GAO rejects request to review HUBZone decisions

SBA and OMB contend GAO overreached its authority in ruling that HUBZone businesses have priority

The Government Accountability Office today denied Small Business Administration officials’ request to reconsider recent bid protest decisions that give some small businesses priority over others.

SBA’s request “is denied where newly raised information fails to show that our prior decision contains any errors of fact or law,” GAO’s Acting General Counsel Daniel Gordon wrote in a decision released today.

SBA and the Office of Management and Budget Director Peter Orszag contended GAO overreached its authority when it ruled that firms in historically underutilized business zones (HUBZones) should get priority over small businesses in the SBA’s 8(a) program or service-disabled, veteran-owned small businesses.

GAO’s rulings are not binding on federal agencies and are contrary to SBA regulations, Orszag wrote in a memo released to agencies July 10.

“If agencies were to follow the GAO decisions, the federal government’s efforts to procure goods and services from 8(a) small businesses and from [service-disabled, veteran-owned small businesses] through the other statutory programs may be negatively impacted,” Orszag wrote.

He also wrote that the rulings remove contracting officers' discretion to set aside a contract. Until administration attorneys finish their legal review, Orszag wrote that contracting officers should continue using SBA's view of the three types of small businesses. Federal agencies should not “prioritize HUBZone small businesses over” 8(a) or veteran-owned companies, he wrote.

The administration’s concerns come from a May 4 ruling on a protest by Mission Critical Solutions, a HUBZone company. GAO ruled that the Army made a mistake and didn’t consider whether at least two HUBZone businesses would bid on an information technology contract. Instead, the Army awarded the one-year, $3.45 million sole-source contract to Copper River Information Technology, a company owned by Alaska Natives. Law allows Alaska Native corporations to receive sole-source contracts of any size.

GAO based its decision on the Small Business Reauthorization Act of 1997. The legislation states that “a contract opportunity shall be awarded” on the basis of a set-aside competition among HUBZone companies. Meanwhile, Congress didn’t afford companies in SBA’s 8(a) program or companies owned by service-disabled veterans the same mandate. The law only says contracting officers may set aside a contract to those types of companies.

“We do not think SBA’s regulatory implementation of HUBZone and 8(a) statutes is reasonable since it fails to give effect to mandatory language of the HUBZone statute,” the decision in the Mission Critical Solutions case states.

GAO reached a similar conclusion in September 2008, when it considered a bid protest from International Program Group, another HUBZone company. The Marine Corps set aside a contract for service-disabled veterans before considering whether a HUBZone set-aside would be appropriate. GAO ruled against the Marines.

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Bid protests keep pace with DOD spending

The number of protests against the Defense Department's contract awards has grown at the same rate as the department’s spending has increased over the past several years, according to a recent report.

The Government Accountability Office has handled as few as 458 bid protests filed by companies against DOD’s contract awards in fiscal 2004 and as many as 540 protests in 2007, GAO reported April 14. In 2008, the protests increased to 611, a 23.9 percent jump compared with 2007, the largest margin in past four years, GAO said, adding that the greatest increase had been 17.9 percent in 2005.

GAO also said 2008’s increase comes from its expanded protest jurisdiction. The fiscal 2008 National Defense Authorization Act granted federal employees involved in a public-private competition for government work to protest a decision to outsource the work to the contractor.

Excluding protests in the expanded jurisdiction, GAO said the protest number rose to 581, or 17.8 percent, over 2007.

GAO put the increase in context of DOD’s spending. Despite the 17.8 percent jump, DOD spent 15.7 percent more money in 2008, compared with the previous year’s spending. “These similar rates of increase may suggest that the increase in protests was due in part to DOD’s increase in procurement spending,” GAO said.

GAO also said during the last two decades, the number of bid protests against both DOD's and civilian agencies' award decisions has declined. In 1989, companies filed 1,490 protests against DOD's award and 750 against civilian agencies’ decisions. In 2008, there were 611 protests against DOD's decisions and 416 against civilian agencies' decisions. The total number of protests against defense and civilian awards peaked in 1993 with 2,336 and has continued downward since, according to GAO’s figures.

Congress required GAO in the fiscal 2009 National Defense Authorization Act to assess bid protest trends; some members of Congress are concerned about frivolous protests. The House Armed Services Committee wrote that bidders seem to automatically file a bid protest if they lose a competition for a contract.

