Chant argues that Clover's quotation should have been found unacceptable because, on its face, it did not comply with the RFQ's LOS clause, FAR sect. 52.219-14(b)(2) (the so-called "50% rule"). Specifically, Chant contends that the breakdown of work to be performed by Clover and Oilgear shows that Clover will perform less than 50% of the contract value.

As a general rule, an agency's judgment as to whether a small business concern will comply with the LOS clause is a matter of responsibility, and the contractor's actual compliance with the provisions is a matter of contract administration. However, where a quotation, on its face, should have led the agency to conclude that the concern could not and would not comply with the subcontracting limitation, this is a matter of technical acceptability. A submission that fails to conform to a material term or condition of the solicitation, such as the LOS clause, is unacceptable and may not form the basis for an order. KIRA, Inc., B-287573.4, B-287573.5, Aug. 29, 2001, 2001 CPD para. 153 at 3.

We find nothing on the face of Clover's quotation indicating an intent not to comply with the LOS clause. Chant points to nothing, and we find nothing, in Clover's quotation or in the solicitation that establishes that Clover's method of performance does not comply with the LOS clause. In contrast, the agency states that its analysis of the quotation shows that Clover will supply and fabricate a number of unique, one-of-a-kind components and assume total project responsibility, while Oilgear is to supply other components that are readily available in its supply chain and require only modest fabrication to meet the solicitation specifications. AR, Tab E, Engineers' Statement, at 3-4. Additionally, the agency states that, after analyzing Clover's proposal, it determined that Clover will incur far more than 50% of the cost to manufacture the entire hydraulic power system (not including the cost of materials). Id. at 3. Under these circumstances, there is no basis for us to conclude that Clover's quotation, on its face, should have led the agency to conclude that Clover could not and would not comply with the LOS clause.

Chant argues that Clover's quotation should have been found unacceptable because it showed that Clover would not incur at least 50% of the personnel costs, as required under the LOS clause. Protest at 5. However, either subparagraph (1) or subparagraph (2) of the LOS clause applies, but not both, depending upon whether the contract is one for services or supplies. The contract here is for the construction, fabrication, assembly, and testing of a hydraulic system, components and new operating machinery, and thus falls under the supplies requirement at subparagraph (2) (as reflected in the agency's analysis above which we have no basis to question). Accordingly, subparagraph (1), establishing the 50% of personnel costs requirement, does not apply. See TFab Mfg., LLC, B-401190, June 18, 2009, 2009 CPD para. 127 at 3-4.  (Chant Engineering Company, Inc., B-402054, December 29, 2009) (pdf)
 

The RFP, issued on July 9, 2008 as a total small business set-aside, provided for the award of an indefinite-delivery, indefinite quantity contract. Contracting Officer’s Statement (COS) at 3. The RFP called for both hardware requirements and engineering services requirements. COS at 2‑3. The RFP incorporated FAR sect. 52.219‑14, the LOS clause, as follows:

LIMITATIONS ON SUBCONTRACTING (DEC 1996)
(a) This clause does not apply to the unrestricted portion of a partial set-aside.
(b) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for--
(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.
(2) Supplies (other than procurement from a nonmanufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.
(3) General construction..…
(4) Construction by special trade contractors..…

Proposals were received from several small businesses, including TFab. COS at 3. The contracting officer questioned TFab regarding its compliance with the LOS clause, since TFab’s proposal specifically indicated “an approximately 95 percent exemption” from the 50% subcontracting rule for the required services. Id. at 3-4. The contracting officer was concerned “that the protester’s proposal for how the services CLINS were to be performed amounted to a significant pass through to a large business.” Id. at 4. On February 12, the contracting officer issued RFP amendment No. 17, which clarified the manner in which the Army intended to apply the LOS clause, as follows:

V. Offerors are cautioned that this acquisition is a Small Business Set‑Aside and is subject to the requirements of FAR clause 52.219-14, Limitations on Subcontracting. This acquisition contains both Supply and Service contract line items, both of which are separately subject to FAR clause 52-219-14, Limitations on Subcontracting. Offerors are cautioned that CLINs described as Cost Plus Fixed Fee CLINs are considered to be an important part of this procurement and not incidental to the production/fixed fee CLINs. Accordingly, offerors must meet the requirements for Small Business Set-Aside with regard to these CLINS.

