GAO Puts Teeth in the “Rule of Two”

The “Rule of Two” is set out in FAR 19.502-2(b):

The contracting officer shall set aside any acquisition over $100,000 for small business participation when there is a reasonable expectation that (1) offers will be obtained from at least two responsible small business concerns offering the products of different small business concerns (but see paragraph (c) of this subsection); and (2) award will be made at fair market prices. Total small business set-asides shall not be made unless such a reasonable expectation exists (but see 19.502-3 as to partial set-asides). Although past acquisition history of an item or similar items is always important, it is not the only factor to be considered in determining whether a reasonable expectation exists. In making R&D small business set-asides, there must also be a reasonable expectation of obtaining from small businesses the best scientific and technological sources consistent with the demands of the proposed acquisition for the best mix of cost, performances, and schedules.

FAR 19.501(c) requires that contracting officers document just why a small business set aside is not required:

The contracting officer shall review acquisitions to determine if they can be set aside for small business, giving consideration to the recommendations of agency personnel having cognizance of the agency’s small and disadvantaged business utilization program and documenting why a set-aside is inappropriate when the acquisition is not set aside. If the acquisition is set aside based on this review, it is a unilateral set-aside by the contracting officer. Agencies may establish threshold levels for this review depending upon their needs.

These regulatory provisions implement the requirement of 15 U.S.C. § 631(a) that agencies “insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government (including but not limited to contracts or subcontracts for maintenance, repair, and construction) be placed with small-business enterprises . . . .”

In Safety Storage, Inc., B-280851, Oct. 29, 1998, GAO puts teeth in the Rule of Two. At issue there was an acquisition for “mobile reuse centers.” It appears from the decision that these mobile reuse centers are containers (constructed with a tube steel frame enclosed with heavy gauge sheet metal) for the storage of hazardous materials.

Defense Supply Center-Columbus had issued an unrestricted solicitation for these items in September 1997 and had received responses from 22 firms, most of them small businesses, to the Commerce Business Daily notice. In November 1997, the solicitation was cancelled, and procurement responsibility was transferred to Defense Industrial Supply Center, Philadelphia, Pennsylvania (DISC). A new, unrestricted solicitation was issued in April 1998. Three small businesses responded to the new Commerce Business Daily announcement.

Safety Storage, Incorporated (Safety Storage), wrote DISC in May 1998, pointing out that the required mobile reuse centers were comparable to items that had been produced both by itself and by another small business. Safety Storage asked that the solicitation be reissued as a total small business set aside. DISC declined to do so:

As stated at the pre-proposal conference, the MRC has never been purchased by DISC before. At this point in time, it has not been determined that 2 small businesses can manufacture this item. This MRC has never been purchased with the specifications that are required for this item in this solicitation. Solicitation will continue to be an unrestricted solicitation.

The GAO protest followed.

GAO soon found that the DISC contracting officer could not support his determination that a set aside was inappropriate:

In our view, the record does not show that the contracting officer reasonably investigated whether the procurement could be set aside for exclusive small business participation. While the use of any particular method of assessing the availability of small businesses is not required, and measures such as prior procurement history, market surveys and/or advice from the agency’s small business specialist and technical personnel may all constitute adequate grounds for a contracting officer’s decision not to set aside a procurement, American Imaging Servs., Inc., B-246124.2, Feb. 13, 1992, 92-1 CPD ¶ 188 at 3, the assessment must be based on sufficient facts so as to establish its reasonableness. McSwain & Assocs., Inc.; Shel-Ken Properties, Inc.; and Elaine Dunn Realty, B-271071 et al., May 20, 1996, 96-1 CPD ¶ 255 at 3. Based upon the facts underlying the determination as they were provided to our Office, we conclude that the contracting officer’s determination not to set aside the procurement was based on incomplete information, unsupported assertions regarding the complexity of the required MRCs, and insufficient efforts to ascertain small business capability to perform the contract.

Safety Storage, B-280851, at 3.

The important point of the Safety Storage decision is GAO’s holding that a determination that a set aside is not appropriate must be supported by objective facts:

The agency’s general assertion that the MRCs and the tests required are too complex to be successfully accomplished by a small business simply states a conclusion that is not supported by any facts provided to our Office. While the technical complexity of a required item and the fact that it is a first-time buy may be factors an agency may properly consider in determining whether to set aside a procurement for small business participation, Mortara Instrument, Inc., supra, there is no evidence in the record that the MRC or tests required here are beyond the capability of small business firms. . . .

Further, as already explained, there is no evidence in the record that the agency made any attempt to contact any of the small businesses that had responded to the initial DSC-OH CBD announcement, or surveyed the three small business firms that responded to the subsequent DISC-PA CBD announcement. In addition, there is no evidence in the record that the agency made any attempt to coordinate its determination with the Small Business Administration or with the agency’s Small Business Utilization Specialist. See FAR §§ 19.401, 19.501(c). In short, we conclude that there is no evidence in the record that the agency made any reasonable effort to adequately survey the market place in order to determine whether there are any small businesses capable of performing the contract.

