Morrison Foerster’s Government Contracts Insights provides our in-depth analysis of developments and trends impacting government contracting. Through Insights, our attorneys offer a real-time assessment of the statutory, regulatory, legal, and business-related developments and trends that are shaping the industry. We also examine a full array of non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Morrison Foerster’s nationally recognized Government Contracts and Public Procurement practice represents the world’s leading companies in the aerospace and defense, intelligence, cybersecurity, information technology, financial and professional services, education, healthcare, infrastructure, and logistics support sectors. We are enlisted to address our clients’ most complex and important legal issues. Our work includes contract and subcontract negotiation and other transactional matters, business and regulatory compliance counseling, internal investigations, bid protests, and a wide array of enforcement and litigation matters. Our clients range from Fortune 50 companies to small and medium-sized companies just entering the public sector. We advise both U.S. and non-U.S. companies involved in municipal, state, federal, and non-U.S. procurement matters.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Tina is Co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmaceutical companies, with a focus on general contract counseling and compliance, particularly concerning intellectual property, and cybersecurity matters and federal grant funding.Tina counsels contractors on compliance with federal, state and local acquisition and ethics regulations and with the evolving myriad of requirements pertaining to data security and cybersecurity. She has been involved with numerous internal investigations and compliance reviews, and with mandatory and voluntary disclosures to agencies, and litigation of False Claims Act matters.Tina routinely advises clients concerning:<ul><li>Prime-subcontractor relationships</li><li>Sources of supply and country of origin requirements</li><li>Price reductions and price reporting issues</li><li>Organizational conflicts of interest</li><li>Safeguarding of intellectual property and other proprietary interests</li><li>Licensing and data rights issues</li><li>Handling of classified materials and controlled unclassified information</li><li>Agency suspension and debarment proceedings</li></ul>She also assists clients with due diligence and other activities related to the acquisition of government contracting concerns, and with the drafting and negotiation of teaming agreements, subcontracts, licensing agreements, and cooperative research and development agreements. She also assists clients applying for federal grants (including SBIR and STTR agreements), and those who seek to obtain other transactional authority agreements, as well as those competing for state and local government work.Tina’s litigation experience includes government contracts claims litigation in federal courts and before boards of contract appeals, bid protests before the Government Accountability Office and the Court of Federal Claims, and complex disputes in federal courts, including civil fraud and False Claims Act litigation and reverse Freedom of Information Act litigation.Prior to joining Morrison Foerster, Tina worked at another large national firm and as a trial attorney in the Office of the General Counsel of the Navy, Navy Litigation Office.<h4>Representative Experience</h4><ul><li>Negotiation of largest CHIPS Act federal funding agreement between multinational semiconductor corporation and U.S. Department of Commerce.</li><li>Negotiated prime contract and major subcontracts related to the Department of Energy’s next generation supercomputer program, including extensive IP rights negotiations and negotiation of associated patent rights waivers.</li><li>Negotiated series of other transaction authority agreements with DARPA and associated subcontracts with more than a dozen research universities on behalf of a firm biotech client, including complex IP rights allocations and material transfer agreements.</li><li>Assist clients with FedRAMP authorization process and with development of license agreements for software products sold to federal, state and local government agencies.</li><li>Cyber incident response counseling to some of the largest companies and organizations impacted by security incidents.</li><li>Advises clients on Bayh-Dole reporting of inventions and IP strategies for contracts and grants.</li><li>Conducts due diligence for major government contract mergers and acquisitions.</li></ul>

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Tina is co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She counsels a wide variety of government contractors on compliance with federal acquisition and ethics regulations. She drafts and negotiates contracts on their behalf and has been involved with numerous internal investigations and compliance reviews, and with bid protest, contract claims, and False Claims Act litigation. She also advises on M&A transactions involving government contractors.

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Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office.Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters. He has represented both protesters and awardees in scores of protests before the Government Accountability Office, the Court of Federal Claims, and procuring agencies, in acquisitions ranging from small business procurements to multibillion-dollar contracts of global significance. His representative protest matters span the aerospace sector, the Intelligence Community, base operations and logistics, healthcare, nuclear and environmental work, and information technology and software acquisitions. His protests have included both classified and unclassified programs. In addition to prevailing in published decisions, Jim has also secured favorable corrective action on behalf of clients in a wide variety of protests that were resolved without a published decision.Jim’s work also focuses on disputes over cost allowability and compliance with the Cost Accounting Standards, and he has appeared before the Armed Services and Civilian Boards of Contract Appeals, in size and status protests before Small Business Administration (SBA) area offices, and appeals before the SBA Office of Hearings and Appeals. Jim regularly counsels clients on contract interpretation, organizational conflicts of interest, and small business compliance.Jim graduated with high honors from the George Washington University Law School, where he focused his studies on federal procurement law, was a member of the Law Review, and interned with the General Services Administration’s suspension and debarment office. Jim also holds a degree in theology magna cum laude from the Pontifical Gregorian University in Rome and a bachelor’s degree in classical languages and literature summa cum laude from the University of Kentucky, where he graduated Phi Beta Kappa.

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Jim maintains an active practice in bid protests before the Government Accountability Office and contracting agencies and counsels clients in contract disputes and compliance obligations.

Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office. Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters.

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<div style="margin-bottom: 15px;" class="videoWrapper"><iframe class="sticky-video" title="Meet Alex Ward, Government Contracts Practice Co-Chair" src="https://www.youtube-nocookie.com/embed/TkliwdSlTaQ?rel=0" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen="1" title="iframe"></iframe></div>J. Alex Ward is co-chair of Morrison Foerster’s Government Contracts and Public Procurement group. His practice covers a full range of government contracts matters, including investigations, bid protests, claims, general litigation, corporate transactions, and counseling. Alex strives in all matters is to provide his clients the highest level of efficient and effective representation.Alex represents contractors in internal and external investigations, disclosures to the government, and qui tam litigation, with great success in reducing or eliminating his clients’ exposure through active engagement with the government. His work in this area includes obtaining numerous declinations and dismissals of False Claims Act cases in their earliest stages, sparing his clients the cost, risk, and exposure of litigation.He has also served as lead counsel in dozens of bid protests involving military and civilian agency procurements of a wide range of products and services, including all manner of pre- and post-award protests in the GAO, the U.S. Court of Federal Claims, and state tribunals, as well as appeals to the U.S. Court of Appeals for the Federal Circuit and size protest appeals before the SBA’s Office of Hearings and Appeals.Alex handles all aspects of the claims process, from the initial assessment and drafting of requests for equitable adjustment through litigation in the Boards of Contract Appeals and the Court of Federal Claims. Alex’s practice also covers the full gamut of other controversies confronting government contractors, including prime-sub, teaming partner, employer-employee, competitor, and indemnification disputes. His litigation work also includes a wide variety of pro bono engagements, in which he has represented both individual and institutional clients in matters ranging from immigration and criminal defense to sustainable procurement and protection of the environment.Prior to joining the firm, Alex served in the U.S. Army as a commissioned officer and an Assistant to the General Counsel of the Army responsible for civil works and international matters, and as a clerk for judges on the U.S. Courts of Appeals for the Armed Forces and the D.C. Circuit. He is a member of the Boards of the Morrison & Foerster Foundation and the Chesapeake Bay Foundation and of Law360’s Government Contracts Editorial Board.

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Alex is co-chair of Morrison Foerster’s Government Contracts and Public Procurement practice. His practice covers a full range of government contracts matters, including bid protests, claims, investigations, corporate transactions, and counseling.

