By Theodore Watson, Esq.

The staggering statistic of cases file at the Court of Federal Claims (COFC) should make contractors aware that the government does in fact deny claims that include terminations for convenience. The process is not as easy as most contractors may think.  By the time they reach the appeals stage, the damage is substantially done. An appeals attorney can only try to salvage the situation and recoupe and much damages as possible.

U.S. Court of Federal Claims (COFC)—Judgments and Appeals for the 12-Month Period Ending September 30, 2011

Number of cases terminated 609

Judgment Amounts Amount in Dollars

• Amount claimed in fiscal year 2011 filings 122,302,466,000
• Amount awarded in judgments for plaintiffs/petitioners ¹ 471,077,558
• Amount awarded in judgments for plaintiffs carrying interest 16,280,213
• Amount awarded in judgments for defendants on counterclaims or offsets 5,732,690
• Amount awarded in judgments for defendants on counterclaims or
• offsets carrying interest 87,879
• Amount awarded in judgments for third-party plaintiffs/petitioners 0
• Appeals pending October 1, 2010 302
• Appeals filed October 1, 2010, to September 30, 2011 120
• Appeals terminated October 1, 2010, to September 30, 2011 138

Decisions

• Affirmed 76
• Reversed (including those reversed in part) 11
• Dismissed 47
• Vacated 4

The following information should make government contractors aware of the dangers facing a termination for convenience.

First, government contractors must understand that in a termination for convenience, they bear the burden of proof to demonstrate compensable damages resulting from the termination. Jacobs Eng’g Grp., Inc. v. United States, 75 Fed. Cl. 752, 759 (2007). The scope of damages that contractors can recover following the Government’s termination for convenience is covered by the contract and the FAR terms incorporated therein. This means that:

• You are limited to statutory provisions
• You have to prove your damages to some extent
• You alleged damages are not always the government’s damages to you

To prevail on a termination for convenience claim, you must demonstrate that you have suffered an actual injury. See, e.g., Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005). In a breach of contract case, the innocent party should be placed in the same position that it would have been had the breach not occurred, but should not be placed in a better position. Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341, 1345 (Fed. Cir. 2003). Likewise, when the Government terminates a contract for convenience pursuant to the contract terms, the contractor is entitled to recover costs allowed by the contract and FAR clauses incorporated therein, but should not expect to be placed in a better position than had the contract run its normal course and the termination not transpired.

Even if you are attempting to assert that the agency has acted in bad faith, and you are looking to assert breach of contract damages, you simply cannot get a windfall. This is basic contract law. Any attempt to collect more than you would have absent the termination, such damages will be denied by the Court of Federal Claims.

Claims for Government’s Failure to Exercise Options

The Federal Circuit has also held that contractors are not entitled to damages based upon the Government’s failure to exercise options where the Government has the discretion to exercise the options, such as here. Hi-Shear Tech. Corp. v. United States, 356 F.3d 1372, 1380 (Fed. Cir. 2004).

Contractors face the danger of a dismissal if this is the basis for its claims. You must understand the power of a termination for convenience clause at the initial stages of the contract award. The government simply has a unilateral right to terminate for convenience when it is in the best interest of the government. The stunning question always becomes” what is an allowable reason for the agency’s termination of a contract?”

Pre-contract Costs Allowable in Termination for Convenience?

There is a difference between direct costs and pre-contract costs. Direct costs must be directly attributable to the performance of the terminated contract. Pre-contract cost are incurred prior to the contract award “in anticipation of being awarded a contract for the fire season.”

To recover pre-contract costs in a termination for convenience case, a contractor must show that the costs were (1) incurred in order to meet the contract delivery schedule, (2) incurred directly pursuant to the negotiation and in anticipation of the award, and (3) would have been allowable if incurred during contract performance. Penberthy Electromelt Int’l, Inc. v. United States, 11 Cl. Ct. 307, 315 (1986).

This is a danger that many contractors face when handling terminations for convenience without an attorney.

