April 21, 2009
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A procurement preference created by the Veterans Benefit Act of 2003, 15 U.S.C. § 657f, is the preference for small business concerns owned and controlled by service-disabled veterans. This preference is principally ensured by set-asides exclusively for service-disabled veteran-owned small business concerns (known generally as SDVOSBC’s), and procedures for these SDVOSBC Contract set-asides are set out at Federal Acquisition Regulation 19.1405.
Eligibility requirements for SDVOSBC’s were established by the Small Business Administration (SBA) in 2004 in Service-Disabled Veteran-Owned (SDVO) Small Business Concern (SBC) Program Rules at 13 Code of Federal Regulations (CFR) Subparts A and B (13 CFR §§ 125.8 through 125.13—Definitions and Eligibility Requirements) and in Subpart C (13 CFR §§ 125.14 through 125.23—SDVO Contracts). Subpart D of the SBA SDVOSBC Program Rules (13 CFR §§ 125.24 through 125.28) sets out Protest procedures allowing Contracting Officers and other Offerors competing for specific SDVOSBC Contracts to challenge the status of particular SDVOSBC’s.
In May 2008 the Department of Veterans Affairs’ (VA’s) Center for Veterans Enterprise (CVE) published interim verification guidelines which permit (but do not require) VA Contracting Officers to set-aside particular VA acquisitions if there are available SDVOSBC’s listed as “verified” in the VetBiz.gov Vendor Information Pages (VIP) database. These CVE interim verification guidelines, which largely parallel the SBA Program Rules, explicitly provide for SDVOSBC status verification and then listing by VA’s CVE in the VetBiz VIP database.
But neither the CVE interim verification guidelines nor the CVE itself give VA the final authority to determine SDVOSBC status. Instead, challenges to SDVOSBC status, either by a Contracting Officer or by another Offeror, are decided only by SBA. Singleton Enterprises-GMT Mechanical, A Joint Venture, B-310552, January 10th, 2008, at 3.
It turns out that there are presently 47 published decisions from SBA’s Office of Hearings and Appeals (OHA) which apply the SBA SDVOSBC Program Rules in deciding challenges to SDVOSBC status. Many of these published OHA decisions concern one particular aspect of the eligibility requirements for the SDVOSBC Program, and this particular aspect is the “control” requirement.
The “control” requirement is explained at 13 CFR § 125.10.
The “control” requirement demands: (1) that long-term decision-making and day-to-day management of the enterprise both must be conducted by one or more service-disabled veterans, 13 CFR § 125.10(a); (2) that a service-disabled veteran hold the highest officer position in the enterprise and that this service-disabled veteran have managerial experience of the extent and complexity needed to run the concern, else possess ultimate managerial and supervisory control over those who possess the required licenses or technical experience, 13 CFR § 125.10(b); and (3) that one or more service-disabled veterans have control over all decisions of the enterprise, this control including the ability to overcome any supermajority voting requirements for decisions otherwise made in the normal course of business, 13 CFR § 125.10(c), (d), (e).
Challenges to required “control” for SDVOSBC status often concern geography—that is, the qualifying service-disabled veteran is located at a site remote from the place of business and/or from the site of Contract performance. If the qualifying service-disabled veteran is located at a site remote from the place of business and from the site of contract performance, then it is likely that SBA will find a lack of “control.” If the service-disabled veteran is proximate to the place of business, then the question becomes whether or not the Contract in question requires intense on-site supervision. See, e.g., Matter of NuGate Group, VET-132, April 24, 2008, at 7.
Supermajority restrictions on business decisions, while common in the operating documents for any private enterprise, including SDVOSBC’s, have an effect on the required “control” for SDVOSBC status which is not as easily resolved. This difficulty stems from the difference between supermajority restrictions limited to circumstances outside the normal course of business (e.g., changes to the operating documents, issuing additional capital stock, or entering into a different line of business) and supermajority provisions not so limited (e.g., appointment and compensation of officers, limits on making other than nominal expenditures, or borrowing money for operations).
OHA has in the past, Size Appeal of EA Engineering, Science, and Technology, Inc., SIZ-4973, July 14, 2008, at 9, made a distinction between supermajority restrictions limited to circumstances outside the normal course of business and supermajority restrictions not so limited, there holding that supermajority restrictions which could be imposed in only three “extraordinary” circumstances outside the normal course of business were insufficient to prove affiliation.
But as regards the SBA SDVOSBC Program Rules, OHA has construed the “all decisions” language of 13 CFR § 125.10(c), (d), (e) strictly, holding that “any specified decisions requiring a supermajority that the [service-disabled veteran] could not himself satisfy” render an enterprise ineligible for status as an SDVOSBC. Matter of Heritage of America, LLC, VET-142, November 12, 2008, at 8 (emphasis added).
The problem with Heritage of America is that the supermajority restrictions there included both circumstances outside the normal course of business and circumstances within the normal course of business (i.e., making other than nominal expenditures or borrowing money). In a previous decision, Matter of Firewatch Contracting of Florida, LLC, VET-137, August 1, 2008, at 8, OHA had distinguished EA Engineering as applying only where supermajority restrictions were expressly limited to circumstances outside the normal course of business.
Heritage of America could have been more narrowly decided. Unfortunately, it was not.
We’re going to have to wait for future OHA decisions to see if the sensible distinction between supermajority restrictions limited to circumstances outside the normal course of business and supermajority restrictions not so limited, the distinction which was the focus of EA Engineering, will ever be applied to a challenge of SDVOSBC status.
