Federal Government Construction Contracting—An Overview

Chapter 24
Federal Government Construction Contracting—An Overview

I. Introduction: The Key Differences

Since the Second World War, the federal government (government) has consistently purchased or funded, directly or indirectly, a larger volume of construction services or work than any other single entity in the United States. Unlike commercial construction contracts, a government construction contract1 combines a statement of the scope of the work to be executed with terms and conditions that reflect the government’s policies regarding contractual risk allocation, project management, and various social and economic policy objectives. While a description of the scope of the work, risk allocation terms, and project management requirements are common on all construction projects, contractors need to recognize the significance of the federal government’s policies and their effect on all aspects of the project. Understanding these key differences between commercial and government construction contracts is an essential step in becoming a successful government contractor. This chapter provides an overview of many of the major differences between commercial and government construction contracts.

Although government construction contracts contain numerous provisions, several standard clauses address many of the performance issues encountered by contractors and provide the basis for a contractor’s entitlement to additional compensation and performance time. These issues include changes and constructive changes, differing site conditions, inspection and acceptance of work, compensable and excusable delays, and terminations (default and convenience). Given the large volume of construction contracts awarded by the federal government and the extensive body of court and administrative board decisions applying these provisions, federal construction contract law often provides the basis for many of the fundamental and substantive principles of construction law discussed in this book. Numerous basic concepts of construction law such as the concept of a “constructive change” have their genesis in federal government construction contracts. For that reason, the discussion of these concepts is not repeated in this chapter. The following table provides a quick reference to these key concepts in government construction contracting and the discussion of those concepts in this book.

For comprehensive discussion of federal government construction contracting, and the principles affecting a contractor’s obligations, rights and remedies, please see the following companion publications authored by Smith, Currie & Hancock attorneys.

  • Federal Government Construction Contracts: A Practical Guide for the Industry Professional (2nd ed.) published by John Wiley & Sons (2010)
  • Federal Socio-Economic Policies: A Practical Guide for Construction Contractors, published by the AGC of America (2013)
  • Federal Government Contractor Ethics and Compliance Programs: Toolkit and Guidance (2nd ed.) published by the AGC of America (2012).

A. The Basic Legal Principles Are Similar

The basic principles governing government construction contracts reflect the American common law of contracts. First, the parties to a contract must have the capacity to enter into that contract. There is no question that federal government has the capacity to enter into contracts.2 A contract is traditionally defined as “a promise or set of promises, for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”3 Similar to private contracts, government construction contracts contain both express and implied obligations and promises.

Less obvious are those obligations that are implied in every contract. Common examples of these implied duties include the obligations of good faith and cooperation.4 In addition, the government’s implied warranty of the adequacy of government-provided plans and specifications has been of great importance to construction contractors. The existence of an implied warranty in connection with government-furnished plans and specifications was recognized in United States v. Spearin.5 The underlying principle is the allocation of the risk of the inadequacies of the design to the party which furnished the design or controlled the development of the design. This doctrine evolved in the context of traditional design-bid-build projects. Thus, in a design-build project, the design-build contractor, not the government, may bear the risk for a design error or deficiency depending upon each party’s control over that aspect of the design.6

Similar to private contracts governed by the common law, the basic concept of breach of contract applies to government contracts. In private contractual relationships, a breach of contract results when one party fails in some respect to do what that party has agreed to do, without excuse or justification.7 Breach of contract actions are relatively rare in government contracting due to the fact that these contracts include remedy-granting clauses, such as those listed in Table 24.1. These clauses, when combined with a very comprehensive disputes procedure that generally requires continued performance pending resolution of a claim (see Section IV below), effectively transform most breach claims to requests for equitable adjustments (REAs) under one or more of these key remedy granting provisions.

Table 24.1 Key Concepts Applicable to Federal Construction Contracts

Concept FAR Clause Chapter Reference(s)
Changes & Constructive Changes Changes—FAR § 52.243–4 11
Differing Site Conditions Differing Site Conditions—FAR § 52.236–2 12
Inspection and Acceptance Inspection of Construction—FAR § 52.246–12 14
Compensable and Excusable Delays Suspension of Work—FAR § 52.242–14 and Default (Fixed-Price Construction) FAR § 52.249–10 13 and 17
Terminations (Default and Convenience) Default (Fixed-Price Construction)—FAR § 52.249–10 and Termination for Convenience of the Government (Fixed Price)—FAR § 52.249–2 17

B. Where Are the Differences?

When contracting with the government, contractors need to appreciate two fundamental and potentially conflicting policies that may affect the parties’ rights and obligations. One policy addresses the status of the United States when it enters into a contract. This was summarized in McQuagge v. United States:8

In ordinary contractual relations with its citizens, the government enjoys the same privileges and assumes the same liabilities as does its citizens. This is distinguished from the situation where the sovereign is seeking to enforce a public right or protect a public interest, for example, eminent domain or an exercise of the taxing power. In the latter case the government is not bound by ordinary rules of private contract law or by doctrines of estoppel or waiver. When the government enters the market place, however, and puts itself in the position of one of its citizens seeking to enforce a contractual right (i.e., one which arises from express consent rather than sovereignty), it submits to the same rules which govern legal relations among its subjects.9

Many of the decisions holding that the United States is bound by its contracts just as a private party involve questions of contract interpretation.10 However, another theme in government contract cases reflects a statement by Justice Oliver Wendell Holmes, Jr., that “Men must turn square corners when they deal with the Government.”11 This statement suggests that the government may have, in certain respects, a special status in its contractual relationships and that all of the rules governing contractual relationships may not apply in government contracts. While the standard contract provisions in a government construction contract generally reflect a balanced allocation of risks, there are many special requirements and legal principles, which every contractor must appreciate. These are the “square corners” of contracting with the government in the twenty-first century.

