Small Business Set-Aside Decisions May Include Restrictive “Capability” Requirements

The small business set-aside “rule of two” is not satisfied unless the procuring agency has a reasonable expectation of receiving proposals from at least two small businesses capable of performing the work.

Although this sounds like a commonsense interpretation of the rule of two, it may give agencies leeway to define “capability” in manner that eliminates small businesses from participation.  In a recent bid protest decision, the GAO held that an agency appropriately issued a solicitation as unrestricted based on the agency’s determination that there were not two or more small businesses with at least five years of relevant experience. Of concern, the GAO did not require the agency to prove that five years of relevant experience was necessary to render a firm “capable” of performing the contract.

The GAO’s decision in Rice Services, Inc., B-411540, B-411540.2 (Aug. 20, 2015) involved a Department of Homeland Security solicitation for food service at the United States Coast Guard Academy.

Before issuing the solicitation, the agency first posted a Sources Sought notice on the FedBizOpps website, informing potential bid offerors that it was seeking formal, family-style, and buffet-style dining as well as some special event and medical clinic services. In order to show capability, the potential offerors had to demonstrate five or more years of “ongoing (currently in progress) business management/corporate experience in managing food service programs of comparable size and complexity of the U.S. Coast Guard Academy.”

Six large businesses and seven small businesses responded to the notice. After reviewing the responses, the DHS concluded that the small business respondents had failed to demonstrate relevant experience in a collegiate environment and in formal events. The DHS then issued the solicitation on an unrestricted basis.

Rice Services, Inc. filed a pre-award GAO protest challenging the terms of the solicitation. Rice Services argued that the solicitation should have been issued as a small business set-aside because the DHS had a reasonable expectation that at least two small businesses would submit proposals.

The “rule of two” under FAR 19.502-2 states that any acquisition with an anticipated dollar value of more than $150,000 must be set aside exclusively for small business participation when there is reasonable expectation that offers will be received from at least two responsible small business concerns. In order to determine whether such an expectation exists, the procuring agency must conduct appropriate market research.

The GAO wrote that “[i]n determining the availability of responsible small business concerns for set-aside purposes, expressions of interest from small businesses are not necessarily determinative; an agency’s investigation is to consider not only the existence of small businesses, but their capability to perform the contract.” In this case, the GAO held, the DHS did not act improperly by issuing the solicitation as unrestricted because, while the DHS was aware of interest from two or more small businesses, there was not a reasonable expectation of receiving offers from two or more “capable” small businesses.

In Rice Services, the GAO appeared to accept, without question, the DHS’s judgment that five years of specialized experience was necessary. But was such experience truly required to make a firm capable of performing? Wouldn’t a firm with four years of relevant experience also be capable? Or three years?  And what is it about the “collegiate environment,” specifically, that would make a firm incapable of serving the Coast Guard facility if the firm lacked five years of such experience?

It makes sense that agencies may consider capability in “rule of two” decision-making; it would be unproductive to force agencies to issue solicitations to be competed among incapable small businesses. The Rice Services case is disturbing, however, because it demonstrates that an agency has very broad discretion to define “capability” in the context of a rule of two decision–and may include in the definition of “capability” restrictions that may represent agency preferences (such as five years of experience instead of four) rather than true minimum requirements for a small business to be capable of performance.

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