Settlement Costs and Proposals

Settlement costs generally are recoverable under FAR § 31.205 and include “[a]ccounting, legal, clerical, and similar costs reasonably necessary for . . . . [t]he preparation and presentation, including supporting data, of settlement claims to the contracting officer.” FAR § 31.205-42(g)(i). FAR § 49.206-1(c) provides:  

Settlement proposals must be in reasonable detail and supported by adequate accounting data. Actual, standard (appropriately adjusted), or average costs may be used in preparing settlement proposals if they are determined under generally recognized accounting principles consistently followed by the contractor.

Although every receipt is not required, you should always keep track of actual costs in anticipation for a termination for convenience. This is one internal control policy that you should always put into place at the initial award stage.

The FAR allows for the reimbursement of reasonable costs that a contractor incurs to prepare and submit a settlement proposal to a contracting officer following a contract termination. However, the danger is that the time spent for preparation of this level of termination must be in a manner that can be used for audit purposes. It must comply with the requirements of FAR § 49.206-1.

Furthermore, to the extent settlement proposal costs were incurred after the commencement of this litigation, the costs are improper because the FAR provides for settlement costs submitted to the contracting officer as a result of the termination. Settlement costs incurred because of pending litigation are not compensable under the FAR.

In sum, you must be aware of the subtle dangers lurking in a termination for convenience settlement stage. You must be aware of the certain types of damages allowed. Getting professional help can help you to avoid some costly mistakes. If you are seeking an attorney to assist in a termination for convenience case, call us  at 1-866-601-5518.

Our current fiscal challenges underscore the importance of maximizing the effectiveness of every tax dollar we spend. With approximately one of every six of these dollars going to contractors, it is imperative that federal contracts provide the best value for the taxpayer.

In March 2009, the President directed agencies to become more fiscally responsible in their contract actions and to take immediate steps to achieve real and sustainable improvements. He charged agencies with saving $40 billion by Fiscal Year (FY) 2011 and reducing the use of high-risk contracts. The President’s mandate has instilled a new sense of fiscal responsibility in agencies, which has slowed the unsustainable contracting cost growth rate of the past decade, from an average annual growth rate of 12 percent between FYs 2000 and 2008 to just four percent between FYs 2008 and 2009. Read more…

“Buying less” and “buying smarter” are simple ideas to understand, but history tells us that these basic principles of fiscal responsibility are not as easy to implement as one might think.  Since 1997, and in 18 of the past 20 years, total spending by the federal government on contracts has increased – and at a near break-neck pace of 12 percent per year between 2000 and 2008.  During this eight-year period, annual procurement budgets grew from $200 billion a year to more than $500 billion a year.

This Administration is doing what has been so elusive in the past:  cutting wasteful spending on contracts and getting better value for the taxpayer dollar.  For the first time in 13 years, we have reduced spending on contracting and agencies have stopped the costly upward spiral in contract growth.  In FY 2010, agencies spent nearly $80 billion less than they would have spent had contract spending continued to grow at the same rate it had under the prior Administration.

A new sense of fiscal responsibility is taking hold.  Agencies are thinking more carefully about what they buy and how they buy it. They are ending contracts they cannot afford or no longer need.  They are taking greater advantage of buying strategies that are more appropriate for the world’s largest purchaser – pooling their buying power to negotiate better prices and deeper discounts.  And, after years of inattention, they are rebuilding the capacity and capability of the acquisition workforce to achieve and sustain better acquisition outcomes and improved government performance.

In his State of the Union address, President Obama said that, “we can’t win the future with the government of the past.” Instead, he said we must reform the way we do business in Washington and give the American people a government that’s not only more affordable, but also more effective and more efficient. This principle has been the cornerstone of our work on contracting and across the Accountable Government Initiative. From reforming and cutting costly IT systems, implementing unprecedented transparency and reporting efforts, buying in bulk, establishing a government-wide Do Not Pay list, or moving toward electronic government payments, we’re making real progress in changing the way government does business.

