The Department of Defense (DOD) recently launched a pilot program allowing Contracting Officers (CO) to award sole-source follow-on contracts to contractors owned 100% by an employee stock ownership plan (ESOP). Although sole-source awards already exist for specific types of small businesses, this program marks the first time that the government authorized a set-aside program for ESOPs. Like most pilot programs, however, the ESOP set-aside program is limited, with strict eligibility criteria and only nine contracts available. Considering these limitations, ESOPs interested in participating in the program should act fast to determine whether they qualify and discuss participation with their CO. Requirements for ESOPs to participate in the pilot program are explained below.

As PilieroMazza previously reported, the National Defense Authorization Act for Fiscal Year 2022 (FY 2022 NDAA) authorized a first-of-its-kind pilot program for 100% ESOPs to qualify for sole-source awards on a follow-on contract. This provision imposed discrete limitations on the pilot program, including requirements that participation is limited to 100% ESOP-owned contractors who received at least a satisfactory rating on a prior DOD contract for the same or substantially similar products or services. Within these general guidelines, DOD issued a memorandum on November 8, 2022, to explain the other requirements for the pilot program.

First, DOD confirmed strict eligibility requirements. Consistent with the statutory rules, the contractor must be a 100% ESOP and have a satisfactory CPARS rating for a similar contract before the contractor is eligible for a set-aside follow-on contract. DOD also clarified that the contractor had to be a 100%-owned ESOP during the prior contract performance period. In addition, DOD stated that any program participants cannot subcontract more than 50% of the amount paid under the follow-on contract.

Second, DOD explained how to apply for participation in the pilot program. Significantly, only the CO is allowed to apply for participation. DOD also committed to responding to such applications within 30 days.

Third, DOD chose to narrow the scope of the pilot program by restricting participation to only nine companies and requiring all follow-on contracts to be awarded no later than August 31, 2023. In contrast, the enabling legislation imposed no such numerical limits and contemplated a five-year program lifespan.

Fourth, DOD requires that any program participant agree to provide data about that contractor’s experiences as an ESOP and information about contractor performance.

In conclusion, DOD’s recent announcement confirms the historic possibility of ESOPs being eligible for non-competitive, set-aside, follow-on contracts. This is a significant advantage for any company. But given the limited spots available in the pilot program, ESOPs should immediately contact their CO if their current DOD contract will expire before August 31, 2023, and open discussions about the CO’s willingness to participate in the program.

If you have questions about DOD’s new ESOP pilot program, please contact Kevin Barnett, the author of this client alert, or a member of PilieroMazza’s Government Contracts Group.