Small Business GAO Bid Protests Are Less Successful, RAND Study Says

GAO bid protests filed by small businesses are (statistically speaking) less likely to succeed than protests filed by large contractors, according to the RAND Corporation’s recent bid protest study.

The disparity isn’t the result of discrimination against small businesses, but rather a product of other factors: primarily, the motivation to protest, the understanding of the protest system, and access to legal counsel.  RAND raises an important point, but offers no fair and easy solution.  Perhaps, given that protests overall are “exceedingly uncommon,” a solution isn’t needed–but it’s wise to think about whether there are ways to help small businesses become better educated about bid protests.

During the years RAND studied, small businesses filed the majority of bid protests at GAO and the Court of Federal Claims–53% at the GAO and 58% at the Court.  However, “[s]mall-business protests are less likely to be effective and more likely to be dismissed for legal insufficiency.”  Indeed, at GAO, “small-business [protesters] are 1.5 times as likely to have their protests dismissed for being ‘legally insufficient.'”  The overall effectiveness rate of GAO bid protests (that is, sustain decisions plus voluntary agency corrective actions) is also lower for small businesses than it is for large companies.

What accounts for the difference?  Well, the biggest factor seems to be the use (or lack thereof) of attorneys.  At the Court of Federal Claims, where all protesters are required to use an attorney, “the effectiveness rate for small businesses is the same as for other businesses. ” At GAO, attorneys aren’t required.  But, in GAO cases where the protester is represented by an attorney, small business “protest sustained rates are similar to those of larger firms.”

This certainly makes sense.  I don’t keep stats, but I bet that I’ve talked more people out of protesting than I’ve filed protests (and I’ve filed my share).  Small businesses frequently call our firm with potential protests, and they’re often fired up about something the agency did.  But often, my colleagues and I have to give them some bad news: the protest has no chance of succeeding.  Maybe it’s untimely–that happens a lot.  Or maybe the potential protester is trying to challenge something outside the GAO’s jurisdiction, like the sufficiency of the debriefing or the size status of the awardee.  Or maybe the potential protester wants to argue that the evaluators were biased, which is almost impossible to prove, and not exactly calculated to make new friends at the agency.

What if all of these people hadn’t called me or another government contracts attorney, but just gone ahead and protested?  These protests would have been dismissed or denied.  Some of the agency officials on the receiving end would have huffed, “that’s a frivolous protest!”  But the protester certainly didn’t intend to file anything frivolous–quite the opposite.  The protester probably thought he or she had a winning case, but simply didn’t have a thorough understanding of the nuanced and complex bid protest world.

Outside the absence of attorneys, RAND says that small businesses’ lower success rate may be caused, in part, because in some cases, “small businesses’ reasons for protesting differ from larger businesses’ reasons.”  For instance, “when debriefings are uninformative, small businesses lodge protests to gain an understanding of why they lost a procurement.”  Large businesses, in contrast, “generally filed a bid protest only if they thought the government did not follow its source-selection procedures or that an error was made that was substantial enough to change the outcome.”

Again, I think that’s largely correct.  As I’ve written before, our firm’s clients–as a rule–are more inclined to protest when they leave a debriefing thinking the agency is hiding something.  I am not sure I agree that they’re protesting to “gain an understanding” so much as a belief that the agency’s reticence means that there’s a smoking gun lurking in the source selection file.  But either way you slice it, the fact remains that better communication with small businesses is very likely to reduce small business bid protests.

Finally, RAND writes that small businesses seem less inclined to forego a protest due to the “potential for ‘ill will’ that could be created when they considered filing a protest.”  This could be because many small businesses have no other contracts with the agency or contracting officer in question, whereas large businesses “with a substantial number of contracts with the federal government” may be more invested in preserving certain relationships.