RFP, Amend. No. 17, sect. A-16.V. All offerors, including the protester, submitted revised proposals by the March 17 closing time. COS at 4. This protest was filed prior to the closing time.

(sections deleted)

ANALYSIS

We agree with the protester that the LOS clause does not provide for dual application of the 50% requirement. The clause, on its face, establishes separate subcontracting limitations “in the case of a contract for” four distinct types of work. Paragraph (b)(1) establishes subcontracting limitations, not with regard to services generally, but with regard to “a contract … for Services.” Similarly, paragraph (b)(2) establishes subcontracting limitations, not with regard to supplies generally, but with regard to “a contract … for Supplies.” There is no language in the clause that contemplates a hybrid services/supply contract; more specifically, there is no language that provides for applying both paragraphs (b)(1) and (b)(2) in a single acquisition to require small business firms to agree to perform at least 50% of both services and supply work under a single contract. We read the language of the clause as indicating that the applicable LOS clause paragraph is to be applied to entire contracts, rather than portions of contracts, and that the clause contemplates that the contracting agency must choose among the paragraphs.

In AFL-CIO v. Donovan, 582 F. Supp. 1015, 1020 (D.D.C. 1984), aff’d, 757 F.2d 330 (D.C. Cir. 1985), the court reached a similar conclusion in interpreting applicability of the Service Contract Act (SCA), 41 U.S.C. sections 351-358 (applicable to contracts “the principal purpose of which is to furnish services”) and the Walsh-Healey Public Contracts Act (WHA), 41 U.S.C. sections 35-45 (applicable to contracts “for the manufacture or furnishing of materials, supplies, articles, and equipment”), statutes in para materia with subsection 15(o) and the LOS clause. Specifically, in interpreting the relevant provisions of the SCA, the court found that text that “refers to ‘the contract’ without any reference to line item specifications” indicated that the SCA “was intended to apply to entire contracts, not to individual line items.” Agencies’ implementation of the SCA and WHA is consistent with this interpretation; the contracting agency must make a determination whether a requirement is for services or supplies in order to determine which of the two statutes is applicable to an acquisition. See Information Handling Servs., 70 Comp. Gen. 35 (1990), 90-2 CPD para. 306 at 3 (regulations implementing the SCA and WHA contemplate an initial determination by the procuring agency as to which statute applies to a particular procurement); Tenavision, Inc., B-231453, Aug. 4, 1988, 88‑2 CPD para. 114 at 2 (regulatory scheme implementing these statutes envisions an initial determination by the contracting agency as to which statute applies to a particular procurement). This determination requires identification of the principal purpose of the contract. See AFL-CIO v. Donovan, 757 F.2d 330, supra, at 345 (SCA applies only when principal purpose of contract is for services); Southern Packaging & Storage Co. v. U.S., 458 F. Supp. 726, 734 (D.S.C. 1978), aff’d, 618 F.2d 1088, 1090 (4th Cir. 1980) (acquisition of field rations would be exempt from coverage under SCA if found to be subject to provisions of WHA); Department of Labor Regulations, 29 C.F.R. sect. 4.117 (2009).

We find the courts’ interpretation regarding the manner in which the SCA and WHA are to be applied to contracts supportive of our conclusion here, where we are interpreting an acquisition statute and associated regulations the provisions of which, like those of the SCA and WHA, apply to “contracts” rather than to particular services or supplies within a contract, and which, to be implemented, require an initial agency determination regarding applicability.