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Morrison Foerster’s Government Contracts Insights blog provides an in-depth analysis of news, developments, and trends impacting government contracting and procurement. Through Insights, attorneys from our nationally recognized Government Contracts and Public Procurement practice will offer a real-time assessment of the statutory, regulatory, legal, and business-related developments that are shaping the industry. This blog will also examine a full array of U.S. and non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Read about our <a href="http://govcon.mofo.com/editors/">Authors</a>.Never miss a post. Subscribe to get real-time updates.

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A recent defective pricing case, Alloy Surfaces Co., ASBCA No. 59625, 2020 WL 1896784, April 9, 2020, charmingly illustrates the Government’s doggedness in trying to reprice a contract using the Truth in Negotiations Act (TINA).  The Armed Services Board of Contracting Appeals did not buy into any of the Government’s arguments, finding that an undisclosed document reflecting fundamentally judgmental data did not constitute cost or pricing data and that disclosure of the document would not, in any event, have lowered the contract price.In Alloy, the Army ordered M211 infrared decoy flares in a series of production runs under a 1999 contract and six delivery orders under a new IDIQ.  Alloy performed the 1999 contract order and these six delivery orders at its “Plant 1.”  In performing the last of the six delivery orders (DO 13), Alloy introduced automation into its production processes.  Alloy was performing DO 13 when the Army requested Alloy’s proposal for DO 14, which would require Alloy to increase production rates to about three times its production rate under DO 13.  To meet this increased demand, Alloy proposed to hire over 250 employees and to expand its new, second plant and open a third plant.  Alloy planned to use automation in performing the new order.Alloy’s proposal was based on its actual labor and material usage factors from its two earliest delivery orders.  It also predicted that it would experience “negative 10%” learning because of the move to the two new plants and its newly expanded, inexperienced work force.  The Army generated its own, lower labor and material usage factors.  The Government acknowledged that “some inefficiency could occur due to additional production rate ramp-up.”  Further, the Army knew during negotiations that the Plant 1 automation had resulted in lower labor usage factors for its various production operations in performing DO 13 than Alloy had experienced in the first two production runs.  Indeed, the Army knew of the specific labor usage factors where Alloy had increased efficiency through automation, and it believed that material usage and labor usage under the new DO 14 would be lower than the “actuals” Alloy had disclosed for all but one of these many labor operations.The negotiation largely centered on whether Alloy would experience decreased efficiency because of its need to ramp up production in these new facilities.  The price for DO 14 eventually negotiated – around $57 M – was based on the early two production runs’ usage factors, which were higher than the Army’s independent estimates, with no “negative learning” applied to those factors.Years later, the Army alleged defective pricing based on Alloy’s failure to disclose “job cost reports” for DO 13.  The Contracting Officer’s Final Decision demanded a price reduction of almost $16 M, based on actuals for DO 13.  The defective pricing allegations reflected a large material-cost impact and a reduction of labor hour usage by almost two-thirds of the amount negotiated.ANALYSISThe Government’s position in Alloy illustrates almost every flaw a defective pricing allegation can possibly contain.  The Army’s allegation was based on judgmental rather than factual data and on data not available on the handshake date.  The Army negotiators knew, in general terms, that the actual costs for DO 13 would be lower than the ones used in negotiations, even if the specific costs of DO 13 had not been disclosed.  Finally, the Army’s decision simply repudiated the negotiators’ decision that, despite automation, the production ramp-up, new facilities, and new hiring would cause inefficiencies.(a) Were the DO 13 “job cost reports” cost or pricing data? The “job cost reports” that were actually available to Alloy before the conclusion of negotiations contained both factual and judgmental data.  They covered “work in process” (WIP) under a partially completed job.  While the reports included the costs incurred on the job to date, the job’s costs could not be understood or used without knowing the quantities they represented, and those quantities could not simply be counted.  Determining the quantities represented by a particular WIP report required significant judgment in developing estimates for the “equivalent units” represented in a particular production period in a given report.The Board agreed with the Government’s contention that the reports included both factual and judgmental information.  But the judgmental information, the “equivalent units,” was a fundamental part of the report, and the Board concluded that the WIP reports from the months prior to job completion were not cost or pricing data.(b) Was the September DO 13 job cost report reasonably available to Alloy before the certificate “as of” date? The Government argued that the DO 13 job cost report for September, when production on this order had been completed, contained final, accurate, equivalent units (because the job had, by then, been completed).  The cutoff established for completion of DO 13 was a few days before the DO 14 handshake.  After this cutoff, though, and before it could finalize the report, Alloy had to take a final physical inventory, review labor timesheets, and reconcile the WIP data with the actual number of units produced and hours logged.  This process was not completed until a few days after the DO 14 handshake.  Absent any evidence that Alloy had held up this process, the Board found that the September report did not possess the degree of certainty necessary for it to qualify as cost or pricing data.  In other words, the only version of the report accurate enough to be cost or pricing data was not available to Alloy until after the date of agreement on price.(c) Would the Government have relied on the WIP reports had they been produced?   The Board found the Army had not met its burden of showing “that having the final job cost report from DO 13 would have changed its decision to rely on the weighted average of the data” from the first two production runs.  The Army was aware of the effects of automation, and it knew that, as a result of automation, the actual costs of DO 13 would be lower than the actuals from the first two production runs.  The Board found that this knowledge of the effect of automation “undermines the causal connection between the allegedly undisclosed data and an overstated contract price.”  Further, while the DO 13 information would have told the Army a bit more about the benefits of automation, it would not have helped the Army estimate the inefficiencies of ramping up, which was the central point of the negotiations.  And finally, the Government offered no specifics as to how it would have used the information in negotiations.COMMENTThe decision in Alloy made interesting use of the CO’s testimony.  First, the Board pointed out that the contracting officer had never asked for the DO 13 actuals.  Of course, it is clear from decades of TINA jurisprudence that the statute imposes an affirmative obligation on the contractor to produce data and that the Government did not have to ask for cost or pricing data to trigger Alloy’s obligation.  But the Board used the CO’s failure to request information on DO 13 to bolster its conclusion that the CO would not have relied on that data had it been produced.  With knowledge that the DO 13 “actuals” would show the extent to which automation had affected Alloy’s production costs, the CO exhibited no interest in receiving them.Second, the Board also used this curious testimony by the Contracting Officer:Q:  You signed the Modification P00025 relying on upon the certificate current costs and pricing data, on the assumption that you would be able to recover any defective pricing cost later, correct?A:  Correct.The Board concluded that the CO believed she could reprice the contract later to recoup any difference the DO 13 data would have made.   But the Price Adjustment clause does not provide a vehicle the Government can use to simply reprice a contract after award.The decision also showed that the Board felt it had to distinguish the decision in Texas Instruments, Inc., ASBCA No. 23678, 87-3 BCA ¶ 20,195.  The Army cited Texas Instruments for the proposition that the reports involved in that case, which including both factual and judgmental data, constituted “cost or pricing data” pursuant to TINA.  But the Texas Instruments case was fundamentally different.  The “Rolled Up Run Cost” report involved in that case had been fully disclosed.  The run cost report was an estimating tool in which the appellant selected a single job order for each piece part or assembly that its estimators believed were predictive of future performance in making those parts/assemblies, and it used those selected job orders’ costs to “roll up” the costs of every piece part/assembly to obtain the cost of a complete unit.  The only “factual” part of the report was the cost of the single, selected job order for each parts, and appellant had produced the costs of all its job orders in its separate “Detail Job Order Cost Report.”  The Government was not complaining about non-disclosure; rather it complained that Texas Instruments’ estimating methodology in the Rolled Up Run Cost – fully disclosed to and understood by the Government – was not “accurate” or complete.  But only data, not estimating methodologies, are required to be “accurate” and “complete.”  In fact, estimates, by their very nature, cannot logically be either accurate or complete, and TINA imposes no such requirement.Lastly, the Alloy decision appears to show the lengths to which the Government may go to reprice a contract when it later becomes dissatisfied with its negotiator’s decisions.  Any one of the flaws described in the decision should have been sufficient to convince the CO and DCAA that there had been no defective pricing.  But scenting an opportunity to recoup almost $16 M, the Government gamely hung in there and forced the appellant to litigate to restore over a quarter of the contract price.

