Ruling buttresses small businesses

Yet favorable 'Rule of Two' decision could come at a high cost

valued more than $100,000 for small businesses
if there is a reasonable expectation
that there are at least two small businesses
that perform that type of work.

The 2008 National Defense
Authorization Act extended the "rule of
two" to task-order contracts when the law
allowed companies to protest task-order
awards worth more than $10 million.

The protest authority for the task orders
expires in 2011.

Ed Driscoll, president and chief
executive officer of Delex
Systems Inc., was forced into an
awkward position last spring. His customer
of 40 years, the Navy, was disregarding
small-business acquisition
rules. Delex risked losing a lot of potential
business if the problem continued.

On a $75 million contract, the Navy
decided against setting aside orders for
small businesses as acquisition rules
require when at least two small companies
can handle the work and can offer
reasonable prices.

Driscoll, a former Navy officer, had
invested millions of dollars just to earn
a spot to compete for the orders on the
Navy's Training Systems Contract II.
Given the size of his investment and
the contract, he had to consider a
protest. At the same time, he did not
want to wreck a relationship he had
spent years building.

Ultimately, he had no choice. "This
was an opportunities issue and an
investment issue," he said.

After hearing Delex's case, the
Government Accountability Office
decided Oct. 8 that agencies must set
aside some task orders if at least two
small businesses could do the work,
which is known as the "rule of two."
The Federal Acquisition Regulation
requires a contracting officer to reserve
any order of more than $100,000 if at
least two responsible small businesses
could enter bids. The regulation was the
foundation for GAO's ruling.

Driscoll won the protest, and the
result might give small businesses such
as Delex a new edge in government
contracting. By ruling that agencies
must set aside work for small businesses
if they find two such companies that
are capable of meeting the agencies'
needs, the GAO buttressed rules that
agencies have often disregarded.

However, the decision could stress
relationships between companies and
agencies. Agency officials expect more
time-consuming protests for not setting
aside work. And they're frustrated by
the prospect.

"Delex hints at some of the angst people
haven't had since" acquisition
reforms in the 1990s, said Ray
Bjorklund, senior vice president and
chief knowledge officer at FedSources
Inc., a market research firm.

When they solicited the task order
under the training contract, Navy officials
decided not to set it aside for small
businesses. Instead, they opened the
competition to large and small companies
on the multiple-award contract.

"GAO tipped the playing field in
favor of small-business contract-holders,"
said Alan Chvotkin, executive vice
president and counsel at the
Professional Services Council, an
industry group. GAO has significantly
changed how agencies and contractors
plan their acquisition strategies, especially
when it comes to multiple-award
contracts that have a mixture of small
and large companies, he added.

As a result of the decision, program
managers and contracting officers will
likely give more weight to small-business
set-asides in their initial acquisition
strategies, Bjorklund said. When
agency officials need to buy something
quickly, the greater possibility of a
protest by a small company on a task or
delivery order would make them keep
set-asides in mind.

"Small businesses should capitalize on
this opportunity," said Andy McCann,
vice president and geographic sales
leader at EDS Corp.'s U.S. Government
and Public Sector business.

ASSESSING THE DECISION

At this point, though, many companies
and industry observers are still trying to
understand what effect the ruling will
have. An executive at a major systems
integrator who asked to remain anonymous
said large companies aren't enthusiastic
about the ruling, but the outcome
depends on how a contracting officer
interprets GAO's decision. Integrators
are waiting to see how to set up bidding
strategies and partner with small businesses,
especially on mixed indefinitedelivery,
indefinite-quantity contracts.

The ruling could cause small businesses to consider new ways of working
with integrators to ensure that they offer
the best services and win future government
contracts, McCann said.

"This ruling creates an incentive for
small businesses to strive to be selected
on IDIQ contract vehicles or to team
with a large integrator on an IDIQ contract,"
McCann said. It might also
encourage companies to put more
emphasis on their mentor/protégé
programs.

Nevertheless, other experts say GAO's
decision doesn't give advantages to small
companies.

"On the surface, this may seem to be a
benefit to small businesses, but the price
may be too high," said Guy Timberlake,
chief visionary and chief executive officer
at the American Small
Business Coalition.

Timberlake said he is concerned
that the decision might
strain the already tense relationship
between agencies and
small businesses.

Officials and experts agree
that the ruling could increase
the distrust between industry
and government. Agencies might suspect
contractors of planning protests
and including those projected costs in
their bids.

Karen Kopf, operations director at the
General Services Administration's
Federal Systems Integration and
Management Center, said she feared
becoming bogged down in protests,
especially now that companies can
protest task and delivery orders and be
heard by GAO.

Lee Harvey, the Army's deputy program
executive officer for enterprise
information systems, said that a decade
ago, fewer companies protested award
decisions because they wanted good
relationships with the government. But
today's larger orders encourage people to
protest, he said, because companies have
more at stake.

"Frustration sums up our feelings,"
Harvey said about GAO's decision and
its likely effects.

KEEPING TABS ON ORDERS

The crux of the issue was the Navy's contention
that Delex's protest was against a
delivery order and not a contract, making
it exempt from the rule of two. But
changes by Congress opened the orders
to protests. In January, lawmakers
decided that task and delivery orders
were growing so large and complex that
they equaled traditional contracts. They
decided orders needed more regulation
because agencies have been using task-order
contracts for more than 50 percent
of their procurements, compared with 14
percent in 1990, experts said. In the
1990s, the government viewed task
orders as distinct from contracts and put
those orders outside GAO's jurisdiction.

GAO will keep its new authority to
review task-order protests for three
years. Legislators plan to evaluate the
effects before then and make any necessary
changes.

In the meantime, the new authority is
changing the acquisition field, and
GAO's ruling could further alter how
agencies view orders and contracts.

"More of these multiple-award
opportunities might be issued as full-and-
open [competitions] with no setaside
components, creating a more prohibitive
competition environment for
the average small business," Timberlake
said.

Agencies will reassess the advantages
of multiple-award contracts because of
GAO's ruling, Bjorklund said. They
might ask themselves why they should
go through the hassle of awarding an
IDIQ and then go through another
competition for task orders.

However, some experts say GAO's
decision won't affect multiple-award
contracts that separate small and large
businesses.

The ruling will have little effect on
NASA's Solutions for Enterprisewide
Procurement, a governmentwide acquisition
contract, said Joanne Woytek,
NASA's SEWP program manager.

SEWP is organized into four groups
of multiple-award contracts. Two are
exclusively for small businesses with one
of the two set-asides for small companies
owned by service-disabled veterans.
The other two groups are primarily
for large businesses, though a few small
companies are in the group.

Woytek said the ruling might affect a
few orders in those groups that lack set-asides,
but the small businesses in those
groups are generally winning orders
when they submit a reasonable bid.

"We have always encouraged contracting
officers to provide a small-business
preference, and now it will be more
targeted if two of the small companies
in the open groups can and want to provide
a reasonable quote," she said.

Whether the ruling opens an advantage
for small businesses, it has left the
contracting community in limbo.
Ultimately, though, the rules are
nothing new, and GAO has simply reinforced
them, Driscoll said.

Matthew Weigelt (mweigelt@1105govinfo.com)
is acquisition editor at Federal Computer
Week.

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