1. Contracting Process and Terms Are Based on Statutes and Regulations

a. The Federal Acquisition Regulation and its Supplements

Most government construction contracts reflect policies contained in statutes and in the Federal Acquisition Regulation (FAR).12 In addition to the standard contract clauses, the FAR also sets forth guidance to the federal agencies regarding contract award and administration. In addition, many of the federal agencies have their own supplements to the FAR. For example, the DFARS is the Department of Defense FAR supplement.

The FAR is subdivided into eight (8) major subchapters containing fifty-three (53) parts. Parts 1-51 contain substantive guidance and policy statements. Part 52 contains the clauses used in government contracts, and Part 53 contains examples of many of the standard forms used in contracting. Each of these parts addresses a separate aspect of the acquisition process and contains policy guidance or direction, and instructions on the use of contract provisions, as well as the text of the actual contract clauses. The eight major subchapters are:

  • General (Parts 1–4)
  • Competition and Acquisition Planning (Parts 5–12)
  • Contracting Methods and Contract Types (Parts 13–18)
  • Socioeconomic Programs (Parts 19–26)
  • General Contracting Requirements (Parts 27–33)
  • Special Categories of Contracting (Parts 34–41)
  • Contract Management (Parts 42–51)
  • Clauses and Forms (Parts 52–53)

One major difference between most private construction contracts and government contracts is the government’s practice of incorporating by reference many key clauses into the contract. Upon reviewing a solicitation for a government project, a contractor may find a multi-page listing of clauses with the FAR or the FAR supplement numerical designations. The significance of these clauses is not diminished by their listing on a table of incorporated clauses. As part of its evaluation of the potential risks and obligations, a contractor should obtain and review each of those provisions. For a firm that is relatively new to government contracting, this review can be rather time intensive. Fortunately, most of the standard FAR clauses are revised on a relatively infrequent basis.13

b. Government Contract Case Law

Government contract case law is found in a variety of sources. Since 1974, Federal Publications, Inc., now part of the West Group, has published the Comptroller General’s Procurement Decisions (CPD) service containing the full text of all of the United States Government Accountability Office (GAO) bid protest decisions. Court decisions regarding bid protests have been issued by the federal district courts, the United States Court of Federal Claims (and its predecessor courts), and the various federal circuit courts of appeals.14 The case law involving disputes arising out of or related to the performance of a contract includes the decisions of the various boards of contract appeals, the United States Court of Federal Claims (COFC) and its predecessor courts, and the United States Court of Appeals for the Federal Circuit (Federal Circuit). On relatively rare occasions, the United States Supreme Court will consider and issue decisions directly addressing federal government contracts.15

2. Public Policy Considerations Can Affect Parties’ Rights and Obligations

The themes noted in the McQuagge decision—that (1) when the government enters the market place, it enjoys the same privileges and assumes the same liabilities as does its citizens, and (2) that all of the traditional rules governing contractual relationships may not apply in government contracts—appear to conflict. But the decision also referenced two conditions that are critical to reconciling these themes. First, the government must be acting in a contractual capacity; and second, it must not be seeking to protect or enforce a public policy.

a. Authority of Government Representatives

While the government has the capacity to enter into a contract,16 a contract that is prohibited by statute or varies from mandatory procedures is not binding on the government.17 Similarly, the person or entity entering into a contract on behalf of the government must have the requisite authority to do so. If that person has the requisite authority to bind the government, the exercise of that authority usually involves a degree of discretion.18

The key is ascertaining the limits of authority. This is one of those square corners for government contractors. The limits of authority question was addressed by the United States Supreme Court in Federal Crop Insurance Corp. v. Merrill,19 which involved an issue of the ability of an unauthorized agent of a government agency to bind the United States. The Court rejected the application of the concept of apparent authority and ruled that the party dealing with the United States had the burden of ascertaining the actual authority of the government’s representative. This actual authority concept also applies to changes to the work ordered by a representative of the government. Since the contractor bears the burden to ascertain the authority of the person with whom it is dealing, questions related to authority appear often when dealing with the government.20

b. The Christian Doctrine

The second McQuagge exception to the principle that the United States is bound to its contracts as is a private party referred to the enforcement of a public right or public interest. This exception is illustrated by the decision of the United States Court of Claims in G. L. Christian & Associates v. United States.21 The Christian decision involved a contractor’s claim for its lost anticipated profits following the government’s decision to terminate for convenience a large housing project. The contract did not contain a termination for convenience clause22; hence, there was no contractual preclusion on the recovery of lost anticipated profits. While acknowledging the basic principle that the government has the rights and ordinarily the liabilities of a private party when it enters into a contract, the Court of Claims held that the termination for convenience clause was incorporated into the contract by operation of law as it was a mandatory clause under the applicable procurement regulations.23

3. Government Contracts and Social and Economic Policy Objectives

Reflecting policies established by Congress, the government has long utilized its contracts as a tool to achieve multiple social and economic objectives. The government’s policies include set-asides and preferences in procurement for different categories of small or disadvantaged businesses, equal opportunity and affirmative action employment requirements, domestic product purchasing preferences, workplace safety and labor standards, and environmental regulations. These requirements can be complicated and compliance with them is essential for any firm competing for and performing a government contract.

II. Contractor Selection

Historically, the preferred method for the award of construction contracts in government procurement was through formal advertising (sealed bidding), as described in Part 14 of the FAR. That method awards contracts based upon the submission of firm fixed price bids with the award made to the low, responsive and responsible bidder. Following the rewrite of FAR Part 15 in 1997, most government construction contracts are now awarded under a competitive negotiation technique known as best value.

Any contractor seeking an award of a government contract must have a working knowledge of the federal procurement process, each agency’s approach to the procurement process, submit the best drafted proposal possible, and perform the contract with the goal of receiving the highest possible past performance evaluation.

