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GAO decision on Small Business Participation

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Paying fees to itself as the prime contractor is not allowed in calculating the required 25 percent small business set-aside according to a June 11, 2019 General Accountability Office (GAO) ruling.1 In this recent decision, the GAO found that a prime contractor could easily manipulate the amount of fees it pays itself to reach the mandatory threshold and even go beyond to make the bid appear more beneficial to small businesses than it really is.

Air Force solicitation at issue

The Air Force let the solicitation for its engineering, development, integration, and sustainment (EDIS) services in support of satellite systems for the Air Force Space Command, Space Warfighting Construct.2 It included a material requirement for small business participation under the program management technical assistance sub factor.

Peraton, Inc. did the math

Peraton, Inc., alleged that the awardee, Engility Corporation, was not eligible for the award because it had failed to meet a requirement that small businesses must be awarded at least 25 percent of the prime contract. The GAO also found that the agency’s evaluation was unreasonable and inconsistent with the terms of the solicitation. Further, the agency failed to document the method used to evaluate to sufficiently justify the award. Finally, the GAO found that if the agency had evaluated the bid in a manner consistent with the solicitation, it would have failed to meet the requirement of the small business set-aside.

Including fees to itself as part of the mandatory small biz subcontract not cool

According to the GAO decision, “Both the Air Force and the offeror, had argued that it had met a 27 percent small business subcontract but the price was based on inclusion of a fee to the offeror and was not based on the actual amount that the small business would receive.”

By Peraton’s calculation this was not allowed and the GAO agreed. “The RFP established that award would be made on a best-value trade-off basis, weighing cost/price and two technical subfactors: systems engineering and program management. Of relevance here, the program management technical subfactor contained five individual criteria—including a requirement for small business participation—and advised offerors that “[f]ailure to meet any one of the individual criteria . . . will result in an ‘unawardable’ rating at the subfactor level.”

The RFP was clear

In this regard, the RFP established a 25 percent minimum requirement for small business participation, to be evaluated on a pass/fail basis. Offerors were required to submit a small business participation commitment document (SBPCD), and the RFP advised that, “[f]or other-than-small business offerors, their [SBPCD] will comply with the small business percentage requirement of 25 [percent].” To calculate the small business participation percentage, the RFP instructed:

4.3.2.5 Small Business. The Offeror shall describe how [its SBPCD] will ensure the 25 [percent] small business requirement is met. Small business participation constitutes small business utilization contributions to contract performance at 1st tier subcontract level. The percentage shall be based on percentage of small business costs/prices on labor [Contract Line Item Numbers] CLINs only, to include [firm-fixed-price] FFP CLINs that are predominately labor (e.g., Sustainment).[6] The percentage shall be calculated on an annual basis by dividing total small business expenditures by total labor costs/prices on all TOs on just those labor CLINs. (Sec. M. 4.3.2.5). The SBPCD will become part of the contract upon award.

The RFP also required offerors to address the method used to develop the percentage in their SBPCD.”

Higher bid was accepted

Engility was one of five offerors on the proposal along with Peraton, Inc. After evaluation, Engility’s offer which was substantially higher than Peraton’s ($$75,919,659 as opposed to $53,770,874) was accepted. Peraton protested on numerous grounds one of them being the small business subcontracting percentage. Engility claimed in its bid that it was 27 percent but Peraton calculated it as only being 23.8 percent so that it did not meet the mandatory threshold. Peraton said it reached the percentage by dividing Engility’s subcontracting proposed price by Engility’s total labor costs/prices on all task orders.

Peraton’s argument, which prevailed, was that the term “total small business expenditure’s” in the solicitation can only reasonably mean the amount actually paid to the small businesses.

Air Force thought fees to bidder were okay to be included

The GAO agreed with Peraton despite the Air Force’s argument that incentives paid to the prime contractor should be included in the calculation.

“The agency contends that allowing a large business prime to include its own fees in calculating the percentage subcontracted to small businesses “incentivizes the prime contractor to continue to subcontract with small businesses.””

But what about the fees going to the small biz?

Peraton countered that argument that the more the prime spent on fees to itself, the less was available for the small business subcontractor.

Typically, the GAO found that an agency’s decision is deferred to unless it is found to be “inconsistent with the solicitation’s evaluation criteria, undocumented or not reasonably based.” “It is a fundamental principle in a negotiated procurement that a proposal that fails to conform to a material solicitation requirement is technically unacceptable and cannot form the basis for award.” The Boeing Company, B-311344, et al., June 18, 2008, 2008 CPD ¶ 114 at 54.

Plain language prevails

The reviewing agency or court examines a solicitation using the “plain use of the language”. In applying that type of analysis here, the GAO said, “we find that the agency’s interpretation of the term “total small business expenditures” that is allowing money charged to the government as fees for the large business prime to be counted as payment to the small businesses for work performed by small businesses – is plainly unreasonable.“

No incentive to use small biz if prime could include fees to itself

The GAO also found that allowing a prime contractor to use its owns fees towards calculating the small business set-aside doesn’t incentivize a prime to use small businesses. In this instance, the incentive was to ensure that 25 percent of the prime contractor’s funding went to the small business.

“In addition to agreeing with the protestor’s assertions above – that allowing large business fees to be considered part of the small business expenditures in fact could have the opposite of an incentivizing effect – we note that here, an offeror is motivated to subcontract with small businesses in order to avoid the risk of rejection for failing to meet a pass/fail requirement. “

GAO's recommendations to the Air Force

The GAO made a series of recommendations on how the Air Force could deal with the GAO’s decision including reviewing the solicitation to make sure it meets with their actual requirements with small business participation goals in the EDIS contract. If it does, then GAO recommends that the agency either terminate the contract with Engility for the convenience of the government and make an award to an offeror whose proposal complies with the terms of the solicitation and offers the best value to the government. Alternatively, the Air Force could re-open discussions with all the offers to the solicitation, obtain revised proposals, document the evaluation and make an award consistent with the terms. They could also revise the solicitation and reopen it for bids again.

Stay tuned.

About the AuthorKimberly Craven

Kimberly Craven is a passionate, highly-motivated Indian law and policy expert who has a wealth of experience when it comes to assisting Tribal peoples to protect their rights, save their homelands and dramatically improve their standards of living. In particular, she has in-depth expertise in issues that have proven to have a significant impact on that critical government-to-government relationship. Her sage counsel has been sought by the Eastern Shoshone Tribe in Wyoming, the Ute Mountain Ute Tribe in Colorado, the Oglala Sioux Tribal Court in South Dakota as well as the Hopi Tribe in Arizona. Kimberly served as the Executive Director for the Governor’s Office of Indian Affairs where she was responsible for managing the intergovernmental relationship between the State of Washington and the 29 federally recognized Tribes within the State’s boundaries. In the capacity of fighting for Tribal rights, she has also served as a General Attorney, Chief Judge, and Associate Magistrate. Plus, she has worked tirelessly for a number of non-profit organizations dedicated to improving social and economic conditions for Native peoples, including one that successfully defended Tribal treaty fishing rights for the Columbia River in Oregon. In addition, she has handled a wide variety of Indian Child Welfare cases. Kimberly earned her Juris Doctor degree from the University of Colorado School of Law and then went on to complete her L.L.M. in Indigenous Peoples Law & Policy from the University of Arizona. When Kimberly isn’t exercising her right to champion causes for Tribal peoples, she enjoys exercising, cooking and curling up with a good book.

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