GAO: WOSB Set-Asides and Sole Sources are Discretionary, not Mandatory

Historically, Uncle Sam has struggled to meet its WOSB contracting goals. It wasn’t until 2015, in fact, that the government first met its WOSB contracting goal and, since then, has continued to struggle to meet it.

Thankfully, agencies are authorized to use set-asides and sole-source awards to increase WOSB participation. But as a recent GAO decision shows, an agency isn’t required to use either procedure.

At issue in EDWOSB Transformer Services, B-416683 (Oct. 15, 2018), was a solicitation issued by the Department of Energy, for construction services at the Ault electrical substation in Colorado. After conducting market research, the government decided to issue the solicitation as a small business set-aside.

EDWOSB Transformer is, as its name implies, a woman-owned small business (but, oddly enough, not an economically disadvantaged woman-owned small business). It challenged DOE’s failure to set-aside the procurement for WOSBs on two grounds: first, it argued that the agency’s market research was flawed, which itself led to the unreasonable decision to not set-aside the solicitation for competition among WOSBs; second, EDWOSB Transformer argued that the agency erred by not issuing it a contract on a sole-source basis.

GAO ended up denying both arguments, finding that the agency’s set-aside decision was reasonable. Let’s take a look at both analyses:

WOSB set-aside.

Under the Small Business Act, the federal government is obligated to ensure that small businesses—including WOSBs—receive a “fair proportion” of federal contracts. To help it do so, the federal government has a few tools at its disposal.

The first tool is an agency’s ability to set aside competitions for WOSBs. This tool is discretionary, because an agency need not utilize it. Instead, the Act says that an agency may restrict competition for WOSBs if certain conditions are met: as the FAR explains, the agency can exercise this discretion in procurements issued under NAICS codes in which WOSBs are “substantially underrepresented” and if the agency reasonably believes, based on its market research, that two or more WOSBs will submit offers at fair and reasonable prices. FAR 19.1505(c).

The second tool isn’t discretionary—but it also doesn’t necessarily compel setting aside an acquisition for WOSBs. The FAR requires agencies to conduct market research to determine whether a contract should be set aside for small businesses. Moreover, the FAR’s small business Rule of Two (found at FAR 19.502-2) requires an agency to set-aside procurements valued at $150,000 or more if the agency’s market research shows that there is a reasonable expectation that two or more small businesses will submit fair market offers.

Before setting aside an acquisition for small businesses, however, FAR 19.203(c) requires the agency to “consider” reserving it for 8(a) participants, HUBZone firms, SDVOSBs, or WOSBs. To determine which of these programs to use, the agency must consider a variety of factors as part of its acquisition planning. In any event, there’s no automatic requirement that an agency use one of these designations over another, so this requirement doesn’t automatically mean that WOSBs will get the first chance at any specific procurement.

Nevertheless, EDWOSB Transformer protested the agency’s failure to set aside for WOSBs. It argued that the requirement for an agency to consider a WOSB set-aside (as required by FAR 19.203(c)) effectively requires it to conduct the same type of market research that is required to justify a small business set-aside (under FAR 19.502-2(b)). In other words, before setting the procurement aside for small businesses, EDWOSB Transformer argued that the agency would first have to show that the requirements for a WOSB set-aside were not met.

GAO rejected this argument, finding the discretionary nature of WOSB set-aside procurements to be determinative:

Although agencies “shall” consider set-asides for WOSB concerns prior to setting aside a procurement for small business concerns, neither the FAR nor SBA’s regulations ultimately require agencies to set aside the procurement—even if agencies find that the requirements for set-aside are met. Instead, agencies “may” set procurements aside for WOSB concerns. In contrast, the small business rule of two requires the agency to conduct market research in order to support one of two mandatory outcomes: (1) setting aside a procurement valued over $150,000, or (2) using full and open competition (or an authorized exception to full and open competition). Additionally . . . an agency must set aside any procurement valued above $150,000 where it finds that the small business rule of two has been met . . . . No such requirement exists for WOSBs.

Effectively, the fact that neither the Act nor the FAR requires set-asides to WOSBs undermined EDWOSB Transformer’s arguments. GAO was not persuaded by perceived issues with the agency’s market research—it noted that “agencies need not use a particular methodology when conducting market research, and measures such as prior procurement history, market surveys, and advice from the agency’s small business specialist, may all constitute adequate grounds for a contracting officer’s decision.”

Reviewing the record of the agency’s market research, GAO found no valid grounds for complaints. Before setting aside the order, DOE evaluated the capabilities of potential WOSB offerors and found that only one provided a narrative that demonstrated relevant capabilities. Moreover, none of these potential WOSB offerors were found to have bid on similar projects in the past. Finally, DOE noted that, as of the time the solicitation was issued, it was already exceeding its annual WOSB participation goals. Based on this market research, DOE concluded that a WOSB set-aside was not proper.

GAO agreed with this determination. It held that DOE met the FAR’s requirement to “consider” setting aside the procurement for WOSBs, and the DOE did not err by failing to set the solicitation aside for WOSBs.

WOSB sole-source award.

Similar to its first argument, EDWOSB Transformer also argued that DOE erred by not issuing it the contract through a sole-source vehicle.

Along with the discretion to reserve competition to WOSBs, agencies also have discretion to award sole-source contracts to WOSBs. Under the FAR, an agency must “consider” issuing a sole-source contract to a WOSB before setting aside a competition for small businesses if five broad criteria are met:

  1. The acquisition is assigned to a NAICS code in which WOSBs are “substantially underrepresented” in federal procurements;
  2. The contracting officer does not reasonably believe that two or more WOSBs would submit an offer at a fair and reasonable price;
  3. The award is anticipated not to exceed $6.5 million for work under a construction NAICS code (or $4 million for any other NAICS code);
  4. The potential WOSB awardee has been determined to be a responsible contractor; and
  5. The award can be made at a fair and reasonable price.

FAR 19.1506(b), (c).

But even if these criteria are met, the FAR does not compel the agency to issue a sole-source award to the WOSB; instead, the FAR only requires the agency “consider” doing so.

Given the lack of a firm requirement to issue a sole-source award, and based on the results of its market research, DOE chose not to award to EDWOSB Transformer under a sole-source basis. Considering the record, GAO again found this decision to be reasonable and denied the protest.

***

As we’ve previously covered on SmallGovCon, the federal government has historically struggled to meet its WOSB contracting goal. EDWOSB Transformer helps show why this is so: although agencies have the tools to increase WOSB participation, they’re generally not compelled to use them. Absent a concerted effort by agencies to increase WOSB participation—through set-asides and sole-source awards—our fear is that WOSB participation numbers will remain far too low.