GAO: “Rule of Two” Market Research Must Examine Capabilities

When conducting market research to determine whether a small business set-aside is appropriate under the “rule of two,” a procuring agency must do more than determine whether multiple small businesses are likely to submit proposals–it must also make reasonable efforts to ascertain whether those small businesses are capable of performing the work.

In a recent bid protest decision, the GAO held that an agency had improperly issued a solicitation as a small business set-aside because the agency’s market research did not reasonably consider whether the identified small businesses were capable of performing the contract requirements.

The GAO’s decision in Triad Isotopes, Inc., B-411360 (July 16, 2015) involved a VA RFQ for the manufacture and delivery of radiopharmaceuticals.  The RFQ was issued as a small business set-aside under NAICS code 325412 (Pharmaceutical Preparation Manufacturing), with a corresponding 750-employee size standard.

The decision to set aside the acquisition resulted from market research conducted in November 2014.  The market research included a search of the VetBiz database under NAICS code 325412 and a search of the SBA’s Dynamic Small Business Search database for the same NAICS code.  The VetBiz search identified 14 companies; the SBA DSBS search produced 676 results.

The market research report also noted that a September 2014 solicitation for similar items resulted in three proposals, one of which was from a small business.  The contracting officer noted, however, that the prior solicitation was for a short period (120 days) and that the current RFQ–with a potential period of performance of five years–was likely to generate more interest.

After the RFQ was issued as a small business set-aside, Triad Isotopes, Inc. filed a pre-award GAO bid protest.  Triad, a large business, challenged the VA’s decision to issue the RFQ as a small business set-aside.  Triad argued that the VA’s market research was flawed and inadequate.

Specifically, Triad contended that searching the VetBiz and DSBS databases for small businesses operating in NAICS code 325412 could not properly support a set-aside because NAICS code 325412 includes businesses manufacturing all types of pharmaceuticals, “including cold medicines and lip balms.”  Triad contended that it was unreasonable for the VA not to consider whether any of the identified small businesses were actually capable of manufacturing radiopharmaceuticals.  (If, like me, you had never heard of a “radiopharmaceutical” before reading this case, click here for an overview.)

The GAO wrote that under the FAR’s “rule of two,” a procurement with an anticipated dollar value of more than $150,000 must be set aside for small businesses when there is a reasonable expectation that offers will be received from at least two responsible small business concerns, and award will be made at a fair market price.  The “reasonable expectation” determination, in turn, rests on market research.  The GAO continued:

A contracting agency’s investigation to determine the availability of responsible small business concerns for set-aside purposes, however, must address not only the existence of small businesses that might submit proposals, but also their capability to perform the contract; the fact that multiple small businesses are identified in the course of market research is not necessarily determinative.  In this regard, we have held that the contracting officer must make reasonable efforts to ascertain whether it is likely that offers will be received from at least two small businesses capable of performing the work.

In this case, “the contracting officer’s market research failed to support an assessment as to whether the identified companies were radiopharmaceutical providers, or otherwise capable of performing the contract requirements.”  Specifically, “the agency’s database searches were based solely on the RFQ’s NAICS code, which as mentioned above, covers a wide range of pharmaceutical manufacturing–from the manufacturing of lip balms, to the manufacturing of nuclear medicine (e.g., radioisotopes).”  There was “no indication in the market research report, or otherwise, that any of the identified companies are radiopharmaceutical providers or have the required nuclear pharmacy licenses to perform under the contract.”  The GAO sustained the protest, concluding that “it was not reasonable for the agency to base its assessment of the availability of small business concerns on search results that merely identified the existence of small businesses under the pertinent NAICS code.”

The rule of two is a powerful tool to benefit small businesses, but agencies must use it correctly.  As the Triad Isotopes bid protest demonstrates, in order for a contract to be set aside, it is not enough for an agency to identify the existence of multiple small businesses operating in the relevant NAICS code.  Instead, the agency must also have a reasonable expectation that at least two of those small businesses are capable of performing the work.

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