New Small Business Rules: Capabilities Of Small Business Joint Venture Members And First-Tier Subcontractors

Morrison & Foerster LLP - Government Contracts Insights

As we recently discussed, the U.S. Small Business Administration (SBA) has published a long-awaited rule that made important changes to numerous small business contracting programs and the rules Federal agencies must follow when contracting with small businesses.  These changes will go into effect on November 16, 2020.  You can read  the rule itself here.  In this post, we’ll take a closer look at changes in the way procuring agencies will have to consider the past performance, experience, security clearances, capabilities, and certifications of small businesses and small business joint ventures.

The Existing Regime

To understand why the new rule is important, it’s useful to consider the current state of affairs.  When businesses compete for Government contracts, they often create joint ventures or put together subcontractor teams with different companies complementing each other’s capabilities and experience.  In general, procuring agencies have had wide latitude in being able to specify on a procurement-by-procurement basis the extent to which the prime offeror itself must have certain capabilities and experience, and the extent to which the offeror may rely upon subcontractors or joint venture members to fill in any gaps.

There currently is one principal exception to that wide latitude.  When an offeror is a small business joint venture, the procuring agency is required to consider the past performance and experience of the joint venture members (including of any large business mentor joint venture member) as the past performance and experience of the joint venture itself.  15 U.S.C. § 644(q)(1)(C); 13 C.F.R. § 125.8(e) (Dec. 27, 2016).

That exception largely solves a problem commonly experienced by small business joint ventures that may lack any experience or past performance in their own names, despite being composed of companies that may have extensive experience and past performance.  The U.S. Government Accountability Office (GAO) has held that this exception does not require agencies to give full evaluation credit to a joint venture where only one of the members possesses relevant experience or past performance, but that is a slightly different problem.  See Ekagra Partners, LLC, B-408685.18, Feb. 15, 2019, 2019 CPD ¶ 83 at 6-7.  By its own terms, this automatic exception does not extend to capabilities, certifications, security clearances, and other qualities (apart from experience and past performance) an agency may seek from the offeror itself.  Nor does it apply to teaming arrangements (such as prime-subcontractor relationships) that are not small business joint ventures.

As a result of the fairly narrow applicability of this fairly narrow exception, small business offerors currently have to scrutinize each solicitation to determine whether it requires offerors to possess clearances, capabilities, certifications, and so forth in their own names, or whether they may rely upon other entities to meet those requirements.  If the solicitation is unfavorable to them in that respect, they then have to advocate for a discretionary solicitation amendment or rethink their teaming structure – or possibly not submit a proposal at all.  This is a particularly weighty consideration in math-based evaluations, where each reference or qualification must be scrutinized.

Further, the current regime made it challenging for joint ventures to access work that requires clearances.  Regulators were often confused by requests for clearances to be issued to unpopulated joint ventures, and requirements around the employment of facility security officers proved frustrating.

The Changes

The new rule changes the existing regime in ways that most small businesses will roundly welcome.

First, with respect to the perennial question of facility security clearances, the new regulation provides:

(4) Facility security clearances. A joint venture may be awarded a contract requiring a facility security clearance where either the joint venture itself or the individual partner(s) to the joint venture that will perform the necessary security work has (have) a facility security clearance.

(i) Where a facility security clearance is required to perform primary and vital requirements of a contract, the lead small business partner to the joint venture must possess the required facility security clearance.

(ii) Where the security portion of the contract requiring a facility security clearance is ancillary to the principal purpose of the procurement, the partner to the joint venture that will perform that work must possess the required facility security clearance.

13 C.F.R. § 121.103(h)(4) (emphasis added).  Thus, if the security clearance is needed for “primary and vital requirements” of the contract, the lead partner must hold the clearance; otherwise, whichever partner will perform the work to which the clearance relates must hold it.  Gone are the days of trying to get a facility security clearance approved at the last minute for a joint venture that has no employees and no prior contracting history.

Second, with respect to capabilities more broadly, the new rule significantly expands the areas for which an agency must credit the capabilities of the partners of small business joint ventures:

(e) Capabilities, past performance and experience. When evaluating the capabilities, past performance, experience, business systems and certifications of an entity submitting an offer for a contract set aside or reserved for small business as a joint venture established pursuant to this section, a procuring activity must consider work done and qualifications held individually by each partner to the joint venture as well as any work done by the joint venture itself previously.  A procuring activity may not require the protégé firm to individually meet the same evaluation or responsibility criteria as that required of other offerors generally. The partners to the joint venture in the aggregate must demonstrate the past performance, experience, business systems and certifications necessary to perform the contract.