Our interpretation also is consistent with SBA’s position regarding this issue. In response to our request for its views, SBA agrees that the Army’s application of the LOS clause to the services and supply portions of the requirement here is improper. SBA points out that the FAR LOS clause requirements parallel those under subsection 125.6(a) of its own regulations, 13 C.F.R. sect. 125.6(a), which also implement subsection 15(o) of the Small Business Act, 15 U.S.C. sect. 644(o).[2] Consistent with our interpretation, it is SBA’s position that these provisions “established one performance requirement that applies to a ‘contract for the procurement of supplies’ and a different performance requirement that applies to a ‘contract for services.’” SBA Comments at 3. SBA concludes that the Army’s attempt to apply both the services and supply provisions of the LOS clause is inconsistent with the act. Id. at 4. We generally will give deference to an agency’s reasonable interpretation of its own regulations. See Blue Rock Structures, Inc., B-293134, Feb. 6, 2004, 2004 CPD para. 63 at 8 (SBA’s interpretation of statute that it is responsible for implementing entitled to substantial deference and, if reasonable, should be upheld).

Further, we agree with SBA that the Army’s implementation of the LOS clause will have the practical effect of restricting competition. In this regard, while, as discussed, the Army is motivated to preclude a small business awardee from subcontracting with a large business to perform all of the service work or all of the supply work under the contract, applying the LOS clause to both the services and supply portions of the contract clearly will limit the small businesses that will be able to compete. Specifically, small business firms that can only perform either a majority of the services work or a majority of the supply work will not be able to compete; the pool of potential competitors will be limited to small businesses that can satisfy the requirements of both paragraph (b)(1) (“50 percent of the cost of contract performance incurred for personnel”) and paragraph (b)(2) (“50 percent of the cost of manufacturing the supplies”).

Accordingly, we sustain the protest.  (TFab Manufacturing, LLC, B-401190, June 18, 2009)  (pdf)

As a general matter, an agency’s judgment as to whether a small business offeror will be able to comply with a subcontracting limitation presents a question of responsibility for review by the SBA. See 13 C.F.R. sect. 125.6(f); Spectrum Sec. Servs., Inc., B-297320.2; B-297320.3, Dec. 29, 2005, 2005 CPD para. 227 at 6. However, our Office has consistently held that where a proposal, on its face, should lead an agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitation, the matter is one of the proposal’s acceptability. Continental Staffing, Inc., B-299054, Jan. 29, 2007, 2007 CPD para. 18 at 6; KIRA Inc., B-287573.4; B‑287573.5, Aug. 29, 2001, 2001 CPD para. 153 at 3; National Med. Staffing, Inc.; PRS Consultants, Inc., B-238694; B-238694.2, June 4, 1990, 90-1 CPD para. 530 at 4. Our Office has also long held that a proposal that fails to conform to a material term or condition of the solicitation, including the subcontracting limitation, is unacceptable and may not form the basis for an award. KIRA Inc., supra; National Med. Staffing, Inc.; PRS Consultants, Inc., supra, at 3-4 (sustaining protest that the award of a contract was improper where the awardee’s proposal evidenced noncompliance with the subcontracting limitation); see Vanderbilt Shirt Co., B-236016, Oct. 10, 1989, 89‑2 CPD para. 333 at 2 (agency properly rejected the protester’s bid as nonresponsive where the bid provided that the protester would not comply with the subcontracting limitation). As set forth above, the record establishes that it was clear to the Air Force that CENTECH’s proposal as submitted and as evaluated provided that 43.2 percent of the cost of contract performance incurred for personnel would be expended for CENTECH employees and, accordingly, that “the CENTECH GROUP did not meet the subcontracting limitation requirements set forth in statute and regulation.” AR (B-298364.6), Tab 9, Determination of Non-Responsibility; see Tab 10, Memorandum from the Contracting Officer to CENTECH, Rescission of Contract (Sept. 8, 2006); Tab 12, Request for COC (Sept. 15, 2006); AR (B-298364.2) at 2; Contacting Officer’s Statement (B-298364.2) at 4. Given the Air Force’s determination that CENTECH’s proposal failed to comply with a material term of the solicitation (the subcontracting limitation) and, accordingly, that the proposal could not form the basis for award under the RFP, the agency should have found CENTECH’s proposal to be unacceptable, rather than finding CENTECH nonresponsible and forwarding the matter to the SBA for its consideration. See Continental Staffing, Inc., supra; National Med. Staffing, Inc.; PRS Consultants, Inc., supra. The fact that the SBA has now determined CENTECH to be a responsible contractor does not alter our view here. Although the SBA’s determinations of responsibility and its issuance of COCs are generally not for review by our Office, Bid Protest Regulations, 4 C.F.R. sect. 21.5(b)(2) (2006), the issues of a proposal’s acceptability and the award of a contract to an offeror based upon a proposal that fails to comply with a material term of a solicitation are matters initially within the purview of the contracting agency and subject to review by our Office. See, e.g., L-3 Communications Westwood Corp., B‑295126, Jan. 19, 2005, 2005 CPD para. 30 at 5; CACI Techs., Inc., B-296946, Oct. 27, 2005, 2005 CPD para. 198 at 5. The SBA disagrees with our Office’s view that where a proposal, on its face, should lead the contracting agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitation, the matter is one of the proposal’s acceptability, rather than the offeror’s responsibility. SBA Submission (Jan. 23, 2007) at 4. Specifically, the SBA points out here that “[w]ith respect to whether or not a [small business concern] will meet its subcontracting limitation requirement, the SBA’s regulations provide that ‘[c]ompliance will be considered an element of responsibility.’” Id.; see 13 C.F.R. 125.6(f). Again, as set forth above, the issue here does not concern whether a bidder or offeror can or will comply with the subcontracting limitation requirement during performance of the contract (where we recognize that the matter is one of responsibility (or in certain cases, contract administration, see, e.g., Raloid Corp., B‑297176, Nov. 10, 2005, 2005 CPD para. 205 at 4)), but rather, whether the bidder or offeror has specifically taken exception to the subcontracting limitation requirement on the face of its bid or proposal. Given that the determination in this latter, limited circumstance involves the evaluation of a bid or proposal for compliance with a material term of the solicitation, the determination is one of responsiveness or acceptability, rather than responsibility. Continental Staffing, Inc., supra; KIRA Inc., supra; National Med. Staffing, Inc.; PRS Consultants, Inc., supra; Vanderbilt Shirt Co., supra.

