard sole source justifica-tions at a third of contractors evaluated, making them number six on the list of top 10 material deficiencies.36

If the FAR, as previously outlined, provides such detailed guidance, why do both gov-ernment and industry contracting officials seem to have such a problem with sole-source justifications? As with many other provisions of the FAR, what seems relatively straightforward in theory becomes much more challenging in practice. Besides suf-fering from a lack of planning, inadequate market research, and an overly narrow focus, too many justifications make vague, unsupported assertions and assume that readers will accept them without question.

Step 4. Provide the DetailsView the sole-source justification as an exercise in persuasive advocacy. Write so that any reader, even—or especially—one

HOW TO FIX AN INADEQUATE SOURCE JUSTIFICATION

EXAMPLE HOW TO FIX IT

ONLY KNOWN SOURCE

Explain and provide details: § Why is it the only known source? § What market research did you perform to determine it

was the only source available?

ONLY QUALIFIED CONTRACTOR/SUPPLIER

Explain and provide details: § Why is it the only qualified contractor or supplier? § What are the barriers to qualifying an additional source?

PROGRAM/REQUESTOR WANTS TO GO WITH THIS CONTRACTOR OR SUPPLIER

Although programs and other functions have input into the sourcing process, ultimately the contracting or supplier manager must make the sourcing decision. Explain and provide details: § Why does the requestor want to solicit only this supplier? § What has the requestor done to see if other contractors

or suppliers could perform the work? § What would it cost (in both time and money) to try to use

another source?CUSTOMER-DIRECTED SOURCE Must have written direction from the government customer.

NEED TO PLACE PURCHASE ORDER QUICKLY, SO NO TIME TO COMPETE

Explain and provide details: § Why is there not enough time to compete? § What can be done to prepare to compete next time? § How will delaying the procurement harm the govern-

ment?

23



with no knowledge of the acquisition, can follow the trail to the desired conclusion: A sole-source procurement is in the best interests of everyone involved. Admittedly, most government agencies (and prob-ably many government contractors) have mandatory forms and formats that may stifle the “storytelling,” but even the most restrictive structure still leaves some room for engaging persuasion.

Be clear, convincing, and compelling. I’ve read some justifications where the person writing the justification obviously didn’t understand what it said, didn’t believe it, or both. If the author isn’t confident that no other source will satisfy the requirement, then how can he or she expect the reader to accept that assertion?

“Specificity is What Makes Good Storytelling, and Good Storytelling is What Makes Money….”37

The key, as with most advocacy, is support-ing details; avoid generalities as much as possible. Go back to the car-buying exer-cise and imagine you’re trying to persuade your significant other to accept your conclu-sion. Simply proclaiming, “I did my research, and this make and model is the best choice out there” probably won’t achieve your desired result. However, suppose you pro-vided the following information:

§ It has the best resale value in its class, according to Kelly Blue Book;

§ No other vehicle in this class averages more than 30 miles per gallon, based on EPA estimates;

§ It received the J.D. Powers “most de-pendable” award in its class;

§ It’s the only vehicle that comes with all the options we want (power windows, heated leather seats, towing package, four-speed manual transmission, Blue-tooth enabled, etc.); and

§ The local dealer has it in stock and can deliver in time for our cross-country trip next month, while we would have to order any other comparable vehicle and wait at least two months.

Different and better information will probably lead to a different and better out-come, and the same holds true for source justifications.

One of the most common mistakes I’ve seen is the assertion—without more—that

“it would cost too much and take too long to compete.” FAR 6.302-1 doesn’t require absolute precision—only that it’s “likely [not definite or conclusive] that award to any other source would result in…[s]ubstantial duplication of cost…that is not expected [rather than certain or guaranteed] to be recovered through competition.”38 That being said, the allowable “fudge factor” only stretches so far:

If the justification is based on “substantial duplication of costs” or “unacceptable delays,” the justification must quantify the costs in terms of either time or money and provide the basis for these estimates.39

When trying to estimate the costs or delay, consider the following:

§ What kind of transition would another supplier require? How great is the learning curve?

§ If you have qualification require-ments, what would be required to get another supplier qualified? What level of qualification testing (e.g., flight test-ing of component or of the complete product) would the supplier need?

§ How much would this qualification cost and how long would it take? What’s the basis for these estimates (similar parts qualified in the past, facility cost and manpower estimates, etc.)?

§ What would be the technical risk to the government or the contractor with such a course of action?

§ What is the acquisition outlook for the relevant program? If the program is only in a sustainment mode or there is limited future demand, then it is probably less likely that the agency or prime contractor could recover the increased costs of try-ing to compete or that suppliers would be willing to invest their own funds in the qualification and start-up efforts.

§ Don’t assert that “there’s no money in the budget to compete.” The decision to compete should be independent of the budget—whether your own or the customer’s for contractors. Remem-ber, competition is presumed to save money, so the justification must dem-onstrate that competing would result in unrecovered, duplicated costs.

Once you’ve obtained the needed esti-mates, use them to support the “magic words” in your justification:

§ “Using any other supplier would result in duplicated costs that would not be recovered through competition.” Then explain how much more it would cost and why.

§ “Attempting to compete would result in unacceptable delay in meeting the government’s requirements.” Describe the length of the delay and how it would harm the customer or ultimate user. For DOD, explaining the negative impact on the warfighter can prove especially compelling. For defense contractors, a good source for this information can be the J&As for the prime contracts posted on FedBi-zOpps.

Another error is to assume that a supplier’s small business status justifies a noncom-petitive procurement. It doesn’t—but it could support “full and open competition after exclusion of sources.”40 You may set aside a procurement for:

§ Small business concerns,

§ Eligible 8(a) participants,

§ HUBZone small business concerns,

§ Service-disabled veteran–owned small business concerns,

§ Women-owned small business con-cerns, or

§ Economically disadvantaged women-owned small business concerns.

