A recent U.S. Government Accountability Office (GAO) ruling will significantly impact the value of certain popular federal government contract programs for both small and large businesses. In a case of first impression, Delex Systems, Inc., B-400403, Oct. 8, 2008, 2008 CPD ¶ __, GAO ruled that a Federal Acquisition Regulation (FAR) small business set-aside requirement, applicable to “acquisitions” valued at more than $100,000, must be applied to task and delivery orders issued under multiple award, indefinite-delivery, indefinite-quantity (IDIQ) contracts. GAO’s decision, which runs counter to the approach taken by most federal agencies, will likely increase the number of task and delivery orders awarded to small businesses to the disadvantage of other business types, while increasing the complexity of some of the most popular government contracting vehicles.

Background

An increasingly large percentage of government purchases of supplies and services are made through task or delivery orders issued under multiple award IDIQ contracts. An IDIQ contract is a type of contract that provides for an indefinite quantity of supplies or services during a fixed period of time. The government places delivery orders (for supplies) or task orders (for services) against a basic master contract for individual requirements. The government uses an IDIQ contract when it cannot predetermine, above a specified minimum, the precise quantities of supplies or services that it will require during the contract period. By statute, government agencies must strive to award IDIQ contracts to multiple suppliers or service providers so as to create on-going competition for each order issued under the contracts. Some of the more widely held IDIQ contracts include awards to dozens of contractors that compete across the government under so-called “Governmentwide Acquisition Contracts” (or GWACs) or “Multi-Agency Contracts” (or MACs).

Under the FAR’s “Rule of Two,” a government purchaser must reserve any acquisition over $100,000 exclusively for small businesses whenever there is a reasonable expectation that offers will be obtained from at least two responsible small businesses at a fair market price.1 Many existing IDIQ contracts include a mix of both small and large businesses, and many of these contracts either are silent regarding potential small business set-asides or purport to grant the government contracting officer with discretion to determine whether or not to reserve a particular task or delivery order for small businesses. Until now, many contractors, regardless of size, expected that most orders would be subject solely to the requirement that each offeror have a fair opportunity to compete pursuant to the ordering requirements located at FAR 16.505(b).

Summary of GAO’s Decision in Delex Systems, Inc.

In August 2003, the Navy awarded the Training Systems Contract II (TSC II)—a multiple award IDIQ contract for the development of aviation simulation products and systems—to eight firms, four of which were small businesses. The program’s period of performance, including options, was eight years with a total ceiling value of $3 billion. Under its terms, all eight contract holders were eligible to complete for the delivery orders. The Navy, however, reserved the right to set-aside individual orders to satisfy its small business requirements. The delivery order at issue was originally released in May 2008 as a small business set-aside. Around the same time, the contracting officer required the TSC II awardees to update their size status pursuant to the Small Business Administration’s (SBA’s) recertification rule. When only two of the contract holders recertified as small businesses, the Navy modified the request for proposals and opened the competition to all eight contractors. Delex Systems, Inc., one of the remaining small businesses, complained to the Navy Ombudsman and then filed a pre-award bid protest at GAO.

The Navy defended the protest on multiple grounds. It initially argued that the Rule of Two did not apply to task and delivery orders. According to the Navy, the FAR’s small business rules applied only to the issuance of the IDIQ contract, not the resulting task or delivery orders. It claimed the requirement that executive agencies comply with the small business set-aside provisions is based solely on the statement in FAR 6.203 that “[FAR] Subpart 19.5 . . . shall be followed with respect to set-asides.” The Navy then argued that the language in FAR 16.505 exempting task and delivery orders from FAR Part 6 also exempted it from following the small business rules.

GAO rejected the Navy’s threshold argument. As it often does on small business matters, GAO requested the SBA’s opinion on the parties’ arguments. The SBA disagreed with the Navy’s interpretation, and argued that the Rule of Two implements the Small Business Act and operates independently from the FAR Part 6 provisions relied upon by the Navy. GAO concurred, finding that nothing in either the Competition in Contracting Act of 1984 or the Federal Acquisition Streamlining Act of 1994—the statutory bases for the FAR provisions relied upon by the Navy—exempted task and delivery orders from the Rule of Two. It noted the statutes expressly provided that they were to be harmonized with existing laws, i.e., the Small Business Act and FAR Subpart 19.5. GAO also found that the issuance of a task or delivery order is an “acquisition” within the meaning of FAR 19.502-2(b), and that awarding a task or delivery order is “the most meaningful stage for a Rule of Two analysis” because it is at that point that holders of multiple award IDIQ contracts offer prices and solutions to meet specific agency needs.

