Miscalculation of Subcontracting Percentage Leads to Sustained Protest

Agencies and contractors must do their math right (even fractions) when evaluating proposals against solicitation terms, and GAO will call them on it if they don’t. GAO recently sustained a protest where an agency improperly calculated a small business subcontracting percentage by including the prime contractor’s fee as part of the subcontracted costs when the fee shouldn’t have been included.

In Peraton, Inc., B-417358.2 (2019), GAO reviewed an award by the Air Force for engineering and related services “for ground systems to command and control satellites in space.” The award would be a single indefinite-delivery, indefinite-quantity contract and “the RFP instructed offerors to provide a single proposal for the IDIQ contract and five sample TOs.”

Peraton, Inc. protested the award to Engility Corporation, including a protest ground that Engility did not meet the required small business participation percentage.

The RFP included a criterion for for small business participation; not meeting this criterion would make the proposal “unawardable.” The RFP established a “25 percent minimum requirement for small business participation, to be evaluated on a pass/fail basis.”

This small business percentage, to be set forth in a small business participation commitment document (SBPCD), was calculated by taking proposed small business labor costs divided by total labor costs:

The Offeror shall describe how [its SBPCD] will ensure the 25 [percent] small business requirement is met. Small business participation constitutes small business utilization contributions to contract performance at 1st tier subcontract level. The percentage shall be based on percentage of small business costs/prices on labor [Contract Line Item Numbers] CLINs only, to include [firm-fixed-price] FFP CLINs that are predominately labor (e.g., Sustainment). The percentage shall be calculated on an annual basis by dividing total small business expenditures by total labor costs/prices on all TOs on just those labor CLINs.

For each proposed subcontractor, the proposal had to include a number of pieces of data:

  • Subcontract Proposed Cost
  • Subcontract Proposed Fee
  • Subcontract Proposed Price
  • Prime Proposed Cost
  • Prime Proposed Fee
  • Prime Proposed Price

The Air Force could then presumably use these data points to calculate the small business participation percentage.

Peraton, Inc. submitted a proposal in response to the RFP, but was later notified that its competitor, Engility Corporation, had been identified as the awardee. Peraton protested the award to Engility Corporation, including a protest ground that Engility did not meet the required small business participation percentage.

Peraton calculated Engility’s small business subcontracting percentage as 23.8%, while Engility’s proposal stated it was 27%. The difference related to how to account for the fee charged by the prime contractor to the subcontractors.

Peraton argued that the term “total small business expenditure[s]” in the solicitation “can only reasonably mean the amount actually paid to small businesses.”

The Air Force argued that “total small business expenditures” means “the total cost to the government for utilizing small businesses, including the prime contractor’s fee.” Under that logic, the Air Force calculated Engility’s small business participation percentage “by using, as the numerator, Engility’s total proposed price for its small business subcontractors, which includes overhead and fees added on by Engility as the large business prime contractor.” (For those who don’t remember their numerators from their denominators, here’s a handy reminder, courtesy of Mathisfun.com).

Peraton responded that including the fee charged to small businesses by the prime contractor would allow the prime contractor to actually pay less to small business subcontractors and inflate its small business participation rate by charging a higher prime contractor fees.

GAO agreed with the protester:

[I]t is readily apparent that the purpose of a small business subcontracting requirement is to assess the extent to which an offeror proposes small businesses to actually perform, and be paid for, the work required under a solicitation. Therefore, we find that the agency’s interpretation of the term “total small business expenditures”–that is, allowing money charged to the government as fees for the large business prime to be counted as payment to small businesses for work performed by small businesses–is plainly unreasonable.

GAO also rejected the Air Force’s argument “that allowing a large business offeror to count its own fees as part of the subcontracting percentage ‘incentivizes’ large businesses to subcontract with small businesses.” First, because allowing the fees to be included could actually reduce small business participation because the fee won’t be paid to small businesses. And second, the risk of being unacceptable under the solicitation requirement is motivation enough to meet the small business participation percentage.

This decision is a reminder that an agency, just like offerors, is bound by the terms of the solicitation, and may not unreasonably interpret those requirements. This is especially true where GAO can check the agency’s mathematically. As GAO’s decision makes clear, where an agency establishes unambiguous evaluation factors, the agency may not deviate from those instructions when evaluating offerors. Doing so may result in GAO sustaining a protest of that agency award.