A. Best Value Selection Process

Once a project is authorized and funded, the procurement process begins when an agency assigns a contracting officer to manage the procurement process and resulting contract.24 An initial determination by the procuring activity (contracting officer) addresses the procurement method (sealed bidding or negotiation) to be used to award the contract. (Given the general use of negotiation to award contracts, this process is described below.) Regardless of the type of procurement method selected by the agency, the solicitation is posted by the agency on the Federal Business Opportunities website, www.fbo.gov.25 (See Appendix A for a list of websites.) In a negotiated procurement, the RFP instructs offerors on how to submit a proposal, any requirements or limits on the form of the proposal, the criteria to be used to evaluate proposals, and the time frame for receiving proposals and selecting a contract awardee. Once a contractor starts to develop a proposal for a specific project, it is imperative to monitor the website for any amendments to the solicitation.

In making a best value award, the agency considers not only at a contractor’s proposed price, but also the contractor’s key personnel, management, and past performance on other projects. A negotiated procurement allows the agency to have certain discussions or exchanges with offerors that enable offerors to refine their proposals.26 The evaluation of proposals can take many months and may involve one or more rounds of revised proposals.

FAR Part 15 affords the agency broad discretion in selecting the award evaluation criteria and determining the relative importance of those criteria. In general, an agency may consider some or all of the following evaluation factors or subfactors during a best value procurement: cost or price (must always be considered during a best value procurement), past performance, experience, management and key personnel, and technical expertise. The best value process permits trade-offs among cost or price and non-cost factors and allows the government to accept other than the lowest-priced proposal.27 Agencies are required to document in writing (generally in narrative form) the relative strengths, weaknesses, and risks of each proposal, rate or rank each proposal, and maintain this documentation in the contract file.28 The trade-off decisions must be based on a reasoned explanation by the agency, but the agency has very broad discretion within the limits of the evaluation criteria in the solicitation.29 Unless the RFP provides that the award will be made to the lowest priced, technically acceptable offeror,30 submission of the lowest priced proposal does not necessarily guarantee an offeror the award.

The best value procurement process has been the subject of many protests to agencies and the GAO, as well as court actions. The GAO and federal courts give substantial deference to the discretion of the government in determining which offer is the most advantageous to the government. However, the ultimate standard or test applied by both the GAO and the federal courts is whether the government complied with (1) the FAR or statutory requirements for negotiated best value procurements, and (2) whether the agency followed the selection and evaluation procedures set forth in the RFP.31 If the agency’s decision meets those standards, the award decision will not be disturbed.32

B. Importance of Contractor Past Performance

The evolution of past performance as a major evaluation factor began taking shape in 1994 when Congress passed the Federal Acquisition Streamlining Act (FASA).33 Congress acknowledged in FASA that a contractor’s past performance should be evaluated during a procurement to ascertain whether that contractor should receive future work. Section 1091 of FASA provides that “past contract performance of an offeror is one of the relevant factors that a contracting official of an executive agency should consider in awarding a contract.”

1. Purpose of Past Performance Evaluations

The theory behind the contemporaneous evaluation of contractor’s performance and its consideration in future procurements is twofold. First, Congress believes that an active dialogue between the contractor and the government, while a contract is being performed, will result in better performance by the contractor. This active dialogue is encouraged by the knowledge of both the contractor and the government that the contractor’s performance will be rated by the government for consideration in future procurements. Second, contractors will presumably provide their best efforts in the performance of a contract if they are aware that their performance evaluations will be used by other procuring activities on future procurements.

Agencies have discretion when considering past performance data on prospective contractors. The GAO has ruled that it is reasonable for an agency to consider the specific past performance of a contractor to which award was being made more favorably than the general past performance of the protesting contractor.34 Similarly, agencies have the right to look at the contractor’s performance of all past contracts, regardless of size or scope, because that information enables the agency to predict whether the contractor will satisfactorily perform the requirements of the new contract.35 Agencies may also consider negative past performance comments even though those comments had not been documented contemporaneously with the past performance.36

The government must be careful to limit the scope and content of performance evaluations to matters related to a contractor’s actual contract performance. In May 2000, the Office of Federal Procurement Policy issued a government-wide memorandum providing that contractors could not be given “downgraded” past performance evaluations for filing protests and claims or for deciding not to use alternative dispute resolution (ADR). That same memorandum provided that contractors could not be given inflated performance evaluations for refraining from filing protests and claims or agreeing to use ADR.37

In Nova Group Inc.,38 the contractor’s past performance rating was downgraded because it had pursued contract claims against the government on nine occasions over 15 years. The GAO found no evidence suggesting the claims were indicative of poor performance, frivolous, or filed in bad faith, and therefore held that the contracting officer could not use legitimate contractor claims to downgrade a contractor’s proposal with regard to past performance.

2. Use of Past Performance Evaluations during Source Selection

Unless the agency documents that past performance is not an appropriate evaluation factor,39 the procuring agency assigns a performance risk rating during the evaluation process.40 Consistent with the guidance in FAR § 15.305(a)(2), agencies are usually expected to determine how well a prospective contractor has performed on past contracts and how relevant that performance is to the new procurement. That past performance rating is then used as part of a comparative assessment to ascertain the most highly rated offeror for contract award.

In general, a procuring agency is given the “greatest deference possible” with regard to its evaluation and rating of an offeror’s past performance during the source selection process.41 An agency is able to revise its past performance rating of an offeror numerous times during the source selection process before it comes up with a final rating.42 These past performance ratings will not generally be disturbed by the courts or the GAO in a bid protest unless the ratings are unreasonable or inconsistent with the terms of a solicitation.43

It is not unusual for a government agency to request that the offeror identify key anticipated subcontractors in its proposal. That request may indicate that the agency will consider past performance evaluation information on these subcontractors. The RFP should advise the prospective offerors of the extent to which the agency plans to consider past performance information on anticipated subcontractors. When reviewing an RFP, a prospective offeror should attempt to determine prior to submitting its proposal whether the agency will consider the past performance of its prospective subcontractors or key team members and, if possible, review those past performance reports.

