Congress Targets VA Procurement Abuse: Seeks Enforcement of Limitations on Subcontracting Rule

June 30, 2017

By Samuel S. Finnerty
Practice Areas: Government Contracts Law and Small Business Programs & Advisory Services

A bill was recently introduced in the U.S. House of Representatives, H.R. 2749, known as the Protecting Business Opportunities for Veterans Act of 2017 (“Bill”), which, if passed, would require the Department of Veterans’ Affairs (“VA”), in administering the Veterans First Contracting Program (“Vets First”), to identify and penalize violations of the limitations on subcontracting (“LOS”) rule, outlined in the Small Business Act and discussed here. As a quick primer, under the Vets First Law (38 U.S.C. § 8127), the VA (1) can make sole source and set-aside awards to veteran-owned small businesses (“VOSBs”); (2) is required to set aside procurements for VOSBs when the "Rule of Two" is met; and (3) for open market procurements, must give priority to service-disabled-veteran-owned small businesses (“SDVOSBs”) and VOSBs.

While VA’s procurement regulations require Vets First participants to comply with LOS, the Vets First Law does not contain LOS provisions and, therefore, does not explicitly authorize VA to extend LOS to Vets First contracts. In contrast, the Small Business Act indicates that LOS apply to set-asides conducted under several sections of the Small Business Act, including the sections for 8(a), HUBZone, SDVOSB, WOSB, and EDWOSB contracts. However, since Vets First contracts are awarded under the Vets First Law—not the Small Business Act—there has been significant debate as to whether VA has the ability to apply LOS to VA set-asides. If enacted, the Bill would settle this debate by amending the Vets First Law to include LOS and by requiring Vets First participants to certify to the VA, prior to award, that they will comply with LOS.

In addition, the Bill targets Vets First participants that violate LOS. Indeed, it has been widely speculated that the confusion regarding the application of LOS to Vets First has created a vehicle for contract abuse. Specifically, many have alleged that bad actors in Vets First capitalize on this regulatory ambiguity by collecting profits from Vets First contracts while improperly “passing through” the majority of contract work to ineligible companies, in clear violation of LOS.

On June 29, 2017, the House Veterans' Affairs' Oversight and Investigations Subcommittee held a hearing to address the impact and purpose of the Bill (“Hearing”). At the Hearing, Bill sponsor and Subcommittee Chairman Jack Bergman (R-Mich.), explained that, in addition to violating “existing prohibitions,” pass-throughs “waste tax dollars by building in unnecessary layers of contractor profit.” According to Chairman Bergman, the “Bill will help ensure contracts that are set aside for [VOSBs] and [SDVOSBs] actually go to companies that abide by the rules, instead of opportunists who are abusing the system.” The Hearing also gave representatives of the VA, the Veterans of Foreign Wars, the National Veteran Small Business Coalition (“NVSBC”), and the American Legion, an opportunity to voice their public support for the Bill.

Besides clarifying the performance expectations for Vets First participants, the Bill would also require the VA to establish a system to enforce compliance with the LOS and refer all violations to the VA’s Inspector General. In turn, if the Inspector General determines that a participant did not act in good faith with respect to the LOS, the Bill provides administrative and criminal penalties that may be imposed, including debarment. As a final oversight mechanism, the Bill would require the VA to submit an annual report to Congress outlining the details of all violations referred to the VA’s Debarment and Suspension Committee.

However, concerns have been raised that the Bill might not go far enough in clarifying the performance requirements of Vets First participants. At the Hearing, Wayne Simpson of NVSBC suggested that the Bill would be further strengthened by indicating that a similarly situated subcontractor must be “verified by VA’s Center for Verification and Evaluation and listed in VA’s Vendor Information Pages Database to be truly similarly situated.” This would ensure that verified Vets First participants do not subcontract to non-verified SDVOSBs or VOSBs, which again, would ostensibly violate LOS.

While the Bill would undoubtedly empower VA to ferret out companies that abuse the benefits of Vets First, it should be noted that by adding another layer of responsibility to the VA, which unlike other agencies is tasked with managing all levels of its procurement process, the Bill could have unintended consequences. In implementing the Bill, VA would hopefully continue to achieve and exceed its contracting goals for VOSBs and SDVOSBs, which as noted at the Hearing by Wayne Simpson (NVSBC), have not always been effectively communicated to the VA procurement personnel responsible for pursuing those goals.

The Bill would have to be passed by the House and Senate, in identical form, and then signed by the President to become law. Follow The PM Legal Minute Blog for updates.

About the Author: Sam Finnerty is an associate with PilieroMazza in the Government Contracts Group. He may be reached at sfinnerty@pilieromazza.com.


Please fill following information to download presentation