In a bid protest argued by our firm before the United States Court of Federal Claims on September 23, 2014, the Court ruled in favor of our client, RLB Contracting, Inc., (RLB) in a matter involving the designation of the dredging exception to NAICS code 237990, which is for “Other Heavy and Civil Engineering Construction.” 13 C.F.R. § 121.201 (2014). The solicitation for the “South Lake Lery Shoreline Protection and Marsh Creation Project” was set aside for small business concerns by the Natural Resource Conservation Service, but the exception to NAICS code 237990 that applies when a project is considered to be dredging was not invoked. At the time, the exception lowered the small business size standard from $33.5 million to $25.5 million for dredging and required that the successful contractor “must perform at least 40 percent of the volume dredged with its own equipment or equipment owned by another small dredging concern.” 13 C.F.R. § 121.201, Footnote 2. (Currently, the applicable small business size standards are $36.5 million and $27.5 million respectively).

Dredging

The small business regulation found at 13 C.F.R. 121.402(b)(2) states that “[a] procurement is usually classified according to the component which accounts for the greatest percentage of contract value.” In this case, RLB presented evidence that the agency had internally estimated that over 50% of the work involved dredging and that the agency had made its NAICS code designation based on an erroneous calculation that only 10% of the work involved dredging. RLB first appealed the NAICS code designation to SBA’s Office of Hearings and Appeals (“OHA”), arguing that the agency applied the incorrect NAICS code size standard. OHA denied the appeal on the basis that the project included other items of work in addition to dredging. However, OHA did no analysis as to the contract value or relative importance of those “other items.” RLB then brought its protest to the United States Court of Federal Claims, again arguing that the agency violated the regulations by failing to apply the dredging exception. RLB also argued that the agency had failed to provide correct information to OHA, and that OHA had refused to consider supplemental information furnished by counsel for RLB. The Court ruled that OHA’s decision was incorrect as a matter of law because OHA’s “decision does not give primary consideration” to “the relative value and importance of the components of the procurement” and did not concern itself with whether the agency classified the procurement “according to the component [of work] which accounts for the greatest percentage of contract value.” 13 C.F.R. § 121.402(b)(1)-(b)(2) (2014).

The Court was critical of the agency for not including pertinent documents in the Administrative Record which demonstrated that the agency knew that the dredging work accounted for the greatest percentage of contract value, and was further critical of OHA for concluding that other, relatively minor, elements of the work supported the agency’s contention that the project did not predominantly involve dredging. As a result, the Court entered a permanent injunction and remanded the matter to the Contracting Officer with instructions “to make a new determination of whether the dredging exception applies based on all available current information.” The Court further stated that “If item 7, Excavation Marsh Creation Dredging, is the most valuable item of work, the contracting officer must give primary consideration to it.”

This decision is an important victory for the small business dredging industry because it makes it clear that federal agencies are not free to circumvent the protection afforded to small business dredging contractors, under the exception to NAICS code 237990, by characterizing work generally as civil construction even though the dominant item of work is dredging. The exception is designed to prevent brokering by non-dredging small business concerns who, after receiving an award, could subcontract virtually all of the dredging work to a large business dredging concern.

Michael H. Payne is the Chairman of the firm’s Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.

Robert Ruggieri is a Senior Associate in the firm’s Federal Practice Group.

By: Joseph A. Hackenbracht 

On July 18, 2012, the Small Business Administration published a proposed increase in the small business size standard for “Dredging and Surface Cleanup Activities” from $20 million to $30 million in average annual receipts. 77 FR 42197. The average annual receipts are calculated by averaging a concern’s receipts for the last three fiscal years. 13 CFR 121.104(c). Receipts means “total income.” 13 CFR 121.104(a).

In order to qualify as small on a Federal procurement, a concern must also perform at least 40 percent of the volume dredged with its own equipment or equipment owned by another small dredging concern. 13 CFR 121.201; note 2. This requirement, sometimes referred to as the “40 percent rule,” has been in SBA’s size standards for small business since 1974. Before 1974, the Department of Defense’s Armed Services Procurement Regulations (ASPR’s) had contained such a requirement for many years. (ASPR 1-701.1(A)(2)). In 1974, it was determined that DoD was exceeding its authority because the obligation to set size standards for small business was within the jurisdiction of the SBA.

