When an agency decides to set aside an acquisition for participation only by small businesses, certain subcontracting limitations apply to the small business awardee. For construction contracts, the small business contractor cannot pay subcontractors more than 85% of the amount they receive from the agency. For service and supply contracts, the small business contractor cannot pay more than 50% of the amount paid to it by the agency to other entities that are not similarly situated. Work performed by similarly situated entities is not considered in determining if the limitation on subcontracting is violated. A similarly situated entity is defined as a small business subcontractor that is a participant of the same small business program as the prime contractor and is small for the NAICS code assigned by the prime contractor to the subcontract.

There is a lot of confusion regarding the current state of the law when it comes to limitations on subcontracting. This is largely because the FAR’s limitations on subcontracting provisions have not been updated to correspond with the statutory changes that were made by Congress in the FY 2013 NDAA. The FY 2013 NDAA changed the way that compliance with the limitations on subcontracting provisions is calculated, shifting from formulas that were based on the cost of contract performance (cost of personnel and cost of manufacturing) to formulas that are based on the amount paid by the agency. This confusion is compounded by the fact that the SBA’s new regulation, which incorporates and implements the statutory changes, went into effect on June 30, 2016.

In a recent bid protest, the GAO had an opportunity to address the limitations on subcontracting issue head on but instead elected to deny the protest, as being a matter of contract administration, without first clarifying whether the FAR or the SBA regulation governs. In that case, the GAO issued a decision suggesting that the changes implemented by the SBA regulation took precedence over the FAR despite the fact that the service contract in question contained FAR 52.219-14, which expressly points to the total cost of contract performance and not the total amount paid by the agency. Specifically, when discussing the awardee’s Management Approach, the GAO noted, “[t]he agency explains that since the value of the contract awarded to OSC was $44,290,359, OSC’s proposal indicated that it would perform 56.5 percent of the required effort with its own employees, which is compliant with the limitations on subcontracting clause.” This language clearly shows that both the agency and the GAO applied the new limitations on subcontracting formula, which considers the amount paid by the agency, instead of the old formula, which considers the cost of personnel. Synaptak Corporation, Inc., B-415917.5, B-415917.6, Sept. 24, 2018.

The entire GAO decision can be found here.

By law, a GAO protest must be filed by an interested party. An interested party is an actual or prospective bidder or offeror whose direct economic interest would be impacted by the award of a contract or by the failure to award a contract. Before bid opening or the closing date for receipt of proposals, a protestor must be a prospective bidder or offeror with a direct economic interest in the procurement. This generally means that a bidder or offeror has expressed an interest in competing and is capable of performing the type of work that the solicitation requires. After bid opening or the submission of proposals, a protestor must be an actual bidder or offeror with a direct economic interest in the procurement. This generally means a bidder or offeror who would be in line for award if the protest were sustained. A protestor who cannot receive an award if it prevails on the merits of its protest is not an interested party. In some cases, a high-priced bidder might be able to demonstrate that all lower-priced bidders are ineligible for award, thus becoming the next-in-line for award. In a “best value” negotiated procurement, the GAO determines whether a protestor is an interested party by examining the probable result if the protest is successful. This means that an actual offeror, who is not in line for award, is an interested party if it would regain the opportunity to compete if the protest is sustained.

Continue Reading Recent GAO Decision Highlights the Distinction Between Jurisdiction and Prejudice

A bid protest must allege a violation of a procurement statute or regulation. Although most protests challenge the award or proposed award of a contract, the GAO will also consider protests involving defective solicitations and other unreasonable agency actions like the cancellation of a solicitation. In certain cases, the GAO will consider protests involving the termination of a contract where the protest alleges that the government’s termination was based upon improprieties associated with the contract award (this is sometimes called a “reverse protest”). Additionally, the GAO will consider protests concerning (1) awards of subcontracts by or for a Federal agency, (2) sales by a Federal agency, or (3) procurement actions by government entities that do not fall within the strict definition of Federal agencies, if the agency or entity involved has agreed in writing to allow the GAO to decide the dispute.

Continue Reading The GAO Reaffirms That a Bid Protest Must Allege a Violation of a Procurement Statute or Regulation

As I mentioned in a recent post, the Department of Defense (DoD) is using its “other transaction” authority with increased frequency to attract non-traditional defense contractors and to capitalize on the cutting-edge technological advancements found in the commercial marketplace. Other Transaction Agreements (OTAs) are not procurement contracts, grants, or cooperative agreements and, as such, many procurement laws and regulations do not apply, including the Competition in Contracting Act (CICA) and the Federal Acquisition Regulation (FAR).  Continue Reading Bid Protests: Are Other Transaction Agreements (OTAs) Really Bulletproof?

Last week, I had the opportunity to participate in the Office of the Director of National Intelligence’s 12th Annual Intelligence Community Legal Conference to discuss acquisition reform with some of the top government attorneys in the intelligence community. Much to my surprise, the majority of the conversation focused on bid protests and the impact that protests have on federal procurements. During my time as a government attorney defending against bid protests, I gained valuable insight into how the government works to defeat them and what contractors can to do improve their chance of success. Some of these lessons are shared below.  Continue Reading Bid Protests: An Insider’s Perspective

The Consolidated Appropriations Act for Fiscal Year 2014 required the U.S. Government Accountability Office (“GAO”) to establish an electronic docketing system for bid protests. Now, four years later, there are indications that the GAO might be moving to the Electronic Protest Docketing System (“EPDS”) sometime this year. Before going live with EPDS, the GAO is implementing a pilot program in which certain protests already filed at the GAO will be moved into EPDS. The pilot program will ensure that EPDS is fully operational before it goes live and becomes the sole means for filing a bid protest at the GAO.  Continue Reading The GAO’s Electronic Docket May Be Going Live Soon!