Here is more information about how we are saving money, cutting waste, and getting better results from our acquisitions. We are turning the tide, but there is still more to be done. OMB’s Office of Federal Procurement Policy will continue to work closely with agencies to build on their accomplishments to date and explore new opportunities for saving so that every taxpayer dollar is spent wisely.

The Veterans Benefits, Health Care, and Information Technology Act of 2006 requires the Department of Veterans Affairs to determine whether two or more service-disabled veteran-owned small business concerns can meet its requirement at a reasonable price before proceeding with a Federal Supply Schedule acquisition. The VA seemed to believe that it has discretion to decide when, and when not to search for SDVOSB before determining that it would resort to the Federal Supply Schedule.

The protestor, Aldevra filed this protest prior to the closing time for the solicitation, arguing that the agency acted improperly by using FSS procedures without first conducting market research to determine whether the procurement should be set aside for SDVOSB concerns. Aldevra asserts that if the agency had conducted market research, it would have found that at least two SDVOSBs could meet the requirement at a reasonable price.  In an email to GAO, the VA conceded that it did not conduct market research to determine whether two or more SDVOSB concerns could meet the requirement at a reasonable price.

In an attempt to get the protest thrown out, the VA then argued that Aldvera was not an interested party. This is a common tactic by the agency to get a GAO bid protest thrown out in the early stages.

Under the bid protest provisions of the Competition in Contracting Act of 1984, 31 U.S.C. §§ 3551-3556 (2006), only an interested party may protest a federal procurement. That is, a protester must be an actual or prospective bidder or offeror whose direct economic interest would be affected by the award of a contract or the failure to award a contract. Bid Protest Regulations, 4 C.F.R. § 21.0(a)(1) (2011). A protester is not an interested party where it would not be in line for contract award were its protest to be sustained. Four Winds Servs., Inc. , B-280714, Aug. 28, 1998, 98-2 CPD ¶ 57. 

GAO disagreed with the agency that Aldevra is not an interested party to pursue this protest. The protest here involves an allegation that the VA is required to conduct set-asides where specific conditions are met under a unique statute applicable only to the VA (i.e., the VA Act), rather than meeting its requirements using the FSS. In addition, the agency here has not contended that there is a reasonable expectation that two or more SDVOSB concerns holding FSS contracts could meet the requirement.

The VA then went on to argue that it was not required to conduct market research in this situation. The VA has addressed this issue before with GAO.  In fact GAO brought this point up. The GAO actual mentioned that  although the agency has defended numerous protests before our Office involving precisely this issue, this is the first time that the agency has raised these arguments. Thus, until this protest, the agency had not suggested that the phrase “for purposes of meeting the goals under subsection (a)” as it appears in 38 U.S.C. § 8127(d) grants the agency discretion to decide that in some procurements the mandate in the statute will apply, and in other procurements it will not.  The VA then attempted to argue how the statute should be now interpreted.

In matters concerning the interpretation of a statute, the purpose is clear: to determine and give effect to the intent of the enacting legislature. Philbrook v. Glodgett, 421 U.S. 707, 713 (1975). In furtherance thereof, the first question is whether the statutory language provides an unambiguous expression of the intent of Congress. If it does, the matter ends there, for the unambiguous intent of Congress must be given effect. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc. , 467 U.S. 837, 842-43 (1984).

GAO found that the plain language of 38 U.S.C. § 8127(d) mandates that the VA “shall” conduct its procurements using an SDVOSB (or VOSB) set-aside when there is a reasonable expectation that two or more SDVOSB (or VOSB) concerns can meet the requirement at a reasonable price. The phrase “for purposes of meeting the goals” is part of an introductory clause that establishes exceptions to the mandate (those exceptions being when subsections (b) and (c) apply). The phrase explains the purpose for the mandate, which is to meet the goals established under subsection (a); however, the phrase does not create an exception to the mandate.

