Small Business Being Acquired by a Large Business? For Multiple Award Contracts, the 180-Day Rule Doesn’t Apply to Task Orders, says GAO

You may recall a post of ours back in April 2021, where we discussed a little-known change to SBA’s size determination rules that occurred in October 2020. SBA created an exception, at 13 C.F.R. § 121.404(g)(2)(iii), to the usual “size is determined at offer date” rule. Now, prior to award, when a small business is part of a merger or acquisition after it makes an offer on a solicitation, the business has to recertify its size, and depending on when that acquisition occurred, if the business is now large, it may lose its award.

However, the rule is for better or worse not that straightforward, as a small business learned in a recent GAO decision. Because a part of the rule says that task order awards in such cases may not be treated as small business awards, GAO concluded that such awards are still allowed.

Here’s the necessary background. In December 2020, GSA issued a solicitation under its One Acquisition Solution for Integrated Services (OASIS) small business pool contract for a fixed-price task order for engineering, program management, and technical support services for the Rocket Systems Launch Program at the Space and Missile Systems Center at Kirtland Air Force Base, which is undoubtedly one of the coolest solicitations I’ve ever seen. In any event, GSA received 5 proposals by the closing date. One was from Millennium Engineering and Integration Company (“Millennium”), and another was from Odyssey Systems Consulting Group, Ltd. (“Odyssey”). GSA eventually awarded the task order to Millennium.

The thing is, 38 days after submitting its proposal, Millennium (now “Millennium Engineering and Integration LLC”) was acquired by QuantiTech, LLC. Upon recertification, it would no longer qualify as a small business. In light of this information (and on other grounds), Odyssey protested the award.

In its protest, Odyssey noted the new exception in 13 C.F.R. § 121.404(g) states:

If the merger, sale or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.  If the merger, sale or acquisition (including agreements in principal) occurs within 180 days of the date of an offer and the offeror is unable to recertify as small, it will not be eligible as a small business to receive the award of the contract. If the merger, sale or acquisition (including agreements in principal) occurs more than 180 days after the date of an offer, award can be made, but it will not count as an award to small business.

Millennium was acquired only 38 days after it submitted its proposal. Therefore, Odyssey reasoned, Millennium must recertify and, because it would not recertify as small, Millennium would be ineligible for award.

However, GSA noted that the above rule only applies to recertification under the “master contract” (in this case, the original OASIS contract). 13 C.F.R. § 121.404(g)(4) provides:

The requirements in paragraphs (g)(1), (2), and (3) of this section apply to Multiple Award Contracts.  However, if the Multiple Award Contract was set-aside for small businesses, . . . then in the case of a contract novation, or merger or acquisition where no novation is required, where the resulting contractor is now other than small, the agency cannot count any new orders issued pursuant to the contract, from that point forward, towards its small business goals.

This, GSA argued, meant that Millennium remained eligible for award; the only effect is that GSA now couldn’t count the task order award towards meeting its small business goals.

GAO invited SBA to comment on the matter. SBA stated that 121.404(g)(2)(iii) does apply to task orders as well. But SBA said this interpretation didn’t control in this case, considering the circumstances. Siding with GSA, SBA explained 121.404(g)(4) is an applicable exception, as the underlying contract is a multiple award contract set aside for small businesses.

This seems like an odd finding, considering 121.404(g)(4) doesn’t say anything about the eligibility of the awardee. GAO agreed, noting:

The regulation at issue here is not a model of clarity.  On the one hand, the result identified by section 121.404(g)(2)(iii) could apply here just as easily as the result outlined in section 121.404(g)(4).  In attempting to reconcile the applicability of these two provisions, we note that the SBA has expressly identified a rule that would result in ineligibility of an entity under section 121.404(g)(2)(iii), but has not expressly revoked that rule under section 121.404(g)(4).  On the other hand, while section 121.404(g)(4) is silent on a firm’s eligibility for award, its express indication–that new orders issued under a multiple award contract to firms that are other than small cannot count against an agency’s small business contracting goals–implies (or seems to assume) that the agency is permitted to issue task orders to firms when the procurement is set aside for small businesses.

In short, because 121.404(g)(4) says that new orders issued cannot count towards the agency’s small business goals, this must imply the agency can still order those issues. GAO continued: “In our view, the protester’s contention that section 124.404(g)(4) only repeats the rules already set forth in section 121.404(g)(2)(iii) would render much of the language in (g)(4) surplusage.” (Surplusage is one of those odd lawyer terms which basically means that rules should be interpreted in a way that doesn’t leave extra unused provisions lying around with no purpose, and judges and the GAO equivalent of judges don’t like surplusage). GAO empathized with Odyssey, noting it was “not convinced that SBA’s interpretation is the only reasonable interpretation of the regulation at issue.” But, it would defer to SBA as SBA’s reading is also reasonable. After rejecting the other grounds for Odyssey’s protest, GAO dismissed the protest.

So, for now, it appears that even if you are acquired within that 180 day time frame after offer, if it’s a task order under a multiple award contract, you’re off the hook, at least on size grounds. However, we agree with GAO that the regulation in question could use a little supplementing for clarity’s sake. This case is also a great reminder of the power an agency’s interpretation of a regulation can have on a decision. Had SBA agreed with Odyssey, things may have been completely different.

Need help with a government contracting legal matter? Email us or give us a call at 785-200-8919.

Looking for the latest government contracting legal news? Sign up for our free monthly newsletter, and follow us on LinkedInTwitter and Facebook.