When the government communicates with contractors to establish a competitive range after the receipt of proposals, it must hold discussions with contractors whose past performance evaluation prevents the contractor from being placed in the competitive range if the contractor has not had a prior opportunity to respond to the adverse information.44 Regardless of whether a contractor may have that opportunity, contractors should make efforts to preemptively explain any deficiencies in their past performance record before the evaluation process begins.

3. Preparing Contractor Performance Ratings

Agencies generally obtain past performance information on offerors in two ways. First, agencies obtain past performance information directly from the offerors or from references submitted by the offerors. The terms of the RFP generally require contractors to provide this past performance information, which comes in the form of performance evaluation forms or surveys, narrative descriptions of the contractor’s performance, or letters from a contractor’s references.

Second, agencies obtain past performance information from data collection systems.45 In general, FAR § 42.1502(e) requires agencies to prepare performance evaluations on each construction contract in excess of $650,000 and any construction contract that is terminated for default. Although the FAR permits the agency to tailor the content and format of these evaluations to the size, content, and complexity of the contract being performed,46 the following factors must be considered:

  • Quality of product or service
  • Timeliness of performance
  • Management or business relations
  • Small business subcontracting

FAR § 42.1503 sets forth a five-scale rating system (exceptional, very good, satisfactory, marginal, and unsatisfactory) and the definitions for those terms.47 Agencies are required to prepare a contractor performance evaluation when the contract is complete, and are also encouraged to prepare interim performance evaluations for contracts that exceed one year in length, including option periods.48 No performance evaluation on a construction contract, regardless of whether it is positive or negative, is to be retained in the PPIRS/CPARS/CCASS/ACASS systems longer than six years after completion of contract performance.

Contractors should obtain and understand the agency’s policy and forms for evaluating performance prior to commencing work on any project. The evaluation criteria and process used by the agency should be an agenda item during partnering meetings as well as during periodic progress meetings with representatives of the government. No contractor wants to be surprised with an adverse performance rating at the end of a contract. Understanding the performance evaluation process and expectations will help contractors avoid this scenario.

4. Challenging a Performance Rating

A contractor’s past performance history is critical to its ability to successfully compete in competitive best-value procurements. In the event a contractor receives an unfavorable past performance evaluation, that contractor needs to be aware of the procedures for challenging and correcting that adverse evaluation.

Contractors may initially challenge an unfavorable past performance evaluation at the agency level. FAR § 42.1503(d) provides that contractors have the opportunity to respond to performance evaluations after the contracting officer has issued and provided a copy of the final performance assessment to the contractor. Contractors have 14 calendar days after receipt of that evaluation to review, comment on, or rebut the conclusions made in the performance evaluation before the evaluation is submitted by the agency for inclusion in the Past Performance Information Retrieval System (PPIRS).49 Agencies are required to submit the evaluation for inclusion in PPIRS no later than 14 calendar days after the evaluation is provided to the contractor.

If the contractor provides a rebuttal for a part or all of the performance ratings, the contracting officer and lead assessor usually work with the contractor to see if a mutual agreement can be reached on the contractor’s ratings. If no agreement can be reached, the contractor may seek review of its rating at least one level above the contracting officer. In the event that no mutual agreement can be reached between the contractor and the agency regarding the performance evaluation, the ultimate conclusion regarding the performance evaluation rests with the agency.50 Any rebuttal statements provided by the contractor must be attached to the performance evaluation and provided to any acquisition officials evaluating the contractor for future contracts.

In the event a contractor is not successful in changing an unfavorable performance evaluation at the agency level, it can, in theory, pursue a challenge to the agency’s performance evaluation at the Court of Federal Claims, and at the boards of contract appeals.51 While asserting a challenge to an unjust performance evaluation may provide some measure of relief for a contractor, using the Disputes process as a remedy should be viewed as the last option.

C. Resolution of Award Disputes—Bid Protests

Increased competition for contracts, combined with economic cycles that reduce the total volume of contracts available for award, have forced contractors to become knowledgeable about the rules governing competitive procurements, and related bid protest rules and regulations. Whether the procurement is conducted using sealed bids or competitive proposals, a challenge to a federal agency’s conduct of a particular procurement action is labeled a “bid protest.”

The guiding principle in bid protests is quick action since the FAR specifies that such action must be taken within a few days. In addition, under some circumstances, the contracting authority may award the contract while the protest is still pending. Once the award is made, the reviewing body is often reluctant to reverse the decision of the awarding authority. Thus, obtaining a favorable ruling on the merits of a bid protest may prove to be an empty victory if the contract itself has already been awarded to another bidder.

In the federal contract arena, a protester has options for filing a bid protest. A bid protest or action may be filed with: (1) the contracting agency responsible for the procurement, (2) the Comptroller General of the Government Accountability Office (GAO), or (3) the United States Court of Federal Claims (COFC).

