With the significant downturn in the economy and resulting slowdown in the commercial construction market, many contractors are strongly considering getting involved in federal construction or expanding the portion of their business dedicated to federal contracting.
The federal government historically has been the world’s largest consumer of construction services, and the risk associated with nonpayment is low. Further, the federal government’s demand for services has increased with the enactment of The American Recovery and Reinvestment Act of 2009 (ARRA). The stimulus bill appropriated $787 billion, of which $134 billion is dedicated to construction spending as directed by federal agencies through grants to states and loans to support local infrastructure projects.
Before contractors get involved, they must understand the hidden costs and risks associated with government contracting. They must assemble the right team of people to find appropriate projects; identify how to get involved (joint venture, teaming agreement, mentor-protégé program); respond to requirements contained in RFPs; implement the necessary internal systems for federal compliance and ethics; and communicate effectively with the contracting officer, technical representative, inspector and other government project personnel.
Getting Started in Federal Construction
To get started, contractors must first register with the Central Contractor Registration (CCR) and Online Representations & Certifications Application (ORCA), both of which can be found at the Business Partner Network at
www.bpn.gov. To register, contractors need their company’s Data Universal Numbering System (DUNS) number, federal tax ID number and electronic funds transfer information. A joint venture must register separately from the partner business. If contractors want to pursue ARRA projects, they also must register at
www.federalreporting.gov.
Contractors can track where ARRA money is being spent in their respective markets on
www.recovery.gov. This website captures the recipient name, award number, agency name and award amount. Most states are tracking spending on their own websites, such as Virginia’s
www.stimulus.virginia.gov. It does not, however, provide information on open RFPs. To find federal contracting opportunities, contractors should regularly monitor the Federal Business Opportunities website at
www.fedbizopps.gov, as well as state procurement sites.
Increasing Federal Contracting Opportunities
Pursuing small business set-asides, teaming with small business concerns or participating in the
Small Business Administration (SBA) or Department of Defense mentor-protégé programs are several ways contractors can access federal construction contracting or increase their presence in the federal marketplace. The federal government-wide goal for participation by small businesses is no less than 23 percent of the total value of all prime contract awards for each fiscal year.
A variety of programs exist to advance the interests of small businesses, such as those located in historically underutilized business zones (HUBZones), as well as those owned by service-disabled veterans (SDVOs), women, or other socially and economically disadvantaged individuals, including small disadvantaged businesses (SDBs) and Section 8(a) program participants.
Registering for these programs begins with the SBA determining a contractor’s size. Beware, when the SBA considers size, it includes the size of the company’s affiliates. Affiliation presents potential risks for small and large businesses depending on how they choose to pair up to compete for projects. Interestingly, a large business can offer bonding assistance, and that is not considered a disqualifying affiliation.
The SBA’s mentor-protégé program is designed to encourage approved mentors to provide various forms of assistance to eligible 8(a) participants as protégés. The purpose of the mentor-protégé relationship is to enhance the capabilities of the protégé and improve its ability to successfully compete for federal contracts. Mentors can take up to a 40 percent equity interest in their protégés to help them raise capital. No determination of affiliation or control will be found between a protégé firm and its mentor based on the mentor-protégé agreement.
The mentor and protégé firms must enter into a written agreement that lays out the protégé’s needs and describes the assistance the mentor is providing to address those needs. The agreement must state that the mentor will provide assistance to the protégé for at least one year, and the SBA must approve the agreement. The agreement must not be merely a vehicle to enable a non-Section 8(a) mentor to receive 8(a) contracts. The mentor must have an active and approved subcontracting plan, and the protégé must be a certified small business under one of the SBA plans.
Limitations on Subcontracting and Joint Ventures
There are important limitations on SBCs, 8(a) set-asides, HUBZones, SDVO subcontracting and joint venturing with large businesses. For example, an 8(a) set-aside small business concern acting as a prime contractor must perform at least 15 percent of the cost of the general construction work (excluding materials) with its own employees. Similarly, a specialty trade small business concern must perform at least 25 percent of the cost of work (excluding materials) with its own employees. Repetitive subcontracts with the same firm are viewed as evidence of a disqualifying affiliation even if percentage limits are followed.
A large business may not joint venture on an 8(a) set-aside absent a mentor-protégé agreement. An 8(a) firm may enter into one or more joint ventures with other small business concerns to perform an 8(a) set-aside contract as long as the SBA approves the joint venture agreement. Members of a joint venture are deemed “affiliates” for the purpose of each acquisition in which they participae, with limited exceptions.
A large business may not joint venture with a HUBZone concern on a HUBZone set-aside.
Finally, a small business that subcontracts with a large business can be found to be an affiliate of the large business under the “ostensible subcontractor” rule. The purpose of the ostensible subcontractor rule is to prevent large firms from forming relationships with small firms to evade SBA size requirements. An ostensible subcontractor is one that performs primary and vital requirements of a contract or of an order under a multiple award schedule contract; or, a subcontractor upon which the prime contractor is unusually reliant. A contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates for the purpose of size determination.
Understanding the Risks
Contractors must understand the recent developments outside the ARRA, such as the requirement for comprehensive federal compliance and ethics programs under Federal Acquisition Regulation (FAR) Subpart 3.10. Under changes to the FAR, the federal government requires companies to have a written code of business ethics and conduct, and to implement it through an employee training program and ethics hotline.
A Contractor Code of Business Ethics is mandatory for all contracts exceeding $5 million or with a 120-day or longer performance period. A contractor may be suspended or debarred for any knowing failure by a principal to timely disclose credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations, or a violation of the Civil False Claims Act.
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Friday, September 3, 2010