When the SBA proposed to increase the size standard for Dredging in July, 2012, it also sought comments regarding the requirement that in order to qualify as small that a concern must perform at least 40 percent of the dredging with its own equipment or equipment owned by another small dredging concern. SBA has heard from small dredging firms that believe they should be able to lease equipment from any size firm as long as employees from the small firm perform the work on the contract.

At this time, however, SBA has proposed to continue requiring small dredging concerns to comply with the “40 percent rule,” in order to ensure that these firms perform a significant and meaningful portion of a dredging project set aside for small business. SBA has asked for comments from the industry and the public concerning (1) whether there continues to be a need for the current 40 percent equipment requirement; (2) whether there is a rationale for a different percentage; and (3) whether a different and more verifiable requirement based on an alternative measure (such as value of contract or personnel involved) may achieve the same objective of ensuring that small businesses perform significant and meaningful work.

The following methods can be used for the submission of comments: (1) the Federal eRulemaking Portal: www.regulations.gov, by following the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier to Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416. Please note that SBA will not accept comments to this proposed rule submitted by email. Also, be sure to refer to “RIN 3245-AG37” when submitting comments, so that SBA correctly attributes your comments to the proposed rule in question.

Joseph A. Hackenbracht is a Partner in the firm and a member of the Federal Contracting Practice Group.

For over twenty years, the federal government and private industry, including contractors, mining companies, developers and builders, have debated the extent to which land clearing and dredging activities should be regulated. Since the 1970’s, the U.S. Army Corps of Engineers and the U.S. Environmental Protection Agency have regulated the discharge of pollutants into the waters of the United States under 33 U.S.C. §1251 et seq., [the Clean Water Act]. Section 404 of the Act includes the discharge of dredged or fill materials as a regulated activity, and the Corps, by issuance of Section 404 permits, has regulated excavation activities in navigable waters and wetlands. 

In the 1980’s, "discharge of dredged material" was not considered by the agencies to include the “de minimis incidental soil movement that occurs during normal dredging.” In the early 1990’s, the Corps and EPA redefined the term to include the redeposit of dredged material. This regulatory definition was challenged in court, and in 1998 the U.S. Court of Appeals for the District of Columbia Circuit ruled that the agencies could not regulate "incidental fallback."   National Mining Association v. U. S. Army Corps of Engineers, 145 F.3d 1399. In August 2000, the Corps and EPA included a definition of the term "incidental fallback" in the regulations. The agencies also added that the use of mechanized earth-moving equipment in waters of the United States was presumed to result in the discharge of dredged material, except where the equipment usage could be shown to only result in incidental fallback. The adoption of these definitions was apparently the agencies’ "reasoned attempt to more clearly delineate the Clean Water Act jurisdiction" rather than develop a "bright line" rule for determining which activities would require a Section 404 permit.

 

In response to an adverse decision issued by the United States District Court for the District of Columbia in January 2007, National Ass’n of Home Builders v. U.S. Army Corps of Engineers, Civil Action No. 01-0274, January 30, 2007, the U.S. Army Corps of Engineers and the Environmental Protection Agency recently adopted a Final Rule on December 31, 2008, 73 FR 79641, that deleted the definition of "incidental fallback" from 33 CFR 323.2(d)(2)(ii) and 40 CFR 232.2(2)(ii), as well as the language indicating that the Corps and EPA "regard" the use of mechanized earthmoving equipment as resulting in a discharge subject to regulation.

