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Client Alert: Defense Department Establishes Sole Source Set-Aside Program For ESOPs

The Department of Defense (DOD) recently announced a pilot program to incentivize contracting with employee-owned businesses, otherwise known as ESOPs, or companies owned by an Employee Stock Ownership Program. Authorized by Section 874 of the National Defense Authorization Act for FY 2022 (Pub. L. 117-81), this program will allow DOD to award certain follow-on contracts on a non-competitive basis to ESOPs.  Contracting Officers (CO) supporting this program will be able to award a follow-on contract for the continued development, production, or provision of products or services that are the same or substantially similar to those procured by DOD under a previous contract with a “qualified business.” The qualifying ESOP companies are not required to be a small business.
 
A follow-on contract means that there is a re-competition of the initial contract.  So, this would mean that the set-aside or non-competitive award would apply to ESOP companies that are currently performing DOD contracts that are about to be recompeted for another contract term, usually one base year with four one-year options.  Although sole-source awards already exist for specific types of small businesses, this program marks the first time that the government has authorized a set-aside program for ESOPs. To qualify for the program, the business must be 100% ESOP-owned.   In order to receive an award under the pilot program, the ESOP must have a minimum performance rating of “Satisfactory” (or the equivalent) for the predecessor contract in the Contractor Performance Assessment Reporting System (CPARS). See FAR 42.15, Contractor Performance Evaluation).  However, the pilot program is limited to no more than nine ESOP entities.
 
If awarded a contract under this Program, the ESOP must represent that no more than 50 percent of the amount paid under the Contract will be expended on subcontracts.  The ESOP must also agree to provide responses required by the Data Collection Template within 30 days of the CO’s request, which will be done upon completion of six months of contract performance or no later than 30 days after the contract end date, whichever is sooner.
 
ESOPs interested in participating in the program should act fast to determine whether they qualify and discuss participation with their CO, since it is only the DOD CO’s interested in the pilot program that are authorized to submit an application for approval.  The Defense Pricing and Contracting (DPC) Office and the Contract Policy Office, which are the offices that consider the applications, will then respond within 30 days of the submission with a decision. Upon approval of the CO’s application by those Offices, the CO may then negotiate and award a follow-on contract to the ESOP-owned company without providing for full and open competition.  
 
 The DPC will accept submissions until April 28, 2023, or until it approves nine contracts for award under the pilot program.  Any follow-on contracts awarded without providing for full and open competition will be awarded no later than August 31, 2023.

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