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Did the SBA Invalidate FAR 19.000(b)?

Don Mansfield

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In Latvian Connection General Trading and Construction LLC, B-408633, September 18, 2013, the Comptroller General denied a protest of a solicitation issued by an Air Force unit in Oman for armored cable to be used at Thumrait Air Base, Oman. At issue was the Air Force’s decision to not automatically reserve the acquisition for small business concerns, which both the protester and the Small Business Administration (SBA) argued was required under the Small Business Act. The protester relied on 15 U.S.C. § 644(j)(1), which states:

“Each contract for the purchase of goods and services that has an anticipated value greater than $2,500 but not greater than $100,000 shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and are competitive with regard to the quality and delivery of the goods or services being purchased.”

[Note: these thresholds have since been raised by the FAR Council. See FAR 19.502-2( a ).]

The SBA implemented this statutory provision at 13 C.F.R. § 125.2(f)(1), which states that contracting officers (COs):

...shall set aside any acquisition with an anticipated dollar value exceeding the Micropurchase Threshold but not exceeding the Simplified Acquisition Threshold . . . for small business concerns when there is a reasonable expectation that offers will be obtained from at least two small business concerns that are competitive in terms of quality and delivery and award will be made at fair market prices.

The Air Force argued that the automatic reservation, which is stated at FAR 19.502-2(a), did not apply because the acquisition was outside the United States and its outlying areas. The Air Force relied on FAR 19.000( b ), which states:

This part [Part 19-Small Business Programs], except for subpart 19.6 [Certificates of Competency], applies only in the United States or its outlying areas. Subpart 19.6 applies worldwide.

The Comptroller General sought the views of the SBA regarding the geographical restriction at FAR 19.000( b ). In its comments, the SBA argued that this regulatory “statement of policy” does not properly implement Small Business Act requirements. Further, the SBA noted that elsewhere the Small Business Act exempts certain provisions from applying outside the United States. Thus, if Congress wanted to place a geographical restriction on § 644(j)(1), it would have done so.

Siding with the Air Force, the Comptroller General stated:

“Given the silence of the Small Business Act with respect to the application of § 644(j)(1) outside the United States and its outlying areas, we cannot say that the validly-promulgated, long-standing regulation found at FAR § 19.000( b ) is inconsistent with, or contrary to, the Small Business Act. This FAR provision is also not inconsistent with the SBA’s own regulation implementing § 644(j)(1). Although the SBA disagrees with how the Federal Acquisition Regulatory Council has interpreted the Small Business Act in this regard, and states that our Office is required to give deference to the SBA’s interpretation of the Act, the SBA’s interpretation reflects its informal legal opinion. The SBA’s view of the statute-- which is not reflected in its own implementing regulation despite the existence of the government-wide FAR rule for decades--does not overcome the deference accorded to the FAR.”

This logic suggests that had the FAR Council exempted Kansas City, Missouri, from the application of § 644(j)(1), that would have been okay, too.

The New SBA Regulations

Fast-forward two weeks to October 2, 2013. The SBA issued a final rule amending its regulations governing small business contracting procedures (see 78 FR 61114). 13 C.F.R. § 125.2 was amended as follows:

“(a)…Small business concerns must receive any award (including orders, and orders placed against Multiple Award Contracts) or contract, part of any such award or contract, and any contract for the sale of Government property, regardless of the place of performance, which SBA and the procuring or disposal agency determine to be in the interest of:…”

[…]

( c ) Procuring Agency Responsibilities—(1) Requirement to Foster Small Business Participation. The Small Business Act requires each Federal agency to foster the participation of small business concerns as prime contractors and subcontractors in the contracting opportunities of the Government regardless of the place of performance of the contract…”

[underlining added].

Although the amended SBA regulation seemingly put to bed the issue of the geographical restriction stated at FAR 19.000( b ), the FAR Council has taken no action to amend the FAR (see “FAR Open Cases Report” at http://www.acq.osd.mil/dpap/dars/far_case_status.html).

Where are We Now?

On July 14, 2014, Latvian Connection, LLC, (Latvian) filed a protest with the Government Accountability Office (GAO) (B-410081.1) of a State Department solicitation for spare and replacement parts for the United States Consulate General in Dubai, United Arab Emirates (Solicitation No. 3458493). One of the bases of the protest was the State Department’s decision to not automatically reserve the acquisition for small business concerns. The Comptroller General sought the views of the SBA. In a letter to the GAO, the SBA explained their position as follows:

“State argues that the GAO decision of Latvian Connection General Trading and Construction LLC, B-408633, Sept. 18, 2013, 2013 CPD ¶ 224, applies here. In that case, GAO ruled that FAR 19.000( b ) limits the application of FAR part 19 (dealing with the SBA’s small business programs) to acquisitions conducted in the United States (and its outlying areas). We believe the basis for GAO’s ruling was that SBA’s regulations were silent on this issue and therefore, the more specific FAR regulation controlled.”

