Negotiation Impasse Results in Cancelled Solicitation

In any negotiation, either party may walk away from the deal at any time for any reason. While this is typically viewed as a negotiation “nuclear option,” it does happen. Unlike the private commercial space, doing business with Uncle Sam typically goes through a progression ultimately resulting in an awarded contract. As one contractor recently discovered, however, agencies still retain the nuclear option–cancelling the solicitation–if they cannot obtain value for the government.

U.S. Marine Management, Inc., B-417353 et al. (Comp. Gen. Sept. 23, 2019), involved a Navy procurement for chartering a maritime support vessel (“MSV”) on behalf of the United States Special Operations Command (“SOCOM”). As GAO described it, the charter was intended to perform “classified maritime security missions worldwide.”

Prior to releasing the solicitation, the Navy conducted market research, which included issuing two market surveys. Based on the data it received in response, the Navy developed an internal government estimate for the procurement. Specifically, the Navy anticipated that it would cost approximately $120 million in fiscal year 2019 and a total of $223 million for the life of the contract to charter the vessel.

The Navy received two bids in response to the solicitation, including Marine Management. Both bids, however, greatly exceeded both the internal government estimates for any year of performance, as well as the fiscal year 2019 allocation. Following its review, the Navy entered into discussions with offerors to negotiate an achievable price. While the negotiations did result in lower proposed prices from both offerors, these proposed prices still greatly exceeded both the fiscal year 2019 allocation and the total program budget.

At roughly the same time that price negotiations were taking place, the Navy Admiralty staff issued a memorandum requiring all MSV ships to be flagged as American vessels. The solicitation had not previously included and flag registry requirements.

Given these challenges, the Navy contracting officer elected to cancel the MSV solicitation. The stated justification for the cancellation was that the flagging requirement had materially altered the Navy’s requirements.

Marine Management subsequently protested the Navy’s cancellation of the solicitation. Marine Management argued that the flag registration did not require cancellation since a solicitation modification could have just as easily addressed the Navy’s concerns.

In response, the Navy argued that its decision to cancel the solicitation was reasonable because the prices proposed by all offerors greatly exceeded its allocation for the procurement. In support of its argument, “[t]he Navy points to the fact that the [Internal Government Estimate] and budget for the . . . procurement totaled approximately $223 million, while offerors’ proposed prices were more than double that amount.” The Navy argued this, alone, was more than enough to cancel the solicitation. Interestingly, the Navy did not raise the flag registration issues as the basis for its cancellation decision.

GAO agreed with the Navy that it was reasonable to terminate the solicitation. As GAO explained, agencies have broad discretion with respect to cancelling solicitations. In fact, agency discretion in this area is so broad that, “[s]o long as there is a reasonable basis for doing so, an agency may cancel a solicitation regardless of when the information precipitating the cancellation first arises, even if it is after proposals have been submitted and evaluated, or even if it is discovered during the course of a protest.”

In the case of Marine Management, GAO concluded the Navy had ample basis for cancelling the Solicitation. According to GAO, “the record demonstrates that both proposals received by the agency substantially exceeded the available funding for this procurement, and the agency has submitted documentation showing that additional funds were not available.” As such, GAO determined that it did not have a basis to object to cancelling the Solicitation.

Interestingly, GAO did not take issue with the fact that the Navy did not initially identify lack of funds as the basis for cancelling the Solicitation. GAO explained:

[W]hile USMMI argues that lack of funding was not identified as a reason for cancellation until after the RFP had been cancelled, our Office has held that a new or additional rationale justifying the cancellation of a solicitation provided by an agency during the development of a protest is acceptable so long as it would have supported cancellation had it been advanced originally.

Since it had already established that the proposed prices of the offers well exceeded the available budget for the program, GAO took no issue with the Navy justify its cancellation decision on funding deficiencies in defining Marine Management’s GAO protest.

GAO’s decision highlights just how much discretion agencies have when negotiating contracts. Just like a commercial negotiation, an agency may walk away from the table if progress can’t be made on reaching a deal. This can undoubtedly be disheartening for offerors, particularly if substantial resources were invested in preparing a proposal. But it remains the government’s prerogative.