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The Small Business Act affords the Small Business Administration (SBA) authority to determine the responsibility of small business concerns.  The Government Accountability Office (GAO) has held that when a procuring agency finds that a small business is not eligible for award due to being nonresponsible or for a failure to satisfy definitive responsibility criteria, the agency is required to refer the matter to the SBA for a final determination under its certificate of competency (COC) procedures.  In two recent cases, GAO spoke to what qualifies as a nonresponsibility determination—in both instances, denying protests of small businesses arguing that evaluation conclusions were tantamount to a nonresponsibility determination which the agency should have referred the protester for a COC.

In A. Prentice Ray & Associates, B-419024.5, B-419024.6, December 22, 2021, APRA protested the General Services Administration’s (GSA) decision to not award it one of eight 8(a) subpool 2 contracts under the One Acquisition Solution for Integrated Services (OASIS) small business multiple award contract solution.

The solicitation provided that offerors could address systems, certification, and clearances for up to 2,000 of a potential 10,000 points.  These were “not minimum or mandatory requirements” but offerors submitting the information would be “considered more favorably.”

APRA had self-scored its 8(a) subpool 2 proposal as 5,200 points.  But GSA found that APRA had not substantiated 500 points for an approved purchasing system, 200 points for an approved forward pricing rate agreement (FPRA), forward pricing rate recommendation (FPRR), or provisional billing rates, and 200 points for an acceptable estimating system.  As such, GSA only scored APRA as having 4,300 points, which fell below the lowest score (4,475 points) of the eight highest technically rated proposals with a fair and reasonable price.

APRA protested GSA’s purported failure to refer its subpool 2 proposal to the SBA for COC determination.  Per APRA, GSA’s downgrading of its proposal on the basis of financial capability factors—i.e., deducting 900 points from APRA’s self-scoring for failing to substantiate that it had an approved purchasing system, FPRA, or an acceptable estimating system — “was tantamount to an adverse responsibility determination on an otherwise successful offeror.”

GAO denied the protest, finding that APRA’s proposal was not eliminated from consideration for award because the contracting officer made a nonresponsibility determination.  The mere fact that 900 points were deducted from its score because it did not have substantiating documentation for its financial capabilities was not a responsibility issue.

As an interesting procedural aside—APRA had an earlier GAO protest that was dismissed while another protest of the same procurement was pending at COFC.  Following resolution of the COFC protest, APRA filed a second protest at GAO.  GAO dismissed this protest after GSA indicated that it would take corrective action in the form of referring APRA to SBA “for a possible COC determination.”  GSA’s implementation of the corrective action amounted to it submitting documents to the SBA for a possible COC explaining: “The unsuccessful Offeror, APRA, has alleged that GSA should have referred their proposal to SBA for a COC determination. Accordingly, GSA is doing so now, despite the fact that GSA did not find that the Offeror was not responsible.”  (SBA, unsurprisingly, did not proceed with a COC review as SBA’s regulations provide that only a contracting officer may refer a valid nonresponsibility determination for a COC.)  But this led APRA to arguing that GSA failed to implement the promised corrective action.  GAO moved past this issue, finding no basis to sustain because APRA’s challenge to the evaluation of its proposal had no merit.

In Monbo Group International, B-420269, B-420269.2, January 11, 2022, Monbo also protested the Army’s failure to refer it for a COC.  In this lowest-priced, technically acceptable procurement, the Army had determined that the lowest-priced proposal as well as the second lowest-priced proposal (which was Monbo’s)—while technically acceptable—were unrealistically low.  Monbo argued at GAO that the Army’s determination that its price was unrealistic constitutes a negative responsibility determination, which, given its small business status, had to be referred to SBA for a COC assessment.

GAO reiterated its position that, where a solicitation provides for a price realism analysis, an agency’s concerns with low pricing as a result of a realism analysis constitute an evaluated assessment of an offeror’s understanding of the solicitation’s requirements and not a determination of nonresponsibility.  GAO contrasted this to where a solicitation does not contain a relevant evaluation criterion pertaining to realism or understanding and a determination that an offeror’s price on a fixed-price contract is too low generally concerns the offeror’s responsibility.  As such, GAO denied this protest ground.

