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A Bridge (Not) Too Far: Prohibition on Dividing up Contracts to get Under 8(a) Sole Source Dollar Limit Doesn’t Apply to Bridge Contracts


Koprince Law LLC

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Under 13 C.F.R. § 124.506, if an 8(a) contract price would exceed a certain threshold ($7 million for manufacturing contracts, $4.5 million for others), in most cases, the agency must compete the set-aside.  13 C.F.R. § 124.506(a)(5) is a provision meant to close up what otherwise would be a loophole in the rules. It states that “[a] proposed 8(a) requirement with an estimated value exceeding the applicable competitive threshold amount may not be divided into several separate procurement actions for lesser amounts in order to use 8(a) sole source procedures to award to a single contractor.” But this rule does not apply in all circumstances. In particular, it does not apply to bridge contracts.

In Anika Systems, Inc., B-422187 (Feb. 1, 2024), the SEC (the federal one, not the football one), had a two-step acquisition plan for data management services. It would sole source the first part to 8(a) participant Peregrine Advisors Benefit, Inc. (Peregrine) and compete the second part, worth $43 million, for 8(a) participants to bid on. The first part in 2022 went through without issue. But the second part of the acquisition was protested by unsuccessful offerors, resulting in the SEC taking corrective action. The problem was that now, the 2022 contract to Peregrine was about to expire with no successor to take on the data management services. As such, the SEC offered a bridge contract worth $4.2 million to Peregrine to continue the work while the second part of the acquisition was carried out. Anika Systems, Inc. (Anika), one of the competitors for the second part of the acquisition protested this bridge contract.

Anika had some good points to make on this. Most notably, Anika argued that this bridge contract was basically inseparable from the 2022 contract as both contracts involve provision of the exact same services, and that, combined, the requirements had a value that exceeded the 8(a) sole source dollar limit. The SEC countered that the bridge contract wasn’t an attempt to split its requirement into smaller procurements so it could sole source the work to Peregrine. It argued that the bridge contract was a different requirement since it was issued in light of the protests and corrective action for the second part of the acquisition. The SEC also stated that 13 C.F.R. § 124.506(a)(5) is not meant to stop bridge contract as bridge contracts are a stop-gap measure to be used until an actual competition can take place.

The SBA (invited to the party by GAO because the matter involved SBA regulations and GAO usually listens to SBA when interpreting SBA rules) filed a brief and agreed with the SEC’s interpretation, noting that the regulation was really meant to stop agencies from using indefinite-delivery, indefinite-quantity (IDIQ) contracts to get around the threshold. It “implemented this regulation to prevent an agency from dividing an IDIQ contract into separate smaller contract actions to make award to a single firm without competition.” Per SBA, it was not meant to stop agencies from using emergency measures like bridge contracts.

GAO sided with SBA and the SEC. It noted that back in 2000, it in fact had addressed this question and agreed with the government’s view of the matter in Champion Bus. Servs., Inc., B-283927 (Jan. 24, 2000). GAO agreed that “the regulation does not apply to bridge contracts because bridge contracts do not pose any threat to the aims sought to be protected by a competitive procurement.” Going further, it noted its decision in New Tech. Mgmt., Inc., B-287714.2 (Dec. 4, 2001). There it “concluded that the regulation only applied to the award of concurrent contracts.” In other words, the regulation prohibits agencies from taking a single contract for, say, 10 services that would have a value above the threshold, and dividing it out into five separate contracts with covering two services each and each smaller contract being below the threshold.

Anika also made an argument that the SEC failed to consider the effect the bridge contract would have on the equitable distribution of 8(a) contracts. Under 13 C.F.R. § 124.503(g), “[a] procuring activity contracting officer must submit a new offering letter to SBA where he or she intends to award a follow-on repetitive contract as an 8(a) award.” The SEC had not done this. However, GAO also rejected this argument. 13 C.F.R. § 124.3 notes:

“The determination of whether a particular requirement or contract is a follow-on includes consideration of whether the scope has changed significantly, requiring meaningful different types of work or different capabilities; whether the magnitude or value of the requirement has changed by at least 25 percent for equivalent periods of performance; and whether the end user of the requirement has changed. As a general guide, if the procurement satisfies at least one of these three conditions, it may be considered a new requirement.”

The bridge contract only had a base period of one month and was worth only $4.2 million compared to the $43 million original competitive acquisition. As such, it was a new requirement, not a follow-on requirement, so the new offering letter requirement did not apply.

Thoughts

GAO’s analysis seems very reasonable concerning bridge contracts, which really aren’t planned ahead of time. After all, how can you divide a requirement after the fact? But we think this protest raises some important questions. What happens when an agency decides that instead of competing a five-year contract to 8(a) companies, it will just sole source five one-year contracts at the sole source dollar threshold to an 8(a) company? Assuming they do this while complying with 13 C.F.R. § 124.503(g) and receiving SBA approval, there’s still an argument to be made that the agency is splitting up a five-year contract into five separate one-year contracts to stay under the threshold limit. 13 C.F.R. § 124.506(a)(5) doesn’t specify that it only applies for concurrent procurements, it says that “[a] proposed requirement may not be divided into several separate procurement actions for lesser amounts in order to use 8(a) sole source procedures to award a single contractor.” In fact, couldn’t this have maybe applied to the 2022 Peregrine contract itself? The agency basically split the procurement into two parts, one large and one small, and sole sourced the small part. It was too late for a GAO protest on the matter, but it is interesting to think about.

It seems the implication is that the procedures in 13 C.F.R. § 124.503(g) on repetitive contracts will serve to prevent such a situation, and to SBA’s credit, we think that would do a good job of it. But it still opens a potential door, and we think it is something where some clarification in the regulation language itself could be helpful.

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The post A Bridge (Not) Too Far: Prohibition on Dividing up Contracts to get Under 8(a) Sole Source Dollar Limit Doesn’t Apply to Bridge Contracts first appeared on SmallGovCon - Government Contracts Law Blog.

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