1. Protests to the Contracting Agency

A disappointed offeror (bidder) may initially submit a bid protest to the agency that is conducting the procurement. Agency protests may be filed before or after contract award by a bidder/offeror or a prospective bidder/offeror if its direct economic interest is affected by the award.52 The protester must submit its protest in writing.53 The agency receiving the protest must respond using a method that provides evidence of receipt.54

Generally, there are strict time limits for agency protests. Protests based on apparent defects in the solicitation must be filed before bid opening or the closing date for the receipt of proposals.55 In all other cases, protests must be filed not later than 10 calendar days after the basis for the protest is known or should have been known, whichever is earlier.56 An agency may consider an untimely protest if the agency determines that the protest raises issues significant to the agency’s acquisition system.57

A protester should also consider submitting its protest at a level within the contracting agency or contracting entity higher than the contracting officer, if allowed by the agency’s rules. The agency must provide a procedural mechanism for the protester to request an independent review above the contracting officer level, either as an initial review of the protest or as an appeal from the contracting officer’s decision.58

The protest must include (1) the name, address, and fax and telephone numbers of the protester; (2) the solicitation or contract number; (3) a detailed statement of the legal and factual grounds for the protest, including a description of the resulting prejudice to the protester; (4) copies of relevant documents; (5) a request for ruling by the agency; (6) a statement of the form of relief requested; (7) all information establishing that the protester is an interested party; and (8) all information establishing the timeliness of the protest.59

Upon receipt of a protest before award, the contract may not be awarded pending agency resolution of the protest unless the award is justified in writing for urgent and compelling reasons, or it is determined in writing to be in the government’s best interest.60 If the contracting officer receives a protest within 10 days after contract award or within 5 days after a debriefing date offered to the protester under a timely debriefing request (whichever is later), the contracting officer must immediately suspend performance pending the agency’s resolution of the protest, unless continued performance is justified in accordance with FAR § 33.103(f)(3). While agency protest will not extend the time for obtaining a stay of performance from the GAO; agencies must include in their protest procedures a voluntary suspension period when the agency protest is denied and the protester subsequently protests to the GAO.61 There are circumstances in which an agency protest may be advantageous to a bidder. An agency protest may be less costly and time-consuming if the protest is unquestionably valid because the agency may act quickly to correct any deficiency so as not to delay the particular project. If the agency protest is unsuccessful, the protester has 10 calendar days from the actual or constructive knowledge of the initial agency decision to file a protest with the GAO.62

2. Protests to the Comptroller General (GAO)

This section summarizes the important initial time constraints and factors to consider in filing a protest with the GAO. These requirements are subject to change (including the initial deadline for filing a protest), and the current bid protest regulations as published in the Federal Register and 4 C.F.R. Part 21 must be followed to assure a valid protest.63

Any “interested party” may file a protest with the GAO alleging an irregularity in the solicitation or award of a federal government contract to which a federal agency is a party. This “interested party” is an actual or prospective bidder or offeror whose direct economic interest would be affected by the award of a contract or by the failure to award a contract.64 Under 4 C.F.R. § 21.1(b) and (c), a protest must (1) be in writing and correctly addressed; (2) include the name, address, e-mail address, telephone number, and fax number of the protester and be signed by the protester or its representative; (3) identify the contracting activity and the solicitation or contract number, or both; (4) include a detailed statement of the legal and factual grounds of the protest, including copies of all relevant documents, (5) set out all information establishing that the protester is an interested party and that the protest is timely; (6) specifically request a ruling by the Comptroller General; and (7) state the form of relief requested.

A protest is filed when it is actually received by the GAO within the time for filing and is accompanied by a certificate that a copy of the protest, together with relevant documents not issued by the contracting agency, was concurrently served on the contracting agency and the contracting activity (a contracting activity is the subelement of the contracting agency that actually issued the solicitation or contract, or both).65

Protests based on alleged improprieties in a solicitation that are apparent before bid opening must be filed before bid opening or the time set for receipt of initial proposals.66 Generally, other protests must be filed no later than 10 calendar days after the basis of the protest is known or should have been known, whichever is earlier, except protests challenging a procurement conducted on the basis of competitive proposals under which a debriefing is requested and, once requested, is then required. If the debriefing is required and the basis for the protest is known before or as a result of the debriefing, the protest must be filed after the debriefing but within 10 calendar days of the debriefing.67 Under most circumstances, a contracting agency cannot award a contract once it has received notice of the protest and while the protest is pending.68 The head of an agency may authorize award of a contract notwithstanding a protest upon a finding that: (1) urgent and compelling circumstances that significantly affect the interests of the United States will not permit waiting for the Comptroller General’s decision (as long as the award was otherwise likely to occur within 30 days after the making of the finding); and (2) after the Comptroller General is advised of the finding.69

If a protest is filed within 10 calendar days after the award (or 5 calendar days after the date offered for a required debriefing), and the agency is notified of the protest, the contracting officer may not authorize performance to begin while the protest is pending, or the contracting officer shall immediately direct the contractor to cease performance and suspend related activities.70 Similar to protests filed before bid opening, the head of the contracting agency can authorize performance of the contract notwithstanding the protest in certain circumstances.71

3. Court of Federal Claims Protest Actions/Suits

The U.S. Court of Federal Claims (COFC) is the only court for a prospective contractor seeking bid protest related injunctive relief against a federal agency.72 Similar to GAO protests, one of the most important aspects of any protest suit is quick action. From the standpoint of the protester, it is imperative to prevent the award or performance of the disputed contract to go any further than it has when the decision to pursue a protest is made. The farther along the award or performance on the contract, the less likely that COFC will be willing to grant relief.

III. Social-Economic Policies

Use of the federal procurement process to achieve specific social or economic goals (“socioeconomic policies”) has a long history. While many current programs have their roots in the Great Depression, the policy preferences underlying some of the current programs can be traced back to the nineteenth century.73 These policies include set-asides and preferences for different categories of small or disadvantaged businesses, domestic product preferences, labor standards, and environmental regulations.

A. Small Business Programs

Congress has authorized a variety of programs to implement its policy74 of advancing the interests of small businesses through the procurement process. These programs grant advantages and preferences to specific categories of small business concerns (SBCs), such as those located in historically underutilized business zones (HUBZones), firms owned by service-disabled veterans (SDVO), by women (WOSB), or by other socially and economically disadvantaged individuals (including small disadvantaged businesses (SDBs)75 and Section 8(a) program participants).76 The policy also permits—and in practice, requires—agencies to create preferential set-aside contracts, which are reserved for award to qualifying SBCs. The value of small business awards for construction is substantial. In FY 2012 the federal government spent approximately $41.5 billion on construction and architecture/engineering (A/E) services with awards to small business concerns totaling approximately $17.25 billion (41.56 percent) of the total value of construction and A/E awards. In addition, the agencies also establish goals for small business subcontracting by the agency’s prime contractors. These can have a substantial effect on a general contractor’s buyout of subcontracts and management of a construction contract.

