Bid Protest Spotlight: Rule Of Two, Post Award, Cost Request

This article is part of a monthly column that provides takeaways from recent bid protest cases. This installment highlights three decisions from the U.S. Government Accountability Office.

Each of this month's decisions addresses a different type of challenge: a solicitation challenge during the course of corrective action, a post-award bid protest and a protester's request for recommended costs.

From the "rule of two," to the Trade Agreements Act, to a recommendation for protest costs, each of these GAO decisions offers distinct, helpful reminders for both contractors submitting proposals and unsuccessful offerors looking to file protests.

Knudsen Systems

Knudsen Systems Inc. involves the rule of two, and the market research that agencies must perform when setting aside contracts for small businesses.[1]

Specifically, under Section 19.502-2(b) of the Federal Acquisition Regulation, agencies are required to set a procurement aside for small businesses where the procurement is valued over the simplified acquisition threshold, and there is a reasonable expectation that at least two responsible small business concerns will submit offers and that award will be made at a fair market price.

This is commonly known as the "rule of two." When setting aside a procurement for small businesses, agencies are required to perform adequate market research to ensure the rule of two is met.

In Knudsen Systems, the U.S. Department of the Navy, Naval Undersea Warfare Center issued a solicitation for sonar sounding sets as a small business set-aside under North American Industry Classification System, or NAICS, code 334511, which is a manufacturing NAICS code.

When a set-aside solicitation is assigned a manufacturing code, an offeror must either be a small business that manufactures the item being procured or qualify as a small business nonmanufacturer.

To qualify as a small business nonmanufacturer, the offeror must, among other requirements, supply an end item of a small business manufacturer in the U.S., or obtain a waiver of such requirement.

When the Navy initially issued the solicitation, it indicated that the Small Business Administration had issued a class waiver for the NAICS code.

However, after the submission of proposals and after the Navy completed its evaluation of those proposals, it discovered that the SBA had not in fact issued a class waiver. The Navy therefore notified Knudsen Systems that it was ineligible for the award because it had proposed supplying the end product of a company from Canada, not from a U.S. small business.

Knudsen Systems subsequently protested that decision, and the Navy took corrective action, and stated it would amend the solicitation to implement the correct nonmanufacturer rule status and conduct discussions to enable offerors to revise their proposals.

After the Navy implemented the amendment to the solicitation, Knudsen Systems filed another protest, this time challenging the terms of the amendment.

Specifically, Knudsen Systems challenged the Navy's decision to continue to set aside the procurement for small businesses in light of the amended terms of the solicitation removing the class waiver.

Knudsen Systems argued that the Navy could not have performed adequate market research to find that the rule of two was still satisfied if there was no class waiver, and offerors had to either manufacture the end products themselves or supply end products manufactured by U.S. small businesses.

In an Aug. 9 decision, the GAO agreed with Knudsen Systems, explaining that GAO precedent provides that where the nonmanufacturer rule applies to a solicitation, and the agency's market research fails to consider whether the firms identified in the market research can comply with the rule, the market research is unreasonable.

Because the Navy's market research for the initial solicitation included an incorrect assumption that the class waiver applied, it did not consider whether small businesses could provide end products of U.S. small businesses. Therefore, the Navy could not rely on its initial market research to support its decision to continue to set aside the procurement after issuing the amendment.

Takeaways

This case is not only a reminder to agencies to ensure that they conduct adequate market research when setting aside a contract, but also a reminder to potential offerors that there is an avenue at the GAO to challenge an agency's decision to set aside a contract for small businesses.

Offerors that may not qualify as small for a particular set-aside solicitation should monitor amendments to the solicitation for potential additional opportunities to make such a challenge.

HPI Federal

HPI Federal LLC, the GAO addressed whether the U.S. Air Force's acceptance of an awardee's representation of TAA compliance in a task order proposal was reasonable. The awardee's task order proposal was in response to an Air Force request for quotations, or RFQ, for the provision of certain information technology products.[2]

The Air Force issued the RFQ to holders of Client Computing Solutions III Blanket Purchase Agreements, which were issued pursuant to the holders' respective General Services Administration federal supply schedule contracts.

The TAA requires that products be wholly made either in the U.S. or in a designated country, or substantially transformed in form, fit, or function in the U.S. or in a designated country.

The RFQ required offerors to "provide a confirmation that the [quoted] end product for each product category is [TAA] compliant under the terms of this solicitation as required by [the offeror's] GSA schedule contract."

