When an agency acquires manufactured products or supplies, the agency need not set aside the solicitation for small businesses under the FAR’s “rule of two” unless the agency has a reasonable expectation of receiving offers from small businesses offering the products of two or more small manufacturers.
A recent GAO bid protest decision highlights a little-known provision of the FAR, which provides that the “rule of two” does not apply to acquisitions for manufactured products over $150,000 where two or more small business nonmanufacturers are likely to submit offers, but the small business nonmanufacturers will not offer the products of two or more small business manufacturers.
GAO’s decision in Latvian Connection, LLC, B-412701 (Apr. 22, 2016) involved an Air Force solicitation for the acquisition of fitness equipment for gyms at Wright-Patterson Air Force Base in Ohio. The anticipated dollar value of the contract exceeded $150,000.
Before issuing the solicitation, the Air Force conducted market research to determine whether to set aside the acquisition. The Air Force’s market research included online research (such as reviewing the SBA’s Dynamic Small Business Search system) and the issuance of a Sources Sought. The Air Force also reviewed the history of prior solicitations for similar gym equipment.
Three small businesses responded to the Sources Sought. None of the three manufactured the equipment itself. In the previous acquisitions, the Air Force had only identified one small business manufacturer.
Based on its market research, the agency determined that it was unlikely to receive offers from two or more small business manufacturers, or from two or more small businesses nonmanufacturers offering the products of different small business manufacturers. The Air Force issued the solicitation on an unrestricted basis.
Latvian Connection, LLC filed a GAO bid protest challenging the terms of the solicitation. Latvian Connection argued that the solicitation should have been set aside for SDVOSBs or small businesses. (If Latvian Connection sounds familiar, it may be because of the company’s important wins in two protests last year involving FedBid).
The GAO wrote that because the solicitation exceeded $150,000, FAR 19.502-2 governed the Air Force’s set-aside obligations. As is well-known, FAR 19.502-2(b) requires a contracting officer to set aside any acquisition over $150,000 for small business participation where there is a reasonable expectation of receiving offers from two or more small businesses at fair market prices. But a lesser-known restriction also applies: under FAR 19.502-2(b), offers must be “obtained from at least two responsible small business concerns offering the products of different small business concerns.” FAR 19.502-2(c) clarifies that the SBA may waive this requirement, but otherwise confirms that, for a solicitation for manufactured products, the decision whether to issue a solicitation as a set aside “will be based on the expectation of receiving offers from at least two responsible small businesses, including nonmanufacturers, offering the products of different concerns.”
In this case, the GAO wrote, “our review of the record confirms that the agency conducted adequate and meaningful market research to determine whether there was a reasonable expectation that two or more small businesses possessed the capability to manufacture the products sought.” Based on this market research, the Air Force “concluded that there was not a reasonable expectation that proposals would be submitted by two or more small business manufacturers, or small businesses offering products manufactured by small concerns.” The GAO denied the protest.
The rule of two is the heart of the government’s small business preference program, and often mandates that solicitations be set aside for small businesses. For small business nonmanufacturers, however, the bar is a little higher. Not only do nonmanufacturers have to demonstrate that two or more small businesses are reasonably likely to submit offers, they must also show that there is a reasonable likelihood that the products offered will come from two or more small manufacturers. Where, as in Latvian Connection, the agency conducts reasonable market research and only identifies one likely small manufacturer source, the agency will not be required to set aside an acquisition over $150,000.