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Try, Try Again

SBA Issues Final Rule on Appeals Process for PPP Loan Review Decisions

A recent defective pricing case, Alloy Surfaces Co., ASBCA No. 59625, 2020 WL 1896784, April 9, 2020, charmingly illustrates the Government’s doggedness in tryi

Try, Try Again

This installment of our monthly <a href="https://www.law360.com/articles/1270496" target="_blank" rel="noopener noreferrer">Law360 bid protest spotlight</a> features a number of noteworthy decisions from the U.S. Government Accountability Office (GAO), Court of Federal Claims (COFC) and Federal Circuit.  Eskridge & Associates addresses the hurdles associated with establishing prejudice.  Abacus Technology Corporation discusses an agency’s requirement (or lack thereof) to conduct a price realism analysis.  Sayres & Associates Corporation addresses an agency’s unreasonable substitution of escalation rates.  Finally, NIKA Technologies, Inc. provides a helpful discussion of the debriefing rules when an agency permits questions.Eskridge & Associates v. United States<a href="#_edn1" name="_ednref1">[i]</a>In Eskridge & Associates v. United States, the Federal Circuit affirmed the COFC’s decision to dismiss Eskridge’s protest for lack of standing.  The solicitation was issued in 2018 to provide nurse anesthetists for an Army hospital.  This was the U.S. Army’s second attempt to procure these services; the first solicitation, issued in 2016, was canceled in connection with a corrective action.  The 2018 solicitation provided that the bids would be evaluated on a lowest price technically acceptable (LPTA) basis, and that the Army would identify the five lowest priced proposals, and then examine them for technical acceptability.The Army identified the five lowest priced bids, determined that three were technically acceptable, and awarded the contract to Ansible Government Solutions (Ansible).  Eskridge protested the decision at the GAO, alleging that the award was unreasonable and contrary to law, and that the evaluation was not performed according to the terms of the solicitation.  The Army ultimately took corrective action to review and document the selection process and determine whether the awardee met solicitation requirements.  The Army reviewed the ten lowest priced bidders on technical and past performance.  Of the five technically acceptable bidders, Eskridge’s bid was the highest priced and the Army awarded the contract to Ansible.Eskridge filed a post-award bid protest with the GAO, alleging a number of protest grounds.  The GAO, however, determined that Eskridge was not an interested party and dismissed the protest.  Eskridge filed a complaint at the COFC requesting declaratory relief and that the court direct award to Eskridge.  Eskridge presented the same allegations brought before the GAO.   The court concluded that Eskridge did not have a substantial chance of winning the contract because of the five bidders that the Army considered, Eskridge’s bid was the highest price.  Eskridge therefore was not an interested party, and lacked standing.  Eskridge appealed to the Federal Circuit.The Federal Circuit affirmed the lower court ruling, finding that Eskridge lacked standing.  The court reasoned that even if Ansible had not received the contract, three other, lower priced bidders were in line to receive the award.  Further, Eskridge failed to demonstrate prejudice outside of its allegations that the Army failed to conduct a meaningful price realism analysis.  Eskridge’s remaining price realism argument was based upon terms in the 2016 solicitation that were not actually incorporated into the 2018 solicitation.  Eskridge could therefore not establish why rebidding would be required.Key Takeaway: Tenacity aside, prejudice is essential.  As evidenced in Eskridge, where the protester could not defend a theory that enabled it to move from fifth to first in line, a protester will not be able to establish standing unless it can show a substantial likelihood that it would have received the contract absent the agency’s errors.  This challenge is further amplified in an LPTA competition where technical acceptability is confirmed and the award hinges on price.Abacus Technology Corporation<a href="#_edn2" name="_ednref2">[ii]</a>The U.S. Department of the Air Force issued a fair opportunity proposal request (FOPR) for network and infrastructure support services.  The FOPR contemplated that proposals would be evaluated under two evaluation factors, technical and cost/price.  The technical evaluation factor considered three subfactors:  technical capability, management, and technical experience.  The cost/price factor provided that proposals would be evaluated for completeness, reasonableness, and unbalanced pricing.The FOPR also required the Air Force to make a responsibility determination.  To assist with this determination, offerors were asked to submit a compensation plan listing salaries and fringe benefit packages.  Offerors were also instructed to include a discussion of how their proposed compensation package reflected a sound management approach and understanding of the contract requirements and facilitated recruitment and retention.The Air Force awarded the task order to Micro Technologies, LLC (MicroTech) and Abacus Technology Corporation (Abacus) filed a protest with the GAO challenging the Agency’s best-value tradeoff decision.  Specifically, Abacus alleged that MicroTech’s proposal should have been rated technically unacceptable or assessed a higher risk level due to its unreasonably low price.  In response, the Air Force took voluntary corrective action.  During its corrective action, the Air Force determined each proposal was technically acceptable and each was assigned a risk rating of low.  The Air Force re-awarded the task order to MicroTech.  Abacus filed a second protest arguing that the Air Force failed to evaluate whether MicroTech could perform the task order requirements at the low price it proposed.The Air Force moved to dismiss Abacus’s protest on the ground that the FOPR did not require the Air Force to conduct a price realism evaluation.  Abacus argued that the language of the FOPR requiring a review of offerors’ compensation plans was substantially similar to the text of the FAR provision 52.222-46, Evaluation of Compensation for Profession Employees, which has been held to essentially contemplate a price realism evaluation.  The GAO, however, agreed with the Air Force and found that the cost/price evaluation criteria said nothing about evaluating an offeror’s compensation plan or price information for realism.  The FOPR only required that the Air Force evaluate prices for completeness, reasonableness and balance.Key Takeaway:  An agency is not required to determine whether a proposed price is unreasonably low or below the cost of performance absent an explicit price realism provision in the Solicitation.  This case stands for the importance of understanding the price evaluation criteria to determine what exactly is required of the agency.Sayres & Associates Corporation<a href="#_edn3" name="_ednref3">[iii]</a>Sayres & Associates Corporation (Sayres) successfully challenged the U.S. Navy’s cost realism evaluation on the grounds that the evaluation of the protester’s escalation rate was unreasonable.  Sayres and RP Technologies (RP) were the sole offerors in response to a Navy Request for Proposals (RFP) to holders of the Navy Seaport-e Indefinite Delivery, Indefinite Quantity (IDIQ) contract.  