(This case also had a bit of a procedural twist in that the Army moved to dismiss Monbo’s COC referral challenge because there was a lower-priced technically acceptable offeror whose proposed price was also found unrealistic and this entity would be entitled to a referral to SBA under the COC procedures if GAO were to sustain Monbo’s protest.  GAO rejected this dismissal argument, explaining that “given that this other offeror was not found eligible for award by the agency and it is not clear that they would be found otherwise responsible by the SBA, we see no basis to consider them an intervening offeror ‘in line for award’ ahead of Monbo.”)

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In its recent decision, Cellular Materials International, Inc., ASBCA No. 61408 (Dec. 27, 2021), the Armed Services Board of Contract Appeals (“ASBCA”) observed that whether a cost has been “incurred” for purposes of claiming allowable costs under FAR 52.216-7 is a fact-intensive inquiry.

Pursuant to its Government contract requirements, Cellular Materials International, Inc. (“CMI”) submitted a final indirect cost rate proposal, which claimed costs for consultant fees.  Notably, the consultant whose fees CMI claimed was also the Chair of CMI’s Board of Directors as well as CMI’s largest shareholder, owning nearly 39% of CMI shares.  The contracting officer issued a final decision disallowing the claimed consultant costs because CMI lacked “sufficient evidence of the nature and scope of the service furnished such that incurrence, allowability, [and] allocability of these costs can be determined,” and unilaterally establishing CMI’s final indirect cost rates.  On appeal, as evidence to support the allowability of the consultant cost, CMI produced promissory notes, in which CMI promised to pay the consultant five days after demand.  But although nine years had passed, the consultant never demanded payment on the notes, and CMI never paid.

CMI’s contracts incorporated FAR 52.216-7, Allowable Cost and Payment (DEC 2002), which requires contractors to submit a final indirect cost rate proposal “based on the Contractor’s actual cost experience for that period.”  The Board noted that “actual costs,” pursuant to FAR 31.001, are defined as “amounts determined on the basis of costs incurred, as distinguished from forecasted costs,” but that the FAR provides no further guidance on the issue of whether a cost has been incurred.  The ASBCA turned to Federal Circuit decisions in other contexts to hold that for a cost to be “incurred” for purposes of the Allowable Cost and Payment clause, the contractor must have a legal obligation to pay—an implicit rejection of the Government’s argument that a cost must be “actually paid.”  In this case, it was undisputed that although CMI had executed promissory notes for the purported debt, the consultant had not demanded payment since the notes were executed nine years ago.  According to the Board, CMI had no legal obligation to pay and, therefore, the consultant cost had not (yet) been incurred and could not be claimed as allowable.  Citing Federal Circuit precedent, the Board noted that even if one were to assume that there is a “near certain future prospect” of a demand for payment, that “future expense must be more than merely likely or probable to be an incurred cost.”

This decision underscores the fact-intensive inquiry that may be necessary to determine whether a cost is incurred for purposes of claiming it as allowable under FAR 52.216-7.  Importantly, when there is no legal obligation to make payment, a future expectation that a payment will be made may not be enough for a cost to be “incurred,” even if an eventual payment is likely, probable, or a “near-certain future prospect.”

 

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The acquisition and consolidation of government contractors has become increasingly prevalent in recent years. GAO’s recently released decision in Vertex Aerospace, LLC, B‑420073, B-420073.2, Nov. 23, 2021, serves as an important reminder to contractors that failure to properly update a procuring agency about such transactional activity can have adverse impacts on a pending proposal, even where a transaction is structured/intended to have no impact upon a contractor’s proposed performance. In Vertex, GAO sustained a protest challenging an Air Force task order award due to the agency’s failure to “meaningfully consider” the impact of the awardee’s acquisition by another company during the pendency of the procurement.

In late 2020, DynCorp was awarded an IDIQ contract. Shortly thereafter, Amentum Government Services Holdings, LLC (“Amentum”), acquired all of the outstanding shares of DynCorp’s former parent holding company, resulting in DynCorp becoming Amentum’s wholly owned subsidiary. In December 2020, DynCorp submitted a proposal in response to a task order solicitation under the IDIQ contract. While DynCorp’s proposal was pending and before award, DynCorp submitted documentation to DCMA requesting novation of its IDIQ contract to Amentum. DCMA, in turn, provided a copy of the novation agreement to the Air Force during its evaluation of DynCorp’s proposal. Nonetheless, the Air Force completed that evaluation without considering what impact, if any, the Amentum acquisition would have on DynCorp’s ability to perform. After the Air Force awarded the task order to DynCorp, Vertex protested, alleging, among other things, that the Air Force’s failure to consider that specific question was in error.