Accordingly, we sustain the protest on this basis. While we find that CENTECH’s proposal could not form the basis for award under this RFP, the record reflects that CENTECH submitted its proposal with the understanding that it would be found to meet or exceed the subcontracting limitation requirement, given the AFMC memorandum that allowed for the performance of work requirement imposed by the Limitation on Subcontracting clause to be met by the “cooperative efforts” of CENTECH and its small business subcontractors. Additionally, although discussions were held with the four offerors that had submitted proposals, the matter of CENTECH’s proposal’s compliance with the requirements of the Limitation on Subcontracting clause was never raised with CENTECH during discussions because of the Air Force’s reliance on the AFMC memorandum. Accordingly, CENTECH was deprived of meaningful discussions regarding its proposal’s failure to comply with the requirements of the Limitation on Subcontracting clause. See FAR sect. 15.306(d)(3); Lockheed Martin Corp., B-293679 et al., May 27, 2004, 2004 CPD para. 115 at 7; see Special Operations Group, Inc., B-287013; B-287103.2, Mar. 30, 2001, 2001 CPD para. 73 at 7 (awardee whose proposal should have been rejected for failing to comply with a material term of the solicitation was deprived of meaningful discussions where this issue was not raised by the agency during its conduct of discussions). (TYBRIN Corporation, B-298364.6; B-298364.7, March 13, 2007) (pdf)

Raloid also questions whether DET will comply with the limitations on subcontracting provision at Federal Acquisition Regulation (FAR) sect. 52.219-14 contained in the RFP because, in its view, DET does not have adequate facilities, equipment, or employees to manufacture the adapters. The FAR limitations on subcontracting provision requires that a prime contractor perform at least 50 percent of the cost of the contract incurred for personnel with its own employees. An agency’s judgment as to whether a small business offeror will comply with the limitations on subcontracting provision is a matter of responsibility and the contractor’s actual compliance with the provision is a matter of contract administration. Coffman Specialties, Inc., B-284546, B-284546.2, May 10, 2000, 2000 CPD para. 77 at 5. However, where a proposal, on its face, should lead an agency to the conclusion that an offeror could not and would not comply with the subcontracting limitation, the proposal may not form the basis for an award. KIRA, Inc., B-287573.4, B‑287573.5, Aug. 29, 2001, 2001 CPD para. 153 at 3. There is nothing on the face of DET’s proposal evidencing that the firm cannot and will not comply with the RFP’s subcontracting limitation provision. Accordingly, we have no basis to question the agency’s reliance on DET’s representations in concluding that DET agreed to perform as required.  (Raloid Corporation, B-297176, November 10, 2005) (pdf)

