GAO: SBA’s Class Waiver Supported VA SDVOSB Set-Aside Decision

Last month, Steve wrote about a new Class Deviation rule adopted by the VA that, in effect, would limit the VA’s use of class waivers as part of its decision to restrict competition to SDVOSBs (or otherwise issue solicitations as sole source awards). But in an apparent contradiction to this Class Deviation rule, GAO recently denied a challenge to an SDVOSB set-aside decision for a manufacturing solicitation, based in large part on SBA’s adoption of a class waiver for the particular NAICS code.

Before delving into the facts of the protest decision, a brief background may be helpful:

The Veterans Benefits, Healthcare, and Information Technology Act of 2006 sought to provide SDVOSBs and VOSBs a leg-up in contracting opportunities at the VA. One of the main tools employed by Congress was a mandatory Rule of Two, which requires the VA to set-aside a solicitation if two or more SDVOSBs will submit an offer at a fair and reasonable price. The Supreme Court famously upheld the broad scope of this mandate in the Kingdomware case.  And as we’ve written, GAO will sustain a protest if the VA fails to follow this Rule (or doesn’t undertake reasonable market research).

Walker Development & Trading Group, B-414365 (May 18, 2017) considered the application of the Rule of Two from the opposite perspective: one of a non-SDVOSB challenging a VA solicitation seeking quotations for mobile cardiac outpatient telemetry, holter monitoring, and cardiokey devices for patient care. The solicitation was issued under a manufacturing NAICS code—334510 (Electrical and Electrotherapeutic Apparatus Manufacturing)—but the VA advised potential offerors that the SBA had issued a nonmanufacturer rule class waiver for that code.

After conducting market research that identified two interested and capable SDVOSB concerns, the VA set the competition aside for SDVOSBs. Walker Development, a non-SDVOSB, protested this restriction, saying that the market research was inadequate.

Considering this challenge, GAO began by noting the discretion contracting officers typically enjoy when deciding whether to set aside a procurement for SDVOSBs. “No particular method of assessing the availability of capable small businesses is required,” GAO wrote, but instead, “the assessment must be based on sufficient facts to establish its reasonableness.” If so, GAO will not question the decision to set aside the solicitation.

In making this determination, moreover, an agency does not have to first actually determine the responsibility of potential offerors. All that is required is that an agency “make an informed business judgment that there is a reasonable expectation of receiving acceptably priced offers from small business concerns that are capable of performing the contract.”

GAO found the VA’s market research to be adequate. The contracting officer conducted a review of prior acquisition history and searched various contracting databases (including VA’s, posted a sources sought notice, and emailed ninety-one different vendors about the procurement. After receiving responses, the VA concluded that at least two interested SDVOSBs would submit offers at fair and reasonable prices and, thus, set the solicitation aside.

Walker did not provide any basis to question that competition between these two firms would result in the award being made at a reasonable price. Instead, it said that the VA erred by not considering whether the SDVOSBs would meet the limitation on subcontracting and comply with the requirements of the nonmanufacturer rule.

As Steve recently wrote, to comply with the limitation on subcontracting in manufacturing contracts, SBA’s regulations require that the SDVOSB prime contractor must either (1) pay no more than 50% of the amount paid by the government to it to firms that are not similarly situated or (2) qualify as a nonmanufacturer (by representing that it will supply the product of a domestic small business manufacturer or processor unless a waiver is granted by the SBA).

Here, SBA granted a class waiver for the products at issue. GAO found this waiver to be determinative, writing that “[w]hen SBA issues a waiver of the nonmanufacturer rule, a firm can supply the product of any size business without regard to the place of manufacture.” Thus, GAO found “no merit to the protester’s contention that the agency’s market research failed to consider whether the firms identified had the capability to perform and could comply with the [nonmanufacturer] rule.”

GAO denied Walker Development’s protest.

Coming so close on the heels of the VA’s adoption of a Class Deviation to the VAAR, the Walker Development decision is quite interesting. The decision confirms SBA’s authority to grant a waiver of the nonmanufacturer rule and, when SBA does so, the waiver applies in the contest of an SDVOSB “Rule of Two” analysis. The VA’s Class Deviation, however, attempts to usurp this authority by reserving for its Heads of Contracting Activity the authority approve the use of a class waiver for a particular VA solicitation—strongly suggesting that the VA believes that it can simply ignore existing SBA class waivers in the Rule of Two analysis. This wouldn’t be the first time SBA and the VA butted heads on an SDVOSB contracting issue. Time (and further protests) will tell who is right.