GAO sustained the protest. In so doing, GAO noted that DynCorp’s proposal made no mention of its recent acquisition, nor did the agency’s evaluation record or source selection documentation make any reference to the acquisition or its potential effect on DynCorp’s performance. GAO also rejected the Air Force’s post-protest explanation that the acquisition would have no impact on DynCorp’s performance, noting the lack of detail in the contemporaneous record explaining how the integration and consolidation of contract performance activities between the two companies would be accomplished to ensure that the resources and employees needed for the contract would be available. As a result, GAO held the record was insufficient to support a conclusion that the agency meaningfully and reasonably considered the effect of the corporate transaction on the awardee’s ability to perform the task order.

Significantly, GAO stressed that decisions regarding matters of corporate status and restructuring are highly fact-specific, and turn largely on the individual circumstances of the proposed transactions and timing. With that in mind, companies undergoing corporate transactions should work closely with experienced government contracts counsel to determine the best way to minimize the impact such transactions may have on pending proposals, to affirmatively notify agencies of such transactions, and to provide sufficient assurance—prior to an agency’s award decision—that such transactions will not impact the offeror’s proposed performance.

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This week’s episode covers an update on the Cybersecurity Maturity Model Certification program, a GAO report on DHS’ controls to protect personally identifiable information, a Federal Circuit decision regarding prejudice in the bid protest context, and highlights from the National Defense Authorization Act for FY2022, and is hosted by Peter Eyre and Monica Sterling. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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In Tolliver Group, Inc. v. United States, No. 2020-2341, 2021 WL 5872256 (Fed. Cir. Dec. 13, 2021), the Federal Circuit vacated and remanded the Court of Federal Claims’ (“COFC”) decision holding that the contractor was entitled to an equitable adjustment for damages caused by the Government’s breach of the implied warranty that satisfactory contract performance will result from adherence to contractual specifications.

The contractor’s underlying claim sought an equitable adjustment to a fixed-price contract for costs incurred to successfully defend against a False Claims Act (“FCA”) suit, claiming the costs as allowable under FAR 31.205-47, Costs related to legal and other proceedings. The FCA suit, brought by a whistleblower, alleged that the contractor violated the FCA in the performance of the contract, but the Government declined to intervene and the FCA suit was ultimately dismissed. The contracting officer denied the contractor’s claim for costs defending against the FCA suit on the basis that the fixed price contract did not permit recovery of costs in excess of the agreed-upon contract price.

In the COFC decision, which we reported on here, the court held sua sponte that the contractor was entitled to recover damages under the Spearin doctrine (citing to United States v. Spearin, 248 U.S. 132 (1918)) because the Government breached the implied warranty of performance. On appeal, the Federal Circuit vacated the COFC’s decision, holding that the contractor did not present a claim for breach of the implied warranty to the contracting officer for a final decision, and therefore the COFC lacked jurisdiction to grant entitlement under the Spearin doctrine.

The Tolliver decision is an example of the tension (discussed here and here) that can exist between the purpose of the CDA—to provide for timely and cost-effective resolution of contract disputes—and the CDA’s procedural requirements when a court or Board determines they have not been met. In this case, after more than four years litigating its claim, the service-disabled veteran-owned small business contractor must now go back to the drawing board, a reminder to all contractors to engage in a thorough claim assessment at the outset of any CDA litigation.

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Published Federal Circuit decisions in bid protests are rare and, as a result, often consequential. In its most recent such decision, System Studies & Simulation, Inc. v. U.S., the Federal Circuit reminded protesters that even where they successfully demonstrate an agency action was “irrational,” they must also make an affirmative showing of prejudice, which will not be presumed.

In May 2020, System Studies & Simulation, Inc. (“S3”) filed a bid protest at the Court of Federal Claims (“CFC”) arguing, among other things, that the Army erroneously assigned the awardee a strength for its cost proposal. CFC agreed the assigned strength was an error, but nonetheless ruled in favor of the government, holding that S3 had failed to demonstrate prejudice because even absent the error, the government had demonstrated the awardee’s proposal was “clearly superior” to S3’s proposal.