However, you must compete as much as possible within these groups. At least you aren’t required to complete a separate justification for such procurements.41



J&A Case Studies: Adequacy/Persuasiveness The following are two real-world examples of J&As posted on FedBizOpps using a “check the box/fill in the blanks” template. Review them and see what you think about their adequacy and persuasiveness. (Let me stress that the intent is not to malign the authors of these documents but to use the J&As to help demonstrate ways to improve.)

EXAMPLE 1, DOD:

4. STATUTORY AUTHORITY PERMITTING OTHER THAN FULL & OPEN COMPETITION: This J&A is based upon the authority of 10 USC 2304(c)(1), only one or a limited number of responsible sources will satisfy agency requirements, as implemented by FAR 6.302-1.

5. RATIONALE JUSTIFYING USE OF CITED AUTHORITY: The current Acquisition/Repair Method/Suffix Code(s) is (are)

{ 0. The part was not assigned AMC/RMC 1 through 5 when it entered the inventory, nor has it ever completed screening. { 1. Suitable for competitive acquisition for the second or subsequent time. { 2. Suitable for competitive acquisition for the first time. ~ 3. Acquire, for the second or subsequent time, directly from the actual manufacturer. { 4. Acquire, for the first time, directly from the actual manufacturer. { 5. Acquire directly from a sole source contractor which is not the actual manufacturer.

C. This part requires engineering source approval by the design control activity in order to maintain the quality of the part. Existing unique design capability, engineering skills, and manufacturing/repair knowledge by the qualified source(s) require acquisition/repair of the part from the approved source(s). The approved source(s) retain data rights, manufacturing/repair knowledge, or technical data that are not economically available to the Government, and the data or knowledge is essential to maintaining the quality of the part. An alternate source must qualify in accordance with the design control activity’s procedures, as approved by the cognizant Government engineering activity. The qualification procedures must be approved by the Government engineering activity having jurisdiction over the part in the intended application. If one source is approved, A/RMCs 3, 4, or 5 are valid. If at least two sources are approved or if data is adequate for an alternate source to qualify in accordance with the design control activity’s procedures, A/RMCs 1 or 2 are valid.

Only the above will be solicited because the articles to be acquired are highly specialized parts, designed and manufactured by a non-Government activity and the technical data required for manufacture by other than the above is not available and no value added other then the above source. XXXXXX are the only commercial manufacture source available for the subject part and hold all technical source controlled drawings. The data needed to fully compete the contract to manufacture is not physically available, and cannot be obtained economically, nor is it possible to draft adequate specifications or any other adequate, economical description of the manufacture for a competitive solicitation. In addition the item is a Criti-cal Safety Items (CSI) and any available data including manufacture manuals, associated drawings and specifications, and supporting test equipment availability required to accomplish the manufacture of the subject part number have not been found adequate to support full and open competition. Any additional sources must acquire engineering source approval from the XXX XXXXX prior to contract award.

Market Research was conducted in accordance with FAR Part 10. The results of the Market Research conducted (or the reason(s) Market Research was not conducted) are as follows: The available technical data necessary to facilitate manufacture of this XXXXXXX is insufficient to support competi-tive acquisition. XXXX has determined this is a Critical Safety Item (CSI). Prospective new sources will require XXXXX approval. Source Development Department indicate no Source Approval Request (SAR) has been received from any party interested in becoming an approved source. XXXX is the only approved source at this time.

POSSIBLE ISSUES:

The justification:

1. Uses acronyms and terms without explaining their meaning or relevance: What is an “Acquisition/Repair Method Code,” and what does it signify? Who is the “DCA,” and why does his/her approval matter? How does the item’s designation as a “Critical Safety Item” support the justification?

2. Asserts limited data rights as the basis for the justification but does not address the caveat in FAR 6.302-1(b)(2) that “the mere existence of such rights or circumstances does not in and of itself justify the use of these authorities.”

3. Seems to imply that using any other source would result in duplicated costs that the agency wouldn’t recover through competition (FAR 6.302-1(a)(ii)(A)) by saying things such as “the data needed to fully compete the contract…cannot be obtained economically, nor is it possible to draft… any other adequate economical description of the manufacture.” However, it doesn’t quantify the relevant costs or explain how that estimate was reached (FAR 6.303-2(b)(9)(ii)).

4. Purports to discuss market research but really just reiterates assertions made elsewhere in the document that have very little to do with market research. It fails to highlight the very compelling fact (not shown) that the agency posted a “Sources Sought” notice on FedBizOpps and no other potential source responded.

For the most part, this justification seems to simply recite canned, boilerplate language and thus lacks any supporting detail required by FAR 6.303-2. Based on what is included, it’s probable that the assertions could be fleshed out to fully justify this sole-source procurement (e.g., qualification of a new source or attempting to purchase/recreate the proprietary technical data would probably add significant costs and delay to the procurement). However, as written, it seems inadequate and unconvincing.



EXAMPLE 2, CIVILIAN AGENCY:

4. Authority and Rationale: Identify the statutory authority, FAR title and FAR citation permitting other than full and open competition. It may be one of the following most commonly used citations by the operating divisions of the Department of XXXXXXXXXXXXX but other exceptions may apply per FAR Subpart 6.3.

41 USC § 253(c)(2), as implemented by FAR 6.302-1 – Only one responsible source and no other supplies or services will satisfy agency requirements per FAR 3.302-1; AND FAR 6.302-2 – Unusual and compelling urgency.

_ FAR 6.302-1: Only one responsible source and no other supplies or services will satisfy agency requirements, 41 USC 3304(a)(1).

(This vendor has the entire five year chemical inventory list for the XXXXXX Service Unit and has under the current contract continually keep it update and current per OSHA requirements.

_ FAR 6.302-2: Unusual or compelling urgency, 41 USC 3304(a)(2).