Each offeror's blanket purchase agreement established a requirement that products must comply with the TAA. In addition, the blanket purchase agreements required, in accordance with Defense Federal Acquisition Regulation Supplement 252.225-7021 on trade agreements, that offerors provide a trade-agreements certificate pursuant to DFARS 252.225-7020 for each product offered in response to any solicitation issued under the blanket purchase agreement.

The awardee, Transource Services Corp., provided a certification that certain LG monitors in its proposal were "assembled [in] Mexico, a TAA compliant country."

However, HPI Federal LLC argued in its bid protest that it was unreasonable for the Air Force to accept this certification because it only related to assembly of the product. It did not specifically certify that the end product is an end product of Mexico.

Agreeing with the protester, the GAO's Aug. 9 decision found that the Air Force could not rely on the certification because a product is not necessarily an end product of the country in which it was assembled, as assembly alone may not constitute substantial transformation.

To constitute a reasonable determination, the Air Force was required to further investigate whether assembly in Mexico was, in effect, a confirmation that the monitors were the end product of Mexico.

Because the Air Force did not determine that assembly of the proposed monitors in Mexico amounted to a substantial transformation of the monitors, the GAO found that the Air Force unreasonably determined that Transource had provided confirmation of TAA compliance.

Thus, the GAO sustained the protest on this ground.[3]

Takeaways

This case serves as a reminder for both offerors and protesters. Offerors should be mindful that if a solicitation requires certifications of TAA compliance, the language of such certifications should clearly address the TAA's requirements. Protesters should remember that TAA certification compliance is a potential protest ground to raise in such situations.

NextStep Technology

NextStep Technology Inc. is a case about a protester's submission of a request for recommended costs.[4]

If an agency takes corrective action in response to a protest, the GAO may recommend that the agency reimburse the protester for the cost of filing and pursuing the protest, including reasonable attorney fees, consultant fees and expert witness fees, and bid and proposal preparation costs.

NextStep Technology Inc., a small business, protested the U.S. Army's award of a task order for programmatic support services to Gemini Industries Inc. The GAO subsequently conducted an outcome prediction conference call, during which the GAO indicated it would likely sustain NextStep's protest.

As a result of the outcome prediction, the Army notified the GAO that it intended to take corrective action by terminating the award to Gemini, canceling the RFP and reviewing the agency's current requirements. It also asked the GAO to dismiss the protest as academic.

NextStep objected to the dismissal request and asked the GAO to include a recommendation for the Army to pay NextStep its reasonable costs of filing and pursuing its protest.

On Sept. 5, 2023, the GAO declined to issue a recommendation for the Army to pay NextStep's reasonable costs of filing and pursuing the protest and granted the Army's request for dismissal as academic.

The GAO also notified NextStep that if there was a dispute about whether the agency would agree to reimburse NextStep, it could file a request for recommendation in accordance with Title 4 of the Code of Federal Regulations, Section 21.8.

Under that regulation, a request for recommendation is due within 15 days after the date on which the protester learned - or should have learned, if earlier - that the GAO had closed the protest based on the agency's decision to take corrective action.

Almost two months later, on Oct. 27, 2023, NextStep submitted a letter directly to the Army requesting reimbursement in accordance with Section 21.8(e).

NextStep and the Army argued over the request for several months, until the Army issued a final determination on April 5, 2023, denying NextStep's request. Ten days later, on April 15, NextStep filed a request with the GAO seeking a recommendation for the reimbursement of costs.

The Army corresponded with NextStep for several months regarding NextStep's Oct. 27, 2023, request, thus leading NextStep to believe it had followed the proper procedure.

However, in an Aug. 16 decision, the GAO applied its regulations' strict timeliness rules. The GAO found that because NextStep did not file its request with the GAO within 15 days of the GAO dismissing the protest as a result of the agency taking corrective action, the request was considered to be untimely.

Takeaways

This case is an example of a hard lesson learned regarding strict adherence to where and when a protester can file a request for a recommendation to pay reasonable costs of filing and pursuing a protest.

To avoid making the same mistake as NextStep, successful protesters should remember to file such requests with the GAO within 15 days of a protest being dismissed due to an agency's taking corrective action.

[1]Knudsen Systems Inc., B-422433.2, Aug. 9, 2024, 2024 EL 3916166.

[2]HPI Federal LLC, B-422583, Aug. 9, 2024, 2024 WL 3823852.

[3]The protester raised an additional protest ground regarding the RFQ's requirement to certify countries of origin for certain component parts of proposed end products. However, the GAO denied this protest ground, finding that the awardee's certification was sufficient.

[4]NextStep Tech. Inc. - Costs, B-421743.2, Aug. 16, 2024, 2024 WL 3876124.

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