13 C.F.R. § 125.8(e) (emphasis added).  The references to capabilities, business systems, certifications, and qualifications are a significant expansion beyond the prior regulatory requirement that agencies consider joint venture partners’ “past performance and experience.”   This section also differs somewhat from the new section on facility security clearances.  Whereas the new 13 C.F.R. § 121.103(h)(4) specifies which joint venture partner must hold a facility security clearance, the new 13 C.F.R. § 125.8(e) places no such restrictions on other capabilities, business systems, certifications, and qualifications.

The regulation as written does not require procuring agencies to consider which joint venture member possesses a required qualification other than facility security clearances.  One can, however, imagine solicitations that reasonably might require certain qualifications to be tied to the joint venture member that actually will be performing the related work, similar to the way the new facility security clearance rule works.

Third, in addition to the new treatment of the qualifications of joint venture members, the rule creates a similar, though less expansive and more ambiguous, requirement to consider “the capabilities, past performance, and experience” of small businesses’ named first-tier subcontractors in certain circumstances:

(g) Capabilities, past performance, and experience.  When an offer of a small business prime contractor includes a proposed team of small business subcontractors and specifically identifies the first-tier subcontractor(s) in the proposal, the head of the agency must consider the capabilities, past performance, and experience of each first tier subcontractor that is part of the team as the capabilities, past performance, and experience of the small business prime contractor if the capabilities, past performance, and experience of the small business prime does not independently demonstrate capabilities and past performance necessary for award.

13 C.F.R. § 125.2(g) (emphasis added).

On first blush, the new rule appears to require agencies to consider the capabilities, past performance, and experience of named first-tier subcontractors of small business offerors.  Many agencies already regularly consider the past performance or experience (and sometimes the capabilities) of first-tier subcontractors responsible for a material percentage of contract performance, regardless of the size status of the prime offeror.  This rule, however, contains a few important differences that may not be obvious at first glance:

(1) It does not specify that the named subcontractor must be responsible for a certain percentage of the work, or even that the capabilities or experience it brings to the table relate to the work it will be performing on the contract. Time will tell whether this regulation will be interpreted to allow agencies to tie any credit for a subcontractor to the kind and amount of work the subcontractor itself will perform.

(2) Although most of the regulation refers simply to “first-tier subcontractor,” one condition for applying the new regulation is that the small business proposal must identify a “team of small business subcontractors.” As written, the rule is ambiguous as to whether it applies to all of a small business’s named first-tier subcontractors, or to all of them if they are part of a team that includes some small business subcontractors, or only to those first-tier subcontractors that are themselves small businesses.

(3) The new rule does not require an agency to consider named first-tier subcontractors’ capabilities, past performance, and experience if the small business prime offeror has the capabilities, past performance, and experience “necessary for award.” The new rule would prevent an agency from disqualifying a small business without capabilities necessary for award, if one of its first-tier subcontractors has the necessary capabilities.  As written, however, it does not necessarily require agencies to consider the subcontractors’ contribution as part of the overall qualitative evaluation of a proposal’s merit.  This distinction is important because a small business offeror with an acceptable level of capabilities on its own is not necessarily entitled, under this rule, to credit for outstanding capabilities that its subcontractor may possess.

Takeaways

            The SBA’s new rule provides much-needed clarity, uniformity, and fairness – particularly for small business joint ventures.  The new rule for small businesses’ first-tier subcontractors is also a step in the right direction, although the rule’s ambiguities will require some time (and likely some litigation) for agencies and companies to understand how it will work in the real world.

Offerors should note that these regulations do not begin to apply until November 16, 2020, although agencies are free to amend pending solicitations to include them, and are free to issue new solicitations incorporating them even before November 16.  After November 16, 2020, offerors should continue to pay attention to new solicitations to ensure they do not contain terms that diverge from the amended regulations.  Under standard bid protest rules, if a solicitation issued after November 16 fails to comply with the new regulations, an aggrieved potential offeror must challenge the terms prior to the solicitation’s proposal submission deadline or forever hold its peace.

[View source.]

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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