S3 appealed, arguing that when an agency acts irrationally in making an award decision—as was the case here—courts should presume prejudice to the protesting party. In making that argument, S3 relied upon language from Impresa Construzioni Geom. Domenico Garufi v. U.S. (“Garufi”), 238 F.3d 1324 (Fed. Cir. 2001), in which the Federal Circuit stated that “a bid award may be set aside if either: (1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure” and that “[w]hen a challenge is brought on the second ground, the disappointed bidder must show “a clear and prejudicial violation of applicable statutes or regulations.” (Emphasis added). S3 argued that by tethering a showing of prejudice only to the “second ground,” Garufi instructed that prejudice was presumed upon a showing of the first ground, agency irrationality.

A divided Federal Circuit (Judge Newman dissented without opinion) rejected this argument. The Court explained that the Administrative Procedure Act mandates that in all cases involving review of agency action as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” “due account shall be taken of the rule of prejudicial error,” and that Garufi did not “disclaim a prejudice requirement” upon a finding that an agency’s action was irrational. The Federal Circuit further emphasized that under the APA, “the challenger of agency action generally bears the burden of showing that an error was harmful—that is, that it was prejudicial,” and to the extent there was uncertainty as to that requirement, the Court was “reject[ing] the interpretation of Garufi on which the uncertainty rests.”

The Federal Circuit’s decision in S3 serves as an important reminder to protesters: regardless of how egregious an agency’s error may seem, prejudice resulting from such error should not be taken for granted. At every step of protest litigation at the CFC (and GAO, too)—from the filing of the initial complaint, to the briefing on the administrative record, to oral argument and any post-argument briefing—a protester’s presentation must include a clear and unequivocal articulation of prejudice.

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During December 2021, the House and Senate reached agreement on a compromise National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2022.  On December 23, 2021, Congress presented S. 1605 to President Biden, which he signed on December 27, 2021.

The FY2022 NDAA contains numerous provisions relating to acquisition policy—which provide new opportunities for government contractors, will result in the imposition of new clauses or reporting requirements on government contractors, require government reporting to Congress on acquisition authorities and programs, alter processes and/or procedures to which government contractors are subject, etc.  Crowell & Moring’s Government Contracts Group discusses the most consequential changes in the FY2022 NDAA for government contractors below. Continue Reading National Defense Authorization Act for Fiscal Year 2022: Acquisition Policy Changes of Which Government Contractors Should Be Aware

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In American Mine Services, LLC, B-420138 (Dec. 3, 2021), the Government Accountability Office (“GAO”) denied a protest by American Mine Services (“AMS”), finding that the Army Corps of Engineers (“Corps”) reasonably rejected AMS’ bid because it included a provision stating that COVID-19, as well as other similar pandemics or endemics, would be considered “force majeure” events.

AMS submitted a timely bid in response to the Corps’ invitation for bids (“IFB”) to furnish and install new service gates at the Surry Mountain Dam in New Hampshire. Notably, AMS’ bid included the following “Clarification and Exceptions” provision:

For purposes of this bid, COVID-19 is considered a Force-Majeure Event along with any other similar disease, epidemic, or pandemic event. If any of the aforementioned events occur and affect the project, AMS reserves its rights for additional time.

The Corps subsequently rejected AMS’ bid as nonresponsive because the added provision materially modified the terms of FAR 52.249-10, Default (Fixed-Price Construction). While the FAR clause lists epidemics and quarantine restrictions as possible causes of excusable delay, GAO noted that the language of the provision inserted in the protester’s bid specifically listed “COVID‑19” and “any other similar disease, epidemic, or pandemic event.”