The RFP contemplated a best-value tradeoff, and the evaluation criteria weighed technical and management, past performance, and total evaluated cost (TEC).  The RFP warned that proposals required substantiating information for any elements affecting cost realism, and that failure to provide that information could result in a cost adjustment.  Offerors were encouraged to provide realistic escalation rates to project future wage increases, but if the proposal lacked substantiating historical rates, the government reserved the right to substitute using current market data.While evaluating proposals, the Navy noted that Sayres’ escalation rate was lower than the industry forecasts for similar services, so it substituted an industry benchmark escalation rate.  The Navy’s cost analysis added over five percent in total to Sayre’s proposed costs.  The source selection authority concluded that RP had a higher technical and past performance rating, and a lower TEC than Sayres’, and awarded the contract to RP.Sayres filed a bid protest at the GAO, challenging the Navy’s cost realism analysis on the grounds that it unreasonably rejected its proposed escalation rate.  Sayres also contested that the Navy’s assertion that it did not provide substantiating data for its escalation rate, arguing that it provided detailed historical data of salaries and their increases over a five-year period. The Navy countered that the historical data Sayres provided was “unverified.”The GAO concluded that Sayres did provide five years of data, which articulated a basis for its escalation rate.  The GAO determined that the record did not show that the Navy conducted a meaningful assessment of Sayres escalation rate.  Instead, the Navy determined the rates were below the IHS rate and stated in a conclusory fashion that Sayres did not provide substantiating data.The Navy argued that Sayres nevertheless was not prejudiced, because RP still had a superior technical score.  The GAO disagreed, and found that Sayres had been prejudiced by the Navy’s evaluation, because absent the Navy’s tinkering with the escalation rate, Sayres would have had a superior TEC, and that would have required the Navy to conduct a true tradeoff determination.Key Takeaway:  Source selection authorities cannot reject offerors’ substantiating information in a conclusory fashion.  If an offeror provides information to justify its pricing, an agency must conduct a meaningful and well-documented review of the data.  That said, to the extent that a solicitation requires substantiating information, we encourage clients to ensure the data submitted is verifiable and complete.NIKA Technologies, Inc. v. United States<a href="#_edn4" name="_ednref4">[iv]</a>NIKA Technologies, Inc. (“NIKA”) filed a complaint at the COFC following refusal by the U.S. Army Corps of Engineers (“Corps”) to authorize a Competition in Contracting (CICA) stay while NIKA’s post-award bid protest was pending at the GAO.  NIKA argued that its protest was timely and triggered an automatic stay pursuant to 31 U.S.C. § 3553(d).  The Corps, on the other hand, argued that NIKA’s protest was untimely and the Corps was thus not required to stay performance.The contract at issue is a multiple-award, IDIQ contract to provide services for the Corps’ Operation and Maintenance Engineering and Enhancement Program.  On February 27, 2020, the Corps informed NIKA that its corporate experience was unacceptable and it would not be selected for award.  The next day, NIKA requested a debriefing.  The Corps acknowledged the request, and NIKA responded with a list of questions on March 3, 2020.  The Corps sent NIKA a written debriefing letter on March 4, 2020, allowing NIKA to submit additional questions within two days of receipt of the debriefing.  The letter explained that the debriefing would be considered closed if questions were not received within two days, but if questions were received, the government would respond within five days, and the debriefing would close upon delivery of the written responses to the additional questions.  NIKA sent the Corps a letter on March 5 stating that it planned to follow up the next day, but on March 7, NIKA informed the Corps that it had no additional questions.NIKA filed a bid protest at the GAO on March 10 and sought an automatic CICA stay.  The Corps, however, argued NIKA’s protest was untimely and refused to implement the CICA stay.  NIKA filed a complaint at the COFC challenging the Corp’s refusal to stay performance pending a determination on its GAO protest.The court reasoned that NIKA would be entitled to an automatic stay if its protest was filed within the later of either ten days after the date of contract award, or five days after a requested debriefing date that when requested, is required.  The parties’ sole disagreement was which debriefing date is the “true” debriefing date.  NIKA argued that its decision not to submit additional questions by March 6 meant the debriefing closed on that date.  Therefore, its protest filed on March 10 fell within the five-day period.  The government argued the debriefing date was March 4, the date the Corps provided the debriefing letter to NIKA.The court looked to Section 181 of the 2018 National Defense Authorization Act (NDAA) (Pub. L. 115-91, 131 Stat. 1283 (2017)), which implements enhanced debriefings.  This legislation modified debriefings under CICA, providing a two-day period in which offerors could submit questions.  The court noted that 10 U.S.C. § 2305(b)(5)(B)(vii) provides that a debriefing shall include “an opportunity for a disappointed offeror to submit, within two business days after receiving a post-award debriefing, additional questions related to the debriefing.”  The court concluded that if no questions were submitted within the two-day period, the debriefing closed at the end of that period.  Further, the court observed that the agency’s own letter indicated that the government would consider the debriefing closed if questions were not received within two business days.  Therefore, the end of the debriefing period would be March 6, the date by which the debriefing would close if questions were not submitted.  Accordingly, the court determined that NIKA’s protest was timely and thus entitled to an automatic stay under CICA.Key Takeaway:  It is well understood that the deadline for filing a protest is within ten days of award or five days after the close of a requested—and required—debriefing.  This opinion defines the boundaries of the enhanced debriefing requirements and addresses the gray areas that arise when questions are being submitted, and answered, by an agency.  There is, however, an adage in the military that (slightly paraphrased) states, “you can either choose to probably be right or certainly be right.”  In essence, this saying counsels a conservative approach to deadlines:  if a deadline is five days, you know you are safe if you get the job done in four days.  While this ruling helps define the boundaries of the filing deadlines, getting the job done early is probably the best approach.<a href="#_ednref1" name="_edn1">[i]</a> Eskridge & Associates v. United States, No. 2019-1862, 2020 WL 1870530, at *1 (Fed. Cir. Apr. 15, 2020)<a href="#_ednref2" name="_edn2">[ii]</a> Abacus Technology Corporation, GAO B-417749.2 B-417749.3, Mar. 9, 2020<a href="#_ednref3" name="_edn3">[iii]</a> Sayres & Associates Corporation, B-418374, Mar. 30, 2020, 2020 WL 1819896<a href="#_ednref4" name="_edn4">[iv]</a> NIKA Technologies, Inc. v. United States, No. 20-299C, 2020 WL 1922381, at *1 (Fed. Cl. Apr. 16, 2020)