 

With the re-issuance of the Section 404 regulations, the situation now will be as it was in 1999 where the decision as to when a particular redeposit of dredged material is subject to Clean Water Act jurisdiction will entail a case-by-case evaluation. This regulatory roll back may create additional burdens to parties that engage in activities that involve incidental fallback and the use of mechanized earthmoving equipment. Corps and EPA guidance in the 1990’s identified these activities as including:

 

· Mining activities, including sand and gravel mining, aggregate mining, precious metals and gem mining, recreational mining, and small instream hydraulic dredges

 

· Ditching and draining activities, including ditching to lower the water table, ditching to drain

wetlands, and removal of beaver dams

 

· Maintenance dredging activities and excavation for currently used flood control projects or for

previously abandoned flood control, and irrigation or drainage projects

 

· Channelization and the reconfiguring or straightening of streams

 

(See 1997 Corps/EPA Memorandum)

The Corps of Engineers responded to the recent Order of the United States Court of Federal Claims dated November 1, 2007, granting a permanent injunction against the issuance of a MATOC solicitation for dredging, by taking four proposed task orders included in the MATOC solicitation and reissuing them as separate negotiated procurements.  (See the article posted on November 5, 2007).  The Plaintiff, Weeks Marine, Inc., filed a motion asking the Court to find that the Corps of Engineers had violated the November 1 Order.  Weeks argued that the injunction of the MATOC solicitation was based upon a finding that there was no legal or rational basis for the Corps to employ contracting by negotiation instead of sealed bidding.  The re-issuance of those same projects as individual RFPs violated the spirit, intent, and the letter of the Court’s Order.

Weeks requested that the Court amend its November 1, 2007 Order to make it clear that the projects addressed by the task orders could only be procured by sealed bidding.   Judge Thomas C. Wheeler of the United States Court of Federal Claims responded by issuing a new Order on November 16, 2007, stating that “. . . the Court must fashion a remedy to address an agency’s conduct that the Court regards as an ‘end run’ to a judicial order and injunction.”  The Court decided to allow one of the four projects to proceed as an RFP because it involved dredging of the entrance channel to the Naval Submarine Base at Kings Bay, Georgia, and was considered to be urgent. The other three RFPs were not allowed to proceed as RFPs, however, because the agency “did not provide any legal or factual justification to use negotiated procurement methods.”  The Court was also concerned about the Corps’ unilateral decision to attempt to circumvent the earlier injunction and stated that “the prudent approach would have been for Defendant to seek relief from the injunction to issue this solicitation, rather than for the agency to decide unilaterally that the injunction did not cover the proposed action.”

In the hearing that was conducted on November 15, 2007, the Judge reiterated that “if sealed bidding is not used for dredging contracts, you may as well read FAR Part 14 right out of the regulation. I mean, when else is it going to apply if not to dredging contracts?”  The decision is a welcome recognition by the Court that sealed bidding is still the preferred method for procuring federal construction contracting, and the decision will hopefully help to stem the continuing move by the Corps of Engineers to unnecessarily employ IDIQ, MATOC, and contracting by negotiation in more of its construction procurements.

In a recent prebid protest presented by our firm, Payne Hackenbracht & Sullivan, the United States Court of Federal Claims considered the protest of Weeks Marine, Inc. v. The United States (“Weeks”) challenging the decision of the United States Army Corps of Engineers, South Atlantic Division (“SAD”), to solicit proposals for maintenance dredging and shore protection projects using negotiated indefinite delivery indefinite quantity (“IDIQ”) multiple-award task order contracts (“MATOC”).  The Court noted that the contemplated change to negotiated IDIQ task order contracting represented a significant departure from SAD’s prior practice of using sealed bidding, and further noted that the policy change had caused widespread industry criticism. 

As grounds for its protest, Weeks asserted that SAD’s proposed change to negotiated IDIQ/MATOC task order contracting was contrary to law, and was without any rational basis.  Weeks relied upon 10 U.S.C. § 2304(a) and Federal Acquisition Regulation (“FAR”) ¶ 6.401(a), mandating that an agency shall use sealed bidding procedures when (1) time permits, (2) awards will be made solely based on price, (3) discussions are not necessary, and (4) the agency reasonably expects to receive more than one bid. Weeks contended that each of these four conditions was met for SAD’s dredging contracts, and that no legal basis existed to use negotiation procedures.

