Under Federal Acquisition Regulation (FAR) 9.103, government contracts may be awarded only to responsible prospective contractors, and contracting officers (COs) are required to make an affirmative determination of financial responsibility before contract award. To be deemed financially responsible under FAR 9.104-1(a), a prospective contractor must either have adequate financial resources to undertake performance or be able to obtain them. While financial responsibility is an important prerequisite for awarding federal contracts, the FAR does not provide specific techniques to make this determination. Thus, depending on the procurement’s needs and circumstances, COs may use various criteria, analyses, and techniques to assess a prospective contractor’s financial responsibility. Such methods may include reviewing cash flow statements, forward projections, working capital, profit and loss, and other financial information. As with other responsibility criteria used to determine a prospective contractor’s ability to perform, when reviewing financial responsibility, the CO must consider all relevant information available at the time of making the determination. Furthermore, any calculations or analyses assessing a prospective contractor’s financial capabilities must be accurate and rely on information available to the CO from the proposal and other relevant sources.

In B-401438, the Government Accountability Office (GAO) found the CO’s affirmative determination of the prospective contractor’s financial responsibility unreasonable because it relied upon an incorrect assumption about how certain costs would be incurred. The Navy issued the request for proposals (RFP) to award a fixed-price task order for towing, dismantling, and disposing of three ships under its Ship Disposal Program indefinite delivery, indefinite quantity (IDIQ) contract. The terms of the IDIQ contract required contractors to sell or dispose of any scrap or reusable materials from the ships and use the sale proceeds to offset the price proposed to the government. The protester proposed a price of $4,679,726, whereas the awardee’s proposed price was only $0.6 after accounting for the estimated scrap proceeds of over $13 million. With all other factors equal for both offerors under the Navy’s adjectival rating system, the contract was awarded to the offeror with the lower price. Among other challenges, the protester questioned the reasonableness of the Navy’s discretionary evaluation of the awardee’s financial responsibility, which was primarily conducted through a cash-flow assessment.

The protester argued that the Navy’s cash-flow analysis underlying the financial responsibility determination was based on the incorrect assumption that the awardee would incur the estimated upfront costs of performance sequentially, working on one ship at a time. The protester alleged that due to this incorrect assumption, the Navy’s analysis underestimated the awardee’s total upfront costs incurred in advance of scrap sale proceeds, which substantially exceeded the awardee’s available line of credit. The GAO agreed, noting that the Navy’s determination that the awardee had sufficient financial resources to perform was largely based on the assumption that the awardee would incur the estimated upfront costs sequentially rather than simultaneously. However, the awardee’s proposal indicated that it intended to tow and dismantle the three ships simultaneously, and before the point in time at which it would begin realizing returns on the sales of scrap from the ships. The GAO also found that the Navy had grossly underestimated the upfront dismantling costs the awardee would incur per ship by failing to account for hazardous waste services, overhead, and general and administrative (G&A) expenses.

After the protest was filed, the Navy provided additional, new information supporting the CO’s financial responsibility determination. Specifically, the Navy provided supporting documentation showing that the awardee would receive profits from the recent completion of a separate ship-dismantling contract, which could be used to perform the task order. However, the GAO gave little weight to this information because it was a post hoc justification by the agency, and the record clearly demonstrated that the CO did not consider the other ship-dismantling contract when determining the awardee’s financial responsibility. The GAO concluded that the Navy’s cash-flow assessment underlying the awardee’s financial responsibility determination was based on an incorrect assumption, which conflicted with information in the awardee’s proposal. This incorrect assumption, together with a miscalculation of the estimated upfront costs, meant that the awardee’s costs were substantially more than its available line of credit and financial resources. Accordingly, the GAO sustained the protest challenging the CO’s affirmative determination of financial responsibility by finding that the CO unreasonably failed to consider all available relevant information.

The FAR requires that prospective contractors have adequate resources to perform the contract or be able to obtain them to be deemed financially responsible. The affirmative determination of responsibility involves subjective business judgment typically within the broad discretion of the procuring agencies. Since the FAR does not list specific techniques for determinations of financial responsibility, agencies may review financial statements and other available business information to determine whether a prospective offeror has the necessary financial resources to perform the contract. Notably, the government determines a prospective contractor’s financial responsibility at the time of award, rather than at the time of proposal submission. Thus, a prospective contractor without sufficient financial resources at the time of proposal submission may still be deemed responsible if it secures the required resources by the time of award. However, since responsibility is determined at the time of award, any documentation or information submitted after the award will not be considered. Ultimately, the determination of a prospective contractor’s financial responsibility, including the techniques employed in making the determination, is largely within the CO’s discretion, unless he unreasonably fails to consider all available relevant information.

This Federal Procurement Insight is provided as 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.