April Bid Protest Roundup (Law360 Spotlight)

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Associate

Caitlin Crujido is an associate in the Government Contracts practice in Morrison Foerster’s Washington, D.C. office.

Caitlin A. Crujido

Caitlin Crujido

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April Bid Protest Roundup (Law360 Spotlight)

GAO Finds CIO-SP4 Solicitation Is Unduly Restrictive of Competition

This installment of our monthly Law360 bid protest spotlight features a number of noteworthy decisions from the U.S. Government Accountability Office (GAO), Cou

April Bid Protest Roundup (Law360 Spotlight)

The federal contracting process is famous for its exacting approach to competitive procurement, which safeguards taxpayer funds and principles of fairness.  This emphasis on process, however, can slow the wheels of the acquisition machine.  The rapid spread of COVID-19, however, has required the government to use available tools to accelerate cash flow to contractors and the procurement of supplies and services.  Notably, both the <a rel="noopener noreferrer" target="_blank" href="https://assets.documentcloud.org/documents/6818341/INTENT-and-DIRECTION-WITHHOLDS-and-RETENTIONS.pdf">U.S. Navy</a> and the U.S. Air Force expressed renewed interest in accelerating contract awards and in the use of Undefinitized Contractual Actions (UCAs) when appropriate.What Are UCAs?UCAs, sometimes called “letter contracts” (see FAR 16.603-1), are used to create contracts with the government when one or more elements of a contract cannot be agreed upon, and there is an urgent need to begin production.  These elements can includes terms, conditions, or even price; however, the UCA must include a schedule that sets forth when any open terms of the UCA are to be definitized.  FAR 16.603-2; DFARS 217.7401, 217.7404-3.  Aspirationally, the parties will mutually agree to all contract terms within the time set by the definitization schedule; if, however, the parties fail to agree, the may unilaterally definitize the contract’s terms—including whatever price the Government deems reasonable—subject to the schedule and internal Government approvals set forth in regulation.  This can pose significant risks to the contractor because the government retains substantial leverage and can unilaterally definitize if negotiations fail.  And because UCAs are created due to urgent needs, the pace of the contract can shorten the timeline for negotiation.  Although a UCA is required to include a schedule for definitization, that schedule may in practice be merely aspirational; the <a href="https://www.gao.gov/assets/680/670257.pdf">GAO</a> and the Department of Defense (DoD) have been critical of some agencies for allowing UCAs to exceed established definitization timeframes.UCAs are meant to be rare, and the DFARS permits the use of UCAs “only when (1) the negotiation of a definitive contract action is not possible in sufficient time to meet the Government’s requirements; and (2) the Government’s interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.”  DFARS 217.7403 (emphasis added).  In litigation, UCAs are treated as any other contract award and can be challenged at the GAO on the same grounds.  See, e.g., Fisher Sand & Gravel Co., B-417496, July 26, 2019, 2019 CPD ¶ 280 (challenging the award of an undefinitized fixed-price design-build contract).Updated Definitization RequirementsLast year, MoFo published an <a href="https://govcon.mofo.com/defense/undefinitized-contract-action-proposed-rule/">article</a> about <a href="https://www.federalregister.gov/documents/2019/02/15/2019-02530/defense-federal-acquisition-regulation-supplement-undefinitized-contract-actions-dfars-case">upcoming regulatory changes</a> to UCAs.  On August 9, 2019, <a href="https://www.federalregister.gov/documents/2019/08/09/2019-16766/defense-federal-acquisition-regulation-supplement-undefinitized-contract-actions-dfars-case">these changes went into effect</a>.  The deadline for definitization is now no later than 180 days after the contractor submits a qualifying proposal.  Previously, the deadline was 180 days from the issuance of the action.  This “deadline” continues to be subject to extensions, but DoD contracting officers can no longer extend this 180‑day deadline by more than 90 days without a written determination from high-level authorities.  10 U.S.C. § 2326(g); DFARS 217.7404-3.  The requirement remains unchanged that definitization occur by the date that the amount of funds obligated under the contract exceeds 50 percent of the “do not exceed” price.  UCAs involving foreign military sales ordinarily now require authorization from the head of the contracting activity and definitization within 180 days of submission of a qualifying proposal.  The definition of “qualifying proposals,” however, remains subjective.  According to the DFARS, a qualifying proposal is a proposal that contains sufficient information for the DoD to meaningfully analyze and audit it.  DFARS 217.7401.  More conditions have been imposed on unilateral definitization of contracts over $50 million: a unilateral definitization cannot be made prior to the end of the 180-day period described above or the date that the amount of funds expended is over 50 percent of the overall not-to-exceed price.  48 C.F.R. § 217.7404(b).Regardless of contract price, if price is undefinitized and the final price is negotiated after a “substantial portion” of performance, the agency head must ensure that the profit allowed on the UCA reflects the possible reduced cost risk as to costs during performance and reduced cost risk during the remainder of the contract.  However, if the contracting officer (CO) definitizes more than 180 days after a contractor submits a qualifying proposal, the agency head must ensure that the profit reflects the cost risk of the contractor that existed on the date that the contractor submitted the proposal.  48 C.F.R. § 217.7404–6.  To unilaterally definitize a contract, the head of the contracting activity, without delegation, must approve the definitization in writing, a copy of the approval must be delivered to the contractor, and 30 days must elapse before the CO may, despite contractor objections, unilaterally definitize terms, specifications, or price.The regulatory landscape of UCAs continues to evolve in response to COVID-19.  On April 3, 2020, the Undersecretary of Defense for Acquisition and Sustainment <a href="https://www.acq.osd.mil/dpap/policy/policyvault/Class_Deviation_2020-O0012.pdf">issued a class deviation</a> for UCAs in response to the epidemic.  The class deviation provides two exemptions to UCAs that are determined by the head of the contracting agency (HCA) to be related to the COVID-19 national emergency.  First, the HCA may waive the rule that limits obligations to 75 percent of the “not to exceed” price before definitization for these UCAs.  Second, the HCA is allowed to waive the requirement that these UCAs include a definitization schedule providing for agreement on terms, specifications, and price within 180 days after a qualifying proposal is received.  These limitations are found in DFARS 217.7404(a)(1)(i) (foreign military sales contracts), 27.7404-3(a) (definitization schedules), and 217.7404-4(a) (providing that no more than 50 percent of the NTE may be obligated prior to definitization).  This guidance is effective until rescinded.As the federal government tackles COVID-19, contractors should review the opportunities and potential pitfalls of rapid procurement vehicles like UCAs.  Because price is often an undefinitized term, contractors must be certain of their risk tolerance and have a good understanding of how far apart the parties are on price before entering into a UCA.  Contractors should fully consider the risk that undefinitized elements of a UCA could be resolved unfavorably, and litigation may become necessary.  Contractors must also contemplate life under an undefinitized contract.  For example, how might performance and schedule be affected by undefinitized terms?  Regulatory changes advantage contractors who promptly deliver qualifying proposals before substantial performance, and help curb the profit concerns that UCAs have <a href="https://govcon.mofo.com/defense/undefinitized-contract-action-proposed-rule/">sometimes raised</a>.  These changes should give heart to contractors willing to step forward in a crisis.

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The Basics of Undefinitized Contractual Actions (UCAs)

Updated Coronavirus (COVID-19) Guidelines For Employers

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The federal contracting process is famous for its exacting approach to competitive procurement, which safeguards taxpayer funds and principles of fairness.  Thi

The Basics of Undefinitized Contractual Actions (UCAs)