The problem apparently was credibility. Since the agency dealt with the same issue before, it was questionable as to why only now did it raise these arguments.

In the end, the GAO recommended that the agency conduct reasonable market research regarding its requirement under the solicitation. If it determines that there is a reasonable expectation that two or more SDVOSB (or VOSB) concerns can meet the requirement at a reasonable price, we recommend that the agency cancel the solicitation and re-solicit the requirement as an SDVOSB (or VOSB) set-aside.

GAO also rewarded Adevera’s efforts by recommending that the agency reimburse the protester the costs of filing and pursuing the protest. 4 C.F.R. § 21.8(d)(1). Aldevra’s certified claims for costs, detailing the time expanded and costs incurred, must be submitted to the agency within 60 days after receipt of this decision. 4 C.F.R. § 21.8(f)(1). See full decision here.

The lesson here is that agency’s still must adhere to setting aside projects for small businesses. If the FSS was a mandatory source, then the VA would have a stronger argument. Agencies should be conducting market research to see what capabilities are out there in the commercial marketplace. 

For additional information or representation in a GAO bid protest, contact the government contract attorneys at Watson & Associates, LLC. Call toll free at 1-866-601-5518.

As iPads, Galaxy Tabs and PlayBooks become ubiquitous in the private sector, the General Services Administration is conducting market research to determine if small-business manufacturers could meet requirements of a possible governmentwide tablet procurement.

According to the March 28 FedBizOpps Request For Information, GSA’s Office of the Chief Acquisition Officer has been fielding many requests for tablet computers across the federal government. With the increasing interest as a catalyst, GSA is considering conducting an acquisition for tablet computers as a small-business set-aside. But the agency doesn’t know if there are any domestic small-business manufacturers that can perform the work under the nonmanufacturer rule.

The nonmanufacturer rule means that a contractor under a small business set-aside contract should be a small business under the applicable size standard and should provide either its own product or that of another domestic small-business manufacturing or processing concern.

Companies must come under The North American Industry Classification System’s Electronic Computer Manufacturing sector and have fewer than 1,000 employees to be considered.

GSA’s main areas under investigation include: Are the tablets manufactured by a small business? Do they contain device encryption (FIPA 140-2 certified)? And do they meet the technical and security requirements specified by the government?

Also the tablets should have WI-Fi access, an integrated touchscreen keyboard, weigh less than two pounds, have a minimum of eight hours of battery life, and contain a camera, among other things.

Responses are due by April 5, at 2 p.m. and companies that answered a Feb. 6, Sources Sought notice do not need to respond.

As a rule of thumb, 8(a) companies must get approval of a joint venture agreement from the SBA before contract award. However, the SBA Office of Hearings and Appeal reversed an SBA decision merely on a technicality (since the contract was not awarded, and the SBA had already approved the JV agreement, it was estopped from later denying the JV relationship). The ultimate message is that also JV relationships with 8(a) firms are generally approved, the 8(a) firm should make sure that it documents to the SBA what it is actually brining to the project. You will not be approved if the SBA thinks that the firm does not have anything to bring to the table besides its 8(a) status. This situation arises when a firm is trying to acquire a contract that is outside of its business plan or primary focus.

With that said, the SBA’s analysis could be questionable simply because procurement rules allow for neutral ratings with zero past performance.  Since the two companies acting in concert as one prime, it would seem that the contracting office can consider the past performance of the other company. Although this was not brought up in this appeal, this could be argued as an unreasonable decision.

Be extra careful when you choose projects to go after. Given our day-to-day practice, and the pressure of government oversight, the SBA is finding reasons to terminate 8(a) participants.  The name of the case in which the SBA was reversed is SBA No. SIZ-5315 (Jan. 24, 2012) (overturns Area Office’s size determination because 8(a) firm’s joint venture agreement was approved prior to award of 8(a) contract and Area Office lacks authority to review mentor-protege agreements in context of 8(a) procurements).