(XXXX Online has developed a comprehensive online Material Safety Data Sheet (MSDS) management program exclusively for the XXXXXX Service Unit and their staff. IMPACT – The inability for the continuation of services at the XXXXXX Service Unit will impact the abil-ity of the end users to effectively manage the hazardous material/safety program and have an adverse impact on the safety of the person-nel working in and around the XXXXXX Service Unit.)

7. Market Research:

Market Research located only one source able to provide the services required. Additionally, if another source were to be found, there are anticipated startup costs required to build existing XXXXXXXXXX.

This period of performance is for 5 years.

POSSIBLE ISSUES:

The justification:1. Improperly cites both FAR 6.302-1 and 6.302-2. FAR 6.302-1(b) states that this authority “shall not be used when any of the other circumstances is

applicable.” 2. Repeatedly states that market research “located only one source able to provide the services required,” but provides no details. Even in a relatively

low-dollar value procurement (which this was), the justification should include at least basic details of the market research (e.g., when, how, and by whom it was conducted and how the results support the conclusion) per FAR 6.303-2(b)(8).

3. Asserts that the current “vendor has the entire five-year chemical inventory list…and continually keep [sic] it update [sic] and current per OSHA requirements.” Besides the grammatical errors, nothing explains why only this vendor can do that. Couldn’t the agency provide the inventory list to other potential contractors? Why is keeping the list updated and current such a “highly specialized service” (FAR 6.302-1) that requires such “unique qualifications” (FAR 6.303-2(b)(5)) that no other contractor can perform?

4. Fails to demonstrate the “unusual and compelling urgency” of the sole-source award. The statement that “inability for the continuation of services…will impact the ability of end users to effectively manage the hazardous material/safety program and have an adverse impact on the safety of the personnel” seems focused on what would happen if the services ceased entirely. It doesn’t explain why this situation precludes competition.

5. Does not comply with the limitations on the period of performance when using FAR 6.302-2. Paragraph (d) of this subpart states:(1) The total period of performance of a contract awarded or modified using this authority—

(i) May not exceed the time necessary—(A) To meet the unusual and compelling requirements of the work to be performed under the contract; and(B) For the agency to enter into another contract for the required goods and services through the use of competitive procedures; and

(ii) May not exceed one year, including all options, unless the head of the agency determines that exceptional circumstances apply. This deter-mination must be documented in the contract file.

6. There was no determination by the agency head, even though the period of performance is five years, nor does it seem reasonable that the agency would require the entire five years to compete the services.

7. Claims that using another source would require “anticipated startup costs,” but fails to quantify the costs and explain how that estimate was de-rived, as required by FAR 6.303-2(9)(iii).

Finally, remember that a sole source justifi-cation is not simply a compliance require-ment or a hurdle to jump on the way to legal sufficiency. While complying with law and regulation is, of course, a valid motive, recognizing that the justification also rep-resents a good business decision will help achieve solid, defensible results. Every-one involved in government contracting

ultimately has a responsibility to be a good steward of the taxpayers’ funds. Those of us with private industry also owe a fidu-ciary duty to shareholders or others who depend on the company turning a profit. So, when writing the justification, explain why this noncompetitive procurement is in the best interests of the program, the cus-tomer, the government, the company—or,

in other words, why being “alone again” is, in fact, perfectly and properly “natural.” CM

Post about this article on NCMA Collaborate at

http://collaborate.ncmahq.org.



ENDNOTES1. “Alone Again (Naturally),” Gilbert O’Sullivan, track

B2 on the U.S. album Himself (MAM Records, 1972).

2. Rhys McCormick, Samantha Cohen, Gregory Sanders, and Andrew P. Hunter; “Acquisition Trends 2018: Defense Contract Spending Bounces Back Executive Summary” (Center for Strategic and International Studies (CSIS), September 2018): 2, 8 (asserting that DOD awarded only 46% of its obligations through “effective competition,” a term which CSIS defines as “a competitively sourced contract awarded after receiving two or more offers.” (Rhys McCormick, Samantha Cohen, and Maura Rose McQuade; “Measuring the Out-comes of Acquisition Reform by Major DOD Com-ponents” (CSIS, September 2015): footnote 1)).

3. Kate M. Manuel, “Competition in Federal Con-tracting: Legal Overview” (Congressional Research Service, January 21, 2015): 4 (quoting 2 Stat. 536).

4. 10 USC 2304 for DOD, NASA, and the Coast Guard and 41 USC 253 for other government agencies.

5. As stated by 41 USC 253(a)(1): “Except as provided in subsections (b), (c), and (g) and except in the case of procurement procedures otherwise expressly authorized by statute, the head of an agency in conducting a procurement for property or services…shall obtain full and open competi-tion through the use of competitive procedures in accordance with the requirements of this chapter and the Federal Acquisition Regulation; and…shall use the competitive procedure or combination of competitive procedures that is best suited under the circumstances of the procurement.”

6. Office of the Under Secretary of Defense for Acquisition, Technology and Logistics, Defense Pricing and Contracting (DPC) Office, “Enhancing Competition Awareness in DOD” (May 2010 Pow-erPoint training): Slide 2, available at http://www.acq.osd.mil/dpap/cpic/cp/docs/training.ppt.

7. See, e.g., the DPC webpage on competition, https://www.acq.osd.mil/dpap/cpic/cp/competition.html; the “Competition in Contracting Act of 1983: Hearings Before the Senate Committee on the Armed Services,” 98th Congress, First Session (1983); the Government Accountability Office (GAO), “Contract Management: Agencies Are Not Maximizing Opportunities for Competition or Savings under Blanket Purchase Agreements Despite Significant Increase in Usage” (September 9, 2009); and Jacques S. Gansler, William Lucyshyn, and Michael Arendt; University of Maryland, Center for Public Policy and Private Enterprise, School of Public Policy; “Competition in Defense Acquisitions” (February 2009), available at www.dtic.mil/dtic/tr/fulltext/u2/a529406.pdf.

