11 Patton Boggs Bob Tompkins

							        “Principals” and Business
          Development Agents


           Robert K. Tompkins, Patton Boggs, LLP
                  National 8(a) Association
                       June 22, 2011



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        Presentation Overview


– Recent developments under SBA and FAR
  provisions regarding:
  o “Principals”
  o Business Development Agents
– For each we will briefly cover
  o SBA Considerations
  o FAR Considerations
  o Business/Legal Considerations


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                 LLP 2010
                 Introduction

– Good “Principals” and BD support are key to
  success, but there are significant risks with each
  that must be managed.
– Several new developments:
  o 2010 Small Business/Jobs Act
  o Revisions to SBA 8(a) Rules
  o Change in enforcement and oversight emphasis
  o Relatively new FAR provisions including
     mandatory disclosure requirements


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     Basic Issues for Both

– Know your partner!
– Flow down ethics and compliance requirements
– Push for access to information and give
  yourselves the tools to get it
– Beware of what your partner is doing
    • Conflicts of Interest/Self Dealing
    • Ethics and Procurement Integrity Issues
    • Dealings with competitors
    • Affiliation and 8(a) eligibility


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             Who are “Principals”

Under the FAR:
  – “Principal” means an officer, director, owner, partner,
    or a person having primary management or
    supervisory responsibilities within a business entity
    (e.g., general manager; plant manager; head of a
    division or business segment; and similar positions).
FAR 52.201; see also 52.203-13.




                   (c) Patton Boggs,
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    Why are Principals Important?

– They speak for your company
– They can bind your company
– “Responsibility” matters (FAR Part 9) and related
  representations and certifications
– Mandatory Disclosure requirements (FAR Part 3)
  o Their problems become your problems!!!




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      Principals – FAR Considerations
         FAR Part 9 Responsibility
• Every contractor must certify that it and its
  Principals:
   – Are not debarred/suspended or proposed for
     debarment
   – No criminal conviction or civil judgment for a variety of
     matters including fraud, antitrust, bribery, theft, etc. (3
     year look back)
   – No pending criminal or civil charges of such offenses
   – No outstanding delinquent federal tax liability >$3,000
   FAR 52.905-1.


                    (c) Patton Boggs,
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       Principals – FAR Considerations
       FAR Part 3 Mandatory Disclosure
• New “mandatory disclosure” rules states:
   –  Knowing failure by a principal
   –  to timely disclose to the Government
   –  in connection with [a] Government contract [or] subcontract
   –  credible evidence of a violation of Federal criminal law involving
      fraud, conflict of interest, bribery, or gratuity violations found in
      Title 18 of the United States Code or a violation of the civil False
      Claims Act.
   Is a basis for debarment of the contractor and the principal.




                        (c) Patton Boggs,
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        Principals – SBA Considerations

•   SBA Requirements
    –   “Good character” requirements ,13 CFR 103.4
    –   Form 912: certain personal history including any criminal
        conviction or plea
    –   Form 1623: similar to FAR Part 9 but adds termination for
        cause/default of any federal award
    –   All can slow down approval processes
    –   Beware of Affiliation arising through activities of a Principal
    –   Other 8(a) eligibility issues – undisclosed control and
        management, flow of 8(a) benefits, etc.




                        (c) Patton Boggs,
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  Important new developments

The 2010 Small Business / Jobs Act:
 the mere submission of a bid or proposal for a set-
 aside contract is a “deemed affirmative, willful and
 intentional certification…of small business size and
 status.”
Query: What if one of your principals has created an
 affiliation that renders the company large and you
 don’t know about it?
The Act also provides for a presumption that the
 damages for fraudulent representation of size
 status is the entire value of the set-aside contract!!


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       Principals: Key Areas of Risk

• For 8(a)’s, inappropriate control by non-
  disadvantaged individuals
• “Responsibility” – can taint the entire
  organization
• Affiliation, through their other endeavors
• Self-Dealing – draining resources from the
  rightful owners/beneficiaries.
• Mandatory disclosure – their failure to disclose
  can result in the company being debarred


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    Key Risk Mitigation/Compliance
              Measures

–   Develop a checklist/individual certification and disclosure to
    cover the FAR and SBA requirements, plus:
    o  Define Roles and Responsibilities
    o  Limit Opportunities for Mischief
    o  Require regular reporting and access to information and
       documents
    o  Make this an on-going requirement and condition of
       employment
–   Prohibit or severely limit self-dealing
–   Adopt a mandatory disclosure policy as part of your
    compliance program



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Part II: Business Development Agents,
       Marketers and Consultants




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           NEW SBA Prohibition on
       “Percentage of Gross” Payments
• The new 8(a) rules added a section 124.4 which
    – reiterates that fees paid to agents must be reasonable.
    – Applies to assistance with application, on-going eligibility and contracts.
    – Note, this is consistent with pre-existing 13 CFR 103.4
• The new rule goes farther and explicitly bars percentage of gross”
  payments for “assisting a Participant obtain one or more 8(a)
  contracts” and gives SBA the authority to suspend an agent’s
  privileges to do assist 8(a)’s and may refer them for government-
  wide debarment.
• Query: Is this a new requirement or just an extension/clarification of
  an existing requirement?




