HUD loses fight for no-bid contracts

A recent Supreme Court decision upholding a lower court ruling makes a strong statement in support of competition, but where it goes from here is still a bit unclear.

The case involves the Department of Housing and Urban Development and its decision to change a procurement for contract administration services from competitive contracts to a group of uncompleted grants.

The roots of the conflict go back to the reinventing government days of the Clinton Administration. For more than two decades, HUD had used internal staff to administer the Section 8 housing program, which provides subsidized housing to low income families.

In 1999, HUD ran a competition and awarded contracts in 53 jurisdictions including Washington, D.C., Puerto Rico and U.S. Virgin Islands to public housing agencies. There are more than 4,000 of these agencies that administer Section 8 housing in the states, according to Bob Tompkins, an attorney at Holland & Knight. His client, Navigate, won four of the contracts. The contracts were for services that HUD had been performing in house. I repeat that because it’s an important fact to keep in mind.

Fast forward to 2011. After a scathing inspector general report that found waste and cost overruns, HUD ran a new competition, Tompkins said. The bidders were limited to PHAs and joint ventures between PHAs and other partners, but with 4,000 PHAs there was plenty of competition, Tompkins said.

His client won six contracts. HUD claimed it would save $100 million a year in what it cost to administer $9 billion in Section 8 subsidies. Everyone should have been happy.

But when the new awards came out, the agency was hit with 66 bid protests involving 42 states or jurisdictions. No protests were filed involving 11 states, including the U.S. Virgin Islands. HUD pulled back the awards under protest and said it needed to reconsider the solicitation.

And that’s when the trouble began.

HUD reissued a solicitation, but this time it was structured as a cooperative agreement for a grant. Instead of an RFP, it issued a notice of funding availability, a NOFA. No longer was there a competition. None of the PHAs who had bid and won would be eligible for the grants.

Navigate and several other PHAs filed pre-award protests with GAO. GAO ruled in their favor, but HUD took the case to the Court of Federal Claims, which backed up HUD.

The next stop was the U.S. Court of Appeals for the Federal Circuit, which sided with GAO and the protesters.

HUD continued to fight on and took it to the U.S. Supreme Court, which sided with GAO and the protesters by refusing to hear the case. They made no comment on their decision to not hear the case.

The Professional Services Council issued a statement praising the Supreme Court decision. Tompkins and his client and the other protesters are happy. HUD, not so much.

Why this case is important is because the courts are telling government agencies that they have to consider the purpose of the spending when deciding whether to use a grant or a contract. In legal terms this called the “instrument determination.”

An agency can’t make a decision based on a desire to avoid competition and other oversight as it appears HUD was trying to do, Tompkins said.

If the purpose of the spending is to provide services to the agency, then the agency has to use a competitive process. It is clear in this case that HUD was outsourcing administration services it once performed in house.

The payments are not directly for a public good, which is a requirement for a grant. Instead, they are paying for a service to support the agency that the agency would otherwise have to provide.

PSC is calling on the Office of Management & Budget to issue clear guidance to agencies based on the court decision.

There are several agencies such as the National Institutes of Health and U.S. Agency for International Development that issue both contracts and grants. PSC praised USAID’s process.

“Now is the time for [OMB] to issue clear guidance to all federal agencies on the criteria to be applied in making this important choice of instrument determination,” said Alan Chvotkin, PSC’s executive vice president and counsel.

But there might be a stumbling block to OMB getting too deeply involved in this issue. OMB Director Shuan Donovan has a long track record in the housing and urban development arena.

He was HUD secretary when the agency decided to flip-flop from a contract to a grant scenario and he defended the move when testifying before the House Appropriations subcommittee for transportation and housing and urban development, according to Law360. He felt it was appropriate and included language in the agency’s proposed budget seeking the authority to issue the grants.

Now the ball is back in HUD’s corner. They could go back to their original contract awards from 2011, but surely the pricing and other items are long out of date. Or they could run a new competition.