- Policing False WOSB Status Representations
- April 3, 2013 | Author: Sarah E. Carson
- Law Firm: Smith, Currie & Hancock LLP - Raleigh Office
Using the 25 years of historical data on 300,000 current and former executives compiled by its VentureSource database, Dow Jones analyzed the positive statistical relationship between the number of women employed in executive positions and “success” achieved as defined by profitability. The “success” rate of a company employing five or more female executives in the position(s) of founder, board member, VP level and/or director increased by 61%. Relying on such statistics, one would expect government contractors to scramble to include additional females for their insight and to take advantage of the opportunities that come with the distinction of operating a Women Owned Small Business (“WOSB”). Logic, unfortunately, sometimes does not dominate the market place as evidenced by the reported sharp decrease in women’s contracting opportunities over the past two fiscal years - the same time period in which federal government goals for awards to WOSB concerns were established.
In the past, some contracting officers expressed reluctance to use WOSB programs based on the perceived potential of an increased administrative hassle and hesitancy as to the legitimate status of such firms, asking the question concerning who truly owns and controls the company. While some government agencies may have been reluctant to use this valuable resource - the private industry is taking advantage. On March 7, 2013, Wal-Mart Stores Inc., announced a significant investment in women owned businesses under the “Empowering Women Together” section on its website.
Even if private sector efforts are laudable, the federal government can be expected to take a more active role to encourage entrepreneurship in WOSBs and Economically Disadvantaged Women-Owned Small Businesses (EDWOSBs). In 2012 the Small Business Administration (SBA) issued the “Women-Owned Small Business Federal Contract Program Final Rule,” designed to facilitate the achievement of the goal to award 5% of the federal government’s prime and subcontract dollars to WOSBs and EDWOSBs. If WOSB/EDWOSB firms meet the eligibility requirements, they would have opportunities to compete for certain set-aside awards valued up to $6.5 million for manufacturing contracts or $4 million for all other contracts. See 77 FR 12914 (March 2, 2012).
These opportunities have not gone unnoticed - especially by those that would not otherwise traditionally qualify. While most WOSBs/EDWOSBs comply with the spirit and letter of the law, some companies may attempt to manipulate their business organizations to provide the appearance of compliance with the requirements of the WOSB/EDWOSB program. Over the past 3 years, the SBA suspended or debarred 26 contractors for procurement fraud who sought to exploit SBA programs by either falsely claiming to meet eligibility criteria or fraudulently using an eligible business as a “pass-through” so that an ineligible company will actually perform the work and receive most of the profits. Other penalties for miscertification are detailed in 13 C.F.R. § 127.700. In addition, in 2010 Congress amended the Small Business Act to provide that willful miscertification of eligibility for participation as a small business concern created a presumption of damages to the federal government equal to the value of the contract or subcontract.
Legitimate EDWOSBs and WOSBs may be accused of improperly designating themselves as such. Such accusations may arise with minor mistakes in creating, verifying, and participating in the program. These interwoven issues are addressed through a review of the WOSB/EDWOSB eligibility requirements, the control issues involved, the disadvantages of affiliation, and the benefits of certain types of joint venture arrangements. If the SBA determines that a firm does not qualify as a WOSB/EDWOSB, 13 C.R.F. § 127.405 allows that firm to make a written request for a review of its status by the SBA. If the SBA’s Director of Government Contracting concludes that a company does not qualify as an EDWOSB or WOSB, it will notify the entity of such and advise that firm that it is prohibited from self-certification as a WOSB/EDWOSB.
To qualify as a WOSB, the business must be: 51% “unconditionally” and “directly” owned and controlled by one or more women who are U.S. citizens and a “small business concern” under the applicable NAICS code. To be deemed unconditional, a woman’s ownership must not be subject to executor agreements, voting trusts, or other arrangements that could cause the woman’s ownership to transfer to another.
An EDWOSB is an entity that meets the WOSB classification except that the business must be owned and controlled by a woman who is “economically disadvantaged.” To determine whether the owner is economically disadvantaged, the SBA examines the woman’s personal net worth (which may not be more that $750,000 excluding her ownership interest in the firm and any equity interest in her primary personal residence). The SBA will consider any personal income for the past three years (including bonuses, and the value of stock given in lieu of cash); as well as her spouse’s and immediate family member’s finances. However, funds invested in an IRA or other official retirement account are typically not included in the financial analysis under 13 C.F.R. § 127.203.
