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GAO: No Set Aside Required Where Offerors’ Prices Too High

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Koprince Law LLC

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An agency was justified in canceling a small business set-aside solicitation–and reissuing the solicitation on an unrestricted basis–where the agency determined that the prices offered by small businesses were too high.

In a recent bid protest decision, the GAO confirmed that while the FAR’s “rule of two” set-aside requirement provides a powerful and important preference for small businesses, it doesn’t require an agency to pay more than fair market value for products or services.

The GAO’s decision in Wall Colmonoy Corporation, B-413320; B-413322 (Oct. 3, 2016) involved an Air Force solicitation for the remanufacture of approximately 80 F-16 heat exchangers.  Before issuing the solicitation, the Air Force conducted market research to determine whether the solicitation should be set aside for small businesses.  The market research indicated that two small businesses were likely to submit proposals.  Based on its market research, the Air Force issued the solicitation as a small business set-aside.

The Air Force also prepared an independent government estimate, or IGE, to use in the evaluation of offerors’ price proposals.  The Air Force’s IGE indicated that the remanufacture of each unit should cost approximately $12,000.  The Air Force’s IGE was based in large part on a 2012 contract for the same services, under which the Air Force paid $11,936 per unit.

The two small businesses identified in the market research submitted proposals.  Wall Colmonoy Corporation, one of the small businesses, proposed a unit price of $17,426.  The other small business proposed a unit price of $29,950.

The Air Force opened discussions with both small business offerors.  Through several rounds of discussions, the Air Force informed the small businesses that their proposed prices were higher than the Air Force had anticipated.  WCC ultimately lowered its proposed price to $15,950 per unit.  The second small business apparently lowered its price by only $450 per unit, to $29,500.

After reviewing revised proposals, the Air Force concluded that it could not make award at a reasonable price.  The Air Force canceled the solicitation.  The Air Force then issued a new solicitation on an unrestricted basis.  Except for removing the small business set-aside designation, the new solicitation was “essentially identical to the previous solicitation.”

WCC filed two GAO bid protests: one challenging the Air Force’s decision to cancel the small business solicitation; the second challenging the Air Force’s failure to issue the second solicitation as a small business set-aside.  The GAO consolidated the protests for decision.

The GAO first determined that the Air Force had properly canceled the first solicitation.  The GAO noted that WCC’s proposed prices were “significantly higher” than the Air Force had anticipated.  The Air Force “engaged in multiple rounds of discussions with WCC, repeatedly advising WCC that its unit price was too high.”  When WCC’s final proposal remained $3,950 higher per unit than the IGE, the Air Force reasonably canceled the solicitation.

The GAO then held that the Air Force had reasonably issued the second solicitation on an unrestricted basis.  The GAO wrote: “[g]iven that the agency canceled [the first solicitation] because the agency concluded that it was unable to make an award at a fair market price, we find nothing improper with the contracting officer’s decision to not set aside [the second solicitation] for the same requirements.”  The GAO denied WCC’s protest.

FAR 19.502-2(b) provides that an acquisition over $150,000 ordinarily shall be set aside for small businesses where the contracting officer has a reasonable expectation of obtaining offers from at least two small businesses, and where “[a]ward will be made at fair market prices.”  Although discussion of the “rule of two” usually centers on the availability of small business sources, the Wall Colmonoy Corporation protest is a good reminder that an agency need not restrict a solicitation to small businesses if the agency has a reasonable belief that it cannot make award at “fair market prices.”

One final note: the Air Force’s response to WCC’s protest indicated that the services had been procured in 2008 for $8,882 per unit and again in 2012 for $11,936 per unit.  In other words, over the four-year period from 2008 to 2012, the cost of the services increased by $3,054 per unit, a jump of approximately 34.4%.  Given this history, it’s surprising that (at least based on the public protest decision), WCC does not appear to have protested the reasonableness of the IGE itself.  The IGE of $12,000 anticipated a mere 0.54% price increase over the four years between 2012 and 2016: well below inflation rates during the period, and at odds with the 34.4% increase the Air Force agreed to in the prior four-year period.  Indeed, WCC’s final unit price of $15,950 was approximately 33.7% higher than the 2012 unit price: directly in line with the percentage increase between 2008 and 2012.  Why didn’t this issue come up in the protest (or at least in the published decision)?  Good question.


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