Recently, the Department of Defense (“DoD”) issued a memorandum to launch a pilot program that will enable certain contractors owned under an employee stock ownership plan (“ESOP”) to receive sole source follow-on awards. ESOP-owned defense contractors should review DoD’s memorandum and move quickly to determine how this unique pilot program may be of benefit.

Section 874 of the National Defense Authorization Act for FY 2022 (“FY22 NDAA”) created a pilot program for noncompetitive awards for certain follow-on contracts to an ESOP-owned business that meets the definition of a “qualified business.” Under Section 874, a ‘‘qualified business” means an S corporation (under section 1361(a)(1) of the Internal Revenue Code) for which 100 percent of the outstanding stock is held through an ESOP as defined under section 4975(e)(7) of the Code.

Participation in the pilot program is limited to nine “qualified businesses” and, to be eligible, the company must have a minimum performance rating of Satisfactory for the predecessor contract in the Contractor Performance Assessment Reporting System (“CPARS”) (FAR Subpart 42.15). The DoD memorandum provides that it will accept submissions until April 28, 2023, or until it approves nine contracts for award. DoD contracting officers approved to participate in the pilot program are required to obtain the following from each qualified business:

• A representation that the contractor meets the definition of a qualified business, an S corporation that is wholly owned through an Employee Stock Ownership Plan during the prior contract performance and as a participant in this pilot program;

• A representation that not more than 50 percent of the amount paid under the contract will be expended on subcontracts;

• An agreement to provide responses required by the Data Collection Template accompanying the memorandum, within 30 days of the contracting officer’s request. The contracting officer shall submit such a request upon completion of six months of the contractor’s performance or not later than 30 days after the contract end date, whichever is sooner.

Takeaway

The pilot program is welcome news for ESOP-owned defense contractors. However, given that the DoD memorandum limits awards to nine entities, ESOP-owned contractors that meet the definition of a “qualified business” and that have a Satisfactory (or better) CPARS rating should immediately discuss this program with their contracting officers to determine whether they would be willing to submit an application for the program. Finally, while the memorandum limits the pilot to just nine entities, the FY22 NDAA included a five-year duration. Therefore, if there is sufficient interest, it is possible that DoD may expand the program