Service-Disabled Veteran-Owned Small Business Concerns (SDVOSBC or commonly known as SDVOSB). The federal government spends between $8 -10 billion dollars with SDVOSB verified firms annually. This spending equates to an annual federal spending goal of 3% for SDVOSB businesses. In 2003 the Veterans Benefits Act added sole-source and set-aside contracts to the SDVOSB verification making it easier for federal procurement officers to meet this 3% goal. The anticipated award price of the contract cannot exceed $5M for manufacturing requirements and $3M for all other requirements. All awards to SDVOSB firms on sole-source and set-aside contracts must be found to be at a fair market price.
The following are the limitations for the portion that an SDVOSBC as a prime contractor can subcontract to another firm. These limitations are the following:
|Services Contracts (Except Construction):||50% of the contract performance incurred by SDVOSB personnel|
|Supply Contract:||50% of the cost of manufacturing the supplies|
|General Construction:||15% of the contract performance incurred by SDVOSB personnel|
|Construction by Special Trade:||25% of the contract performance incurred by SDVOSB personnel|
Helpful hints when creating your firm to avoid problems in the SDVOSB application process
The service-disabled veteran owner should be the highest paid officer, member and/or shareholder. This issue often occurs when the SDVOSB owner has 51% ownership and the two business partners are treated as equals. In some instances, a non-service-disabled veteran can end up with higher W-2 wages causing the firm to fail tests for control. This will result in the denial of the application.
51% means 51.0000%, the CVE does not round up. Your organizational documents such as Articles of Incorporation and Bylaws, Buy-Sell Agreements, Operating Agreements, Stockholders Agreement, and all other pertinent documents should consistently show at least 51% ownership by the SDVOSB. Additionally, there should not be any supermajority provisions as this will create a control issue. A “red flag” for the CVE would be in instances where terms such as “unanimous” or “all” when referring to ownership voting rights or a quorum of the board members.
Options held by non-SDVOSB owners are deemed to be fully executed at the date of the application. Therefore, be careful of option agreements because they can create a control issue as the exercise of those options would change ownership control of the firm.
Ideally, the SDVOSB is the manager of your business. The service-disabled veteran must be the day-to-day and long-term strategic manager of the business, and in some cases their spouse or other aid giver can run the business. But if the nature of the SDVOSB’s injuries still allows them to have the capability of running the day-to-day operations of the business they should be doing so.
No conditional ownership. Conditional ownership usually takes the form of restrictions on withdrawal from the business, other transfer of interests, and rights of first refusal. Be careful as many template bylaws have these types of provisions. Usually removing these provisions is safest for SDVOSB approval; however, if these provisions do not apply to the service-disabled veterans, they can be allowable. The three allowable instances are 1) When the provision is triggered by the death or incapacity of the service-disabled veteran. 2) When the stock is pledged for commercial financing arrangements. 3) First rights of refusal can be acceptable in some cases, however, be very careful with these types of provisions.
Cover all language: Your organizational documents should include an amendment provision stating that the document (including any provisions restricting the ownership or control of the service-disabled veterans) may be amended by the service-disabled veteran(s). In this way, even if your organizational document has a provision that the CVE finds objectionable, you can point to the fact that the service-disabled veterans can amend it at any time and thus does not actually impact the ownership or control of the service-disabled veterans.