Generally, two firms that form a joint venture to perform a contract will be considered affiliates for purposes of that contract. 13 C.F.R. § 121.103(h); see also Size Appeal of Safety and Ecology Corp., SBA No. SIZ-5177, at 26 (2010) (“A finding of affiliation based upon § 121.103(h) is usually contract-specific.”); Size Appeal of Med. and Occupational Servs. Alliance,SBA No. SIZ-4989, at 4 (2008) (“The general rule is that firms submitting offers on a particular procurement as joint venturers are affiliates with regard to that contract, and they will be aggregated for the purpose of determining size for that procurement.”). However, the regulations recognize several exceptions to the general rule. One such exception is afforded to joint ventures formed by 8(a) BD program mentor and protégé firms.

Based upon OHA case precedent and the updated joint venture regulations, the court found that the Area Office has no authority to review the substance of an 8(a) mentor-protégé joint venture agreement in connection with a size protest. Whether an 8(a) mentor-protégé joint venture agreement complies with § 124.513 and whether the agreement should be approved are matters solely within the discretion of the Office of Business Development. The Area Office cannot review those determinations. Therefore, the size determination at issue is based upon a clear error of law because the Area Office should not have examined Appellant’s compliance with § 124.513. For additional information about 8a certification  contact Watson & Associates, LLC at 1-866-601-5518.

During a bid protest, an agency will not prevail when it is shown that the agency did not comply with its evaluation scheme as set forth in the solicitation.

The Court of Federal Claims (COFC) ruled in favor of the bid protestor because of the agency’s faulty evaluation scheme which included:

• Weighting Scheme in Tradeoff Analysis Different from Scheme in Solicitation
• Tradeoff Analysis Based on Flawed Past Performance
• Ratings and Other Error
• The Agency’s Negative PPQ Regarding HSA’s Performance
• as the Incumbent Contractor
• Factual Errors in Past Performance Ratings

The case revealed that the SSD, however, conflated evaluation factors and sub-factors in the single paragraph explaining the Agency’s tradeoff analysis. Thus, the tradeoff analysis assumed, contrary to the solicitation, that the three evaluation “sub factors” were Management Plan (deemed the “highest and most important technical sub factor”), Transition Plan (deemed “the second highest important sub factor”), and past performance (deemed “the third highest important sub factor”).

The court also found that although the evaluation criteria weighting scheme in the tradeoff analysis paragraph is not easily deciphered, the Agency appears to have conducted its tradeoff analysis using three non-price evaluation criteria, whether these are termed factors or sub-factors, listed here in descending order of importance: Management Plan, Transition Plan, and Past Performance. This is not the weighting scheme set forth in the solicitation, and therefore constitutes an arbitrary and improper evaluation scheme. Because the Agency’s best value decision is based on an evaluation scheme that differs from that disclosed to offerors, the best value award is invalid.

The court also founds that the public interest is best served by enjoining the award to VSI , the awardee. The Agency’s award decision did not have a rational basis. Such award decisions destroy the public trust in government contracting and deprive the government of the benefits of full and open competition. See, e.g., Metcalf Constr.Co. v. United States, 53 Fed. Cl. 617, 645 (2002) (noting the twin goals of preserving “public confidence and competition in the federal procurement process”) (citation omitted). Because all four factors favor injunctive relief in this protest, the award to VSI must be overturned.

The COFC ordered the set aside of the award of Contract but also gave the agency some options.  The Court noted that the Agency, may, at its option, choose not to procure this requirement through Solicitation No. SAQMMA10-R-0331, and may issue a new solicitation. See the entire ruling BayFirst Solutions, LLC v. United States, No. 11-516 C (Jan. 9, 2012) . For more information or assistance with your bid protest, call Watson & Associates, LLC at 1-866-60-5518.

Write Federal Proposals that also can withstand a bid protest.