When a company files a protest, the matter goes before GAO. A group of 30 attorneys in GAO’s Office of General Counsel, who serve as hearing officers, address a company’s allegations that an agency acted contrary to procurement law or its contract solicitation.

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Ruling clouds future for buyers

Experts debate the potential impact of a GAO decision on small-business contracting

The Government Accountability Office’s recent ruling that agencies must set aside some task orders for small businesses could give those firms a new advantage, some observers say. But others say it remains unclear how much the ruling will change how agencies do business.

GAO sustained a protest by Delex Systems, which argued that the Navy should have limited competition for an aviation training products delivery order to small businesses because at least two small firms could have offered bids.

The Navy solicited bids through its Training Systems Contract II, a multiple-award, indefinite-delivery, indefinite-quantity (IDIQ) contract, which features two small businesses and six large businesses.

Under the rule of two, the Federal Acquisition Regulation requires agencies to set aside any order of more than $100,000 if the agency finds that at least two qualified small businesses could enter bids. In the Delex case, the Navy argued that the rule applies to contracts, not task orders. GAO’s ruling marks the first time the rule of two has been interpreted to apply to task and delivery orders.

“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. The ruling significantly changes the landscape for agencies’ and contractors’ acquisition strategies, especially for multiple-award contracts with a mix of small and large companies, he added.

As a result of GAO’s decision, program managers and contracting officers will likely give more weight to small-business set-asides in their initial acquisition strategies, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources.

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

A mixed verdict
However, at this point, many companies are trying to understand how the ruling will affect them. An executive at a major systems integrator said large companies were not happy with the ruling, but the outcome depends heavily on how a contracting officer interprets GAO’s decision. Integrators might need to adopt new bidding and partnership strategies, especially on multiple-award contracts that feature large and small businesses.

Likewise, the ruling could cause small companies to seek new strategies for working with integrators, 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 a greater emphasis on their mentor/protégé programs.

“Through our small-business program, EDS has established and maintained strong relationships with small businesses and has introduced them to new business opportunities with EDS,” he said.

Other experts say GAO’s decision will not give small companies any new advantages. “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 the decision might strain the already tense relationship between agencies and small businesses.

John Howell, a partner at law firm Sullivan and Worcester, said any time GAO or Congress institutes a new requirement, agencies push back, straining their relationships with small businesses.

Officials and experts agree that the ruling could widen the rift between government and industry. Already, agencies and firms are slow to trust one another. Some experts speculated that agencies now might assume that contractors plan to protest losses and even factor the costs of pursuing those protests into their bids, raising the costs to government.

The cost of doing business
Lee Harvey, the Army’s deputy program executive officer for enterprise information systems,, said fewer companies protested award decisions a decade ago because they wanted to avoid making a fuss and preferred to maintain good relationships with the government. However, today’s larger orders make people want to protest, he said. Companies have more at stake.

Companies that don’t file frequent protests might still be tarnished by agencies’ perception that contractors in general do so, Timberlake said.

“The business of doing business with the government today is so overwhelmingly out of focus that, in my opinion, we’re no longer looking at the true picture of industry and government partnering,” Timberlake said.

Earlier this year, Congress gave GAO the authority to hear task-order protests because they have become so complex and widely used that they are now the equivalent of what full contracts are, experts say. Agencies have been using task orders for more than half of their procurements in recent years, compared with 14 percent in 1990. 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, GAO’s recent ruling could change how agencies view orders and contracts.

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

Harvey recently predicted that agencies would take that course in the near future. He said agencies, particularly those under pressure to buy what they need quickly, might resort to the Big Bang theory of procurement: one competition for one big contract.

Bjorklund agreed that agencies will likely reassess the use of multiple-award contracts in light of GAO’s Delex ruling. They will probably ask themselves why they should go through the hassle of awarding an IDIQ and then go through another competition for task orders, he said.

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 for small businesses, with one of the two set-asides for small companies owned by service-disabled veterans. The other two are primarily for large businesses, though a few small businesses are in the mix.

Woytek said the ruling might affect a few orders in the groups that lack set-asides, but the small companies 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 or not the ruling offers an advantage to small businesses, it has left the contracting community in limbo.

“The decision changes the rules of engagement” and leaves new questions unanswered, Chvotkin said. “It changes procurements midstream.”

