ESOPs to Be Eligible for Sole-Source Follow-On Contracts

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Bradley Arant Boult Cummings LLP

Section 874 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2022 contains what is believed to be the first-ever federal government contracting program designed to specifically encourage and benefit businesses wholly owned through an Employee Stock Ownership Plan (ESOP). Key features of this proposed pilot program — which include sole-source follow-on awards — are discussed below.

Key Features

  • Qualified Business Wholly Owned Through an ESOP: The term “qualified business wholly owned through an Employee Stock Ownership Plan” means an S Corporation for which 100% of the outstanding stock is held through an ESOP.
  • Follow-on Contracts: With respect to a follow-on contract for the continued development, production, or provision of products or services that are the same as or substantially similar to the products or services procured by the DoD under a prior contract held by a qualified business wholly owned through an ESOP, the products or services to be procured under the follow-on contract may be procured by the DoD through procedures other than competitive procedures if the performance of the qualified business wholly owned through an ESOP on the prior contract was rated as satisfactory (or the equivalent) or better in the applicable past performance database.
  • Limitation: A qualified business wholly owned through an ESOP may have a single opportunity for award of a sole-source follow-on contract unless a senior contracting official approves a waiver of the requirement.
  • Verification and Reporting: The secretary of defense is directed to establish procedures under such a pilot program (1) for businesses to verify status as a qualified business wholly owned through an ESOP; (2) for a qualified business wholly owned through an ESOP to certify that not more than 50% of the amount paid under the contract will be expended on subcontracts, subject to such necessary and reasonable waivers as the secretary may prescribe; and (3) to record information on each of the follow-on contracts awarded under the pilot program.
  • Sunset: Any pilot program established under Section 874 “shall expire” five years after the date of the enactment of the FY 2022 NDAA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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