Last month, we reported that the Government Accountability Office’s (“GAO”) statutory authority to hear bid protests on civilian task orders exceeding $10 million had expired, leading to a parade of dismissed protests and disappointed contractors left without legal recourse. As of last week, there is reason to be hopeful, as the House of Representatives and Senate agreed on legislation that promises to permanently restore the GAO’s authority to hear civilian bid protests.  Continue Reading Proposed 2017 NDAA is a Mixed Bag for Government Contractors

The Government Accountability Office (“GAO”) issues statistics each year regarding the outcome of bid protests.  In 2015, there were 2,639 cases filed and there we 587 decisions on the merits.  Of those, only 68 protests were sustained.  According to the way the GAO presents its statistics, that would indicate that protestors prevailed approximately 12% of the time.  In reality, since many protests were withdrawn or summarily dismissed, the protesters only prevailed in 68 of the 2,639 protests filed and the true success rate was closer to 3%.  With those odds, why would anyone file a GAO bid protest?  The answer requires a little closer scrutiny since statistics can be misleading.

Continue Reading Deciding Whether to File a GAO Bid Protest

On September 11, 2013, the American Legion filed an amicus curiae brief, asking the Federal Circuit to reverse the Court of Federal Claims’ November decision in Kingdomware Technologies, Inc. v. The United States. In Kingdomware, the COFC effectively overturned an important line of Government Accountability Office (“GAO”) decisions affecting VOSBs and SDVOSBs. Those GAO cases (commonly referred to as the Aldevra cases) addressed a critically important aspect of the Veterans Benefits, Health Care, and Information Technology Act of 2006, 8 U.S.C. §§ 8127-28 (“the Act”).

That Act established “the rule of two.” It required that “a contracting officer of [the VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.” 38 U.S.C. § 8127(d).

On multiple occasions, contractors Kingdomware Technologies and Aldevra brought protests before the GAO, wherein they cited the language above and argued that the VA failed to follow the requisite “rule of two.” Specifically, the contractors averred that the agency failed to perform market research to determine whether two or more VOSB/SDVOSB concerns could satisfy the requirements of numerous solicitations and/or failed to set contracts aside for such concerns when market studies indicated that two or more such companies existed. Instead, in multiple instances, the VA opted to simply select contractors from the Federal Supply Schedule (FSS). The contractors argued that doing so was a violation of the Act.

The VA looked at it differently. It argued that the Act did not require it to consider setting aside procurements for SDVOSBs or VOSBs when the FSS could be used. The VA felt that it had the discretion to meet its requirements through the FSS, regardless of any obligations imposed by the Act.

In the Aldevra line of cases, the GAO agreed with the contractors’ interpretation of the Act. However, in a surprising move, the VA refused to follow the GAO’s recommendation. In an effort to break the gridlock, Kingdomware opted to press its position in the Court of Federal Claims. Unfortunately, the COFC agreed with the VA’s interpretation and effectively rejected the GAO’s support of “Veterans First.”

The COFC concluded that “the 2006 Act must be construed in light of its goal-setting provisions and thus the statute is at best ambiguous as to whether it mandates a preference for SDVOSBs and VOSBs for all VA procurements.” Although the Act uses the phrase “shall award” in one place, the Court reasoned that this phrase “must be read in connection with the other terms in the 2006 Act.” The Court found that those other terms demonstrated that the Act was “goal-setting in nature.” As such, it did not require the VA to consider setting aside procurements for SDVOSBs or VOSBs. Based on this reading of the Act, the COFC held that the VA had broad discretion with regard to set-aside procurements and, therefore, that the agency was not required to consider setting aside the procurement at issue. Kingdomware appealed to the Federal Circuit, which is where the matter presently sits.

In filing its amicus brief, the American Legion has joined the fight against the VA. In the brief, the American Legion argues that the Act was specifically passed to increase the number of contracts set-aside for VOSBs and SDVOSBs. As such, Congress’ use of the word “shall” was entirely deliberate. The selected language was intended to force the VA to follow the “rule of two.” The American Legion’s brief cites to an earlier Federal Circuit decision, which stated that: “the word ‘shall’ is not ambiguous. . . ‘shall is mandatory language,’ and ‘nothing in the language of the statute states or suggests that the word shall does not mean exactly what it says.’ ” The amicus brief goes on to state that “[b]y awarding contracts to nonveteran businesses…the VA diverts up to nearly $3 billion per year in government contracts away from veteran-owned small businesses.” The American Legion argues that this result is unacceptable and calls on the Federal Circuit to reverse the COFC ruling.

It is difficult to argue with the American Legion’s position. By using the word “shall” in the Act, Congress made its intent clear. The Act was designed to place veterans and service-disabled veterans ahead of all others for contracting purposes. There is nothing ambiguous about that proposition and the statutory language supports such a conclusion. The fact that the VA refuses to make awards to those it is designed to serve, despite the clear intent of the Act, is mind-boggling. Let’s hope the Federal Circuit agrees.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.