As a government contractor, it is important to understand how the agency evaluates your proposal. If you are fortunate to get the award, you now have to probably withstand a bid protest to GAO or some other forum. The first step in proposal writing for federal contracts is to thoroughly read the requirements and develop a compliance matrix that outlines what you have to submit. This is a critical step that many bidders fail to accomplish. Then you want to carefully analyze the statement of work requirements with your key members. Look at your strengths and weaknesses. Figure out how you will overcome any weaknesses. If you don’t, the agency will surely see them.

The Instruction to Offerors and the evaluation criteria sections are also of equal importance when bidding on government contract. They formulate the mandatory outline in the solicitation that neither you nor the government can deviate from. If either one deviates from these instructions, then a bid protest is likely to occur.

Government proposals must also contain a road map of how you plan to meet the requirements. Simply stating that you can perform the project and giving a long list of past performances simply does not get the award. The qualifications of your key personnel are critical aspects. You must also tell the government what each person will accomplish in the project. This includes their responsibilities and the nuts and bolts of their assignments.

When it comes to delivery schedules, never just meet the required schedules. Try to be earlier that what the government is asking for. During a source selection trade-off, your proposal might get the edge over your competition. You have to give the government something to work with and give a reason for the source selection to lean to your proposal for award.

For construction proposals, always propose an earlier schedule for completion than what the government is asking for. This puts you ahead of the competition. In addition, when you as bidding on government construction projects, make sure that you elaborate on your past performances. This means stating the material used that are similar, the size and measurements of buildings or areas for which you have performed work. Also list your best practices. These little, but commonly missed, items can get you within the competitive range.

Proposal pricing is yet another pitfall for many government contractors. Many companies simply propose what it will actually cost them to perform a federal project. The correct approach to government proposal pricing is to conduct your own estimate of what similar services or products are sold for in the commercial sector. The government is generally required to conduct and independent government estimate (IGE). This is usually done (in a perfect world) by conducting inquiries to agencies or larger commercial entities that have recently bought similar items or services. To simply state what it would cost you, is a fatal deviation away from possibly getting the award. You have to conform to the market and not the other way around.

During a bid protest, sometimes protestors challenge the government’s award to another company. The agency usually gets around this by alleging that (regardless of a higher or lower price) that there was value in some other aspect of your proposal that caused them to lean in your direction. This is hard to overcome.

When applying the evaluation criteria to government proposal writing, follow the agency’s instructions. If possible, include diagrams that simplify what you are trying to say. Never leave your proposal content for government interpretation.

Teaming partners in government contract proposals is another reason that bidders fall prey to a bid protest. When you are submitting a bid to the government, and you are trying to get a larger contract, you must ensure that your teaming partner has also accomplished similar projects in size and scope in the past. Never just propose the name of your teaming partner. Give examples of its past performance and request that the government consider it. The FAR allows source selection authorities to consider a subcontractor’s past performance.

Government proposal writing also calls for a sound management approach. Many contractors simply gloss over this critical part of the proposal. Then, during a bid protest, they realize that although they submitted a management approach in their technical proposal, that the protestor may have gone more in depth. Summarized statements in government contract proposals do not get you to the finish line.

If the solicitation is vague, ask questions to the contracting officer. Accomplish this effort as early as possible. There is generally a date to submit questions.

Of importance in the proposal writing stage, is to challenge any problems in the solicitation before bid closing. If you believe the solicitation requirements are too restrictive, then you must submit a pre-award bid protest quickly. You cannot wait until after bid closing to challenge the proposal requirements. Your protest will be deemed untimely.

If you need assistance in the proposal writing stages of government contract bid, or need help filing or defending a bid protest, call us toll free at 1-866-601-5518.

GAO sustained this protest because the Department of Justice failed to conduct meaningful discussions with protester where it did not reasonably advise the protester of agency’s real concern with protester’s quotation–that evaluators considered its project schedule to be too short. Agency’s request during discussions that protester submit a new project schedule as part of its final revised quotation did not reasonably convey to the protester that the evaluators viewed its proposed schedule as too aggressive, particularly given that a period of over a year had elapsed between submission of initial quotations and submission of final revised quotations.

