The federal government must base its acquisition decisions on sufficiently supported facts and data. While acquisition decisions such as set-aside determinations are squarely within the government’s discretion as a matter of business judgment, the underlying data and analysis supporting such decisions must be accurate. Similarly, when the government makes set-aside decisions based on market research, any assumptions on which the market research is based must also be correct. Additionally, the results of the market research must themselves be current, accurate, and complete. When the government relies on flawed market research to support its set-aside determinations, prospective offerors may protest those decisions in the form of pre-award protests that challenge the terms of a solicitation.
In B-422433.2, the Government Accountability Office (GAO) sustained such a pre-award protest challenging the government’s small business set-aside determination based on an outdated market survey, which was conducted under an incorrect assumption. The request for proposal (RFP) subject to the protest was issued by the Navy’s Naval Undersea Warfare Center (Navy) to acquire SONAR sounding sets via a single award indefinite delivery indefinite quantity (IDIQ) contract. The acquisition implicated the “Rule of Two” and the “Nonmanufacturer Rule.” The interplay of these rules with the facts and circumstances surrounding the procurement ultimately rendered the Navy’s set-aside decision unreasonable.
Under the Rule of Two described in Federal Acquisition Regulation (FAR) § 19.502-2(b), federal agencies must set aside for small businesses any procurement valued over the simplified acquisition threshold when there is a reasonable expectation that it will receive offers from at least two responsible small business concerns and that the award will be made at a fair market price. Meanwhile, under the Nonmanufacturer Rule, in contracts that include the clause at FAR 52.219-33, contractors must provide end items manufactured by a small business in the United States. The Small Business Administration (SBA) can issue a Nonmanufacturer Rule class waiver for a specific North American Industry Classification System (NAICS) code that waives the domestic small business production requirement imposed by the clause at FAR 52.219-33 for end items under that NAICS code.
Before issuing the solicitation in B-422433.2, the Navy released a sources-sought notice, which received responses from five small businesses. Based on those responses, the Navy concluded that three of the five small businesses could meet the solicitation’s technical requirements, thus satisfying the Rule of Two. Consequently, the RFP was issued as a total small business set-aside. At its issuance, the RFP did not include the Nonmanufacturer Rule clause at FAR 52.219-33. The RFP also informed prospective offerors that the SBA had issued a class waiver to the Nonmanufacturer Rule for the relevant NAICS code 334511. However, a few months later, the Navy discovered that the Nonmanufacturer Rule class waiver issued by the SBA was narrower in scope and that the waiver was not applicable to the SONAR sounding sets that the Navy was procuring.
As a result, and in response to an earlier protest, the Navy amended the solicitation to remove references to the SBA class waiver and included the Nonmanufacturer Rule clause at FAR 52.219-33. Notably, the Navy did not conduct new or additional market research before amending the solicitation, instead continuing its reliance upon the prior market survey, which was conducted on the errant belief that a class waiver to the Nonmanufacturer Rule applied to the procurement. The protestor alleged that due to the amendment’s inclusion of the Nonmanufacturer Rule, the Navy’s previous market research was now outdated and provided insufficient support for the Navy’s decision to set aside the procurement for small businesses. The protestor contended that had the Navy conducted new market research, it would have realized that the Rule of Two could not be satisfied with the inclusion of the Nonmanufacturer Rule clause in the RFP. Consequently, the Navy would have issued the solicitation on a full and open basis.
Meanwhile, the Navy argued that it was under no obligation to revisit its market research just because the Nonmanufacturing Rule clause was now included in the RFP. In support of the Navy’s position, the contracting officer (CO) provided a statement affirming that he had reread the market research report and confirmed that the set-aside decision was still correct. Additionally, the Navy pointed to the GAO’s decision in Synchrogenix Info. Strategies, B-414068.4, Sept. 8, 2017, 2017 CPD ¶ 283. The Navy argued that it was not required to redo its Rule of Two market research even if it later became aware that it would only receive one responsible small business offer in response to an amended solicitation.
In sustaining the protest, the GAO explained that its decision in Synchrogenix was not applicable here because the protestor in Synchrogenix had not challenged the agency’s set-aside determination. In the present protest, the protestor challenged the reasonableness of the Navy’s set-aside determination, alleging that the set-aside decision was based on flawed and outdated market research. Furthermore, in Synchrogenix, the agency properly conducted the Rule of Two analysis for the set-aside determination and later discovered that only one responsible small business would submit an offer. Here, the Navy did not conduct an adequate Rule of Two analysis because its market research was based on an outdated and incorrect assumption that the Nonmanufacturer Rule did not apply. Therefore, the market research failed to consider whether prospective small business offerors that responded to the survey could comply with the Nonmanufacturer Rule. As a result, the GAO concluded that when making the set-aside determination, the Navy CO could not have known whether any identified small businesses could meet the Nonmanufacturer Rule requirement while offering fair market prices.
To demonstrate that the flawed market survey impacted the Navy’s analysis concerning the set-aside determination, the GAO also specifically pointed to the market survey’s conclusion that an ineligible small business could perform the work. In response to the sources-sought notice, the small business had explicitly stated that it would supply SONAR sounding sets manufactured by a Canadian company. However, despite this obvious inconsistency with the Nonmanufacturer Rule, the survey concluded that the small business was eligible to compete because, at the time the Navy conducted the survey, it was under the incorrect impression that the Nonmanufacturer Rule did not apply. The market research similarly failed to assess whether other prospective small business offerors could comply with the Nonmanufacturer Rule. Therefore, the Navy’s Rule of Two analysis and the set-aside determination based on that analysis were flawed.
Finally, the GAO gave little weight to the CO’s post hoc conclusory statement that he had reread the market research report and sources sought responses and confirmed that the set-aside decision was correct. The GAO found that the statement had no support in the contemporaneous record and that the CO had failed to sufficiently explain his conclusion that he was not required to revisit the market research or otherwise assess the capability of prospective small business offerors to comply with the later included nonmanufacturer rule. In sustaining the protest, the GAO recommended that the Navy reconduct its market research and determine whether there is a reasonable expectation that at least two or more responsible small businesses will submit proposals for supplying the SONAR sounding sets at fair market prices.
Government set-aside determinations are generally granted deference by protest adjudicative forums such as the GAO unless the protestor can demonstrate that the decision was unreasonable. One of the ways in which the protestor may succeed in such a protest is by showing that the market research underlying the set-aside decision was flawed, outdated, or otherwise defective. In situations where the set aside decision is based on flawed or outdated market research, protestors should focus their protest arguments on the insufficiency of the agency’s Rule of Two analysis. This is especially true if the record demonstrates that the agency failed to revisit the results of its market research underlying the set aside decision after an amendment to the solicitation rendered the market research obsolete. Since set-aside determinations, like other acquisition decisions, must be reasonably supported by the record and adequately documented, challenging the sufficiency of the research or analysis underlying the decisions may increase the likelihood of successful protest outcomes.
This Bid Protests Insight provides a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