Here, I think RAND only saw half the picture.  Yes, it’s true that I’ve occasionally heard something like “what the heck, this is my only bid with these guys, so I don’t care if I burn bridges.”  But I think that most small businesses do care about relationships with government customers, and approach the protest process little differently than our large business clients in that regard.  (Also, in my experience, the vast majority of contracting officials understand that respectful disagreements are part of the competitive system, and don’t blackball companies for filing good faith protests).

More often, I believe that small businesses are highly motivated to protest because of the relative importance to their overall business of a particular acquisition.  For a large business, losing a $10 million contract may be a drop in the bucket, and not worth a protest unless there’s a very obvious error.  But for a small business incumbent, that $10 million contract might represent half of the company’s annual revenues.  In situations like these, the small business is–very understandably–much more motivated to protest.

RAND Corporation offers a few potential options to reduce the disparity between the success rates of protests filed by large and small businesses.  But, as RAND essentially concedes, some of these suggestions aren’t very good ideas.

RAND says, for instance, that “[o]ne option would be to require all protests at GAO to be filed through legal counsel.”  However, RAND continues, “this approach might be viewed as unfair, as small businesses might face more-significant economic barriers to filing than larger businesses.”

Yup. Good government contracts lawyers ain’t cheap, and not all small businesses can afford to hire an attorney.  Imposing such a requirement would essentially lock the GAO’s doors to the smallest and newest contractors.  If it’s a choice between that and accepting some legally deficient “pro se” filings in the GAO’s docket, I say give me the legal deficiencies.

Along the same lines, RAND writes that “the current ‘loser-pays’ pilot program for DoD excludes businesses with annual revenues under $250 million.”  RAND’s italicized implication seems to be that Congress shouldn’t have exempted small businesses from “loser-pays.”

I’ve got a ton of respect for RAND and this comprehensive report (and not just because the report cites SmallGovCon twice–check the footnotes!)  But here, I think RAND gets it wrong.  For the smallest businesses, imposing a “loser-pays” requirement would be no different than requiring attorneys.  They can’t afford it, so they’ll essentially be locked out of the protest process.  Or, worse: they’ll essentially bet the company on a protest.  The stakes of a major bid protest can be high, but they shouldn’t be that high.

RAND finally suggests that “[a]nother option would be to provide legal assistance to small businesses–perhaps through the Small Business Administration.”  RAND says that “[s]uch advice might be useful if it is provided early enough that small businesses can determine whether they have valid cases, which could allow them to craft more-persuasive arguments and, possibly, reduce the number of dismissed protests.”

This suggestion focuses on the problem of small businesses lacking a full understanding of the complex bid protest system.  I’m all for educating small businesses about protests, and would welcome an initiative to help contractors learn more about protest timeliness, GAO’s jurisdiction, and other common reasons why protests are dismissed or denied.

That said, policymakers have to be very careful how they go about providing this education.  The SBA would be a logical choice to lead such an initiative, but most SBA representatives don’t have the knowledge or experience in this area to provide the right guidance.  If policymakers want SBA to educate contractors on bid protests, they ought to be sure that the individuals doing the educating have a deep background in the protest world–even if it means that SBA needs to contract with outside government contracts attorneys to provide some of that education.

RAND also seems to suggest that SBA might help potential protesters determine, in individual cases, whether they have valid arguments.  This strikes me as highly problematic.  It’s one thing for the government to tell contractors, in a vacuum, how the GAO’s jurisdictional and timeliness rules work.  It’s quite another for a government employee to weigh in on whether a particular protest should be filed.  Our firm doesn’t just represent protesters; we also represent many awardees who intervene in bid protests to help defend their awards.  I can only imagine the reaction from these companies when they realize that their taxpayer dollars paid for the SBA to assist the protester in determining whether it had a case.

At the end of the day, there may not be a whole lot that can be done to easily and fairly address the lower success rate of bid protests filed by small businesses.  And maybe that’s okay.  As RAND concluded, only 0.3 percent of DoD acquisitions are protested.  Statistics like these simply don’t warrant major exclusionary changes like forcing small businesses to hire attorneys to file protests.