GAO: Subcontracting Uncertainty Means No HUBZone Price Preference Required

An agency properly refused to apply the HUBZone price preference when the agency determined HUBZone company’s proposal was unclear as to whether the company would comply with the subcontracting limits set forth in the FAR’s HUBZone price preference clause.

In a recent bid protest decision, the GAO held that the Defense Logistics Agency reasonably refused to apply the HUBZone price preference in a procurement for supplies because the HUBZone company’s proposal suggested that HUBZone companies might perform less than 50% of the manufacturing costs.

The GAO’s decision in Wakan, LLC, B-408535.2 (June 19, 2014) involved a DLA procurement for chicken products.  The procurement included a small business set-aside portion and an unrestricted portion.  The unrestricted portion of the procurement was to be awarded on a lowest-price, technically acceptable basis.

The solicitation for the unrestricted portion contained FAR 52.219-4 (Notice of Price Evaluation Preference for HUBZone Small Business Concerns), better known as the “HUBZone price preference clause.”  FAR 52.219-4 states that the agency will add a factor of 10 percent to the price of all offerors, except offers from HUBZone small businesses that have not waived the evaluation preference, and otherwise successful offers from small businesses.

The HUBZone price preference clause also includes a section requiring the HUBZone prime contractor, or other HUBZone companies, to perform certain portions of the work.  With respect to a procurement for supplies, FAR 52.219-4(d) states that the prime contractor must agree that “at least 50 percent of the cost of manufacturing, excluding the cost of materials, will be performed by the [HUBZone prime contractor] or other HUBZone small business concerns.”

Wakan, LLC, a certified HUBZone small business, submitted a proposal.  Wakan’s proposal identified its place of manufacturing as a particular facility owned by a non-HUBZone company, and confirmed that understanding in discussions with the agency.  Wakan’s total annual price was $55,612,794.

After evaluating competitive proposals, the DLA determined that both Wakan and Tyson Foods, Inc. were technically acceptable.  Tyson’s annual price was $51,549,579.66.  Had the DLA applied the 10 percent HUBZone price preference, Tyson’s price would have been evaluated as higher than Wakan’s.  However,  the DLA concluded that because the manufacturing would be performed at a facility owned by a non-HUBZone company, Wakan had not agreed that it or other HUBZone small businesses would perform at least 50 percent of the cost of manufacturing.  The DLA declined to apply the HUBZone price preference, and awarded the contract to Tyson.

Wakan filed a GAO bid protest challenging the award.  Wakan contended that the DLA should have applied the HUBZone price preference to its proposal.  Wakan argued that it was merely leasing a portion of the non-HUBZone company’s facilities and employees to perform the contract, and would comply with the 50 percent requirement under FAR 52.219-4.

The SBA weighed in on Wakan’s side.  The SBA argued that “neither the small business act nor the FAR allow a contracting officer to determine whether HUBZone small businesses are ‘entitled’ to application of the evaluation preference.”

The GAO wrote that “[a]lthough we accord considerable deference to SBA’s views concerning the application of the HUBZone evaluation preference, we do not agree that Wakan was entitled to the benefit of the preference here.”  The GAO stated that the 50 percent requirement is a “condition” to receiving the price preference, and that Wakan’s proposal had not indicated that it was merely leasing a portion of the non-HUBZone company’s facilities.

The GAO held that identifying the non-HUBZone company’s facilities as the place of performance “without further information reasonably led DLA to conclude that Wakan was proposing to supply the products of a non-HUBZone small business.”  The GAO concluded, “[o]n this basis, DLA reasonably concluded that Wakan was not entitled to application of the HUBZone evaluation preference.”  The GAO denied Wakan’s protest.

The Wakan case should serve as a cautionary tale for HUBZone companies hoping to benefit from the HUBZone price preference clause.  As the case demonstrates, an agency’s uncertainty about whether a HUBZone company will satisfy the performance of work requirement of FAR 52.219-4(d) could cause the agency to decline to apply the HUBZone price preference.

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