On November 8, 2022, the Department of Defense (DOD) issued a memorandum that provides details on a pilot program that allows government contractors owned 100% by an S-corporation employee stock ownership plan (ESOP) to receive a noncompetitive award for certain follow-on contracts. According to the memorandum, the program is limited to only nine “entities,” and applications will only be accepted until April 28, 2023, or until nine contracts are approved. The application is submitted by the contracting officer. Therefore, interested government contractors should contact their contracting officer as soon as possible to determine if an application will be submitted and to provide certain information required for the submission.

Background

On December 27, 2021, President Biden signed the National Defense Authorization Act for Fiscal Year 2022 (NDAA), which included the first-ever government contracting program to encourage employee ownership through ESOPs. Specifically, Section 874 of the NDAA authorized a DOD pilot program that allows for selected contractors owned 100% by an S-corporation ESOP to receive automatic follow-on contracts. Although similar programs have existed for small businesses, this program is the first instance where the government has authorized a program for ESOPs.

Memorandum

Section 874 of the NDAA provided few program details, but the memorandum provides detailed guidance on who can apply and how the program works. The key points are:

• Participation is restricted to only nine contracts for nine contractors, so competition may be fierce; interested contractors should act quickly to assist their contracting officer in filing an application.
• Contractors can only apply through a contracting officer.
• Contractors must have received a minimum rating of satisfactory (or equivalent) for the predecessor contract to be considered for the program; also, the contractor must have been 100% S-corporation ESOP-owned during the performance period of the predecessor contract.
• Contractors cannot subcontract more than 50% of the amount paid under the follow-on contract.
• Applications are due by April 28, 2023, and contracts must be awarded by August 31, 2023.
• The program will remain in effect until December 7, 2026.

The memorandum also provides an application template, which must be submitted in accordance with the DOD’s agency procedures, and a data collection template, which program participants must complete and submit within 30 days of the contracting officer’s request.

Conclusion

The memorandum provides greater detail regarding the program’s application process and places further limitations on who can apply and the number of contracts that will be selected. As indicated by the program’s deadlines and contract limit, interested government contractors should contact their contracting officer as soon as possible to determine if an application can be submitted and to provide information for the submission. Hopefully, with good experience, the DOD will expand the program.