Manipulation of Control
The requirement of control is often manipulated when the ownership of the WOSB is actually a female figure head. In these cases, a woman is designated as having the necessary control of the WOSB, but the actual day-to-day control is dictated by an entity or person that would not otherwise qualify. This is often demonstrated by the little actual participation the woman has in determining the day to day and long term operation of the WOSB.
Although the first step is determining whether an entity, by itself, is small under the applicable size standard, that determination may be complicated by the determination of “affiliation.” If the SBA deems two or more entities to be affiliated, the SBA combines two firms’ annual receipts or number of employees when determining whether either entity meets the size standard for the WOSB/EDWOSB procurement. Accordingly, affiliation can destroy a firm’s small business size status.
A fraudulent attempt to avoid an affiliation finding arises when former officers or key employees of one entity create a new WOSB wherein the older company furnishes the WOSB with contracts and/or financial assistance. Such an arrangement is prohibited as it seeks to circumvent the size standards by the creation of “spinoff” entities that appear to be small, independent entities but are, in fact, affiliates or extensions of ineligible large companies.
Joint Venture Exceptions
In joint venture arrangements, the size of each member is attributed to the total size of the joint venture or team; however, there are two main exceptions to this rule: when the procurement is bundled or when the two companies participate in the SBA’s separate Mentor/Protégé program. If a solicitation consolidates two or more requirements for supplies or services, previously provided or performed under separate smaller contracts, then the procurement is considered to be “bundled.” Because a small business is less likely to be able to perform a bundled procurement, the SBA provides an exception for WOSB/EDWOSBs teaming together to compete for bundled contracts. Traditionally, the federal agencies have asserted that the bundling rules do not apply to new construction projects; however, Congress sought to address that assertion by including a new definition of construction bundling in the 2013 National Defense Authorization Act. Time will tell if this revision is meaningful.
If a firm is accepted into the SBA’s Section 8(a) Business Development Program (13 C.F.R. Part 124), that firm may subsequently enter into a SBA approved “Mentor/Protégé” arrangement with another firm. The Mentor and Protégé may joint venture on certain procurements. To qualify for the Mentor/Protégé arrangement, a number of requirements must be fulfilled as this arrangement also presents an opportunity for manipulation. To qualify as a Mentor, the entity must demonstrate its favorable financial health, good character, eligibility for federal contracts, and ability to “impart value” to the Protégé firm based on its experience. Potential Protégés must also meet certain eligibility requirements. For instance, a prospective Protégé must be in its first four years as an SBA 8(a) program participant (the “developmental” stage) and be in good standing with the SBA.
Sometimes, even a sophisticated WOSB/EDWOSB that intends to comply with the various regulations may accidently overlook some requirement which may create the impression of fraudulent behavior. Ensuring that a business remains eligible under the applicable size standard is critical, and may involve an affiliation analysis.
Remember, to qualify for the WOSB/EDWOSB programs, the individual on whom eligibility for the program is based must directly and unconditionally own the concern and must control both the day-to-day operations of the business as well as the long term corporate decisions. Establish safeguards to prevent actual, or the appearance of, “negative control” by “minority” owners.
Finally, should the eligibility of a competing WOSB/EDWOSB come into question, consider protesting that firm’s representations as to its status or size. To protest the eligibility of a WOSB/EDWOSB, a party must follow the procedures set forth in 13 C.F.R. § 127.601 and file two separate protests, one challenging the firm’s size and a second challenging the firm’s status as a WOSB/EDWOSB. If questions regarding the government’s selection of a questionable WOSB/EDWOSB arise, consider the potential benefits provided small businesses under the Equal Access to Justice Act. Under EAJA, small businesses that prevail in a suit against the Government may be reimbursed for a portion of the attorneys’ fees incurred in connection with the suit. In addition, the Government Accountability Office (GAO) has a separate provision for recovery of legal fees in its bid protest regulations. See 4 C.F.R. § 21.8.