8. FAR 2.101.9. Ibid.10. FAR 9.104-1.

11. The shortest is Part 38, “Federal Supply Schedule Contracting,” which is just slightly more than a page (not counting, of course, Parts 20, 21, and 40, which are reserved).

12. GAO, “Market Research: Better Documentation Needed to Inform Future Procurements at Selected Agencies” (October 9, 2014): 1.

13. See, generally, ibid. 14. DOD Office of Defense Procurement and Acquisi-

tion Policy, “Market Research Report Guide for Improving the Tradecraft in Services Acquisition” (March 2017): 3.

15. FAR 6.303-2(b)(5).16. A highly unscientific search on December 18, 2018,

of the FedBizOpps active and archived records for justifications and approvals turned up 56,406 related to the first rationale, with 6,756 for unusual and compelling urgency, 544 for industrial mobili-zation, 116 for international agreement, 3,719 for authorized or required by statute, 50 for national security, and 2,496 for public interest.

17. GAO, XTec, Inc., B-410778.3 (October 1, 2015). 18. Ibid., at 10–11. 19. FedBizOps.gov is the federal government’s web-

site for posting and publicizing most federal pro-curement opportunities.

20. Department of Justice, Bureau of Prisons, Solicita-tion 15B12119PUUA50002—Emergency Lockdown Meals, available at https://www.fbo.gov/spg/DOJ/BPR/12104/15B12119PUUA50002/listing.html. The prison involved was the Federal Correctional Complex in Bruceton Mills, a high-security prison that houses almost 1,300 inmates.

21. See FAR 6.302-5(b).22. In other words, the fact that the customer pro-

gram manager “likes this contractor” isn’t going to cut it.

23. See FAR 6.302-4(a)(2).24. DFARS 225.871-2 defines a cooperative project as

a “jointly managed arrangement” described in a written agreement aimed at furthering “standard-ization, rationalization, and interoperability” of the armed forces of NATO member countries and that provides for the following:• At least one other participant besides the

United States shares the cost of research and development, testing, evaluation, or joint pro-duction (including follow-on support) of cer-tain defense articles;

• A jointly developed defense article is pro-duced concurrently in the United States and another member country; or

• The United States acquires a defense article or service from another member country.

25. FAR 6.302-1(a)(2).26. FAR 6.302-1(a)(2)(ii)(A)–(B). (DOD, NASA, and the

Coast Guard also have this option for “follow-on contracts for the continued provision of highly specialized services” (FAR 6.302-1(a)(2)(iii)).)

27. FAR 6.302-1(b)(1).

28. FAR 6.302-1(b)(4).29. FAR 6.302-1(b)(2).30. Headquarters Air Force Materiel Command

(AFMC), Contracting Policy Division, Directorate of Contracting, “Justification and Approval Preparation Guide and Template” (undated): 7 (hereinafter, “AFMC J&A Guide”); available at https://www.acq.osd.mil/dpap/ccap/cc/jcchb/Files/DVD/Training_Scenarios/tornado/j_a.docx.

31. Ibid.32. According to FAR 27.201-1(a)–(b): “[T]he exclusive

remedy for patent or copyright infringement by or on behalf of the government is a suit for monetary damages against the government in the Court of Federal Claims. There is no injunctive relief avail-able, and there is no direct cause of action against a contractor that is infringing a patent or copyright with the authorization or consent of the govern-ment (e.g., while performing a contract)…. The government may expressly authorize and consent to a contractor’s use or manufacture of inventions covered by U.S. patents by inserting the clause at 52.227-1, ‘Authorization and Consent.’”

33. U.S. Army, The Judge Advocate General’s Legal Center and School, Contract and Fiscal Law Department, “2018 Contract Attorneys Deskbook” (2018): Ch. 5, p. 12 (internal citations omitted).

34. Ibid., at 5–13.35. GAO, Barnes Aerospace Group, B-298864,

B-298864.2, 1 (Dec. 26, 2006).36. John C. Foley and Maura Lachance, “Contractor

Purchasing System Review (CPSR) and Property System Discussion” (March 7, 2018): slide 18, available at http://www.ncmaboston.org/wp-content/uploads/2018/03/4.-DCMA-Perspective-CPSR-and-Property-Audits.pptx.

37. Constance Wu (actor and star of TV series Fresh Off the Boat and the movie Crazy Rich Asians),

“Constance Wu Quotes,” BrainyQuote.com (2018), available at https://www.brainyquote.com/quotes/constance_wu_706509.

38. FAR 6.302-1(a)(2)(ii) (emphasis added).39. AFMC J&A Guide, see note 30, at 7.40. I.e., FAR Subpart 6.2.41. See FAR 6.203–6.207.

SUSAN L. TURLEY

� Currently working in strategic sourcing and subcontract compliance for a large defense contractor

� Retired U.S. Air Force Judge Advocate and former DOD government contract-ing attorney

{ [email protected]



LOSING KEY OWNERS OF SBA SET-ASIDE BUSINESSES—

How to Comply with the Rules on Ownership Changes and Maintain the Business’ Socioeconomic Status and Contracts

By Shane J. McCall, JD


A large amount of federal spending is set aside under the Small Business Administration (SBA) socioeconomic programs, and for these small businesses, the status of the company’s owner(s) is crucial.One often overlooked situation involves when an owner of such a company passes away or becomes otherwise incapacitated. What, then, happens to the company’s ability to bid on and perform set-aside contracts?

This article explores the rules for Service-Disabled Veteran–Owned Small Business-es (SDVOSBs), 8(a) Business Development Program participants, Women-Owned Small Businesses (WOSBs), and Historically Underutilized Business Zone (HUBZone) businesses.

BACKGROUNDThe death or incapacity of any business owner can create ripple effects of uncer-tainty and change for the business and the family members of that business owner. But the impact can be magnified when the small business qualifies under the SBA’s set-aside programs. This article will address, from a federal government contracting perspective, the rules governing what happens to the in-terest of the owner of a small business under the SBA’s set-aside programs upon death or loss of capacity, and what the business must do to address those rules.