This post has been updated on May 6, 2020 with new safe harbor deadline for repayment of PPP loans.Given the proliferation of adverse news articles and TV pundit segments about well-funded companies that have received federal, Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP), it is important to separate what guidance has now been issued and what appears to be more political rhetoric than law.  As discussed below, companies should take agency guidance seriously and consider (and document) the issues raised, but legitimate small business PPP recipients can to a large extent take with a grain of salt what amounts to political sabre rattling in a time where specific large companies are being pilloried in the press.The PPP, which we have written about <a rel="noopener noreferrer" target="_blank" href="https://www.mofo.com/resources/insights/200327-faq-coronavirus-economic-stabilization-act-cesa.html">previously</a>, is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  The program initially had $349 billion in appropriations, but when that was quickly exhausted, Congress injected another $310 billion into the program.  The program provides aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including, in particular, provisions that allow potentially the entire loan amount to be forgiven if the proceeds are spent on payroll and other qualifying expenses.Shortly after the second round of funding, and in the face of new negative publicity surrounding the program, the SBA and the Treasury Department came out with <a rel="noopener noreferrer" target="_blank" href="https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf">additional FAQs</a><a name="_ftnref1" href="#_ftn1">[1]</a> specifically focused on one element of the application process, the fact that the borrower must certify that“[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  In addressing a question (#31) as to whether companies with adequate sources of liquidity might qualify for PPP loans, the agencies provided the following clarification:Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.  Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.  For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.The FAQ went on to clarify that if a company that previously applied for a loan now believes, based on this additional guidance, that it should return a loan, “[a]ny borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.”  In addition, the FAQ emphasized that lenders need not perform additional research in order to rely on the borrower’s certification that the loan was necessary.On April 29, SBA and Treasury issued yet <a rel="noopener noreferrer" target="_blank" href="https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf">another clarification</a>, addressing the “necessary” language in the context of private equity-backed companies:37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?Answer: See response to FAQ #31.Finally, in response to a question (#39) about whether or not the SBA will review PPP loan files, the agency responded as follows:Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan.  To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.  Additional guidance implementing this procedure will be forthcoming.In light of these FAQs we have received a number of questions from companies trying to determine whether they should return PPP funds already received or retract applications that are in process.  The following key considerations should guide companies’ assessments of these questions:1. The “necessary to support . . . ongoing operations” standard is subjective.Because the standard was developed specifically for the PPP program and is not further defined in any FAQ, the “necessary” standard has no objective measure.  SBA’s 7(a) loan regulations do not address this language, because they do not follow this standard.  Indeed, for other SBA loan programs, potential borrowers must demonstrate an affirmative lack of access to capital, known as the “Credit Elsewhere” policy.  SBA has made clear that no such standard applies here (FAQ # 31:  “Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.”)  As result, one thing we do know is that “necessary” does not include a proven inability to obtain credit elsewhere—at least as that concept is implemented in the 7(a) program.The best standard the agencies have articulated to date may be this one:  “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”  As a result, in place of the clear “Credit Elsewhere” policy, the agencies appear to have created a subjective factor test where harm to “current business activity” (e.g., loss of sales and uncertainty) is balanced against “liquidity” that can be tapped without significant detriment to the business (e.g., lines of credit and cash on hand).  It is difficult not to see this as a lower and easier to meet standard than that which applies for 7(a) loans.  A lesser standard would comport with apparent Congressional intent to distribute the PPP funds quickly with a minimum of hassle.Given that this is a factor-based test relying on the borrower’s good faith, absent a showing of absolute bad faith, or indicia of profligate spending on the part of a loan recipient, it is difficult to imagine how SBA will be able to demonstrate with legal certainty that a company did not have a good‑faith belief that the PPP loan proceeds were “necessary.”  Companies can protect themselves in this regard by documenting adverse impacts that the current environment has had on its business, and by showing that but for the loan proceeds, the company might not be able to maintain its workforce or ongoing business operations into the foreseeable future.  The fact that a company has access to a line of credit or other capital does not in and of itself bar a company from seeking a PPP loan.  However, especially where a company has a comfortable cash cushion or wealthy investors, the basis for the PPP loan request should be carefully documented to show, for example, that funds are insufficient to maintain the business without PPP or that they are otherwise required for significant expenditures necessary for the business.2. It is almost certain that public companies or those receiving more the $2 million in loan proceeds will be audited or otherwise scrutinized in some manner.Even before FAQ #39 was issued, the Treasury Secretary stated in television appearances that companies receiving PPP loans in excess of $2 million would be audited, and that criminal prosecutions would be initiated if wrongdoing is discovered.  It remains to be seen whether such large‑scale audits can be performed as a practical matter or what level of depth of analysis would be performed.  But it is undeniable that the PPP program itself will be scrutinized for many years—by Congress, by agency officials and Inspector Generals, and most certainly in the press and the court of public opinion.  For these reasons, companies decided whether to return or reject PPP funding should document their good‑faith belief now and consider whether the hassle factor, potential legal fees, and adverse publicity outweigh any loan benefits.3. Criminal and civil prosecution, while unlikely in the absence of actual fraud, are risks to be considered.Criminal False Claims Act and False Statements Act cases are somewhat rare.  However, in theory, if SBA determines that a company did not certify eligibility in good faith, the company could be charged criminally under the federal False Claims Act<a name="_ftnref2" href="#_ftn2">[2]</a> or False Statements Act<a name="_ftnref3" href="#_ftn3">[3]</a>.  The civil False Claims Act, which is far more commonly used, allows for treble damages, which in the context of the PPP could be three times the value of the loan.  As noted above, we think it is unlikely such prosecutions ultimate would be successful where the issue will turn on a subjective determination of good faith as to whether the loans were necessary and the balancing of multiple subjective factors.  Prosecution is further unlikely if a company’s submissions were accurate and complete in all material ways.  However, companies that did not disclose or consider affiliates, or that otherwise had incorrect or misleading information on their applications, could be prosecuted.  Any litigation could also name the certifying individual as part of the charging documents.  One aspect of the False Claims Act to further consider is the qui tam provisions of the Act that permit a whistleblower or other person with non-public information to come forward with a complaint and share a portion of the proceeds of any settlement or verdict.  This provision incentivizes individuals within a company that might be uncomfortable with the loan certification to come forward.  The plaintiffs’ bar has already taken note of this possibility and issued public statements indicated they expect many qui tam matter emanating out of the CARES Act relief programs generally, and PPP in particular.In sum, companies for which PPP loan funding is an available and appropriate avenue for relief should feel confident in taking and retaining loan monies to which they are entitled.  They should document their analysis and be prepared to provide it when appropriate.  However, those companies with significant doubts as to whether the funds are needed (e.g., with significant cash reserves), or whether in fact they qualify for the loans in light of affiliation and other considerations, might reconsider their initial inclination to apply under the PPP.  The costs of defending a suit or being audited or just dealing with adverse publicity need to be considered by companies in balancing whether it makes the most sense to return or refuse loan proceeds.  Any company that decides to take this route should do so by May 7.<a name="_ftnref1" href="#_ftn4">[4]</a><a name="_ftn1" href="#_ftnref1">[1]</a> All prior FAQs were consolidated into a single document on the Treasury CARES Act website on April 29, 2020.  Importantly, the FAQs do not carry the force and effect of law independent of the statute and regulations on which they are based.<a name="_ftn2" href="#_ftnref2">[2]</a> Per 18 U.S.C. § 1031, fraud against the U.S., including obtaining money from the government under false or fraudulent circumstances, is punishable by fine, imprisonment of up to ten years, or both.<a name="_ftn3" href="#_ftnref3">[3]</a> Per 18 U.S.C. § 1001, false statements may be punished by fines, imprisonment for no more than five years, or both.<a name="_ftn1" href="#_ftnref4">[4]</a> On May 5, 2020, SBA and Treasury issued additional FAQ guidance extending the safe harbor to May 14, 2020. Companies need not apply for this extension.

Tina is a partner in Morrison & Foerster’s Government Contracts practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmace

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Damien is a partner in the firm’s Government Contracts & Public Procurement practice. He represents clients in all facets of government contracts transactions, as well as regulatory counseling, subcon

Damien Specht

Damien C. Specht

Is My Company’s PPP Loan “Necessary to Support Ongoing Operations?” What If I’m Wrong?

This post has been updated on May 6, 2020 with new safe harbor deadline for repayment of PPP loans. Given the proliferation of adverse news articles and TV pund

Is My Company’s PPP Loan “Necessary to Support Ongoing Operations?” What If I’m Wrong?