“Heeding this advice, SBA recently promulgated regulations to address this issue. Specifically, SBA made wholesale changes to 13 CFR § 125.2 on October 2, 2013.”

[Letter from SBA to GAO, dtd. 25 August 2014, RE: B-410081 Protest of Latvian Connection, LLC]. The letter went on to reference the changes to 13 CFR § 125.2 shown above. The protest against the State Department solicitation was subsequently dismissed on other grounds.

On December 10, 2014, Latvian filed a protest with the GAO (B-410921) of an Army solicitation for the installation of canopy sunshades on Camp Arifjan, Kuwait (Solicitation No. W912D1-15-R-0004). Again, Latvian argued that the acquisition should have been automatically reserved for small business as required by the Small Business Act and the newly amended SBA regulations. Presumably understanding that they would be fighting a losing battle, the Army amended the solicitation to automatically reserve it for small business concerns and the protest was dismissed. The description block of the amendment contained the following statement:

“The purpose of this amendment is to cancel the solicitation in its entirety and pursue a revised acquisition strategy considering small business set-aside requirements, without regard to Federal Acquisition Regulation (FAR) Part 19.000( b ).”

[Amendment 0004 to W912D1-15-R-0004]

Conclusion

As it stands, overseas COs and small business concerns seeking overseas contracting opportunities are in a tough spot. Overseas COs must deviate from the FAR to comply with the Small Business Act and SBA regulations. Small business concerns seeking overseas contracting opportunities are dealing with contracting officers that are blissfully ignorant of the changes to the SBA regulations due to the longstanding geographical restriction stated at FAR 19.000( b ). It may take nothing short of a GAO protest to get overseas COs to pay attention to the amended SBA regulations.

The ball is squarely in the FAR Council’s court. It needs to revisit FAR 19.000( b ) in light of the amended SBA regulations. If there is a legal argument for keeping the geographical restriction at FAR 19.000( b ), then the Office of Federal Procurement Policy should issue guidance to that effect to agencies. If there is no legal argument for keeping FAR 19.000( b ), then it should be removed. Sitting back and letting overseas COs and small business concerns fight it out solicitation by solicitation is not fair to either party.



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Don,

(1) You write, "Overseas COs must deviate from the FAR to comply with the Small Business Act and SBA regulations." How so? If the PCO complies with SBA regulations, from what express language of the FAR is the PCO deviating?

(2) I'm much more interested in your answer to #1 than your thoughts on #2. That said, it seems to me a PCO could, consistent with the FAR, set aside a contract action for small business concerns under FAR 6.203. The PCO could, in so doing, and in reliance on FAR 6.203( c ), follow the policies and procedures in Subpart 19.5 in doing so, despite FAR 19.000( b ). What am I missing?

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Jacques,

Per FAR 19.000( b ), the policies and procedures of FAR part 19 do not apply outside the United States and its outlying areas. Thus, if a contracting officer outside the U.S. and its outlying areas were following the policies and procedures of FAR subpart 19.5 (i.e., limiting competition to small business concerns), their actions would be inconsistent with the FAR. This would meet the definition of "deviation" at FAR 1.401( a ).

You suggest that a CO can solely rely on FAR 6.203 to limit competition to small business concerns for overseas COs. Yes, FAR 6.203( c ) directs compliance with FAR subpart 19.5, but you can't ignore FAR 19.000( b ). Even if I bought your argument, which I don't, it would not permit set-asides when using SAP per FAR 6.001( a ).

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Don,

By your logic, a contract for research and development can't include options (at least without a deviation). See FAR 17.200 (FAR Subpart 17.2 does not apply to contract for, e.g., research and development services). I understand FAR 17.200 includes the sentence, "However, it does not preclude the use of options in those contracts." Are you suggesting that if FAR 17.200 did not include that sentence, use of options in R&D contracts would be precluded? What does FAR 1.102(d) & 1.102-4(e) mean to you?