One benefit of a corporate entity is that the entity itself is essentially “immortal.”1 Since a corporate entity is perpetual, it can withstand the “removal” of its key officers and owners. However, in some respects, the SBA’s set-aside programs turn this

“perpetual existence” notion on its head.

This is so because, under many2 of the SBA’s certification and socioeconomic

programs for small businesses, the owner’s status is integral to the ability of the busi-ness to compete for certain government contracts. Without that key person—the owner of the set-aside business—can the business keep going when that owner dies or becomes incapacitated? In order to understand that question, a little back-ground on what the SBA calls “certification programs and socioeconomic categories” can help.3

There are four different major categories of set-asides for small businesses (each a

“set-aside business”):

§ Service-Disabled Veteran–Owned Small Business (SDVOSB),

§ 8(a) Business Development Program (8(a)),

§ Women-Owned Small Business (WOSB),4 and

§ Historically Underutilized Business Zones (HUBZone) Program.

The SBA has distinct but overlapping regu-lations for each type of set-aside business.

The SBA regulations govern how the individual with the set-aside status (e.g., a service-disabled veteran, which, for the purposes of this article, will generally be referred to as the “set-aside owner”) can con-dition ownership of the set-aside business and what happens to the set-aside business and the current contracts upon the death or incapacity of the set-aside owner. Because these requirements create important restric-tions on what a set-aside owner can do with his or her ownership interest upon death or incapacity and still maintain eligibility for certain federal government contracts, it is important to understand them.5

SDVOSBStarting October 1, 2018, the SBA, not the Department of Veterans Affairs (VA), has sole authority to issue regulations relating to ownership and control of SDVOSBs.6 The SBA (and to some extent the VA, for VA contracts) has rules governing conditional ownership, transfer of ownership, and per-forming contracts after such a transfer.

LOSING KEY OWNERS OF SBA SET-ASIDE BUSINESSES—HOW TO COMPLY WITH THE RULES ON OWNERSHIP CHANGES AND MAINTAIN THE BUSINESS’ SOCIOECONOMIC STATUS AND CONTRACTS

Ownership ConditionsAn SDVOSB “must be at least 51% uncondi-tionally and directly owned by one or more service-disabled veterans.”7 In this context, unconditional ownership means:

[N]ot subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on or assignments of voting rights, or other arrangements causing or poten-tially causing ownership benefits to go to another (other than after death or incapacity).8

This is the same definition that is used in the 8(a) program, as will be discussed later on.

This rule allows for restrictions on owner-ship of the set-aside owner in the event of death or incapacity. For instance, the minority owner of an SDVOSB could impose restrictions, such as an option to purchase the ownership interest on the service-disabled veteran’s death or incapacity. However, the minority owner cannot impose any other condition on the set-aside owner’s interest in the SDVOSB.



For instance, a right of first refusal (ROFR) if the set-aside owner sought to sell the ownership interest could be barred by SDVOSB rules.

Interestingly, ROFR provisions have cre-ated issues for SDVOSBs. The SBA has long held that they are impermissible in the SDVOSB context because the ROFR prevents the service-disabled veteran’s ownership from being “unconditional.”9 The new ownership rules don’t mention ROFRs, while the new control rules state that a minority may have veto power over

“[a]dding a new equity stakeholder,” but it is not clear if this means substituting one owner for another.10 The ROFR issue remains something to look out for.

Ownership ChangesThe SBA rules state that an SDVOSB “may change its ownership or business structure so long as one or more service-disabled veterans own and control it after the change.”11 This would allow the SDVOSB ownership to transfer to a new service-disabled veteran and there is no require-ment to update the SBA about the change.

However, the VA does require notification of the change within 30 days.12

In the October 1 changes, the SBA includ-ed a new “surviving spouse” rule, which is similar to the VA’s old rule. Under this rule, an SDVOSB can maintain its eligibility under limited conditions. These are:

§ If the surviving spouse acquires the service-disabled veteran’s interest;

§ If the “veteran had a service-connected disability…rated as 100 percent dis-abling…or such veteran died as a result of a service-connected disability”; and

§ If the SDVOSB was in the VA’s VIP database.13

If these conditions are met, the surviving spouse can maintain SDVOSB status until the earlier of when the spouse remarries or gives up the ownership interest, or 10 years after the service-disabled veteran’s death.14 There is a common misconception that any surviving spouse may use this rule; but, the applicability is quite restricted.


This rule, while allowing for an SDVOSB to maintain its status after the death of the owner, has a number of limitations. For instance, it would not apply if the service-disabled veteran’s disability was less than 100%, if the service-disabled veteran died from something other than a service-con-nected disability, or if the SDVOSB was not in the VA database. These many limitations limit the rule’s applicability.

Maintaining ContractsGenerally, an SDVOSB can maintain its status on an already-awarded contract and continue to perform on that contract, as long as it was eligible at the time of its offer:

A concern that represents itself and qualifies as an [SDVOSB] at the time of initial offer…is considered an [SDVOSB] throughout the life of that contract.15

A recent court case (i.e., NEIE, Inc. v. United States16) demonstrates how a business can maintain its SDVOSB status even when the service-disabled veteran has to leave the business. Because the regulatory lan-guage for WOSBs (but not 8(a) businesses) is similar, the analysis in this case should apply to WOSBs as well.17

The case concerned an Environmental Protection Agency (EPA) solicitation for cleanup services restricted to SDVOSBs. At the time NEIE submitted its proposal, it was owned 100% by a service-disabled veteran, but in between its offer and award, the owner passed away.18 The court concluded that “the [Federal Acquisition Regulation (FAR)] only requires that a con-tractor meet the eligibility requirements for an SDVOSB at the time of offer,” and NEIE did.19 Plus, “NEIE had no legal duty to disclose the death of [the service-disabled veteran] to the EPA, because his death was immaterial to NEIE’s performance of the SDVOSB contract,” as nothing in the solicitation required the service-disabled veteran for performance.20