(This post has been updated on May 5, 2020)The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows certain eligible companies and individuals to obtain loans of up to $10 million or 2.5 times the average monthly payroll costs over the last year, whichever is less, from the Small Business Administration (“SBA”). The CARES Act further specifies the SBA regulations that will be used as a baseline to determine eligibility, although the CARES Act has, in some instances, expanded these eligibility standards.Who Is Eligible?At the outset, to be eligible for a covered loan, a company must have been in operation on February 15, 2020 (the start date of the “covered period,” which extends through June 30, 2020), and must have or have had employees for whom the company paid salaries and payroll taxes or independent contractors to which 1099s were issued.The company must also be an eligible small business (including their affiliates). There are multiple paths to qualifying. Companies that currently qualify as small under the SBA regulations in 13 C.F.R. Part 121 are eligible based on their primary North American Industry Classification System (“NAICS”) code.<a name="_ftnref1" href="#_ftn1">[1]</a>Some NAICS codes determine eligibility based on average revenue over the last three years while others use the average number of employees over the last calendar year. Under the CARES Act, eligibility has also been expanded to any company with no more than 500 employees that would not otherwise qualify under its primary NAICS. Finally, a higher threshold was put in place for restaurants and hotels (those companies under NAICS Code 72, Accommodation and Food Services). For those companies only, the relevant eligibility standard is whether they have fewer than 500 employees per physical location, although corporate groups owned directly or indirectly by a single entity will be limited in the total amount they can borrow.Under SBA regulations, the number of qualifying employees is calculated by taking an average of the number of employees (full or part time) for each of the pay periods over the preceding completed 12 calendar months and adding the average number of employees of any affiliates (more below on this) over the same period.Note that SBA has taken the position that a business in bankruptcy at the time it submits its application or at the time the loan is disbursed is not eligible for PPP funds.  If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so could be regarded as a use of PPP funds for unauthorized purposes.How Do Affiliation Rules Come Into Play?Except with respect to Accommodation and Food Services businesses and firms with Small Business Investment Company (“SBIC”) investment, when calculating both average revenue and number of employees, a company must include the revenues and employees of any “affiliates.” As defined under the SBA regulations, affiliates include companies under common ownership, companies owned and managed by investors, and the holdings of venture capital investors.SBA guidance indicates that four tests for affiliation will apply to Paycheck Protection Program loans under the CARES. Under those tests, companies are considered to be affiliates “when one controls or has the power to control the other, or a third party, or parties, controls or has the power to control both.”<a name="_ftnref2" href="#_ftn2">[2]</a> Control is considered to be present whether or not exercised, and may be affirmative or negative.<a name="_ftnref3" href="#_ftn3">[3]</a>The following circumstances create affiliation and the affiliates’ revenues/employees must be included in the calculation of average revenues/number of employees for purposes of determining eligibility:<ul><li>Any person or entity owns or has the power to control more than 50 percent of the concern’s voting equity.</li><li>If no individual, concern, or entity is found to control, SBA will deem the Board of Directors or President or Chief Executive Officer (or other officers, managing members, or partners who control the management of the concern) to be in control of the concern.</li><li>SBA will deem a minority shareholder to be in control if that individual or entity has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.  Although SBA has in the past, allowed some negative controls by a minority shareholder, these are limited and counsel should be consulted if negative controls (even those common to venture capital or private equity investment) are present.</li><li>With some limited exceptions, SBA considers stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA treats such options, convertible securities, and agreements as though the rights granted have been exercised.</li><li>Affiliation will also arise where concerns have common management or “identity of interests” such as where close relatives have significantly similar business interests.</li></ul>The following sorts of companies are exceptions to these affiliation rules and are not to be considered to create affiliation under this specific program:<ul><li>Businesses that have investments from an SBIC.</li><li>Businesses owned by Native American tribes or Alaska native or Hawaiian native corporations.</li><li>Businesses that lease employees or use co-employer arrangements under a Professional Employer Organization (“PEO”).</li><li>For business concerns with investors that fit very specific defined criteria, including “venture capital operating companies,” state or federal employee pensions or benefit plans, charitable trusts, or foundations, etc., the investors are not to be considered affiliates.</li><li>Mentor-protégé arrangements under SBA regulations.</li></ul>SBA provides additional guidance on affiliation considerations in a resource guide.<a name="_ftnref4" href="#_ftn4">[4]</a>How Can The Money Be Used And What Are The Terms?Loan funds can be used to pay payroll costs, mortgage loan interest for business property, interests on any other debt obligations that were incurred before the covered period, rent for business, utilities, and health benefits costs.  To pursue forgiveness, borrowers must demonstrate that 75% of funds were used for payroll costs.The loans are non-recourse, and no collateral or personal guarantee is required. However, applicants need to submit a certification attesting to their eligibility (including their size status), specifying that the loan is necessary to support ongoing obligations and asserting that the funds will be used for permitted purposes. Any requirement that the applicant not have access to credit elsewhere is waived during the covered period, but there may be a focus on liquidity when determining if, in fact, the loan was necessary for ongoing obligations.The maximum interest rate that may be charged is one percent and, under the CARES ACT, the maximum maturity will be 10 years from the date on which borrower applies.The CARES Act also contains a loan forgiveness program which allows a certain portion of the loans equal to payroll costs, rent, and mortgage payments to be forgiven.What Is The Process For Applying?Applications are submitted through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.  In general, borrowers should start with institutions which they have a current borrowing relationship, which can expedite some of the paperwork required by individual lenders.Borrowers are required to submit signed certifications with their application including that:<ul><li>Current economic uncertainty makes the loan necessary to support your ongoing operations.</li><li>The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.</li><li>They have not and will not receive another loan under this program.</li><li>They will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan.</li><li>All the information provided in the application and in all supporting documents and forms is true and accurate.</li></ul>Note that knowingly making a false statement to get a loan under this program is punishable by law.Banks will then calculate the eligible loan amount using the tax documents submitted with the application. Again, the borrower must affirm that the tax documents are identical to those they submitted to the IRS and that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.To that end, recipients of loans of more than $2 million should expect an audit of their loan for compliance with these requirements.<a name="_ftn1" href="#_ftnref1">[1]</a> For NAICS codes and corresponding size standards, see <a href="https://www.sba.gov/document/support--table-size-standards">https://www.sba.gov/document/support–table-size-standards</a>.<a name="_ftn2" href="#_ftnref2">[2]</a> 13 C.F.R. 121.301(f).<a name="_ftn3" href="#_ftnref3">[3]</a> 13 C.F.R. 121.301(f), (f)(1).<a name="_ftn4" href="#_ftnref4">[4]</a> https://www.sba.gov/sites/default/files/2018-09/2018-07-13%20AFFILIATION%20GUIDE_Updated%20%281%29.pdf.