Let me ask my question a different way, because you haven't answered it. Put yourself in the shoes of a contracting officer awarding a contract outside the United States who wanted to award in a manner consistent with SBA regulations. What would the deviation package look like? Please include in your answer a discussion as to which part of the definition of "deviation" in FAR 1.401 is implicated and why. Surely you must be relying on something more than that Part 19 does not apply, which seems to me to equate to silence. I'm not going to infer the existence of a restriction based on silence alone. Doesn't FAR Subpart 6.2 [Edit: Forgive the mental block on simplified acquisition procedures. I don't know why I missed your point on FAR 6.001( a ) above. A potentially valid reference might be to FAR 13.003( b )] give me all the authority I need to not award on the basis of full and open competition (i.e., to award after excluding sources) [Edit: or, rather than phrasing it in Part 6 terms, to reserve the award for small business concerns]?

Bottom line: I think you're bootstrapping.

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Jacques,

FAR 17.200 states:

This subpart prescribes policies and procedures for the use of option solicitation provisions and contract clauses. Except as provided in agency regulations, this subpart does not apply to contracts for

(a) services involving the construction, alteration, or repair (including dredging, excavating, and painting) of buildings, bridges, roads, or other kinds of real property;

( b ) architect-engineer services; and

( c ) research and development services. However, it does not preclude the use of options in those contracts.

You may want to use a different example.

I don't know what you mean by "deviation package", so I don't know how to describe what one would look like.

Using the policies and procedures of FAR subpart 19.5 outside the United States and its outlying areas would be a deviation (as defined at FAR 1.401(a)) from FAR 19.000( b ), which limits application of FAR part 19 to the United States and its outlying areas. You seem to suggest that the FAR already permits a CO to limit competition to small business concerns regardless of place of performance. However, such an interpretation renders FAR 19.000( b ) meaningless.

If an overseas CO were to limit competition to small business concerns for a contract requiring performance overseas, they would need quoters or offerors to represent themselves in connection with their quote or offer. Use of the provision at FAR 52.219-1, Small Business Program Representations, in a solicitation when the contract will be performed outside the United States and its outlying areas would be a deviation (as defined at FAR 1.401(e)) from the prescription at FAR 19.309( a )(1). Same goes for use of FAR 52.219-2, Equal Low Bids, and FAR 52.219-28, Post-Award Small Business Program Rerepresentation.

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I disagree that FAR 19.000( b ) would be "rendered meaningless" by a PCO excluding sources under FAR Subpart 6.2 in this context. The Part applies when it does. In other words, when it applies, compliance is mandatory. When it does not apply, it simply does not apply. It does not follow that because the Part does not apply, compliance with the opposite is somehow mandatory.

Put differently, a PCO can simultaneously comply with the new SBA regulation and FAR 19.000( b ), because FAR 19.000( b ) does not require a PCO do anything or refrain from doing anything.

The State Department did not need a class deviation when it revised DOSAR 619.000( b ) to provide, "Contracts awarded overseas should comply on a voluntary basis [with FAR Part 19 as supplemented], where practicable."

You write, “Using the policies and procedures of FAR subpart 19.5 outside the United States and its outlying areas would be a deviation (as defined in FAR 1.401(a)) from FAR 19.000( b )....” I couldn’t disagree more. FAR 1.401(a) requires that the use be “inconsistent with the FAR.” To be "inconsistent with the FAR" would require that the agency was doing something prohibited by the FAR or refraining from doing something required by the FAR. Again, silence isn’t enough.

I don't understand your comment on the provisions and clauses and would just as soon not go down this rabbit hole. It is perhaps sufficient for me to ask, under your reading of FAR 1.401(e), would a PCO require a deviation in order to use one of the clauses at FAR 52.217-3 through 52.217-9 in a contract for research and development, as none of them are prescribed?

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Jacques,

Before this discussion gets too unwieldy, let me try to summarize your argument. According to you, FAR 19.000( b ) should be read something like this--

This part, except for Subpart 19.6, applies only in the United States or its outlying areas. Subpart 19.6 applies worldwide. However, it does not preclude application of the policies and procedures of other subparts worldwide.

Is that what you're saying?

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My point is you haven't explained very well (IMHO) the basis underlying your statement, "Overseas COs must deviate from the FAR to comply with the

Small Business Act and SBA regulations." If I have to have an affirmative point of my own, it is expressed in my prior post, which is, "A PCO can simultaneously comply with the new SBA regulation and FAR 19.000( b ), because FAR 19.000( b ) does not require a PCO do anything or refrain from doing anything."

It is not my desire to divorce this conversation from its context, which includes SBA's change to its regulation discussed in your blog post (13 CFR 125.2). You seem to believe a PCO is faced with two irreconcilably conflicting authorities--that is, two authorities with which the PCO cannot simultaneously comply (or cannot simultaneously comply without, in your words, a deviation). I do not; or at least you haven't convinced me yet why I'm wrong (understanding you're not obligated to do so).

