Government contractors are learning the hard way that agencies need to be kept apprised of major changes within the company during the entire period of bid evaluations. Most recently, the Government Accountability Office (GAO) made an example of Lockheed Martin Integrated Systems, Inc. (LMIS), which was excluded from awards for failure to disclose its spin-off agreement with Leidos.

Earlier this year, the National Nuclear Security Administration (NNSA) rescinded a contract to Nevada Site Science Support and Technologies Corporation, LLC (NVS3T) upon learning that NVS3T had been acquired by Leidos Innovations Corporation prior to award. The proposal NNSA relied on to make the award decision identified NVS3T as a wholly-owned subsidiary of LMIS; although the highly publicized deal closed 10 days prior to contract award, NVS3T failed to timely notify NNSA of the change in ownership and control.

NNSA’s press release stated that the “change in ownership raises substantial questions about the information in the NVS3T proposal, which could significantly impact the evaluation of the proposal and award decision.” The solicitation required offerors to notify the contracting officer of a change in ownership or control. Without providing further detail, NNSA also stated that “[i]n making the award, NNSA evaluated past performance and other factors based upon the proposal as submitted.”

Even if NVS3T’s acquisition did not materially change its proposal or performance under the contract, the failure to notify the agency prior to award deprived the agency an opportunity to make that determination. Instead, without accurate information, the agency made the award based on pre-award evaluations that were no longer valid, resulting in the decision to rescind and reevaluate all offerors.

Following rescission, NVS3T filed a case in the U.S. Court of Federal Claims, arguing that the government was arbitrary and capricious in their decision. Since then, NVS3T and the Department of Energy have filed a joint motion to dismiss the case, stating that the NNSA has agreed to take corrective action and will evaluate revised proposals from all the offerors – including NVS3T – based on an established competitive range.

While that case may soon be resolved, LMIS also lost a protest disputing the Department of Army’s decision to exclude LMIS from consideration for an award based on the same premise – that the agency was not notified of the spin-off arrangement with Leidos. In this case, the agency chose not to consider the proposal from LMIS based on press releases from the company. While LMIS argued that the agency should not have relied on the press release, the agency responded that the spin-off directly impacted the reasonableness and realism of the proposal LMIS submitted to the agency. LMIS did not mention plans of the acquisition in its proposal, even though its press release admits uncertainties in operations, markets, products, services, and prices that may arise out of the transaction.

LMIS argued that previous GAO decisions only warrant examining a company’s reorganization where the offeror notified the agency of the potential effect of the corporate change on its proposal. GAO disagreed with this analysis, concluding that the offeror is required to disclose any effects on its proposal where the restructuring transaction is “imminent and essentially certain.” Ultimately, GAO decided that since the agency was unable to calculate the impact of the transaction on the price determination in the proposal, it properly concluded that the cost estimates were no longer reasonable.

These cases reflect the long-standing principle that an award based on a proposal with materially different representations has an adverse impact on the integrity of the procurement process and cannot stand. The mere failure to accurately and timely notify the agency of a sale or transfer is an affirmative, even if inadvertent, misrepresentation.

Thus, a key take away for acquirers of government contractors: review the target’s outstanding bids for potential notice requirements in connection with a change of control and make sure your target timely notifies the government agencies. If not, you too may lose a contract the hard way.