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Home Small Business Court Allows Agency Small Business Subcontracting Goals to Ride on the Back of Primes – By Stephen Ramaley, Esq.

Court Allows Agency Small Business Subcontracting Goals to Ride on the Back of Primes – By Stephen Ramaley, Esq.

Stephen Ramaley, Esq.While fiscal cliff negotiations have stalled, the Courts have continued to be prolific this fall in issuing new guidance for agencies and contractors alike.  Specifically, just last week the Court of Federal Claims issued a decision that sanctions the use of large subcontracting goals for small businesses.  It is a given with sequestration looming on the horizon that small businesses will be hit harder by a tight market, so this decision should be a welcome sight for them.  Here is a summary of the decision and a few thoughts on its consequences for small (and large) businesses.  For those of you short on time, I have included some take-away bullets at the end.

Firstline Transportation Security, Inc. v. United States challenged a Transportation Security Administration (TSA) solicitation that established a 40% small business subcontracting goal.  This goal was protested on several grounds — most forcibly, in my view, by the argument that the agency did not conduct adequate market research to indicate that such a high goal was feasible, and that the agency unlawfully applied the 40% goal to all contract dollars, rather than just subcontracting dollars.  In response, Judge Wheeler quipped, “[i]f the Court were issuing this solicitation instead of this agency, it may well have based the rather aggressive small business goals on more robust market research . . . .”  He went on to imply that it would have been wiser to give prime contractors “the discretion to determine on their own how much of the work they were prepared to subcontract,” rather than have the federal agency dictate “the desired level of subcontracting.”

However, the Court still held that the TSA was within its rights to act as it did.  According to the Court, the subcontracting goals were indeed only goals, and bidders below the 40% mark would not be eliminated from competition unless they failed to exercise “due diligence in their efforts to meet the stated goals,” a fact which would presumably come to light during the negotiation of a subcontracting plan with the contracting officer.  Further, the Court approved the use of a subcontracting goal for total contract dollars because the Federal Acquisition Regulation (FAR) does not approve nor prohibit this practice, and where the FAR and other applicable laws are silent, the procurement action is permissible.

This case is remarkable, less for what the Court did than for what the Court did not do.  At one point in his opinion, Judge Wheeler recognizes that “the usual practice is for the offeror, not the agency, to propose” subcontracting goals, and that here “the agency is working within a regulatory gray area.”  That the Judge can recognize these facts but still rule for the government is yet another example of the high degree of deference accorded to agencies under the Administrative Procedure Act, which requires that a protestor show a clear violation of applicable law.  In this case, the violation may have been arguable, but it was not clear.

As this decision is brand new, it’s not yet known whether agencies will embrace their newly enshrined power to set large subcontracting goals in a solicitation.  However, as federal markets run dry, the pressure on agencies to do more with less will certainly result in a greater emphasis on price in proposal evaluation, and that may discourage agencies from totally setting aside opportunities.  Agencies that nonetheless want to support small businesses might be able to use a partial set-aside, as I have discussed in a previous article, and now they can confidently set large subcontracting goals.  These goals will presumably allow lower bids at the “front end” of a solicitation while also offering the agency more authority at the “back end” to insist on the largest subcontracting plan that is reasonable taking into account market realities.  As a result, this decision seems to put even more onus on large businesses to court small subcontractors, which small firms will no doubt welcome.

Quick read summary:

  • Court of Claims upheld practice of agencies setting high small business subcontracting goals in a solicitation.
  • Court said that the high goals (40% in this case) need not be tied to robust market research.
  • Court also upheld practice of applying small business subcontracting goals to all contract dollars, not just subcontracting dollars.
  • These holdings give agencies looking to boost small business utilization another arrow in their quiver.
  • Agency could procure full and open, but impose high subcontracting goals in the solicitation that require large businesses to do their best in meeting those goals or risk being eliminated from competition.

As always, we’ll keep you updated on this case and agency reactions.  And for the latest sequestration news and analysis, take a look at Centre’s Sequestration Update page.

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3 Comments  comments 

3 Responses

  1. SPMayor

    In my experience it is not uncommon: 1] for agencies to specify the subcontracting goals in the RFP and for those goals to be higher than published; 2] to base the goals on total contract costs; and 3] to require a subcontractor utilization plans in additional to subcontrating plans [these plans have no $ and provide a more complete narrative on how the prime intends to deploy the subcontractor{s} on the project].

  2. brownmm3

    I am having a hard time accepting what I understand the transfer of the goals from planned subcontracting dollars to the full contract value. A prime wins a $100M contract and planned to subcontract $30M. With a SB goal of 40%, $12M would bet set aside for SB.
    If I understand the ruling, in the same situation the Prime would have to set aside 40% of the $100M, or $40M instead of $12M for SB.
    I understand other factors would enter, but I kept this simple just to make sure that I have understood the impact and frankly hope I have not.
    Thank you

  3. steve.ramaley

    Thanks for the comments.

    SPMayor: Our clients have seen these procurement strategies used before as well, but I think it varies by agency whether it’s once in a blue moon or commonplace. Either way, Judge Wheeler understood that this is not the “usual” practice. What makes this case important is that the Court finally weighed in to approve the practice, which was until now questionable under the FAR. Agencies operate in legal grey areas all the time (big surprise, right?), but when a Court comes in to declare that something is OK, it generally means we’ll see more of it.

    Brownmm3: Your understanding is, unfortunately, correct. Remember, though, because it’s a “goal” the prime must only exercise due diligence/good faith in reaching for it. If it falls short because that level of SB effort isn’t feasible, that’s not a problem. But this case is still a tough pill for primes to swallow, I know.