1. Eligibility as a Small Business

The Small Business Administration (SBA) establishes small business eligibility requirements and makes determinations regarding individual contractors. In order to be eligible to participate in small business programs, a business must first meet certain qualifying criteria regarding its organization, its activities, and its size.

a. Defining a “Small Business Concern”

For a concern to qualify as a small business concern (SBC), it must be: (1) independently owned and operated, (2) not dominant in the field of operation in which it is bidding, and (3) qualified under the criteria and size standards established by the SBA. In order to determine whether a concern is “dominant” under that definition, the SBA considers business volume, the number of employees, financial resources, competitive status or position, ownership or control of materials, processes, patents, license agreements, facilities, sales territory, and the nature of the business’ activity.77

b. Size Standards

The SBA establishes “criteria and size standards” by industry.78 In the construction industry, size standards are defined by average annual receipts computed on a rolling three year average. The subsectors for “Construction of Buildings” and for “Heavy and Civil Engineering Construction” put the limit at $36.5 million. Dredging and Surface Cleanup Activities are limited to $27.5 million in average receipts and Land Subdivision is $27.5 million. The subsector for “Specialty Trade Contractors” limits small business concerns to those under $15 million in annual receipts.79 The contracting officer determines which industry classification is appropriate for any particular solicitation. The solicitation identifies the applicable size standard by listing North American Industry Classification System (NAICS) group number found in 13 C.F.R. § 121.201.

c. Affiliates

Size determinations consider not only the size of the concern bidding/offering on the contract but also by including the size of its affiliates. A business concern that otherwise would meet the applicable size standard to qualify as a small business on its own is ineligible if the combined size of that concern and its affiliate(s) exceeds the applicable size standard.80 Business concerns are affiliates of each other if, either directly or indirectly, one controls or has the power to control the other, or if, either directly or indirectly, another concern controls or has the power to control both.81 Whether the power to control is actually exercised is irrelevant.82 The SBA’s regulations also authorize it to find that concerns are affiliates even when no single factor is sufficient to constitute affiliation.83

d. SBC Subcontracting to Large Businesses and Affiliation

SBCs are permitted to subcontract portions of set-aside contracts to large businesses84 unless prohibited by statute, by regulation, or by the terms of the solicitation.85 While the existence of a subcontract relationship is not itself dispositive of affiliation, contractors should be aware that businesses will be deemed to be affiliates if the nature of the subcontract relationship is such that the large-business subcontractor has the power to control the small business concern.86 As summarized in Table 24-3, there are also limits on the amount of work that may be subcontracted by small business prime contractors.

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. An ostensible subcontractor is one that performs primary and vital requirements of a contract or is a subcontractor upon which the prime contractor is unusually reliant. In that context, the SBA can treat the SBC and its subcontractor as joint venturers and therefore affiliates for size determination purposes.87

2. Size and Status Determinations

a. Contractor Self-Certification (Representation)

Contractor self-certification as a small business is permitted under the SBA’s regulations and is typically the initial step that a concern takes.88 Self-certification as a small business occurs when a firm establishes an account under the federal government’s System for Award Management (SAM),89 which combines the functions of the Central Contractor Registry (CCR), Federal Agency Registration (Fedreg), Online Representations and Qualification Application (OCRA), and Excluded Parties List (EPL).90 The self-certification is considered to be true when there is no written size protest by another concern, or other information that causes the contracting officer or the SBA to question the size of the concern.91

If a firm’s size is protested, the SBA has exclusive jurisdiction to determine whether a concern is “small” for the purpose of any given solicitation. Size protests at the SBA can be initiated by competitors, the contracting agency, or the SBA. To be considered timely, a protest by an interested party or a competitor must contain “specific and detailed evidence” and must be received by the contracting officer by the close of business on the 5th business day after bid opening or receipt of notification from the contracting officer that identifies the apparent successful offeror.92

When developing a small business source selection list for purposes of a small business subcontracting plan or program, a prime contractor, acting in good faith,93 may rely on the information regarding a prospective subcontractor’s size characteristics, which is now found in the System for Award Management (SAM) or its successor database.94 However, even if a firm is on a small business source selection list, the prospective subcontractor must qualify and self-certify its size and status when it submits its offer or bid to a prime contractor. A prime contractor may accept a subcontractor’s electronic self-certification if the eventual subcontract contains a clause stating that the subcontractor verifies its size and status by submission of its offer and that the data in SAM or its successor database is accurate and complete as of the date of the offer.95 However, prime contractors are prohibited from mandating that small business subcontractors use the SAM database.96

b. Federal Agency Certification

While self-certification is the means by which an SBC can establish eligibility as a “small business” under 13 C.F.R. Part 121, some federal programs, as noted below, require a determination (certification) of status eligibility by a federal agency. In addition, the Women Owned Small Business Concern program allows for either self-certification or third-party certification on behalf of the agency.97 In either case, the SBA’s regulation contemplates that an entity seeking certification as a WOSB or EDWOSB does not simply “check a block.” Rather, the concern must submit a detailed list of documents to the WOSB Program Repository that demonstrate that the concern is owned and controlled by one or more women.98

The VA has a separate program for verification of VOSB or SDVOSB status to be eligible for set-asides that are VA projects. The Vets First Contracting Program allows for VOSB and SDVOSB concerns to apply for verification of their status. If the application is approved, then the contractor is listed on the VA’s database for future VA set-aside work.99

c. Eligibility under Specific Programs

The federal government has multiple programs to provide assistance to various categories of SBCs, e.g., HUBZone firms, firms owned by socially and economically disadvantaged individuals (including small disadvantaged businesses (Section 8(a) program participants), veteran-owned and service-disabled veterans (SDVO)–owned firms, and women (WOSB) and economically disadvantaged women (EDWOSB) owned firms. With the exception of the VA procurement program for veteran-owned small businesses, the SBA’s regulations control whether a SBC qualifies for each of these specific programs.