                          (c) Patton Boggs,
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 SBA Requirements related to Business
            Development

– Form 1790 – see next slide
– Consider overall benefit accruing to the 8(a)
– Be sure the Agent understands 8(a) program rules,
  including the limitation on subcontracting and
  ostensible subcontractor rules.
– Again, new prohibition on payment of “percentage of
  gross” arrangements with respect to 8(a) contracts.




               (c) Patton Boggs,
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                      Form 1790

• Requires semi-annual report on [quote]
• Compensation to “employees” not reportable,
  but:
  – Likely reportable under individual compensation
  – Could trigger excessive withdrawal issue
  – Compensation not paid pursuant to employment
    relationship (i.e. 1099 income) is reportable




                  (c) Patton Boggs,
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FAR Requirements related to Business
       Development Agents

–   Contingent Fee Arrangements are generally illegal (FAR
    3.400, et seq)
–   Unless the BD agent qualifies as a “bona fide agency” or “bona
    fide employee” (see next slide)
–   Significant Penalties for violating this rule, including possible
    contract termination
–   If contemplating a contingent fee, include representation and
    warranty that the agent is a “bona fide agency” (and make sure
    they are!) AND
–   Make sure you comply with SBA’s new prohibition on
    “percentage of gross” payments (see below)




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             “Bona Fide Agency”

• “An established commercial or selling agency,
  maintained by a contractor for the purpose of
  securing business, that neither exerts nor
  proposes to exert improper influence to solicit or
  obtain Government contracts nor holds itself out
  as being able to obtain any Government contract
  or contracts through improper influence.”
  – FAR 3.401 (emphasis added)



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              Bona Fide Employee

• “Bona fide employee” means a person, employed by a
  contractor and subject to the contractor’s supervision
  and control as to time, place, and manner of
  performance, who neither exerts nor proposes to exert
  improper influence to solicit or obtain Government
  contracts nor holds out as being able to obtain any
  Government contract or contracts through improper
  influence.
• FAR 3.401
• Query:     What if the person is a 1099 contractor?



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Other Considerations Related to Business
             Development

– There is a limit to what the government will pay for
  Business Development or “Selling costs”
– Especially important in cost-type contracts,
  negotiated fixed price contracts (i.e. sole source
  contracts) and in contract modifications
– Generally the costs must be “allocable”,
  “reasonable” and “allowable.” See Generally FAR
  Part 31, and in particular FAR 31.205-38




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           Selling costs – (Cont.)


– Allocable: direct v. indirect
– Reasonable: prudent; proportionate; company
  trends; industry comparison; actual effort –
  causal/beneficial relationship
– Allowable: Many types of costs are expressly
  unallowable (i.e. including illegal contingent fees), or
  are allowable under different cost principles (bid and
  proposal costs)



                 (c) Patton Boggs,
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    Other Legal Issues to Consider

–   Apparent Authority
–   Loyalty and Personal Conflicts of Interest
–   Organizational Conflicts of Interest
–   Safeguarding proprietary information
–   Procurement Integrity
–   Ethical Practices




                 (c) Patton Boggs,
                     LLP 2010
       Practical Issues to Consider


–   Are interests aligned?
–   Stay away from “percentage of gross” arrangements
–   Limit the scope and amount of payments as best you can
    o   Scope: where to draw the line: Option years? Follow-on
        contracts? Other contracts with the same customer?
    o   Amount: what’s fair? How to calculate? When to pay?
–   Limit use of sub-agents, require disclosure, and require flow
    down of requirements




                   (c) Patton Boggs,
                       LLP 2010
                   Conclusion

• Look beyond the “nomenclature” of your
  agreements
• Be very careful of agreements or relationships
  that really are “management”-related, and
  remember the SBA/8(a) requirements
• Make sure business development agreements
  are carefully considered and crafted



                (c) Patton Boggs,
                    LLP 2010
                   Thank you!

•   Robert K. Tompkins
•   Partner
•   Patton Boggs, LLP
•   2550 M Street, NW
•   Washington, DC 20037
•   (202) 457-6168
•   (202) 457-6315


                (c) Patton Boggs,
                    LLP 2010