April 4, 2011
On September 27, 2010, President Obama signed into law the Small Business Jobs and Credit Act of 2010 (Pub. L. No. 111-240). The Act, designed to stimulate the small business sector and create jobs, contains a number of provisions that could have a significant impact on government contractors. The Small Business Administration ("SBA") is holding meetings in 13 U.S. cities throughout March and April of 2011 in what is being billed as a "Jobs Act Tour." The meetings are designed to educate the public and to seek input from the public and small business owners regarding how best to implement the Act’s provisions. These meetings have raised issues regarding the Act’s implementation that are not readily apparent in the language of the Act, but are likely to effect government contractors of all sizes.
Small Business Set-Asides under Multiple Award Contracts
One of the more potentially significant changes under the Act is its amendment of the Small Business Act (15 U.S.C. § 644) to allow small business set-asides under multiple award contracts such as the General Services Administration’s ("GSA") Schedule program. Agencies are currently not required to provide set-asides for task and delivery orders under these contract vehicles, which account for almost 30% of Federal procurement spending. The scope of the set-asides, and whether agency participation will be mandatory or discretionary, is currently unclear. Although Section 1331 of the Act directs the Administrators of the SBA and the Office of Federal Procurement Policy ("OFPP") to "establish guidance under which Federal agencies may, at their discretion," establish set-asides under multiple award contracts, it is possible that the future implementing regulations will mandate Federal agencies to establish set-asides under these contracts. The SBA and OFPP are holding outreach events in cities across the United States seeking public feedback on the implementation of the Act, including the issue of whether set-asides should be mandatory. The Act requires that this regulatory guidance be established no later than September 27, 2011.
Prime Contractor Representations and Notifications Regarding Small Business Subcontractors
The Act also creates new hurdles for large businesses who submit offers or proposals that include subcontracting plans. Pursuant to Section 1322 of the Act, offerors must now "make a good faith effort" to acquire products or services "in the same amount and quality used in preparing and submitting the bid or proposal" from small business concerns. Moreover, contractors must "provide the contracting officer a written explanation if the offeror or bidder fails to acquire" goods and services from small business concerns as represented in the contractor’s subcontracting plan. Small business allocations in subcontracting plans previously tended to be considered goals rather than contract requirements, and different agencies often imposed different requirements regarding notification to the Government if the subcontracting plan’s goals were not met. Although the Act allows contractors to provide a justification for why they were unable to utilize small business concerns as described in their subcontracting plan, contractors should carefully evaluate all future subcontracting plans due to the Act’s new notice and "good faith effort" requirements.
Prime Contractor Payments to Small Business Subcontractors
The Act provides further protections for small business subcontractors with regard to the timing and quantum of prime contractor payments. Under Section 1334 of the Act, prime contractors under covered contracts (i.e., contracts for which the prime contractor is required to submit a subcontracting plan) must notify the contracting officer if the prime contractor pays a reduced price to a subcontractor for goods and services under the contract upon completion of the subcontractor’s contract requirements, as well as when payments to the subcontractor are more than 90 days past due and the prime contractor has been paid by the Government for the subcontractor’s services. The prime contractor must also include a written justification for the reduced or delayed payment. The Act further directs contracting officers to "consider the unjustified failure by a prime contractor to make a full or timely payment to a subcontractor in evaluating the performance of the prime contractor." Although Section 1334 is clearly directed at protecting small business subcontractors from slow or reduced payments, it also has the potential for bringing the prime-subcontractor relationship further into the contracting officer’s purview.
Deemed Certification and Presumption of Loss
In addition to providing benefits to small business concerns, the Act contains a number of provisions designed to prevent fraud and abuse in connection with small business contracting. Section 1341 of the Act establishes a number of actions that will result in a "deemed certification" that the offeror is a small business. These include: (1) submission of a bid or proposal for a Federal grant, contract, subcontract, or cooperative research and development agreement that is "reserved, set aside, or otherwise classified as intended for award to small business concerns;" (2) submission of a bid or proposal which in any way encourages a Federal agency to classify the bid or proposal, if awarded, as an award to a small business concern; and, (3) registration as a small business concern on any Federal electronic database for the purpose of being considered for the award of a Federal contract, grant, subcontract, cooperative agreement, or cooperative research agreement.
The deemed certification requirement thus greatly increases the risk associated with improper, or even accidental, small business certifications. Under this provision, offerors who submit a proposal for a solicitation set-aside for small business concerns would be deemed to have made an "affirmative, willful, and intentional" certification that they are a small business even if they did not otherwise represent themselves as a small business concern. The penalties for such a misrepresentation have also been increased under Section 1341 of the Act. Section 1341 establishes a general presumption that the loss to the Government will be the total amount expended on the contract when it is determined that the awardee misrepresented its status as a small business concern.
The Act contains a number of additional provisions that may impact government contractors. For example, the Act requires small business concerns to provide annual certifications regarding their status on the Online Representations and Certifications Application ("ORCA") database. Previously, many small business contractors were only required to provide a certification regarding their status prior to the fifth contract year on a long-term contract, and every year thereafter. The Act also requires the SBA to revise at least one-third of its size standards every eighteen months. The SBA must seek public comment on these revisions.
In addition, the Act removes the existing preference for Historically Underutilized Business ("HUB") Zone concerns, creating parity between HUBZone contractors and 8(a), service-disabled veteran-owned, and women-owned concerns. The Act also lowers the threshold for contract bundling from $10 million to $2 million, and imposes new requirements on agencies to justify contract bundling decisions.
The Small Business Jobs Act of 2010 presents new challenges, risks, and opportunities for contractors. Although the full contours of the Act will only become apparent following regulatory implementation efforts, small business concerns and large contractors alike should be aware of the Act’s potential impact on their business and risk management strategies. Gibson Dunn will continue to provide updates on the development and implementation of the Act.
Gibson, Dunn & Crutcher’s Government and Commercial Contracts Practice Group is available to assist in addressing any questions you may have regarding this issue. Please contact the Gibson Dunn lawyer with whom you work, or any of the following lawyers in the firm’s Washington, D.C. office:
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