The SBA’s rules and the NEIE decision are instructive for those facing the loss of a set-aside owner. The set-aside business, if it has

some time to plan, can transfer ownership of the set-aside business to another set-aside owner. If there is not time to plan, the business can continue to perform existing contracts and attempt to find a new service-disabled veteran owner. For future SDVOSB solicitations, a business would have to certify as an SDVOSB at the time of initial offer.21

VA Rule on Maintaining ContractsWhile the SBA rule applies to almost all non-VA agencies, including the Depart-ment of Defense, the VA regulations, still applicable for SDVOSBs wishing to bid on VA procurements, include an additional rule on ownership transfer. This rule pro-vides that if an SDVOSB wishes to transfer ownership to another veteran owner while performing contracts, the SDVOSB must submit a novation agreement “prior to the substitution or change of ownership for approval.”22 Further—

Where the transfer results from the death or incapacity due to a serious, long-term illness or injury of an eligible principal, prior approval is not required, but the concern must file an updated VA Form 0877 with CVE within 60 days of the change. Existing contracts may be performed to the end of the instant term.23

This rule is actually stricter than the SBA’s rule, which allows the SDVOSB status to persist for ongoing contracts even if the owner dies or is incapacitated without notifying the SBA.

8(A) BUSINESSESThe 8(a) program has its own set of rules on conditional ownership, transfer of ownership, and performing contracts after a change in ownership. Compared to the SDVOSB rules, the 8(a) rules are more re-strictive of maintaining contracts after loss of a set-aside owner.

Ownership ConditionsUnder the 8(a) Program, “[a]n applicant or participant must be at least 51 percent unconditionally and directly owned by one or more socially and economically dis-

advantaged individuals.”24 Unconditional ownership has the identical meaning as under the SDVOSB rules, meaning—

[N]ot subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on or assignments of voting rights, or other arrangements causing or poten-tially causing ownership benefits to go to another (other than after death or incapacity).25

Like the SDVOSB rule, this would also allow for restrictions on ownership of the set-aside owner in the event of death or incapacity.

Ownership ChangesThe SBA rules provide that a “[p]articipant may change its ownership or business structure so long as one or more disad-vantaged individuals own and control it after the change and the SBA approves the transaction in writing prior to the change.”26 While this rule allows ownership transfer to another disadvantaged individ-ual, there must be prior approval from the SBA. Unfortunately, there is no guarantee that the SBA will provide this approval on a short time frame.

However, there is an exception to this rule. When “the transfer results from the death or incapacity due to a serious, long-term illness or injury of a disadvantaged prin-cipal, prior approval is not required, but the concern must notify the SBA within 60 days.”27 In addition—

[W]here a change of ownership results from the death or incapacity of a disadvantaged individual for which a request prior to the change in ownership could not occur, [then the] SBA will suspend the participant from program benefits pending resolution of the request. If the change is ap-proved, the length of the suspension will be restored to the participant’s program term in the case of death or incapacity.28

Finally—


XXX


[A] change in ownership does not provide the new owner(s) with a new 8(a) BD program term. For example, if a concern has been in the 8(a) BD program for five years when a change in ownership occurs, the new owner will have four years remaining until program graduation.29

An 8(a) program set-aside owner can change ownership, but there are many restrictions on such a transfer.

Maintaining Contracts There are additional requirements for an 8(a) participant who was awarded an 8(a) contract. In that situation—

Any participant that was awarded one or more 8(a) contracts may substitute one disadvantaged individual for another disadvantaged individual without requir-ing the termination of those contracts or a


request for waiver under § 124.515, as long as it receives the SBA’s approval prior to the change.30

Also, an 8(a) participant will not be allowed to change owners to a non-disadvantaged individual without a waiver from the SBA or the contract will be terminated for conve-nience.31 This is different than the rule for other set-aside businesses.

The 8(a) business can receive a waiver from the SBA administrator to continue performance in a number of circumstances, including where “[a]ny individual upon whom eligibility was based is no longer able to exercise control of the concern due to physical or mental incapacity or death.”32 The waiver must be requested prior to the change in ownership, or within 60 days of the death or incapacity of the 8(a) set-aside owner.33

There is one other strict requirement, how-ever, when it comes to a business perform-ing an 8(a) contract:

[The concern] must notify SBA in writ-ing immediately upon entering into an agreement or agreement in principle (either oral or written) to transfer all or part of its stock or other ownership interest or assets to any other party. Such an agreement could include an oral agreement to enter into a transac-tion to transfer interests in the future.34

This requirement is quite far-reaching. It applies even when a firm has graduated from the 8(a) program but is still perform-ing an 8(a) contract. It also applies to an oral agreement to transfer stock owner-ship. Finally, it does not matter what per-centage ownership the 8(a) concern will be transferring, and it applies to asset sales.

Given its broad scope, this requirement could be a trap for the unwary and would apply in the event of transfer of ownership after loss of the set-aside owner. If a com-pany performing an 8(a) contract wants to transfer ownership or assets, it must notify SBA as soon as an agreement is reached. While the rule does not require prior ap-proval before the agreement is reached, prior approval is needed for changing the set-aside owner in an 8(a) business.

The 8(a) program provides a mechanism for changes in ownership, but it has a number of restrictions. First and foremost, a new disadvantaged individual must be found to replace the former owner. Sec-ond, prior approval is normally required, unless the change in ownership was the result of death or incapacity. In that case, the SBA will determine eligibility with the new owner and the 8(a) company will be suspended from 8(a) program benefits during this review. Finally, the new owner will be bound by the eligibility term of the prior owner. If these restrictions are met, a new owner can take the place of the former set-aside owner for an 8(a) company.