(1) HUBZone firms. Established as part of the Small Business Reauthorization Act of 1997,100 the Historically Underutilized Business Zone (HUBZone) program provides contracting assistance for qualifying SBCs in an effort to increase employment and economic development in HUBZone areas. The government-wide goal for participation by HUBZone small business concerns in procurement contracts is 3 percent of the total value of all prime contract awards for each fiscal year.101 Similar to the other SBA preference programs, HUBZone contractors are eligible for set-asides. In addition, on non-set-aside (full and open competition) procurements exceeding the simplified acquisition threshold ($150,000), HUBZone contractors receive a price evaluation preference of 10 percent.102

The SBA’s website at www.sba.gov/hubzone/ provides basic information on this program and a link to a map that helps a firm determine if it is located in a HUBZone. In addition to being located within a HUBZone and qualifying as a small business, a concern must meet three additional criteria to qualify for the HUBZone program. It must (1) have its principal office located in a HUBZone, (2) be at least 51 percent unconditionally and directly owned and controlled by United States citizens, and (3) 35 percent of its employees must reside in a HUBZone.103

Once a HUBZone SBC has received SBA’s notice of certification, that firm’s name should appear on the List of Qualified HUBZone SBCs within 10 business days thereafter. If a firm finds that its name is not on the SBA’s list, the SBA’s regulation places the burden on that firm to immediately notify the D/HUB in writing or via e-mail at hubzone@sba.gov.104

(2) Section 8(a) Program Participants. The SBA Section 8(a) program is named after Section 8(a) of the Small Business Act and is designed to assist the economic development of qualifying businesses. Under Section 8(a), the SBA directly enters into contracts with federal agencies and, in turn, subcontracts the work to certain SBCs.105 In order to participate in the Section 8(a) program, a concern must qualify as a “socially and economically disadvantaged”106 small business concern. Those regulations describe a small business concern107 as both owned and controlled by socially and economically disadvantaged individuals. That is, at least 51 percent of the concern must be unconditionally owned by such individuals, and they must manage the daily business operations on a full-time basis, including setting strategic policy.108

In order to participate in the Section 8(a) program, a small business concern also must establish that it possesses reasonable prospects for success in competing in the private sector. To do so, it must have been in business in its primary industry classification for at least two full years immediately prior to the date of its application to the program, unless a waiver is granted. Other factors considered include access to credit and capital, technical and managerial experience, operating history, and the firm’s record of performance.109

(3) Veteran-Owned and Service-Disabled Veteran–Owned Small Businesses. The regulations governing programs intended to benefit veteran-owned and service-disabled veteran–owned small businesses (VOSBs and SDVOSBs) present an additional set of complications in government contracting. Depending on the agency issuing the specific procurement, either the VA or the SBA will control the status determination.110 The VA’s program includes both VOSB concerns as well as SDVOSB concerns. The SBA’s program, which is applicable to all other procurements, is limited to only SDVOSBs.111 Both the SBA and the VA require that a veteran(s) claiming to be eligible under either program unconditionally and directly own at least 51 percent of the concern,112 and control the long-term decision making, as well as the day-to-day management of the concern.113

(4) Woman-Owned and Economically Disadvantaged Woman–Owned Small Businesses. To qualify as a WOSB, the concern must be small pursuant to SBA regulations and a woman who is a United States citizen must own at least 51 percent of the concern.114 The ownership by the woman must be direct and unconditional.115 The woman owner must manage the long-term decision making, the day-to-day management, and the administration of the concern’s business operations.116

To qualify as an EDWOSB, a concern must be a small business as defined in 13 C.F.R. Part 121 (SBA’s Size Regulations) for its primary industry classification; and not less than 51 percent unconditionally and directly owned and controlled by one or more women who are United States citizens and are economically disadvantaged. While the economic factors (net worth, income, etc.) affecting the SBA’s economically disadvantaged determination are similar to those set forth in the SBA’s Section 8(a) program, they are not identical.117

d. Misrepresentation of Status by Contractors

(1) Overview. Multiple statutes and regulations setting forth penalties for fraud or misrepresentation of a firm’s status as a small business or its eligibility for preference under one or more of the various small business programs are not new. In addition to the penalties and sanctions provided under the criminal False Claims Act118 and civil False Claims Act,119 False Statements Act,120 and the Program Fraud Civil Remedies Act,121 contractors need to be aware of the following additional antifraud statutes and regulations:

  • Section 16(a) of the Small Business Act, 15 U.S.C. § 645(a) setting forth criminal penalties for knowingly making false statements or misrepresentations to the SBA in order to influence its actions.
  • Section 16(d) of the Small Business Act, 15 U.S.C. § 645(d) setting forth criminal penalties for knowingly misrepresenting the small business size status of a concern.
  • Suspension or debarment under 13 C.F.R. Part 145 and FAR Part 9, Subpart 9.4.
  • Termination from the SBA’s Section 8(a) program pursuant to 13 C.F.R. §§ 124.303(a)(15)–(17).
  • Suspension or debarment by the Department of Transportation in accordance with 49 C.F.R. § 26.107.

(2) Sanctions Added by the Small Business Jobs Act. Under the civil False Claims Act, a violation subjects the wrongdoer to a fine per violation plus civil liability equal to three times the government’s damages.122 However, proving actual damages can be difficult. For example, if an offeror were to misrepresent its small business status and was the successful offeror with the low price, the government might have a more difficult task establishing False Claims Act civil damages if the project were completed on schedule and at the contract price.

