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Video on the Rule of Two and Kingdomware

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Introduction

Good afternoon, my name is Joe Whitcomb, founder and owner of Whitcomb Selinsky PC located in Denver, Colorado. Today we are going to discuss what is commonly referred to as the Rule of Two in government contracting. We will also talk about the statutes and regulations that govern the rule of two and issues that specifically affect veterans and service-disabled veteran business owners in the universe of government contracting.

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1. What is the Rule of Two


The Rule of Two, put most simply, states that the government must first satisfy the Rule of Two before it can “set aside” a contract for a particular socio-economic group. The policy reason behind that rule is that if there are at least two companies competing for a contract then by virtue of that competition, the government has some assurance that they will receive reasonable pricing for the goods or services that they are attempting to purchase.

In 2006, Congress passed a law that is known as the “Veterans Benefits, Health Care, and Information Technology Act of 2006.” That statute is listed as 38 USC 8127 subparagraph D. Our firm’s view of that statute is that Congress created a two-pronged test with that statute. First, the contracting officer is supposed to do market research to determine whether or not here she has a reasonable expectation of receiving two offers from either service disabled or veteran owned small businesses. Secondly, the contracting officer should determine in advance whether or not here she has a reasonable expectation of being able to make an award at a “fair and reasonable price.” If both of those criteria are satisfied, then the statute requires that the government award the contract to a service disabled or veteran owned small business as long as the agency receives one qualified offer from one of those two types of companies.

2. Government Accountability Office

As mentioned before, the law was passed in 2006. The associated case law demonstrates that from 2006 to 2016 the VA resisted Congress’s mandate of awarding these contracts to veteran-owned small businesses. For most of those 10 years the VA took the position that on the Rule of Two and 38 U.S.C.A. 8127did not apply to GSA Schedule contracts. Therefore, if the Veterans Administration was competing contracts on the GSA or other Federal supply schedules then it was not adhering to the rule of two or complying with 38 U.S.C.A. 8127.  The Government Accountability Office agreed with the VA position for most of those ten years.

Then in 2011 a company called Kingdomware Technologies began protesting contracts over solicitations that were not set aside for veteran-owned small businesses. Moreover, they won many of those cases at the Government Accountability Office. In fact, there is a report that the GAO published in 2014 in which it instructed Congress that it had sustained about 14 protests on Kingdomware’s behalf as related to the set-aside issue, but the VA ignored the GAO’s recommendations.

3. Court of Federal Claims

In one of those instances, the Veterans Administration simply ignored the Government Accountability Office’s recommendation that the contract be set aside for veteran-owned small businesses. Kingdomware took the case to the Court of Federal Claims. Judge Firestone, at the Court of Federal Claims agreed with the Veterans Administration that the Rule of Two and 8127 was aspirational and so long as the Veterans Administration was meeting its three percent set-aside goals, then the VA did not need to do more. In the Court’s opinion, there was no requirement that it set aside these contracts and reward contracts to veteran owned small businesses. As we know now, Kingdomware Technologies took the case up to the Court of Appeals for the Federal Circuit and the Federal Circuit (or CAFC for short) agreed with the lower court and affirmed the lower court's decision.

4. US Supreme Court

Then Kingdomware took the case to the US Supreme Court. (where it took about two years to get through the US Supreme Court) and was finally decided in June of 2016. In a rare nine to zero decision authored by Justice Thomas, the Supreme Court ruled, as other instances that “shall” meant “must.”  Justice Thomas, in his written decision, pointed to the fact that the statute in question contained both the words “may” and “shall” and where “may” and “shall” exist in the same statute, the court took the position that “shall” meant “must.” Following that ruling in 2016, the VA has been required to set aside contracts and award contracts to veteran-owned small businesses so long as the contracting officer had a reasonable expectation of receiving two offers from SDVOSBs or VOSBs and being able to make an award at a fair and reasonable price.

5. Reasonable Expectation

The way this process is supposed to work is that the Contracting Officer receives a requirement from one of the contracting officer’s customers, a VA employee. The VA customer needs manufactured items, construction, or services. Then the Contracting Officer is supposed to go out into the market and determine by way of whatever form of research that the VA Contracting Officer wants to use, whether or not that Contracting Officer can reasonably expect at least two offers to come in from veteran-owned small businesses.

The second thing the Contracting Officer is supposed to accomplish is to get reasonable assurance that here she will be able to make an award at a fair and reasonable price that offers “the best value” to the United States.

It has been this law firm’s experience that since 2016, the VA has latched on to that language in its attempt to maintain its discretion in what it pays for goods and services.

The way our law firm interprets that statute is that if the VA rejects a price as being not fair and reasonable then the Contracting Officer is saying by extension that the government cannot award to that contractor and that doing so would be illegal. The VA has not been taking that position. It has been taking the position for the last two years, and doing so in earnest, that it, the agency, is the sole arbiter of what constitutes a fair and reasonable price. The VA has consistently argued that the Contracting Officer has sole discretion to determine what is fair and reasonable based on whatever metric that contracting officer comes up with under the circumstances.

What we have witnessed contracting officers doing is looking at the pricing the contracting office has paid historically for a good or service. Some cases that we have at the court of Federal claims and the US Court of Appeals for the Federal Circuit involved document destruction companies competing for VA contracts. Their prices submitted to the Veterans Administration were far below there GSA approved pricing. However, the Veterans Administration Contracting Officer has rejected those prices as being not fair and reasonable. This is because the contracting officer created what here she refers to as an IGCE or Independent Government Cost Estimate based on historical invoices. Many times these are prices that were created five or more years ago by large sometimes multinational publicly traded companies. As you would expect, the prices that these large companies bid are far below what a veteran owned small business is able to match. Many times, this is because the veteran-owned small businesses lack the economies of scale to be able to compete with large multi-national corporations in price.

The way this plays out is that the VA receives bid prices from veteran-owned contractors and those prices will exceed the historical pricing by some margin. Sometimes that margin is one hundred percent higher, sometimes more. The VA will reject those prices as not being fair and reasonable for that procurement. This is true, notwithstanding that fact, the contracts many of the prices proposed were well below that contractor’s GSA pricing and in our view inherently fair and reasonable.

6. Federal Court of Appeals and Court of Appeals Federal Circuit

Of course, the courts have not agreed with us thus far on this. We have several of these cases before the Court of Appeals for the Federal Circuit and we are prepared to file a writ of certiorari if necessary.

7. Kingdomware II

Our law firm has affectionately dubbed these cases Kingdomware Two because we believe that both the federal legislation and the Supreme Court in the Kingdomware decision has left the question of what constitutes an “fair and reasonable price” open to interpretation. Our argument is that the VA should not be in the business of frustrating Congress's intent, which was to award as many contracts as the VA could reasonably award to businesses owned and controlled by veterans or service-disabled veterans.

Conclusion

We will certainly be following up with this issue in the future. There are also some overlapping issues having to do with the rule of two like limitations and subcontracting. We have already created a separate video blog on that subject. We hope you learned something from this video and that the content has been informative. Of course, if you have any further questions, please reach out to us. If you have something you would like to speak to me about specifically, you can click the let’s talk but an at the bottom of our website and schedule a time to speak with me.

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About the AuthorJoseph Whitcomb

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