WOSBThe rules are a little different for WOSBS when it comes to conditional ownership, transfer of ownership, and performing contracts after a change in ownership.

Ownership ConditionsBoth a WOSB and an Economically Disad-vantaged WOSB (EDWOSB) must be “not less than 51 percent unconditionally and directly owned and controlled by one or more women who are United States citizens” and, in the case of an EDWOSB,

“be economically disadvantaged.”35 In this context, unconditional ownership means not “subject to any conditions, executory agreements, voting trusts, or other ar-rangements that cause or potentially cause ownership benefits to go to another.”36

The definition of unconditional under the WOSB program is quite similar to the definition under the SDVOSB and 8(a) pro-grams, with one key difference: The WOSB definition does not include the exception for conditions “other than after death or incapacity” found in the SDVOSB and 8(a) definitions. While there are no decisions interpreting this provision, it is likely that the absence of the “death or incapacity” exception means that there can be no con-ditions on the ownership of the set-aside owner of a WOSB.37 As a concrete example, it is likely that a minority owner cannot have a ROFR to purchase the interest of the set-aside owner in a WOSB after the owner’s death or incapacity.

Ownership ChangesThe WOSB program regulations do not provide specific rules dealing with contract performance or maintaining eligibility after the death or incapacity of the set-aside owner. The SBA’s WOSB program regula-tions require that a WOSB either be certified or provide documents allowing it to be certi-fied either to the WOSB Program Repository or directly to the contracting officer “at the time of initial offer.”38 Part of the WOSB self-certification must include a statement that

“there have been no changes in its circum-stances affecting its eligibility since certifica-tion” and “[i]t is at least 51 percent owned and controlled by one or more women.”39

Under this language, there is not any requirement to notify the SBA within a certain time period of any change in the WOSB set-aside owner. However, the SBA requires WOSBs to update their certifica-tions “as necessary, but at least annually, to ensure they are kept current, accurate, and complete.”40 Under this regulation, there is no set time period to update the SBA upon a change of ownership, but it should be done within a reasonable amount of time in order to keep the certification “current” and in all cases before submitting an offer for a WOSB contract.

Maintaining ContractsGenerally, a WOSB or EDWOSB can maintain its status on an already awarded contract and continue to perform on that contract, as long as it was eligible at the time of its offer:

A concern that represents itself and qualifies as a WOSB or EDWOSB at the time of initial offer…is considered a WOSB or EDWOSB throughout the life of that contract.41

This is the same rule as for SDVOSBs.

HUBZONEThe HUBZone program is a little different from the SDVOSB, 8(a), and WOSB pro-grams because the socioeconomic status of the set-aside owner is not as important as in the other programs. The HUBZone program is more concerned with the geo-graphic status of the business, rather than the socioeconomic status of the set-aside owner. As the SBA has explained:

The HUBZone program differs in that the program’s goals do not center on the socioeconomic status of the [small business concern] owner but rather the location of the business and the residence of its employees.42

Ownership ConditionsAs for ownership, a HUBZone concern

“must be at least 51% owned and controlled by persons who are United States citizens” or be owned by certain types of tribal or other organizations.43 As the defini-

tion makes clear, for individually owned HUBZone concerns, there is no require-ment that the ownership of a HUBZone be

“unconditional,” as is required under the SDVOSB, 8(a), and WOSB programs.44 The absence of the term unconditional from the regulation likely means that a HUB-Zone set-aside owner can have reasonable conditions on the ownership interest in the HUBZone business and still be an eligible HUBZone business. This stands in contrast to the other three set-aside programs, which have stricter requirements for condi-tions on ownership.

Ownership ChangesThe HUBZone program requires certifica-tion through the SBA, and a HUBZone concern “must immediately notify SBA of any material change that could affect its eligibility”—including “a change in the own-ership”—or risk decertification.45 Based on the HUBZone eligibility and notification requirements, upon the death or incapac-ity of a set-aside owner of a HUBZone business, a new owner can replace the former owner as long as the new owner is a U.S. citizen. The new owner or owners must then notify the SBA of the change in ownership as soon as possible. If all re-quirements are met, the new owner should be able to maintain HUBZone eligibility.

Maintaining ContractsAs far as maintaining HUBZone eligibility during a contract—

A concern that is a qualified HUBZone [small business concern] at the time of initial offer and contract award, including a Multiple Award Contract, is considered a HUBZone [small busi-ness concern] throughout the life of that contract.46

Therefore, if a set-aside owner of a HUB-Zone business dies or becomes incapaci-tated, the business can generally continue performing that contract.

The HUBZone program differs in a major respect from the SBA’s other set-aside programs when it comes to the set-aside owner’s ownership interest. That interest


XXX



can have conditions on it, meaning, for in-stance, the other owners can have a ROFR to purchase that interest for any reason, not limited to death or incapacity of the set-aside owner. However, similar to the other set-aside programs, the HUBZone business must still notify the SBA of any change in ownership. And, it can continue to perform on contracts even if the set-aside owner dies or is incapacitated.

CONCLUSIONIt is important to know the SBA’s rules for ownership and continuing to perform contracts when the owner of a set-aside business dies or becomes incapacitated. For set-aside owners of SDVOSB, 8(a), and WOSB businesses, there are restrictions on what conditions can be put on the ownership. For all types of set-aside busi-nesses, the owners must be cognizant of the notification requirements, especially strict for 8(a) businesses, in the unfortu-nate event that the set-aside owner dies or becomes incapacitated. While already awarded contracts can generally be main-tained (except for 8(a) businesses, which have stricter requirements), eligibility for future contracts depends on transfer to a new set-aside owner. CM

Post about this article on NCMA Collaborate at

http://collaborate.ncmahq.org.

ENDNOTES1. See Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4

Wheat.) 518, 636 (1819) (noting the “immortality” of a corporation, calling it “a perpetual succession of individuals”).

