Ruling buttresses small businesses

Yet favorable 'Rule of Two' decision could come at a high cost

Ed Driscoll, president and chief executive officer of Delex Systems Inc., was forced into an awkward position last spring. His customer of 40 years, the Navy, was disregarding small-business acquisition rules. Delex risked losing a lot of potential business if the problem continued.

On a $75 million contract, the Navy decided against setting aside orders for small businesses as acquisition rules require when at least two small companies can handle the work and can offer reasonable prices.

Driscoll, a former Navy officer, had invested millions of dollars just to earn a spot to compete for the orders on the Navy’s Training Systems Contract II. Given the size of his investment and the contract, he had to consider a protest. At the same time, he did not want to wreck a relationship he had spent years building.

Ultimately, he had no choice. “This was an opportunities issue and an investment issue,” he said.

After hearing Delex’s case, the Government Accountability Office decided Oct. 8 that agencies must set aside some task orders if at least two small businesses could do the work, which is known as the “rule of two.” The Federal Acquisition Regulation requires a contracting officer to reserve any order of more than $100,000 if at least two responsible small businesses could enter bids. The regulation was the foundation for GAO’s ruling.

Driscoll won the protest, and the result might give small businesses such as Delex a new edge in government contracting. By ruling that agencies must set aside work for small businesses if they find two such companies that are capable of meeting the agencies’ needs, the GAO buttressed rules that agencies have often disregarded.

However, the decision could stress relationships between companies and agencies. Agency officials expect more time-consuming protests for not setting aside work. And they’re frustrated by the prospect.

“Delex hints at some of the angst people haven’t had since” acquisition reforms in the 1990s, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources Inc., a market research firm.

When they solicited the task order under the training contract, Navy officials decided not to set it aside for small businesses. Instead, they opened the competition to large and small companies on the multiple-award contract.

“GAO tipped the playing field in favor of small-business contract-holders,” said Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry group. GAO has significantly changed how agencies and contractors plan their acquisition strategies, especially when it comes to multiple-award contracts that have a mixture of small and large companies, he added.

As a result of the decision, program managers and contracting officers will likely give more weight to small-business set-asides in their initial acquisition strategies, Bjorklund said. When agency officials need to buy something quickly, the greater possibility of a protest by a small company on a task or delivery order would make them keep set-asides in mind.

“Small businesses should capitalize on this opportunity,” said Andy McCann, vice president and geographic sales leader at EDS Corp.’s U.S. Government and Public Sector business.

ASSESSING THE DECISION
At this point, though, many companies and industry observers are still trying to understand what effect the ruling will have. An executive at a major systems integrator who asked to remain anonymous said large companies aren’t enthusiastic about the ruling, but the outcome depends on how a contracting officer interprets GAO’s decision. Integrators are waiting to see how to set up bidding strategies and partner with small businesses, especially on mixed indefinitedelivery, indefinite-quantity contracts.

The ruling could cause small businesses to consider new ways of working with integrators to ensure that they offer the best services and win future government contracts, McCann said.

“This ruling creates an incentive for small businesses to strive to be selected on IDIQ contract vehicles or to team with a large integrator on an IDIQ contract,” McCann said. It might also encourage companies to put more emphasis on their mentor/protégé programs.

Nevertheless, other experts say GAO’s decision doesn’t give advantages to small companies.

“On the surface, this may seem to be a benefit to small businesses, but the price may be too high,” said Guy Timberlake, chief visionary and chief executive officer at the American Small Business Coalition.

Timberlake said he is concerned that the decision might strain the already tense relationship between agencies and small businesses.

Officials and experts agree that the ruling could increase the distrust between industry and government. Agencies might suspect contractors of planning protests and including those projected costs in their bids.

Karen Kopf, operations director at the General Services Administration’s Federal Systems Integration and Management Center, said she feared becoming bogged down in protests, especially now that companies can protest task and delivery orders and be heard by GAO.

Lee Harvey, the Army’s deputy program executive officer for enterprise information systems, said that a decade ago, fewer companies protested award decisions because they wanted good relationships with the government. But today’s larger orders encourage people to protest, he said, because companies have more at stake.

“Frustration sums up our feelings,” Harvey said about GAO’s decision and its likely effects.

KEEPING TABS ON ORDERS
The crux of the issue was the Navy’s contention that Delex’s protest was against a delivery order and not a contract, making it exempt from the rule of two. But changes by Congress opened the orders to protests. In January, lawmakers decided that task and delivery orders were growing so large and complex that they equaled traditional contracts. They decided orders needed more regulation because agencies have been using task-order contracts for more than 50 percent of their procurements, compared with 14 percent in 1990, experts said. In the 1990s, the government viewed task orders as distinct from contracts and put those orders outside GAO’s jurisdiction.

GAO will keep its new authority to review task-order protests for three years. Legislators plan to evaluate the effects before then and make any necessary changes.

In the meantime, the new authority is changing the acquisition field, and GAO’s ruling could further alter how agencies view orders and contracts.

“More of these multiple-award opportunities might be issued as full-and- open [competitions] with no setaside components, creating a more prohibitive competition environment for the average small business,” Timberlake said.

Agencies will reassess the advantages of multiple-award contracts because of GAO’s ruling, Bjorklund said. They might ask themselves why they should go through the hassle of awarding an IDIQ and then go through another competition for task orders.

However, some experts say GAO’s decision won’t affect multiple-award contracts that separate small and large businesses.

The ruling will have little effect on NASA’s Solutions for Enterprisewide Procurement, a governmentwide acquisition contract, said Joanne Woytek, NASA’s SEWP program manager.

SEWP is organized into four groups of multiple-award contracts. Two are exclusively for small businesses with one of the two set-asides for small companies owned by service-disabled veterans. The other two groups are primarily for large businesses, though a few small companies are in the group.

Woytek said the ruling might affect a few orders in those groups that lack set-asides, but the small businesses in those groups are generally winning orders when they submit a reasonable bid.

“We have always encouraged contracting officers to provide a small-business preference, and now it will be more targeted if two of the small companies in the open groups can and want to provide a reasonable quote,” she said.

Whether the ruling opens an advantage for small businesses, it has left the contracting community in limbo. Ultimately, though, the rules are nothing new, and GAO has simply reinforced them, Driscoll said.

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