Get Your Novation Before Filing a Bid Protest with GAO

Only an “interested party” can bring a GAO bid protest. This generally means that a protester must be “an actual or prospective bidder or offeror” with a “direct economic interest” in the contract’s award.

You might ask: is there such a thing as an offeror without a direct economic interest in the outcome of the contract award? It can happen–and a novation may be relevant. In a recent case, GAO held that a pending novation meant that the protester didn’t meet the standard necessary to file a protest.

In Wyle Labs., Inc., B-416528 (Sept. 7, 2018), U.S. Customs and Border Control issued a solicitation for various support services. But the agency limited the procurement to firms holding one of GSA’s OASIS IDIQ contracts for professional, scientific and technical services. Wyle held an OASIS contract at the time the agency released the solicitation.

Just after the solicitation issued, however, Wyle transferred its “assets and liabilities used in or relating to the performance” of its OASIS contract to another company (GAO’s decision redacted the other company’s identity, so for the purposes of this post I’ll call the company “ABC Corp.”). Under the companies’ agreement, Wyle agreed to cooperate and assist ABC Corp. in submitting proposals before a novation was granted (see FAR 42.1204 for a discussion of novation–the avenue by which a government contract is transferred to a third party). And in fact, Wyle and ABC Corp. submitted a bid for the solicitation, explaining that Wyle would “serve as the prime contractor until novation of its OASIS . . . contract assets” and would perform “requisite prime contract administration responsibilities only during the novation period.” After novation, however, ABC Corp. would become the prime contractor and assume the all contract responsibilities.

Before submitting its bid, Wyle filed a protest with GAO arguing that the solicitation unduly restricted competition given how the agency limited the submission of past performance information. The agency moved to dismiss Wyle’s protest arguing that Wyle was not an “interested party.”

Without much analysis, GAO found that Wyle met the first half of the “interested party” requirement because Wyle was an actual bidder under GAO’s regulations. So GAO turned its attention to the second requirement —i.e., whether Wyle had a “a direct economic interest in the procurement that would be affected by the award of a contract or the failure to award a contract.”

GAO’s analysis focused on three salient facts: 1) Wyle submitted the bid solely to comply with Wyle’s contractual obligations to ABC Corp. under their asset transfer agreement; 2) the bid was prepared by ABC Corp.; and 3) ABC Corp. would perform all the work under the task order.

Given these facts, GAO found that Wyle had “not demonstrated how the limited prime contract administration responsibilities it indicates that it will provide as the prime contractor reflect that Wyle has a direct economic interest in the procurement.” Significantly, GAO latched onto the key fact that Wyle had no intention of performing any substantive work under the task order. Thus, GAO held:

Where, as here, Wyle’s purpose as the “prime contractor” is a legal requirement of its third-party asset purchase agreement with [ABC Corp.] and Wyle’s only duties as the prime contractor are the administrative responsibilities required to allow [ABC Corp.] and its subcontractors to perform under the task order until the novation is finalized, and where Wyle acknowledges that it does not intend to perform any work required under the solicitation, we do not believe that the protester has demonstrated sufficient direct economic interest in the procurement to qualify as an interested party.

GAO then dismissed the protest, never reaching the protest’s merits.

This case teaches an important lesson: a contractor can’t be a mere placeholder and invoke GAO’s jurisdiction. Put differently, before GAO entertains a protest, it wants to see a protester that will play a bona fide role in contract performance.

In our firm’s experience, novations often involve deals like that between Wyle and ABC, under which the party seeking the novation (in this case, Wyle) essentially agrees to subcontract all or almost all of its work to the “new” contractor (here, ABC) pending the approval of the novation. But as this case demonstrates, a relatively commonplace novation arrangement may impact the ability to file a bid protest.