2. As explained in this article, the owner’s personal status is less crucial to maintaining HUBZone eligibility.

3. See SBA, “What is a Small Business Set Aside?” available at https://www.sba.gov/contracting/ government-contracting-programs/what-small-business-set-aside.

4. There is also a subcategory of WOSB called Eco-nomically Disadvantaged Women-Owned Small Business (EDWOSB).

5. This article will not delve into the state law matters of corporate and estate planning law that bear on the set-aside owner’s interest in a set-aside business.

6. VA Veteran-Owned Small Business (VOSB) Verifi-cation Guidelines, 83 Fed. Reg. 48221 (Sept. 24, 2018). Until October 1, 2018, the VA had distinct eligibility rules for SDVOSB set-asides for VA pro-curements only, but the VA and SBA consolidated their SDVOSB rules under SBA at that time. How-ever, the VA “is still charged with verifying that each applicant complies with those regulatory provisions prior to granting verified status and including the applicant in the VA list of verified firms.” (Ibid.) The VA’s list of verified firms, com-monly known as the “VIP pages,” contains the list of firms who are eligible to bid on VA procure-ments that are set aside for SDVOSBs or Veteran-Owned Small Businesses (VOSBs). Being verified on the list is only required for VA procurements, not for those of other agencies.

7. 13 CFR 125.12. Prior to the October 1 rule change, the definitions section of SBA’s SDVOSB regula-tions contained no definition for “unconditional,” but SBA’s Office of Hearing and Appeals judges had defined unconditional ownership in a very strict manner.

8. 13 CFR 125.11 (emphasis added). This definition incorporates the definition of unconditional that had been contained in the VA’s former rules on unconditional ownership.

9. The Wexford Grp. Int’ l, Inc., SBA No. SDV-105 (June 29, 2006) (holding that where stock is “sub-ject to the right of first refusal,” it was not uncondi-tionally owned). It is unclear whether that restriction remains in light of the October 1 changes to the SDVOSB rules.

10. 13 CFR 125.11.11. 13 CFR 125.12(f).12. 38 CFR 74.3(b)(1). 13. 13 CFR 125.12(i).14. 13 CFR 125.12(i)(2).15. 13 CFR 125.18(e)(1). There are certain exceptions

to this rule, such as in the case of a contract nova-tion or a merger or acquisition involving another concern. (See 13 CFR 125.18(e)(1)(i)–(ii).)

16. NEIE, Inc. v. United States, No. 13-164 C, 2013 WL 6406992 (Fed. Cl. Nov. 26, 2013).

17. Because HUBZone businesses don’t require anyone in particular to own it except U.S. citizens, this is usually a very low bar to meet for purposes of maintaining contracts.

18. Ibid.19. Ibid.20. Ibid.21. 13 CFR 125.18.22. 38 CFR 74.3(b)(2). 23. 38 CFR 74.3(b)(3).24. 13 CFR 124.105.25. 13 CFR 124.3 (emphasis added).26. 13 CFR 124.105(i) (emphasis added).27. 13 CFR 124.105(i)(2). This is the same 60-day dead-

line as under the VA’s rule for notifying CVE under 38 CFR 74.3(b)(3).

28. 13 CFR 124.105(i)(4).29. 13 CFR 124.105(i)(5).30. 13 CFR 124.105(i)(1) (emphasis added).31. 13 CFR 124.515(a).32. 13 CFR 124.515(b).33. 13 CFR 124.515(c).34. 13 CFR 124.515(g).

35. 13 CFR 127.200(a)–(b).36. 13 CFR 127.201(b).37. An earlier court case, interpreting the SDVOSB

unconditional control rule back when it did not include the exceptions for conditions “other than after death or incapacity,” called the SDVOSB con-trol rules “draconian and perverse” because they allowed for no conditions. (Veterans Contracting Group, Inc. v. United States, 135 Fed. Cl. 316 (2017)). The current WOSB rules have nearly iden-tical language as the old SDVOSB rule interpreted in this decision, so a court would probably reach the same result regarding the definition of uncon-ditional ownership for WOSBs.

38. 13 CFR 127.300(c). While Congress eliminated the self-certification option in the 2015 National Defense Authorization Act (15 USC 637(m)(2)(E)), the SBA continues to allow it, legally questionable as that may be.

39. 13 CFR 127.300(b).40. 13 CFR 127.300(f).41. 13 CFR 127.503(h)(1).42. Conforming Statutory Amendments and Technical

Corrections to Small Business Government Con-tracting Regulations, 83 Fed. 12849 (Mar. 26, 2018) (to be codified at 13 CFR Part 126).

43. 13 CFR §§ 126.103; 126.200(b)(1)(i). Note: This arti-cle only discusses HUBZone ownership by a natu-ral person, not ownership by an organization.

44. However, this is a fairly recent development. SBA, effective May 25, 2018, deleted the words “uncon-ditionally and directly” from the description of ownership of a HUBZone business by a U.S. citizen in 13 CFR 126.200(b)(1)(i). Before that date, owner-ship had to be “unconditional.” (Conforming Statu-tory Amendments and Technical Corrections to Small Business Government Contracting Regula-tions, 83 Fed. 12849 (Mar. 26, 2018).) Presumably, unconditional ownership was not necessary for the HUBZone program for the same reason that direct ownership is not required: HUBZone status is not based on the socioeconomic condition of the set-aside owner.

45. 13 CFR 126.501.46. 13 CFR 126.601(h).

SHANE MCCALL

� Senior associate attorney, Koprince Law LLC

� Regularly litigates GAO bid protests, as well as size and status protests and appeals before the SBA

� Assists with contract administration is-sues, including claims and appeals

� In the transactional world, he works on joint venture agreements, subcontracts, and teaming agreements, among other things

Documents

The Contract You Never Had—If Your Contract is Voided Ab ... · the contract void ab initio. In the absence of a valid contract, ABS had no contractual basis for additional pay-ment