GAO also rejected the Navy’s alternative argument that, in any event, the contracting officer complied with the FAR’s small business set-aside provisions. Two days after the Navy released the unrestricted delivery order proposal request, the contracting officer prepared a memorandum for her files in which she concluded that due to her past experience with the remaining small businesses and the size and scope of the delivery order, the agency did not expect to receive two or more offers from small businesses. The issue before GAO was whether her conclusion was reasonable and supported by the record. During the protest, however, GAO learned that she failed to contact the two small businesses to confirm whether they planned to submit a proposal. Delex also submitted evidence that it was capable of performing the proposed five-year, $75 million contract, which undercut the Navy’s contention that Delex lacked the necessary resources. GAO concluded that the contracting officer’s determination that the Navy would not receive at least two offers from small businesses was unreasonable and not supported by the record.

Accordingly, GAO sustained the protest and recommended that the Navy reassess whether there is a reasonable expectation that it will receive fair market price offers from at least two small businesses. GAO also awarded Delex the costs of filing its bid protest, including attorneys’ fees.

Implications of Delex Systems, Inc.

The Delex decision significantly changes the ground rules applicable to multiple award IDIQ contracts and is otherwise important on several levels. First, although GAO decisions are not binding on government agencies, they are almost always followed, in part because any noncompliance is reported to Congress. Given that government agencies often prefer to use IDIQ contracts since they present a relatively streamlined way to purchase goods and services, many businesses have targeted multiple award IDIQ contracts as a primary part of their federal market business strategies. Many of these businesses, however, have given little, if any, consideration to the possibility that opportunities under these contracts must be reserved solely for small businesses whenever two small businesses are capable of competing. Application of Delex in some cases will run counter to the pre-existing ordering provisions that make up part of the bargain originally struck by the parties. In this regard, Delex is expected to result in disputes and legal challenges as agencies attempt to implement the decision.

Second, Delex is likely to result in procurement delays as government agencies conduct the research necessary to determine whether or not it should expect two or more small businesses to compete (while offering a fair market price) for each specific task or delivery order. In light of GAO’s decision, agencies may feel inclined to prepare thorough written determinations in order to make their actions less susceptible to bid protests. This will also negate at least some of the “simplicity” advantages that IDIQ contracts have typically offered both contractors and government agencies.

Third, going forward government agencies may attempt to segregate requirements into “small business only” and other than small business requirements under separate contract vehicles. Such an approach, however, would not normally preclude an opportunity for small businesses to file bid protests against agencies that fail to set-aside the IDIQ “umbrella” contract itself, if two or more small businesses can perform the work at a fair market price. Also, the fact that a business is “small” does not in and of itself constitute a valid basis for excluding a company from a contracting opportunity.

Fourth, Delex leaves in place, at least for now, the rules applicable to the most popular of all of the multiple award contract programs, that is, GSA’s Multiple Award Schedules (MAS) program. Although the SBA and several small business trade associations have advocated applying the Rule of Two, as well as the small business set-aside requirements applicable to acquisitions valued at less than $100,000, to the MAS program, Delex did not overturn GAO’s prior decisions in which it ruled that the small business set-aside requirements do not apply to the MAS program.2 Those decisions are based on GAO’s interpretation of the MAS ordering procedures located at FAR 8.404(a) and the small business set-aside rules located at FAR 19.502-1(b), both of which indicate that the small business set-aside requirements do not apply to MAS contracts.

Fifth, considering that GAO ruled that the Rule of Two is based upon the FAR’s implementation of the Small Business Act, but that the Act itself does not specifically enunciate the Rule of Two, there is an opening for disappointed businesses, as well as government agencies, to petition the FAR Councils and the Office of Federal Procurement Policy to revise the FAR in order to exempt multiple award IDIQ contracts from the Rule of Two as it has done so for the MAS program. In this regard, both proponents and opponents of GAO’s ruling are likely to engage in lobbying activities in connection with the ruling.

Finally, Delex is also noteworthy because it appears to be the first published decision in which GAO has sustained a bid protest under its new jurisdiction over task and delivery orders valued at more than $10 million. By one report, since Congress’s grant to GAO of jurisdiction over task and delivery orders took effect on May 27, 2008, more than 70 such bid protests have been filed, most of which are currently pending at GAO. Delex hits upon just one of the potentially many issues that received little to no consideration at the time that Congress expanded GAO’s jurisdiction to cover task and delivery orders.