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GAO disputes savings reports

The Bush administration’s competitive-sourcing policy took a hard smack from the Government Accountability Office less than three weeks after Office of Management and Budget officials publicized one agency’s success story about saving an estimated $100 million a year from that initiative.

The Agriculture Department’s Forest Service reported savings of $38 million from competitive sourcing based on three public/private job competitions between fiscal 2004 and 2006. However, the agency spent an estimated $40 million on transition costs in 2005 and 2006 to restructure its information technology infrastructure for one of the competitions.

That cost is $5 million more than the $35 million in savings that the agency reported to Congress, according to a GAO report issued Feb. 21.

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Walker: Redefine 'inherently governmental'

The definition of an inherently governmental function needs a re-examination because public employees and private-sector contractors are almost indistinguishable, U.S. Comptroller General David Walker told a Senate committee Tuesday.

“We need to look at when and under what circumstances is it appropriate to be contracting and when is it not, because we are in a very different situation today, and we’re likely to continue to have to rely on contractors…to accomplish the government’s mission,” he told the Senate Homeland Security and Governmental Affairs Committee.

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DOD time-and-materials contracts raise red flag for GAO

Defense agencies can expect to analyze whether time-and-materials contracts have become their default contracting method when other pricing arrangements may be more appropriate, a Defense Department official has said.

The Government Accountability Office said in a June 29 report that DOD is turning to those contracts because they can be awarded quickly and the department can adjust some parts of them if issues arise. Despite their increasing use, contracting officers rarely explain why they pass on less-risky contract types. Also, GAO found little attempt to convert follow-on work to a different type of contract.

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GAO: DOD relying more on contractors

The Defense Department has increased its reliance on contractors to maintain operations in the past decade because its personnel have been pulled away on military duty, according to a new report.

Following relatively constant spending levels from fiscal 1995 to fiscal 2000, the money going to the private sector skyrocketed from fiscal 2000 to fiscal 2005. In that time period, DOD’s operations and maintenance costs increased 57 percent, from $133.4 billion to $209.5 billion, according to a Government Accountability Office report released today.

An increase in military obligations because of the war on terrorism without an increase in personnel led DOD to rely more on the private sector, the report states.

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Feds stay competitive

Federal employees beat private contract employees in 19 of 22 public/private job competitions that four science agencies conducted from fiscal 2003 through fiscal 2005. Science agency officials said insider knowledge gives agency employees an advantage over their private-sector competitors.

The Office of Management and Budget’s Circular A-76 policy allows companies to take over certain jobs performed by federal employees if they can do the work more efficiently.

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NASA broke procurement promise to GAO, senator says

NASA needs to account for misleading the Government Accountability Office (GAO) on a pledge to review contracting irregularities after having a bid protest dismissed in 2005, Sen. Charles Grassley (R-Iowa) said in a letter to the space agency.

In the letter sent April 5, Grassley, the ranking member of the Senate Finance Committee, said NASA made specific commitments to GAO as part of its response to a bid protest. The commitments led GAO to dismiss the protest. However, a review by NASA’s inspector general found that agency did not follow through on its promises, Grassley said.

“NASA needs to ensure that basic procurement principles are followed,” Grassley said.

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Katrina subcontracting plans incomplete, GAO finds

Departments should keep better records of subcontracts going to small businesses during emergency situations, such as in the aftermath of Hurricane Katrina in 2005, the Government Accountability Office said in a new report. GAO also said inspectors general should review recordkeeping practices.

Required information on small business subcontracting is not consistently available in official procurement data systems of the Defense and Homeland Security departments, the General Services Administration, and the U.S. Army Corps of Engineers, GAO found.

Specifically, the systems had no information on whether DHS or GSA required subcontracting plans for 70 percent or more of their contracting funds. But when agencies decided the plans were unnecessary, they often gave no explanation, GAO found.

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Davis asks GAO to review SARA panel report

Rep. Tom Davis (R-Va.) asked the Government Accountability Office to assess whether the Acquisition Advisory Panel's reommendations to improve federal acquisition regulations will help the system, protect the government’s best interest and ensure the financial and ethical integrity of the government’s acquisitions, according to a letter sent in November.

The Services Acquisition Reform Act of 2003, which created the panel, was passed as part of the National Defense Authorization Act for Fiscal Year 2004. It directed the administrator for federal procurement policy to establish an advisory panel to review acquisition laws and regulations.

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