Safety Storage, B-280851, at 4-5.

Safety Storage is an important decision because it emphasizes that a decision not to set aside a particular acquisition must be made based on objective facts, and that while GAO will review such decisions on an abuse of discretion standard (upholding the contracting officer’s “business judgment” absent a showing that it was unreasonable), GAO expects that such decisions will be based on more than just the contracting officer’s judgment that there are not at least two responsible small business concerns capable of performing the work at a fair market price.

Just what then, is sufficient support for a decision not to set aside a particular acquisition? In Cardiometrix, B-276912, Aug. 11, 1997, 97-2 CPD ¶ 45, GAO upheld a contracting officer’s decision, based on prior procurement history, not to set aside an acquisition for disability examination services. There, under a prior, unrestricted procurement for the same services, three small business offerors remain ed in the competitive range after best and final offers, but only one firm’s offer was at a fair market price, and the remaining two offers were more than 50 percent higher than the low small-business offer and the government estimate. It also turned out that the successor solicitation included requirements for electronic data interchange capabilities, and offered a smaller contract base over which to spread these costs, since awards were to be made on a regional, rather than national, basis. Cardiometrix’s challenge to the contracting officer’s decision not to set the acquisition aside was supported by the Small Business Administration (SBA). But GAO held the contracting officer’s decision to be “adequately supported” by the prior procurement history, and it went on to say that the SBA’s position was simply a “difference in judgment,” and not an error in the contracting officer’s rationale. Id., at 3.

In Ruchman and Associates, Inc., B-275956, April 23, 1997, 97-1 CPD ¶ 147, it was a market survey performed by agency technical specialists that supported a contracting officer’s decision not to set aside an acquisition for publications clearinghouse services. This market survey had included contacts with other agencies with similar clearinghouse operations, identification of potential small business sources, communications with identified small business sources, review of the qualifications of other small businesses that responded to a Commerce Business Daily synopsis, and, finally, on-site review by these agency technical specialists of similar clearinghouse operations, a review that confirmed that the technology and resources required “rendered large businesses the only viable competitors.” The market survey was the basis for GAO’s ultimate conclusion that “the record provides a reasonable basis for the agency’s procurement approach.” Id., at 3.

All that is required under FAR 19.502-2(b) to issue an acquisition as a total set-aside is “an informed business judgment that there is a reasonable expectation of receiving acceptably priced offers from small business concerns that are capable of performing the contract.” American Medical Response of Connecticut, Inc., B-278457, Jan. 30, 1998, 98-1 CPD ¶ 44, at 3. The decisions do not require a determination tantamount to an affirmative of responsibility, as is necessary for a contract award. PR Newswire, B-279216, April 23, 1998, 98-1 CPD ¶ 118, at 3. Neither is it required that prices proposed by small businesses be at or below the prices that could be obtained under an unrestricted competition-agencies are allowed to make awards under total small business set-asides at premium prices, so long as the price premiums are not unreasonable. And the reasonableness of any price premium can be demonstrated, inter alia, by the range of prices offered, by comparison with published prices, and by review of prices obtained under previous contracts. Hardcore DuPont Composites, L.L.C., B-278371, Jan. 20, 1998, 98-1 CPD ¶ 28, at 3.

Safety Storage is precedent-setting because it correctly requires that contracting officers do more than simply document the file, and it is the first case we know of where GAO has insisted on agency compliance with the Rule of Two without input from the SBA. A prior, similar case is ACCU-Lab Medical Testing, B-270259, Feb. 20, 1996, 96-1 CPD ¶ 106, but ACCU-Lab arose after withdrawal of a set-aside under FAR 19.506(a), and in such cases, there is provision for participation, and a challenge, by the SBA. In ACCU-Lab, the SBA argued strongly that prior procurement history alone did not support withdrawal of a set-aside when 21 small businesses responded to the solicitation while it was still set aside, the contracting officer did not investigate whether any of those concerns were likely to submit bids or were capable of performing contract requirements, and the contracting officer took no other steps-including review of the SBA’s Procurement Automated Source System (now PRO-Net™)-to ascertain whether the Rule of Two could be satisfied. GAO granted this protest, but it relied heavily on the SBA’s views: “we generally give great weight to the views of SBA in these matters.” Id., 96-1 CPD, at 3.

Safety Storage puts teeth in the Rule of Two-FAR 19.502-2(b) requires small business set asides upon a reasonable expectation that the Rule of Two will be satisfied, and now, clearly, the FAR 19.501(c) documentation of a decision that a set-aside under the Rule of Two is inappropriate must be supported with facts that can be verified. “Papering the file” is no longer sufficient to avoid agency obligations under 15 U.S.C. § 631(a).

— Peter Kilcullen