The Limitations on Subcontracting clause applies only to solicitations (or portions thereof) that are set aside for small business competition or the 8(a) program. See FAR 19.508(e) ("The contracting officer shall insert the clause at 52.219-14, Limitations on Subcontracting, in solicitations and contracts for supplies, services, and construction, if any portion of the requirement is to be set aside for small business and the contract amount is expected to exceed100,000"). See also FAR 19.811-3(e) ("The contracting officer shall insert the clause at 52.219-14, Limitations on Subcontracting, in any solicitation and contract resulting from this subpart [ i.e. , subpart 19.8 (The 8(a) Program)]"). Accordingly, since the solicitation at issue here was unrestricted, the clause has no application to it (despite the fact that it was incorrectly incorporated by reference). With regard to FAR 52.203-6, the protesters have furnished no argument in support of their allegation that B&R's stated intention to subcontract with [deleted] would violate the clause, and we see no basis for such an argument. Section 52.203-6 prohibits a contractor from entering into an agreement with an actual or prospective subcontractor, or otherwise acting in a manner, "which has or may have the effect of restricting sales by such subcontractors directly to the Government of any item or process (. . .) made or furnished by the subcontractor under this contract or under any follow-on production contract." There is no evidence in the record here that B&R has entered into an agreement with [deleted], or otherwise acted in a manner, that violates the above provision. (Superior Optical Labs, Inc.; Diversified Ophthalmics, Inc., B-294662; B-294662.2, December 9, 2004) (pdf)

It is undisputed that accepting IBM's proposal and using IBM to perform maintenance for all computers and laser printers (other than the few IBM 4028 laser printers) would place COMTek in violation of the limitation in the Federal Acquisition Regulation (FAR) on subcontracting where a solicitation is set aside for small business and the contract amount is expected to exceed $100,000. In this regard, under FAR § 52.219‑14(b)(1), which was included in the solicitation, in the case of a contract for services, “[a]t least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.”  (Integration Technologies Group, Inc., B-291657, February 13, 2003)  (txt version)

However, where a proposal, on its face, should lead an agency to the conclusion that an offeror could not and would not comply with the subcontracting limitation, we have considered this to be a matter of the proposal's technical acceptability; a proposal that fails to conform to a material term or condition of the solicitation such as the subcontracting limitation is unacceptable and may not form the basis for an award. Coffman Specialties, Inc., B-284546, B-284546.2, May 10, 2000, 2000 CPD para. 77 at 5.  (KIRA Inc., B-287573.4; B-287573.5, August 29, 2001)

In any event, the record shows that the evaluators noted that this issue was not entirely verifiable prior to award, and that NASA will ensure Infinity's compliance with the subcontracting limitation provision. Further, based on our review of Infinity's proposal, there is nothing to suggest that the firm took exception to the subcontracting limitation provision. Given that an agency is permitted wide discretion in this area, and in light of the agency's explanation in response to this allegation, we see no basis to conclude that NASA abused its discretion in selecting Infinity's proposal for award.  (Symtech Corporation, B-285358, August 21, 2000)

We have held that an agency need not consider subcontractor experience where the solicitation contemplates award of a service contract to a section 8(a) firm, and includes the provision at Federal Acquisition Regulation (FAR) sect. 52.219-14, which imposes a limitation on subcontracting to an amount less than 50 percent of the cost of contract performance. USATREX Int'l, Inc. supra at 4. In such cases, the agency properly may determine that only the offeror's own capabilities are relevant for purposes of discriminating among the proposals. Since the RFP here provided for award of a service contract and contained the cited FAR provision, we think it properly could limit its evaluation to the prime contractor?s capabilities.  (North State Resources, Inc., B-282140, June 7, 1999)