Section 1341 of the Small Business Jobs Act of 2010 changes that calculation by creating a “presumption of loss to the United States equal to the total amount expended on the contract, subcontract, cooperative agreement, cooperative research and development agreement, or grant” when it is established that a concern, other than a small business, affirmatively and willfully sought and received the award by misrepresenting its status.123 The same section also defines affirmative and willful misrepresentations as one or more of the following:

  • Submission of a bid or proposal for a contract, subcontract, grant, etc.
  • Submission of a bid or proposal that encourages the federal agency to classify the award as an award to a small business.
  • Registration on any federal database in order to be considered for award of a contract, subcontract, grant, etc., as a small business.

When a concern misrepresents its small business status, there is now a presumption that the damage to the government is the total amount of the contract, subcontract, grant, etc.124 The apparent ease of establishing damages may stimulate more civil false claims actions in the coming years related to allegations that a firm misrepresented its size status or eligibility under one of the various small business programs.

3. Procurement Assistance for SBCs

Assistance for small business contractors directly related to the procurement process involve multiple programs including:

  • Certificates of Competency
  • Set-asides
  • Subcontracting Programs
  • Mentor-Protégé Agreements

a. Certificates of Competency

Prior to awarding any contract, a contracting officer must make an affirmative determination that a prospective contractor, whether a large or small business, is a responsible bidder/offeror.125 To be determined responsible, a prospective contractor must satisfy the criteria set forth in FAR § 9.104–1.126 If a contracting officer determines that a small business contractor is not responsible under the FAR § 9.104-1 criteria, the contracting officer is directed to withhold award and refer the matter along with detailed information relating to the proposed award to the SBA.127

Upon receipt of this notification, the SBA has 15 business days (or such longer period as agreed to by the agency and the SBA) to inform the prospective contractor of the agency’s determination and advise that firm of its right to seek a Certificate of Competency (COC) from the SBA, review the agency’s determination, and either issue or deny a COC.128

b. Set-asides (SBC Restricted Procurements)

As noted above, federal agencies are authorized to restrict procurements, either in whole or in part, for award only to small business concerns.129 These reserved contracts are commonly labeled set-asides. While the FAR authorizes both total set-asides130 and partial set-asides,131 it only authorizes total set-asides for construction.132 In addition to set-asides for SBCs, federal agencies may restrict (set-aside) contracting opportunities for Section 8(a) contractors, HUBZone, SDVO, and WOSB concerns.

  1. Sole Source Set-Asides

    While most set-asides for construction projects are competitive, the FAR and the SBA’s regulations allow for the possibility of sole-source, set-aside awards to certain SBCs. The VA has a separate set-aside program for its procurements that includes the potential for sole-source awards, as authorized by the Veterans Benefits Act.133

  2. As reflected in Table 24.2, the authorizations for sole source awards of construction contracts and dollar limits on such awards vary depending upon the specific program.
  3. Competitive Set-Asides—General Policies

    1. No Priority among Competitive Set-Asides. Prior to the passage of the Small Business Jobs Act of 2010, there was a statutory preference for HUBZone contracts. That is, contracting agencies were obligated to set-aside a contract for qualified HUBZone contractors if the “Rule of Two” (discussed below) was satisfied. Following the passage of the Small Business Jobs Act of 2010, all small business set-aside programs are on an equal footing.134

      Table 24.2 Monetary Limits on Sole-Source Set-Aside Awards for Construction Contracts

      Program Dollar Limits Authority Conditions
      HUBZone $4 million including options FAR §§ 6.302–5(b)(5), 19.1306; 13 C.F.R. § 126.612 No reasonable expectation that offers at a fair market price would be submitted by two or more HUBZone firms.
      Section 8(a) Generally, $4 million including options; however procurements with an anticipated award price above that amount may be accepted by the SBA for sole source awards (see comments). Absent an agency justification under FAR § 6.303, the cap on sole-source 8(a) procurements is $20 million.
      13 C.F.R. § 124.519(a)(1) caps the total amount of sole source awards to an 8(a) concern at 5 times its primary NAICS code revenue size standard in effect when it entered the 8(a) program.
      FAR §§ 6.302–5(b)(4), 19.808–1, and 19.811–1; 13 C.F.R. § 124.506 Competition is not required if the SBA accepts the procurement for award to an Indian tribe or ANC firm; or there is no reasonable expectation that offers at a fair market price would be submitted by two or more 8(a) firms and the SBA determines that a participant in the 8(a) program is capable of performing the requirement at a fair price.
      SDVOSBs (other than the VA program) $3.5 million including options FAR §§ 6.302-5(b)(6), 19.1406; 13 C.F.R. § 125.20 No reasonable expectation that offers at a fair market price would be submitted by two or more SDVOSB firms.
      SDVOSBs (VA program) $5 million including options VAAR §§ 819.7007; 19.7004 A determination that only one SDVOSB concern is available to meet the requirement is not required. Contracting officers are instructed to consider SDVOSB set-asides before VOSB set-asides.
      VOSBs (VA program) $5 million including options VAAR § 819.7007 A determination that only one VOSB concern is available to meet the requirement is not required.
      WOSB & EDWOSB N/A N/A Sole source awards are not authorized under either the FAR or the SBA’s regulations.

    2. Rule of Two. Contracting agencies may set-aside procurements for small business concerns if the so-called “Rule of Two” is satisfied. In other words, if the agency has a reasonable expectation from its market research, such as responses to a “Sources Sought” posting on FedBizOpps,135
    3. that at least two responsible small business concerns will submit an offer on a contract exceeding $100,000 at a fair market price, then the contract must be set-aside for small business concerns. The contracting officer must determine the fair market price for the goods or services being sought by the agency and is given relatively broad discretion to determine a fair market price using the pricing guidelines set forth in the FAR.136

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