GAO: VA Rule of Two Doesn’t Apply if Pricing Isn’t Reasonable

GAO recently gave its blessing to a VA decision not to follow the Rule of Two, despite knowing several SDVOSBs would bid. The VA’s decision was based on the contracting officer’s opinion that prices would not be fair and reasonable based on an evaluation of prices and market research. The decision is important for providing some clarification on what research a contracting officer must undertake to establish that prices will not be fair and reasonable for purposes of the Rule of Two.

In Veteran Shredding, LLC, B-417399 (2019), Veteran Shredding protested the terms of the VA’s RFQ for document destruction services because it failed to set aside the RFQ for SDVOSBs, instead making it a small business set-aside.

Here’s how the issue came up.

In a prior procurement, VA had restricted competition for the same document destruction services to SDVOSBs. It received five proposals, the lowest of which was 83 percent higher than the independent government cost estimate (IGCE). As a result of the high prices, VA canceled the solicitation.

(Veteran Shredding tried to protest the cancellation, but both GAO and the Court of Federal Claims dismissed the protests. The court dismissed based on lack of standing due to there being two offerors lower priced than Veteran Shredding.)

The contracting officer then went back to the drawing board and conducted additional market research, determining it was not reasonable to expect two VOSBs to submit quotations at a fair and reasonable price, but at least two small business concerns would do so. The VA then updated the IGCE and the solicitation requirements and published a new sources-sought notice. Two SDVOSB concerns and one small business responded to the sources sought notice, but the protester did not.

After consideration, the contracting officer set the RFQ aside for small businesses. The VA received “four quotations, one from an SDVOSB, one from a VOSB, and two from small businesses,” but no quotation from Veteran Shredding.

In reviewing the contracting officer’s determination of availability of SDVOSB firms, “the assessment must be based on sufficient evidence to establish its reasonableness.” GAO described the thoroughness of the assessment as follows:

the contracting officer considered the five quotations the agency received from SDVOSBs in response to the cancelled procurement for the identical requirement that is the subject of the current procurement, and concluded that the prices were unreasonable, even in comparison to the updated IGCE. In this regard, as noted above, the VA published a sources-sought notice for this procurement. Only one SDVOSB, which had not previously submitted a quotation in response to the cancelled solicitation, expressed interest. The contracting officer, however, did not expect this interested SDVOSB to submit a quotation with fair and reasonable pricing based on the contracting officer’s knowledge of that vendor’s unreasonably high prices in response to other solicitations for similar shredding services in Minnesota and North Dakota.

A few things stand out from this paragraph. First, the contracting officer can compare SDVOSB prices to the IGCE. Second, SDVOSBs should respond to sources-sought notices if they want a procurement to be set aside for SDVOSBs. GAO made sure to point out that the protester did not respond to the sources-sought notice. Third, the contracting officer can rely on personal knowledge of past pricing of potential SDVOSB offerors in connection with similar solicitations.

Veteran Shredding argued that “the contracting officer should have deemed the pricing from the cancelled procurement to have been per se fair and reasonable because the prices were based on competition, as opposed to comparing these prices with an IGCE.”

GAO rejected this argument. While sections 13.106 and 15.404 of the FAR indicate that price competition can show reasonable pricing, the VA Rule of Two in 38 U.S.C. § 8127(d) does not require competition to be a stand-in for evaluating prices. GAO wrote that “it defies logic that an agency would be limited to utilizing pricing from a competition that was cancelled because all the prices were found to be unreasonably high as the yardstick for reasonableness.” Comparison to IGCE was an acceptable price-evaluation method for the Rule of Two.

The VA’s Rule of Two requires an SDVOSB or VOSB set-aside, but not where the contracting officer has a sufficient basis to believe prices under a set-aside contract will not be fair and reasonable. But the contracting officer has to do the legwork. Here, that meant looking at actual proposal prices, comparison to IGCE, review of known historical pricing, and responses to a sources-sought notice.

The VA’s “Rule of Two” is a powerful lever for VA’s procurement process, forcing VA to restrict acquisitions where there is a reasonable expectation of receiving two or more offers from SDVOSBs or VOSBs at fair and reasonable prices. The rule applies across a broad range of procurement situations: even where VA is using the GPO for purchasing items and it also trumps the AbilityOne procurement list.

The Rule of Two affords VA contracting officers some leeway before restricting a procurement, in part based on whether award can be made at “a fair and reasonable price.” 38 U.S.C. § 8127(d). But if you suspect a contracting officer has not done the legwork in passing over a SDVOSB set-aside, you may have grounds for protest.