Recent IG Report Could Lead to Much Stricter Process for SDVOSBs at DOD
July 11, 2012
By: Eric Whytsell
Service-disabled, veteran-owned small businesses (SDVOSBs) should not be surprised if the Department of Defense (“DoD”) adopts a robust verification program for SDVOSB contractors similar to that in place at the Department of Veteran Affairs (“VA”).
This Spring, the DoD Inspector General (“IG”) found that DoD had made hundreds of millions of dollars of SDVOSB set-aside and sole-source awards to contractors that either (i) were demonstrably ineligible; or (ii) had potentially misstated their SDVOSB status. The title of the February 29, 2012 Report succinctly summarizes the IG’s key conclusion: “Inadequate Controls Over the DoD Service-Disabled Veteran-Owned Small Business Set-Aside Program Allow Ineligible Contractors to Receive Contracts.” According to the Report, the DoD’s procurement mistakes resulted from its having no mechanism in place to ensure that awardees met applicable requirements but instead relying “on contractors to self-represent their SDVOSB status, without confirming the accuracy of the representations.” Report at 4.
In recommending that DoD management “establish a contractor verification process to evaluate contractors’ SDVOSB status,” Report at i, the IG implicitly held up the SDVOSB verification program managed by the VA Center for Veterans Enterprise (“CVE Program”) as an example of the necessary procedures. Indeed, all of the specific requirements recommended by the Report are also elements of the CVE Program: “These procedures should require contractors to submit documentation to support their SDVOSB status. At a minimum, contractors should establish that a service-disabled veteran is at least 51-percent owner, holds the highest officer position, controls the long-term decisionmaking, and manages the day-to-day operations of the business. Status as a service-disabled veteran should be confirmed through either a disability rating letter issued by the VA or a disability determination from DoD.” Id. at 14; see generally 38 C.F.R. § 74.
If the DoD Office of Small Business Programs follows through on the IG’s recommendation, things could get significantly more complicated for SDVOSBs doing business with DoD. An example of the complications – and corresponding opportunity for disputes – that SDVOSB contractors may face at DoD as a result is amply illustrated in CS-360, LLC v. U.S Department of Veteran Affairs, Civil Action No. 11-00078 (D.D.C. March 6, 2012), a recent decision involving a challenge to Veterans Affairs’ refusal to find a contractor eligible under the CVE Program on the ground that the concern was not controlled by a service-disabled veteran. As detailed in the Court’s lengthy opinion, the VA’s process included, among other things: an examination of the books and records of the contractor; on-site interviews with the concern’s employees and owners; and a searching review of the concern’s business relationship with its DHS-approved mentor. CS-306 LLC, at 5-6. The VA’s final decision was based on: (i) the operating agreement’s failure to require the managing members to devote a particular amount of time to their duties; (ii) excessive potential for delegation of decision-making authority by the managing members; (iii) “deeper organizational flaws,” presumably a reference to the concern’s reliance on its mentor; and (iv) the conclusion that the concern was created as a “sham” entity to solicit SDVOSB set-aside contracts on its mentor’s behalf. Id. at 9-11.
However, finding that VA had failed to provide a satisfactory contemporaneous explanation for its decision, the Court ultimately remanded the matter to the VA for additional investigation or explanation. Id. at 23, 33. Thus, almost two and a half years after CS-360, LLC submitted its application to the CVE Program, the issue of its eligibility still has not been resolved.
To some extent, this case can be considered an outlier; not all SDVOSBs have the same experience with the CVE Program as CS-360. But the case underscores the heightened level of attention to eligibility requirements -- and potential for complications – that may soon confront SDVOSBs doing business with DoD.
Eric Whytsell is the attorney responsible for the content of this article.