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I don't think a CO outside the U.S. and its outlying areas has to deviate from FAR in order to set an acquisition aside for small businesses.

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I work at Department of State. We are getting one protest after another from Latvian Connection. When we do, we withdraw the solicitation and set it aside for American Small Business under FAR Part 19 unless it can only be performed by a local company cost effectively. Then we have to write a justification to file as to why it is dumb to buy from the U.S.

A massive training program for our General Service Officers worldwide in the coming months to train them on FAR 19 which they have never had to deal with before. (They have 1 week of procurement training and $250K warrants) Even our Regional Office in Frankfurt has little knowledge of FAR 19. I have been to several meetings with SBA who are pushing for a FAR change because they say the FAR violates the public law which never exempted overseas purchases.

Beginning October 1, 2015, SBA plans to count all agency dollars into the small business percentages without an exemption for overseas which will drop many agencies considerably. State expects to have our percentage drop 19% to barely over the Governmentwide 23% but unable to meet any subgoals. DoD, State and other agencies provided our negative impacts to SBA and suggested a much longer implementation period but their minds seem made up. The law is the law and it had no exemptions for overseas is thier point of view.

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My point is you haven't explained very well (IMHO) the basis underlying your statement, "Overseas COs must deviate from the FAR to comply with the

Small Business Act and SBA regulations." If I have to have an affirmative point of my own, it is expressed in my prior post, which is, "A PCO can simultaneously comply with the new SBA regulation and FAR 19.000( b ), because FAR 19.000( b ) does not require a PCO do anything or refrain from doing anything."

It is not my desire to divorce this conversation from its context, which includes SBA's change to its regulation discussed in your blog post (13 CFR 125.2). You seem to believe a PCO is faced with two irreconcilably conflicting authorities--that is, two authorities with which the PCO cannot simultaneously comply (or cannot simultaneously comply without, in your words, a deviation). I do not; or at least you haven't convinced me yet why I'm wrong (understanding you're not obligated to do so).

Jacques,

Assuming, arguendo, that overseas COs could set aside acquisitions for small business concerns without deviating from the FAR, they are not required to. If an overseas contracting office were to issue a policy mandating set-asides pursuant to 13 CFR 125.2(f), that would be a deviation as defined at FAR 1.401(f).

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Don, you write COs "are not required" to set aside acquisitions for small businesses overseas. I don't understand what you mean. Are you saying that failing to comply with the Small Business Act (as interpreted by the SBA) or failing to comply with SBA regulations is not a valid protest ground? Doesn't the statute and reg relate to procurement? You might want to take a look 4 CFR Part 21 and a number of GAO protests, including BGI-Fiore JV, LLC, B-409520, May 29, 2014, 2014 CPD ¶ 160, which seems to be grounded on the agency's failure to comply with SBA regulations.

While you're at it, you might want to look at Hawpe Constr., Inc. v. U.S., 46 Fed. Cl. 571, 582 (2000). Since the heart of what is at issue is what the Small Business Act means, I'm pretty sure the SBA's regulations would prevail, even if the FAR conflicted (which--I continue to maintain--it doesn't).

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Jacques,

I mean that COs are not required by the FAR to set aside acquisitions for small businesses overseas. If an overseas contracting office adopted such a policy, it would be a deviation as defined by FAR 1.401(f). A policy need not conflict with the FAR to be a deviation as defined by FAR 1.401(f).

I think that if there were a protest against an overseas CO for not setting aside an acquisition when required by 13 CFR 125.2(f), the Government would lose. I don't think reliance on FAR 19.000( b ) would work as a defense anymore, given the change in the SBA regulations. This is probably why the State Department and the Army aren't fighting these protests.

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Don,

It doesn't seem like it would be very hard to get around the limitation in FAR 1.401(f) here. The contracting office's memo could simply state (or the contracting office could later argue in the face of any challenge) that the memo did not represent new policy, but represented a reminder to follow existing policy and rules, which includes complying with all applicable regulations. (To put it in the language of FAR 1.401(f), the memo does not "govern the contracting process or otherwise control contracting relationships.") Rather, the memo could simply (1) acknowledge the SBA's revision to its regulations (which is what "governs" and "controls"), (2) discuss the impact of that revision, and (3) provide useful guidance on the steps one might take to comply.

Don't get me wrong. I'm not advocating that the FAR Council do nothing. Rather, I'm saying that PCOs don't have to (and competent PCOs should not) sit on their hands waiting for the FAR Council to act. It would be a total failure of leadership by the contracting chain of command for it to rely on FAR 1.401(f) to justify why it did nothing in the face of PCOs struggling.

