Veteran-owned small businesses have long faced inconsistencies between the regulations of the Small Business Administration (SBA) and those of the Department of Veterans Affairs (VA). For example, these inconsistencies can lead to companies qualifying as a Service-Disabled Veteran-Owned Small Business (SDVOSB) under VA standards yet but not SBA standards—or vice versa. This issue came to a head recently at the U.S. Court of Federal Claims (COFC) in Veterans Contracting Group, Inc. v. United States.

In a decision issued on December 15 and made public on December 21, the COFC restored a company’s ability to pursue contracts set aside for small businesses owned by disabled veterans by the VA. The decision came a day after the COFC reluctantly backed the SBA’s determination that the same company did not qualify for set-aside contracts under its rules. These conflicting decisions show the struggle the COFC and contractors face when dealing with inconsistent small business rules from two agencies.

Recent Decisions Highlight Challenges Associated with VA and SBA Discrepancies

In the first decision, Judge Lettow ruled the SBA’s Office of Hearings and Appeals had reasonably found that Veterans Contracting Group Inc. did not qualify as an SDVOSB under the SBA rules—justifying the company’s removal from a VA SDVOSB database and ineligibility for a U.S. Army Corps of Engineers set-aside contract.

However, Judge Lettow noted that while the decision was legally sound, it was not necessarily fair due to the complex and contradicting regulatory frameworks between the agencies and the SBA itself. According to the COFC, the SBA’s strict SDVOSB ownership rules could produce “draconian and perverse” results. While the COFC did not overrule the SBA, the COFC wrote that the SBA’s application of the unconditional ownership requirements was flawed.

In the decision that followed, Judge Lettow restored the Veterans Contracting Group’s status on the VA’s “VetBiz VIP” database for SDVOSBs for at least a year—finding the VA’s unquestioning application of the SBA’s determination to be arbitrary. The COFC found it improper for the VA to remove Veterans Contracting Group from its database without evaluating the consistency of the SBA’s determination with the VA’s separate SDVOSB requirements.

Definition of Veteran’s “Unconditional” Ownership Differs between VA and SBA

The VA and SBA have overlapping jurisdiction over SDVOSB determinations. However, the agencies have conflicting standards regarding what qualifies as “unconditional” ownership and control by a veteran. The SBA standards that applied even differed from its own standards for companies in the 8(a) program and its women-owned small business program. In addition, the VA regulations provided a substantially more detailed definition that should have encompassed the company.

Despite these differences, the VA regulations still required the removal of a company found ineligible by the SBA. The COFC held that the VA “mechanically” applying this SBA determination to its own eligibility database—without examining any basis for the SBA determination—to be arbitrary. The VA’s removal of the company from the database cost the company an opportunity to compete for a contract for which it was otherwise eligible.

This problem of inconsistent SDVOSB regulations has not gone unnoticed. In 2016, Congress recognized this clash between the VA and SBA standards and ordered the agencies in the 2017 National Defense Authorization Act (NDAA) to reconcile their SDVOSB program regulations. In response to Congress’ order, the VA recently introduced a proposed rule to resolve these conflicts.

New Proposed Rule Would Make SBA the Governing Agency over Veteran-Owned Small Businesses

On January 10, 2018, the VA issued a proposed rule that would place all veteran-owned small business ownership and control requirements with the SBA. In line with the 2017 NDAA, the rule gives the SBA sole responsibility for regulations regarding these ownership requirements—removing all related clauses from VA regulations. In addition, the rule includes changes intended to clarify how veterans can establish a service-connected disability in order to qualify a business as an SDVOSB and how surviving spouses of owners can still certify. The VA also created a more comprehensive list of the circumstances involving waste, fraud, and abuse that would cause a business to become ineligible as a veteran-owned small business.

This proposed rule clearly seeks to avoid similar issues as the ones found in Veterans Contracting Group and is open for public comment for 60 days after its publication.

If you have any questions about service-disabled veteran-owned small businesses, please contact the author.