The small business rule of two requires agencies to restrict procurements for small businesses when there is a “a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of fair market prices, quality, and delivery.” FAR 19.502-2. Agencies often use market research to assess whether the small business rule of two is met. But what happens when an agency amends its solicitation terms after conducting market research? Can the new terms render the agency’s market research, and therefore its set-aside decision, unreasonable? In a recent decision, GAO concluded that yes, market research may be insufficient to establish a set-aside if an agency amends the solicitation’s terms.
In Knudsen Systems, Inc., B-422433.2 (Comp. Gen. Aug. 9, 2024), GAO considered a protester’s challenge to the Navy’s set-aside decision. The protester argued the Navy failed to perform new market research following an amendment to the terms of the solicitation, making the old market research insufficient to establish that at least two small business concerns could meet the amended solicitation’s requirements.
The initial solicitation sought proposals for SONAR equipment. The market research report found that two or more small businesses had been identified as being capable of meeting the requirements and issued the initial request for proposals (RFP) as a total small business set-aside under NAICS code 334511. The RFP did not include FAR clause 52.219-33 Nonmanufacturer Rule (read more about this rule here). Rather, the RFP stated that SBA had issued a nonmanufacturer rule class waiver for NAICS code 334511.
Knudsen Systems Inc. (KSI), a woman-owned small business, submitted a proposal that explained its intention to use SONAR equipment manufactured in Canada.
A few months later, the Navy discovered that the class waiver rule in the RFP did not apply to the SONAR sounding sets being procured, and the solicitation should have included the nonmanufacturer rule. Since KSI did not comply with the nonmanufacturer rule, it was no longer eligible for award. KSI filed a GAO protest stating that its ineligibility based on the FAR nonmanufacturer rule clause was inconsistent with the terms of the solicitation.
The Navy then amended solicitation to remove the class waiver and include the FAR nonmanufacturer rule clause. No further market research was conducted, and the solicitation remained a total small business set-aside.
KSI protested, arguing the market research previously conducted did not establish that at least two small businesses could satisfy the amended terms of the solicitation. Therefore, the solicitation should have been listed as full and open competition.
In response, the Navy argued it was “under no obligation to revisit its market research in light of the addition of the nonmanufacturing rule through amendment” and further argued that “it is not necessary for an agency to redo its market research regarding the ‘rule of two’ should the agency later become aware that ‘only one responsible small business offer will be received in response to amended solicitation.’”
GAO disagreed because the Navy “did not properly comply with the rule of two analysis in making the initial set-aside decision because its market research failed to consider whether prospective small business offerors could comply with the nonmanufacturing rule.” In other words, the earlier market research was flawed as it didn’t look at an important aspect of a small business set-aside under the nonmanufacturer rule.
GAO sustained the protest and ultimately concluded,
We find that the Navy’s market research was insufficient to conclude that the agency would receive offers from at least two responsible small business concerns that could meet the requirements of the solicitation at a fair market price. For this reason, the agency’s decision to restrict the solicitation to small businesses was unreasonable.
Contractors should be aware of this ruling in reviewing an agency’s set-aside decision. Was the market research based on a proper review of small business rules? Did the small business situation change due to an amendment to the solicitation? In such a case, a protest may well be in order.
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