Government Contracts Newsletter - July 2023
Date: July 27, 2023
R&D Contractors Implore Congress To Restore Crucial Tax Incentive
Since 1954, the tax laws have allowed businesses that invest in research and development (R&D) to receive a full tax deduction for their R&D expenses in the year such expenses are incurred. Beginning in 2022, however, R&D businesses are now required to amortize such costs over five years — essentially reducing the annual tax benefit of such businesses to just 20% of what it used to be.
R&D contractors are saying that they are already feeling the punitive effects of this policy. According to some, when filing their taxes in April (2023), many R&D businesses were hit by numbers, far beyond what they anticipated. The higher tax bills were said to greatly reduce their cash flow, causing them to struggle to hire and retain qualified talent. Some R&D companies, especially small businesses, said that they will need to take out loans to cover the larger-than-expected expenses. Most importantly, they reported having fewer dollars to invest in future R&D, which is so necessary to keep the U.S. on the cutting edge of aerospace and defense technologies — and ahead of its foreign competitors. Notably, according to PwC, private investment in R&D fell for the first time in seven years at the end of 2022.
Two bills have been introduced in both houses of Congress to restore the tax benefit. Both have wide bipartisan support. They are: S. 866, the “American Innovation and Jobs Act” (co-sponsored by 35 Senators, 15 Democrats, 18 Republicans and 2 Independents), and H.R. 2673, the “American Innovation and R&D Competitiveness Act” (co-sponsored by 131 House Members, 66 Democrats and 65 Republicans). In May of 2023 the Aerospace Industries Association (AIA) sent a letter to House and Senate leadership, signed by 35 small businesses, who are R&D contractors, urging the two bodies to swiftly pass the two bills. Unfortunately, to date, there has been little movement on either bill.
Incumbent’s Non-Compete Agreements Did Not Lead To Successful Protest
A contractor recently lost a bid protest before the General Accountability Office (GAO) on the question of whether personnel identified in a vendor’s quotation will, in fact, be able to perform under the subsequently-awarded contract. In this case the protester was the incumbent contractor. As the incumbent, the protester argued that the contractor selected for the award could not possibly provide its proposed Project Manager, and half the proposed staff, to perform on the contract, because they were incumbent staff who signed non-compete agreements with the incumbent protester.
The Agency countered such argument by making the point that the awardee included a signed letter of commitment from its proposed Project Manager as required by the Request for Quotations (RFQ). The RFQ did not require vendors to provide any proof of commitment for other staff.
The GAO determined that the question of whether personnel identified in a vendor’s quotation will or can perform under a subsequently-awarded contract (the re-compete) is generally a matter of contract administration that the GAO does not review. However, the GAO pointed out that it will consider allegations that vendor proposed personnel did not have a reasonable basis to expect to provide during contract performance in order to obtain a more favorable evaluation, as such a material misrepresentation has an adverse effect on the integrity of the competitive procurement system.
Thus, the GAO found that, “. . .the non-compete agreements are not, by themselves, sufficient to establish that [the awardee] did not have a reasonable basis to expect to furnish its proposed Project Manager and staff for performance. Such an argument depends on a presumption that the non-compete agreements are enforceable and will prevent [the incumbent protester’s] staff from working for [the awardee.] These issues, however, raise questions about contractual obligations between private parties. Even if [the awardee] knew of the existence of the non-compete agreements, [the awardee’s] ability to provide the individuals for performance would only be affected if the agreements were enforced by a court or forum with the power to prohibit [the awardee] from employing the individuals, thereby precluding [the awardee] from providing them for performance.” Therefore, the GAO concluded that, “Because our Office does not review private disputes such as the enforceability of non-compete agreements, we cannot consider whether non-compete agreements render the awardee’s quotation unacceptable here.”
The protester also asserted that the awardee’s proposed facility, the current facility in use by the incumbent protester, was unavailable to the awarding, citing a copy of the incumbent awardee’s lease agreement. However, the GAO, noting that the incumbent protester’s argument was similarly based on a contractual obligation between the incumbent protester and the owner of the facility, the dispute was still between private parties that the GAO did not review. For more information see: Strativia, B-421511; B-421511.2 (June 1, 2023).
[Editor’s Note: In related news, on January 5, 2023, the Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking (NPRM) to prohibit employers from imposing noncompete clauses on workers. The rule would provide that noncompete clauses are an unfair method of competition. As a result, the rule would ban employers from entering noncompete clauses with their workers, including independent contractors.
The rule would require employers to rescind existing noncompete clauses with workers
and actively inform their employees that the contracts are no longer in effect. The FTC will vote on the Rule in April 2024, after reviewing over 27,000 comments to the Rule. The Rule is supported by labor and related-advocacy groups, but opposed by industry organizations, including the U.S. Chamber of Commerce.]
Contractor Turns Size Protest Into Federal Claims Act Case Resulting In Favorable Federal Court Decision, Upending Sba’s Traditional Method For Calculating Size Of A Small Business
In a jolt to the government contracting small business community, a Federal Court ruled in a recent case that contractors cannot always rely on their tax returns alone when calculating their annual receipts and certifying their size status in size protests. The ruling disrupts a long-held practice by the Small Business Administration (SBA) and could have serious ramifications in determining when a business is actually “small.”
When CWS submitted a proposal for a federal contract that was set aside for competition by small businesses only, CWS certified that it was a small business because its average annual receipts were below $7.5 million—the size standard for the relevant NAICS code at that time—over the prior three years. After CWS won the contract, a competitor (Bid Solve) filed a size protest with the SBA alleging that CWS was not a small business because its average annual receipts exceeded $7.5 million. The SBA Area Office disagreed and denied the protest. Subsequently, the Office of Hearings and Appeals (OHA), the SBA’s highest judicial arm, dismissed Bid Solve's appeal as untimely.
