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).

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.