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Agency Insists On Subcontract With OEM; GAO Agrees

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Koprince Law LLC

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Subcontracting is a way of life for many federal government contractors; however, the identification and selection of such subcontractors is usually left up to the reasonable discretion of the prime contractor. So what happens when a solicitation prescribes that a particular subcontractor be retained, but that subcontractor won’t assist in bid preparation efforts?

Well, in one recent case, the prospective prime contractor was out of luck.

In Simplex Aerospace, B-414566.2 (Aug. 8, 2017), the Air Force sought firefighting modifications for seven demilitarized HC-130H transport aircraft formerly operated by the United States Coast Guard. Modifications included increasing the frame support within the aircraft and installing gravity fed drop tanks for fire retardant dispersal. Modifications were to be overseen by the United States Air Force. Once modifications were complete, the Air Force was to transfer the HC-130Hs to the Forest Service.

Among its technical specifications, the Solicitation required offerors to retain the Original Equipment Manufacturer as a subcontractor. According to GAO, the OEM was “to, among other things, perform and/or review analyses substantiating the contractor’s modification design, and validate that the analyses and processes used are appropriate, the results are accurate, and the design requirements set forth in the SOW are satisfied.”

Simplex had attempted to work with the OEM during the bid preparation phase of the procurement, but the OEM “refused [Simplex’s] requests to participate in the pre-award phase.” According to Simplex, “the lack of participation has hindered Simplex’s ability to properly evaluate schedule risk and/or limit the firm’s liability.”

Unable to obtain the desired level of cooperation from the OEM, Simplex protested the terms of the Solicitation, including the OEM component. Simplex argued that the requirement to use the OEM was “overly prescriptive and unduly restrictive.”

Simplex argued that a better structure for the procurement was for the Air Force to obtain a separate agreement with the OEM for its participation during the pre-award phase. According to Simplex, such an arrangement would assure the level of OEM participation the Air Force desired, while relieving contractors of the responsibility of directly negotiating with a disinterested manufacturer. The Air Force countered that its decision to require OEM participation through subcontracts rather than a separate agreement overseen by the Air Force was reasonable. Simplex also argued that problems could arise if the OEM ultimately declined to team with the awardee.

GAO felt the Air Force had the better of the argument. To GAO, Simplex’s protest was about risk allocation. As GAO explained, “the mere presence of risk in a solicitation does not make the solicitation inappropriate or improper. . . . Risk is inherent in most types of contracts, especially fixed-price contracts, and firms must use their professional expertise and business judgment in anticipating a variety of influences affecting performance costs.” Here, one of those risks was submitting a proposal without the OEM’s active participation.

The GAO also wasn’t persuaded by the argument that the OEM might not team with the eventual awardee. “The protester’s concern here is speculative,” the GAO wrote, adding “[f]urther, should such a situation arise, it would be a matter of contract administration” outside the GAO’s jurisdiction.

Accordingly, GAO found nothing unreasonable about the Air Force’s decision to require contractors to retain the OEM as a subcontractor rather than independently solicit the services.

The Simplex decision is an interesting one. In it, GAO said that, at least under the facts at issue, it was reasonable for the agency to require an OEM as a subcontractor. This places significant risk on prospective prime contractors in the event the OEM does not cooperate with bid preparation activities (or, as Simplex noted, if the OEM refuses to team with the ultimate awardee). Unfortunately, as GAO made clear in its Simplex decision, contractors may be forced to bear the burden of this risk.


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