The bid protestor also prevailed because GAO found that the agency evaluation of quotations received in response to solicitation for establishment of a blanket purchase agreement for an automated Freedom of Information Act system and associated services failed to demonstrate that the evaluation was reasonable and even-handed.

When an agency engages in discussions with a vendor, the discussions must be “meaningful,” that is, sufficiently detailed to lead the vendor into the areas of its quotation requiring amplification or revision. Honeywell Tech. Solutions, Inc., B-400771, B-400771.2, Jan. 27, 2009, 2009 CPD ¶ 49 at 10. Click here to read entire GAO bid protest decision.

As a government contractor, you should also ensure that you ask affirmative questions. You have an obligation to seek clarification. This can help to build your record in the event of a bid protest.  However, realize that the agency is not required to spoon feed each bidder. Instead, the agency is supposed to raise critical issues regarding your proposal.

Contact Watson & Associates’ lawyers for additional questions or bid protest representation at 1-866-601-5518.

Call our size protest lawyers for immediate help – 1-866-601-5518. 

Size Appeal of Argus and Black, Inc, SBA No. SIZ-5204 (2011)(overturns Area Office’s size determination and finding of affiliation through economic dependence because it was based only on one, small contract and did not satisfy the conditions for such a finding).

In this case, the SBA made clear error of fact or law in concluding that the protested concern is affiliated with a large concern though economic dependence. The Area Office concluded that this convoluted chain of address demonstrates that there is no clear line of fracture between Appellant, TSI and TSII. The Area Office emphasized that the address given on Appellant’s website is the same as TSI’s registered office address.

Watson & Associates argued the common elements of OHA’s precedents on economic dependence are the length of the relationship between the firms, the substantial amount of revenues generated as a result of the relationship between the firms, and that there are usually multiple relationships between the firms.

Watson also  argued the contract here lasted for only four months, generated less than $11,000 in revenue, and that this contract is the only contract between the firms. In the size determination appeal, the law firm argued that its relationship with TSI does not reach the level of economic dependence required for a finding of affiliation. The firm’s lawyers further asserts that it has recently developed other sources of revenue.

On appeal, Watson further argued that a finding against it would have a “chilling effect” on start-up firms, who would be required to avoid contracting with large firms in the start-up phase of operations.

The court ruled that “Further, it is simply not true that one small contract, regardless of what proportion it represents of Appellant’s revenues at the time, actually renders one firm dependent upon the other. In order to survive and prosper, Appellant must obtain a number of other contracts. If, over time, the great majority of these are with TSI or TSII, then a finding of economic dependence might be warranted. But here, where the contract by itself is not enough to sustain business operations, a finding of economic dependence based upon it is not warranted.

 The court held that in a case such as this, where the challenged firm has only recently begun operations either initially or after a period of dormancy, and is dependent upon its alleged affiliate for only one small contract of short duration, which by itself could sustain a business, that a finding of economic dependence is not warranted. Accordingly, the court found that the Area Office erred as a matter of law in finding Appellant economically dependent upon, and thus affiliated with, TSI, based upon its contract with TSI.

At the appeal, the court found that Watson & Associates, on behalf of Appellant has met its burden of proving that the Area Office committed clear errors of law based upon the record before it. Accordingly, this appeal is GRANTED, and the Size Determination is REVERSED. Appellant is an eligible small business for the applicable NAICS code 611699.

See also

Size Appeal of Accent Service Co., SBA No. SIZ-5237 (May 26, 2011) (Master Subcontracting Agreement did not establish joint venture and did not establish that one firm was ostensible subcontractor of the other; the fact that contested firm often awarded subcontracts to another firm did not establish economic dependence, if anything it made the other firm dependent on contested firm).

For immediate representation or defense in an SBA size determination protest, contact Watson & Associates, LLC lawyers online or call toll free 1-866-601-5518.