The OHA ruling that Bid Solve’s appeal was untimely effectively crippled any chance that CWS would have of going to Federal court, suing the SBA, and having its case decided on the merits. Bid Solve would have probably spent most of its time arguing the why and the how it did not file a timely administrative appeal with OHA.
Thus, in a very unique litigation maneuver, Bid Solve filed a complaint against CWS and its owners (not the SBA) in Federal court in Washington, D.C. under the False Claims Act (FCA). The FCA provides that any person who knowingly submits, or causes to submit, false claims to the government is liable for three times the government’s damages plus a penalty that is linked to inflation. Bid Solve alleged that CWS had violated the FCA by fraudulently inducing the SBA into allowing the awarding of CWS a contract through false statements about CWS’s size status. Bid Solve argued that CWS had misreported CWS’s receipts by improperly subtracting certain expenses for “flowthrough income” from its annual receipts.
CWS moved for summary judgment, arguing that its tax returns properly excluded the flowthrough income and that SBA’s regulation at 13 C.F.R. § 121.104 required calculating CWS’s annual receipts based on those tax returns, such that its receipts were lower than $7.5 million. CWS correctly argued that SBA-OHA had long held that Section 121.104 requires calculation of annual receipts based on information contained within federal tax returns when such returns are available.
In a previous case, for example, OHA stated that “there is no authority for an area office to consider any evidence apart from tax returns (when they have been filed) when calculating a firm’s average annual receipts” and that “[b]ecause tax returns must be used to calculate size unless those returns are unavailable, revenue data from other non-tax sources cannot be used to determine size or to question the results reached by the Area Office’s examination of the Federal tax returns.” Size Appeal of SC&A, Inc., SBA No. SIZ-6059 (2020).
However, the Federal court interpreted Section 121.104 differently than OHA. The court held that the regulation required including flowthrough income in CWS’s annual receipts, even if CWS’s tax returns properly excluded the flowthrough income. With that, the court pointed out that other language in the regulation is broader than that portion recognized by OHA. For example, in another part of the regulation it defines “receipts” to mean “all revenue in whatever form received or accrued from whatever source” and then states that “reimbursements for purchases a contractor makes at a customer’s request,” a category that the court said included CWS’s flowthrough income, “may not be excluded from receipts.” Id. § 121.104(a).
Thus, in the court’s view, Section 121.104(a) “provides a clear formula: receipts are ‘all revenue . . . reduced by returns and allowances,’ and ‘the only exclusions from receipts are those specifically’ listed in § 104(a). Tax returns may be used to calculate receipts, but they cannot override § 104(a)’s basic rules,” according to the court. The Federal court concluded that “[e]ven if the CWS’s tax returns were prepared correctly, [CWS] still needed to” include its flowthrough income in its annual receipts under Section 121.104.
This decision is very important because federal contractors and the SBA typically rely on tax return data to calculate annual receipts. The Federal court’s decision suggests not only that such calculations may be incomplete, but that they could lead to False Claims Act (FCA) liability.
For more information, see United States ex rel, Inc. v. CWS Mktg.Grp. Inc., No.1:19-CV-1861-TNM, 2023 WL 3521616 (D.D.C May 18, 2023).
New Initiative Launched To Increase Federal Contracting With Small Disadvantaged Businesses
The U.S Small Business Administration (SBA) and the U.S. General Services Administration (GSA) have embarked on a joint effort, known as the “8(a) MAS Pool Initiative”, to help small, disadvantaged businesses (SDBs) participating in the SBA’s 8(a) Business Development Program, gain access to more federal contracts in GSA’s Multiple Award Schedule (MAS) Program. This agreement will establish a pool of 8(a) firms to make it easier for procurement officials to locate and contract with SDBs across industries.
Once participants are accepted into the newly established 8(a) MAS Pool, they will receive a designation that indicates to agency buyers that a business is eligible for 8(a) sole source awards and competitive set-asides. Federal agencies will be able to leverage the size and scale of the MAS marketplace to achieve their SDB contracting goals while they make smart purchasing decisions.
The SBA certifies small businesses considered to be socially and economically disadvantaged under its nine-year 8(a) Business Development (BD) Program. The 8(a) BD Program provides significant opportunities for participants to develop and grow their businesses, generate wealth, and create jobs in historically underserved communities through powerful contracting tools, such as sole source contract award opportunities. The program also involves regular business development training with SBA’s district teams, providing one-on-one counseling, business workshops, and management and technical guidance programs.
Meanwhile, GSA’s MAS Program consists of long-term, government-wide contracts that provide government buyers access to products, services, and solutions at pre-negotiated prices. MAS is organized into 12 major categories and further subdivided into Special Item Numbers (SINs) that represent the products and services sold and bought on the schedule.
Under the MAS Program, GSA’s customer agencies will be able to place 8(a) directed awards once the MAS Solicitation is refreshed and the MAS 8(a) companies are in the pool, beginning later in 2023. This initiative is designed to result in increased ordering flexibility under the GSA Schedule program and streamline the acquisition process, further incentivizing agencies to contract with 8(a) firms. The Program should also work to provide government buyers with greater access to a large number of 8(a) contractors that will help agencies meet their small and socioeconomic business contracting goals, which Federal agencies negotiate with the SBA on an annual basis.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.