I know your focus is on the FAR Council, so I'm not claiming you're advocating that the contracting chain abdicate its responsibility. I would offer the Serenity Prayer might be informative here: "God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference." Here, PCOs and their bosses don't need serenity, they need courage.

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Jacques,

There would still be an inconsistency between the FAR and the SBA regulations. The SBA regs mandate set-asides worldwide when the requisite conditions are met and the FAR does not. According to the FAR Council:

Contracting officers under the Executive Branch are required to follow the FAR. In cases where there are inconsistencies between Title 13 (SBA regulations) and Title 48 (FAR) of the Code of Federal Regulations, contracting officers follow the FAR.

[see 74 FR 11823].

There's also procedural hurdles to be worked out if overseas contracting offices follow a policy of mandatory set-asides. For example, what provisions will be used to require offerors and quoters to represent themselves as small business concerns? What clauses will be used to implement the limitation on subcontracting? Will there be a limitation on subcontracting? When the policies and procedures of FAR part 19 went through the rulemaking process, their application was limited by FAR 19.000( b ). There was no public notice that they would apply worldwide (except for FAR subpart 19.6) or opportunity for public comment.

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Don,

(1) The FAR and the SBA regulations are not in conflict; namely, a PCO can simultaneously comply with both.

(2) Your Federal Register quote isn't even persuasive authority. There is no doubt in the case law as to how a conflict between the SBA regulations and the FAR would be resolved where the statute being interpreted or implemented is the Small Business Act (here, its section 15(j)(1)). This is a non-issue, though. See #1.

(3) To suggest there are "procedural hurdles" that warrant sitting on one's hands is to pretend ignorance on how the FAR Council works. I think we can predict with reasonable certainty what the FAR case is going to look like. All it is going to do is revise FAR 19.000( b ) and make minor tweaks to prescriptions.

(4) The contracting office wouldn't be the office making set-asides mandatory; set-asides of contracts over the micropurchase threshold and under SAT already are mandatory by virtue of SBA's change to its rule. The SBA's rule already went through the rulemaking process. I'm not suggesting that a contracting office issuing the memo discussed in an earlier post is engaged in rulemaking. In fact, I'm saying the opposite.

Is your suggestion to PCOs and their bosses who are facing with this issue today that they NOT set asides these actions, wait for the protest, and then take corrective action? If a PCO knows how to take corrective action, then the PCO already knows what to do, and doesn't have to wait for the protest. If you aren't advocating for corrective action, are you suggesting that requiring activities should just go without their requirements because the rules aren't laying as flat as you would like?

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Jacques,

1) The SBA regulations require set-asides overseas. The FAR does not. They are inconsistent. Even if you believe that a PCO would be permitted to set aside an individual acquisition overseas under the FAR, the procedure is not mandatory under the FAR for all acquisitions meeting the conditions for a set-aside.

2) The FR quote reflects the FAR Council's position on what COs must do when there is a conflict between the SBA regulations and the FAR. They say you must follow the FAR. It does not say that following the FAR will result in winning a protest.

3) The actual changes to the FAR text could be little. However, I don't see how that's relevant. The impact would be undeniably significant. A change in policy requiring the use of existing FAR part 19 provisions and clauses relating to set-asides for overseas acquisitions would be required to go through rulemaking. I hope you don't think that this type of change could be made by technical amendment.

4) As I said earlier, set-asides are not mandatory worldwide under the FAR. Although the the SBA's rule did go through the rulemaking process, it didn't contain any provisions and clauses for COs to use to implement the policy. Do you think contracting office can just create their own without regard for 41 U.S.C. 1707 and the Paperwork Reduction Act?

5) No, I'm not suggesting anything to or advocating for any particular solution for the COs and their bosses faced with this issue today. I'm just bringing the issue to light. Overseas contracting offices know better than me how to solve their problems.

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Thanks for the discussion, Don. I’m glad to see you aren’t arguing that simply because the “The ball is squarely in the FAR Council’s court,” that contracting activities must or should proceed as though SBA has not changed its rules, and that everything is sure to work out great. We can agree to disagree about the rest.

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Don,

Sorry I have been on two weeks leave. It is our legal office that told us to not try and fight the protests. This was based on previous decisions that indicated GAO was going to agree with SBA that overseas was not exempt.

We are writing briefings to try and sway SBA and OFPP that setting aside at our overseas posts is not economical or efficient. I personally have little confidence that will get a positive result but our Small Business Office and Procurment Executive are trying.

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