The Corps of Engineers argued in opposition that SAD’s proposed IDIQ task order contracting was lawful, that the agency had wide discretion in selecting an appropriate procurement method, and that SAD’s justification for the change was reasonable under current circumstances.  The Court disagreed and ruled that an agency’s discretion “does not empower an agency to employ a procurement method in violation of applicable law.”  The Court ruled that SAD had not pointed to any significant changes in its procurement environment that would warrant a change to IDIQ task order contracting.  The Acquisition Plan confirmed that SAD had “excelled in program execution” during the last two years and “the Court does not see any reasons or developments for moving away from the sealed bid process.  Without any analysis of the applicable statutes and regulations, and without citing any significant reasons or developments, the Court held that SAD would violate 10 U.S.C. § 2304(a), FAR ¶ 6.401(a), FAR ¶ 14.103-1(a), and FAR ¶ 36.103(a) by employing IDIQ task order contracting methods.“

This is an important judicial opinion that will hopefully cause government agencies to revisit decisions to utilize contracting by negotiation in either single procurements or IDIQ contracting.  When the sole justification for negotiated contracting boils down to nothing more than a desire to introduce unnecessary subjectivity into the source selection process, RFPs should not be used and sealed bidding should continue to be the preferred method.  In dredging, as in many other areas of construction contracting, sealed bidding has been a successful procurement method for many years.  It is a system that provides the greatest risk coupled with the greatest opportunity for reward and it is an integral part of the free enterprise system.

Of great concern to the Court was the fact that under SAD’s “new” procurement method approximately $2 billion in task order awards during the next five years would become virtually immune from any judicial or administrative bid protest review.  The Federal Acquisition Streamlining Act of 1994 (“FASA”) provides that “[a] protest is not authorized in connection with the issuance of a task order or delivery order except for a protest on the ground that the order increases the scope, period, or maximum value of the contract under which the order is issued.”  While SAD’s current sealed bid awards routinely are subject to bid protest review by the Government Accountability Office (“GAO”) or the Court, SAD’s task order awards would be insulated from review except in very limited circumstances.  Thus, while purporting to use highly discretionary “best value” evaluation procedures in awarding task orders, SAD effectively would remove itself from any bid protest oversight.   Although the Corps argued that the Court must apply the FASA provision that Congress created, the Court ruled that this provision did not authorize SAD to convert all of its procurements into task orders.

In asserting a need for a change from sealed bidding to contracting by negotiation, the Corps contradicted its own position by stating that its sealed bid approach had “excelled in program execution” during the last two years.  As a result, the Court concluded that “The agency has provided no evidence that the current system is failing or in need of revision.  In fact, the Court would be hard-pressed to identify any contracts better suited to sealed bid procurement than dredging.  If not appropriate for dredging work, it is difficult to imagine when sealed bidding ought to be used.” (Emphasis added).

Continue Reading Federal Court Rules that Negotiated IDIQ/MATOC Contracting Cannot be Used Instead of Sealed Bidding Without a Lawful and Rational Basis

Although a contractor encountered subsurface conditions in a dredging project that it may not have anticipated, it was unable to prove that the hard material was a differing site condition.   The contractor’s claim was that it had encountered a Type I differing site condition. The Armed Services Board of Contract Appeals denied the claim, stating that the contractor had not proven that the actual conditions differed materially from those indicated in the solicitation. The ASBCA reiterated the four elements of proof that a contractor must meet in order to prevail on a Type I differing site conditions claim, as follows:

1) The conditions in the contract must have differed materially from those encountered.

2) The actual conditions must not have been reasonably foreseeable based upon all of the information available to the contractor at bid time.

3) The contractor must have reasonably relied upon its interpretation of the contract and the contract related documents. (In this case there were additional boring logs referenced in the solicitation that were available upon request).

4) The contractor must have been damaged by the actual, materially different, conditions.

In denying the contractor’s claim for a differing site condition, the ASBCA held that “a contractor has a duty to review information that is made available for inspection.” The Board of Contract Appeals determined that had the bidder reviewed the referenced boring logs in conjunction with those appended to the solicitation, the site conditions encountered would have been reasonably foreseeable. The ASBCA found that the actual conditions, including rock, cemented sand, and other hard materials were reasonably foreseeable based upon the borings in the solicitation and the additional borings referenced in the solicitation as being available upon request.  See Appeal of Bean Stuyvesant L.L.C.