CARES SBA Loan Eligibility and Process (UPDATED)

(This post has been updated on May 5, 2020) The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allows certain eligible companies and indiv

CARES SBA Loan Eligibility and Process (UPDATED)

Although, as of late, the coronavirus and its impact have been top of mind for government contractors and, indeed, the entire world, the Department of Defense (DoD) has continued undeterred with its planned implementation of the Cybersecurity Maturity Model Certification (CMMC) program.  Below we highlight some recent developments, preview upcoming activities pertaining to CMMC, and offer some recommendations about what contractors can do now to prepare.DoD Has Issued, and Updated, the CMMC Model.On January 31, 2020, the long-promised CMMC version 1 was issued, along with accompanying appendices.  An updated version (v.1.02) was released on March 18, 2020 to correct various administrative errors.  The detailed assessment guide to accompany the CMMC model is expected soon.  Information from DoD about CMMC is regularly published on the official website:  https://www.acq.osd.mil/cmmc/index.html.The CMMC Accreditation Body Is Up and Running.In January 2020, the CMMC Accreditation Body (CMMC-AB) was registered as a Maryland 501(c)(3) nonprofit organization.  It has a Board of Directors consisting of industry-leading experts and a chairperson from the University of Virginia, Darden School Foundation.  Its website is www.CMMCAB.org.The DoD has tasked the CMMC-AB with running the operational aspects of CMMC, including the selection and training of those persons who will conduct CMMC evaluations.  The relationship between DoD and CMMC-AB is defined in a Memorandum of Understanding that has not been made public.To date, no certified third party assessment organizations (C3PAOs) have been selected or identified.  However, the CMMC-AB has indicated that it expects to start training assessors in the coming months, likely through a combination of online and in-person activities.  Assessors will receive a license from the CMMC-AB after completing the required training and passing an examination.  The assessors will not work for CMMC-AB but will have to be associated with a C3PAO.  Licenses will vary depending on the certification level for which the assessor has been trained.  To conduct assessments at the highest levels, assessors will need to have more experience, although the CMMC-AB has not yet determined the specific experiential requirements.  Training for certification of CMMC levels 1 through 3 will happen first, with the more complex training for levels 4 and 5 to follow.On April 22, 2020, the CMMC-AB released its first RFP, for continuous monitoring services.  Responses to the RFP were due on May 1, with selection anticipated by May 8.The CMMC-Implementing DFARS Rule is Imminent.According to recent public statements by the DoD, the DFARS rule implementing CMMC is expected “any day now.”  Industry associations and major contractors are eagerly awaiting the interim rule, and will be certain to supply extensive comments to shape the final rule.The First Requests for Information Pertaining to CMMC Are Still Expected This Summer.DoD representatives have repeatedly indicated that the first programs to implement CMMC, the so-called “Pathfinder programs,” will be identified this summer in RFIs laying out the expected forthcoming CMMC requirements.  DoD has indicated that it is in active discussions with the prime contractors expected to be part of the Pathfinder programs, so if incumbents have not heard from DoD it may be safe to assume that their programs will not be selected.  DoD has also indicated that it will not slow down any program for CMMC, so if the guidance is not in place and/or assessors are not yet trained before a program needs to be renewed, the CMMC requirement may drop out and another program will be selected for Pathfinder status.DoD Has Provided Additional Guidance Concerning Controlled Unclassified Information.The absence of a clear definition of controlled unclassified information (CUI) and the lack of a process for identifying CUI has confounded contractors charged with implementation of the current DFARS cybersecurity rule in 252.204-7012.  DoD recently attempted to minimize this confusion with a new DoD Instruction, <a href="https://www.esd.whs.mil/Portals/54/Documents/DD/issuances/dodi/520048p.PDF">DoDI 5200.48, “Controlled Unclassified Information</a>.”  This DoDI cancels the prior DoD Manual 5200.01 vol. 4, “DoD Information Security Program: Controlled Unclassified Information.”  DoDI 5200.48 establishes an official DoD CUI Registry, and outlines responsibilities and logistics for the handling, marking and dissemination of CUI.  Most helpfully, with respect to contractors, the instruction makes clear that the obligation to mark CUI is in the first instance on DoD.  DoD must mark any CUI provided to contractors, and the requirement to mark CUI that is generated by contractors or other non-DoD entities will be specified in the applicable contract.In addition, the DoD CISO for Assistant Secretary for Defense Acquisition, Katie Arrington, has recently indicated that the DoD intends to do a lot less sharing of CUI with contractors in the future, sharing information that will be housed on contractor systems only when clearly necessary.  In turn, we recommend that contractors closely examine their supply chains and determine whether or not they need to share CUI as widely as they have been.DoD Has Created an Exception from CMMC for Purely Commercial Off-the-Shelf Products.Although DoD initially indicated it would not do so, the agency has recently carved out an exception to CMMC for companies that exclusively supply commercial off-the-shelf (COTS) products that will not be altered in any way for use by the government.<a name="_ftnref1" href="#_ftn1">[1]</a>  Thus, for example, the supplier of chicken or fuel to a military installation does not need to be CMMC certified.  Companies should be careful not to assume they or their subcontractors will fall within this narrow exception.  Commercial items more broadly, including commercial services, are not exempt from CMMC, and companies that provide such products and services will need to be CMMC certified to continue supplying to DoD.CMMC May Expand Beyond DoD.Other federal agencies are showing interest in the CMMC process.  For example, the recent Department of Health and Human Services CIO SP4 draft solicitation has CMMC as an optional item, presumably to accommodate potential future use of the CIO SP4 contract vehicle by DoD customers.  The recently released Cyberspace Solarium Commission <a href="https://www.solarium.gov/">report</a> suggests implementation of CMMC for civilian agencies and recommends that the FAR adopt more rigorous and adaptable cybersecurity standards.<a name="_ftnref2" href="#_ftn2">[2]</a>  In addition, the report suggests that the Sarbanes-Oxley Act should be amended to include cybersecurity reporting requirements.<a name="_ftnref3" href="#_ftn3">[3]</a>So what should companies be doing now to prepare for CMMC?Most importantly, companies should identify what level of CMMC certification they will need.  Those that currently access, process, generate or store CUI will going forward need to be certified at least at CMMC Level 3, which has additional requirements beyond the current NIST SP 800-171 framework.  All DoD contractors and subcontractors at any tier, with the exception of exclusively COTS product providers, will need to be certified at least at Level 1.If your company is not part of a Pathfinder program it will not be among the first to be certified, but that does not mean that the company should wait to start getting its IT systems updated to meet the requisite level’s requirements.  Companies should conduct gap analyses to determine what policies, procedures and requirements may be missing, and then come up with plans of action to address any deficiencies long before certification has to take place.  Once the process for getting into queue for assessment is identified, those companies that are ready to assess should quickly line up, as the initial demand for assessment will be significant.We also recommend that contractors coordinate and consult with their agency customers to determine what level of certification will be needed going forward and to push for identification of precisely what contract-related data needs to be protected as CUI.  DoD has indicated that only a very small percentage of programs will require Level 4 and 5 certification (the most recently suggestion by DoD is .06% of programs at each level).  However, if you are a contractor or subcontractor working on mission critical systems with national security or defense implications, it is likely that you may fall into this small minority of entities that need to be ready for higher-level certification.  This certification process will start later, but it will be imperative that the company is prepared to be assessed in order to continue to be considered for these programs.Finally, even non-DoD contractors must consider that eventually the reach of CMMC, or some close analogue, is going to expand beyond DoD to civilian agencies.<a name="_ftn1" href="#_ftnref1">[1]</a> See CMMC FAQs, responses to FAQs 19 and 20, available at: https://www.acq.osd.mil/cmmc/faq.html.<a name="_ftn2" href="#_ftnref2">[2]</a> See U.S. Cyberspace Solarium Commission March 2020 report at p. 89 (§ 4.4.3), available at <a href="https://www.solarium.gov/">https://www.solarium.gov/</a>.<a name="_ftn3" href="#_ftnref3">[3]</a> See id. at p. 90 (§ 4.4.4).

Department of Defense March Towards CMMC Continues