In its protest, AMS argued that the Corps’ decision was unreasonable because its “Clarification and Exception” provision only confirmed existing protections offered to bidders under FAR 52.249-10. GAO disagreed, finding that the added provision limited the government’s rights under the Default clause because FAR 52.249‑10 only terminates a contractor’s duty to proceed in cases of “unforeseeable causes beyond the control and without the fault or negligence of the Contractor, . . . [including] Epidemics.” GAO reasoned that AMS’ added provision would impose a lower standard than what FAR 52.249‑10 requires by rendering the occurrence of disease, pandemic or endemic per se unforeseeable causes of delay beyond the control and without the fault or negligence of the contractor. As a result, the added provision would remove the contracting officer’s discretion to determine whether COVID‑19 (or similar pandemics or epidemics) are force majeure events that qualify as excusable delays. Further, GAO rejected AMS’ argument that its changes were immaterial such that the contracting officer could waive them. Ultimately, GAO concluded that not all challenges arising from the COVID‑19 pandemic are “unforeseeable or beyond mitigation,” and supported the Corps’ position that contractors can consider these risks when determining the total price of their bid, but cannot except themselves from those risks.

This decision foreshadows possible protest issues to come. For example, while E.O. 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors is currently stayed, it is possible that contractors’ compliance with the vaccine mandate could serve as grounds for future protests if the executive order is reinstated.

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On November 15, 2021, the Defense Innovation Unit (DIU) released its Responsible Artificial Intelligence (AI) Guidelines (“RAI Guidelines”) to help contractors and federal officials gauge whether AI technology and programs align with the Department of Defense’s (DoD) Ethical Principles for AI (as we previously reported on here). Specifically, the RAI Guidelines provide a process for all stakeholders involved in AI development (e.g., program managers, commercial vendors, and government partners) to achieve the following goals:

(1) Ensure that the DoD’s Ethical Principles for AI are integrated into all three phases of the technical lifecycle (i.e., planning, development, and deployment);
(2) Effectively examine, test, and validate that all programs and prototypes align with DoD’s Ethical Principles for AI; and
(3) Leverage a process that is reliable, replicable, and scalable across a variety of programs.

The step-by-step process, which is presented as worksheets in the RAI Guidelines, instructs stakeholders on how to properly scope AI problem statements. They also provide detailed guidance on the considerations that stakeholders should keep in mind as they proceed through the planning, development, and deployment phases of AI systems. Those considerations include procedures for identifying who might use the technology, as well as who might be harmed by it, what those harms might be, and how they might be avoided – both before the system is built and after it is deployed.

As the RAI Guidelines note, DIU is the only DoD organization exclusively focused on accelerating the adoption of existing commercial technology across the U.S. military and partners with DoD organizations and “non-traditional” companies to field commercial solutions. According to DIU, although the majority of AI companies it works with are new to doing business with the Federal government, generally they are open to doing business with DIU because of its more agile and “commercial friendly” acquisition processes. Specifically, DIU utilizes other transaction (OT) authority under 10 U.S.C. § 2371b to direct-award prototype agreements, and successful prototypes may result in the direct award of a sole-source follow-on production OT or contract.

According to DIU, it is “actively deploying the RAI Guidelines on a range of projects that cover applications including predictive health, underwater autonomy, predictive maintenance, and supply chain analysis.” Additionally, DIU anticipates continued collaboration with government, industry, academia, and civil society to further develop the RAI Guidelines, and invites stakeholders to provide feedback, comments, or suggested updates.

Crowell & Moring is available to assist companies of all sizes and in all markets navigate the transition from commercial contracting to government contracting efficiently and effectively.

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In Section 839 of the Fiscal Year 2021 National Defense Authorization Act, Congress directed the Government Accountability Office (“GAO”) to prepare a report evaluating the implementation of Department of Defense (“DoD”) Instruction 5010.44 relating to Intellectual Property Acquisition and Licensing, including but not limited to, DoD’s establishment of a cadre of intellectual property (“IP”) experts previously directed by Congress. On November 30, 2021, GAO issued a final report to Congress entitled “DOD Should Take Additional Actions to Improve How It Approaches Intellectual Property” (“Report”). The Report made four recommendations: (1) DoD’s planned guidebook on IP (currently expected to be published in the first quarter of 2022) should clarify how DoD personnel can pursue detailed manufacturing or process data; (2) DoD should determine the collaboration, staffing, and resources needed to execute DoD’s proposed approach for the IP Cadre; (3) the Director of the IP Cadre should collaborate with the President of Defense Acquisition University (“DAU”) to prioritize IP-related tasks that DAU should undertake between 2023 through 2025; and (4) the Director of the IP Cadre should develop additional guidance to help identify the DoD personnel in key career fields that would benefit most from receiving IP training and credentials. In response to a draft of the Report, DoD concurred with each of these recommendations.