In a troubling case, the VA recently refused to issue a small business set-aside because responses to a Request for Information indicated that prospective small business offerors lacked similar experience with the VA, and did not currently have available the personnel, equipment and facilities necessary to perform the contract.

The GAO, ignoring the recommendation of the SBA, affirmed the VA’s decision to forego a small business set-aside.

The GAO’s decision in American Medical Equipment Co., B-407113, B-407113.2 (Nov. 8, 2012) involved a VA procurement for home oxygen services in Veterans Integrated Service Network 16.  Prior to issuing the solicitation, the Contracting Officer conducted market research to determine whether the solicitation should be set-aside for small businesses.  The market research included, among other things, contacting four other VISNs  (1, 11, 19 and 23) where similar services had been solicited on an unrestricted basis.

The VA also issued a Request for Information, seeking, in part, capabilities statements from prospective offerors.  The VA received 14 responses to the RFI, seven of which were from small businesses.  Two of the seven small businesses indicated that they were interested in serving only part of the VISN.

Despite interest from at least five small businesses willing to serve the entire VISN, the VA elected not to issue the solicitation as a small business set-aside.  The VA based its decision on its conclusion that the small businesses in question did not demonstrate the capability to successfully provide the home oxygen services.

In reaching this conclusion, the VA determined that: (1) none of the small businesses had any contracts with the VA in the previous five years that were comparable in dollar value to the estimated value of the home oxygen services contract; (2) none of the small businesses that responded to the RFI indicated that they currently had the necessary personnel, supplies, equipment or facilities to service all of VISN 16, although some indicated that they would acquire them after award; and (3) three of the small businesses had Dun & Bradstreet scores indicating that they were potential credit risks.

After the VA issued the solicitation on an unrestricted basis, American Medical Equipment Company filed a GAO bid protest.  AMEC argued that the VA’s decision not to set aside the contract was improper.

The GAO subsequently asked the SBA for its comments.  The SBA agreed with AMEC, and informed the GAO that in the SBA’s view, the refusal to issue a set-aside was contrary to law.

Nevertheless, the GAO sided with the VA.  The GAO wrote that “[i]n determining the availability of responsible small business concerns for set-aside purposes the contracting agency’s investigation goes not only to the existence of the businesses, but also to their capability to perform the contract.  The fact that multiple small business responses are received in the course of market research is not necessarily determinative.”

Although five small businesses had expressed interest in serving all of VISN 16, the GAO concluded that the VA had not acted unreasonably by evaluating the prospective small business offerors as it did and concluding that they lacked the capabilities to successfully complete the contract.  The GAO denied AMEC’s bid protest.

While I agree as a big-picture matter that an agency should not be forced to issue a small business set-aside when it is evident that no small businesses are capable of performing the contract, I am troubled by several aspects of how the VA got to its “not capable” decision in this case.

First, the VA based its conclusion in part on the fact that none of the small businesses had recently performed similar contracts with the VA.  Using an absence of VA-specific experience as evidence of a lack of capability seems inconsistent with a recent GAO decision holding that a contractor was improperly downgraded for not possessing agency-specific experience.

Even if the small businesses lacked similar experience government-wide, refusing to issue a set-aside on this basis seems inconsistent with the policy established in FAR 15.305, which provides that a lack of past performance may not be used to evaluate an offeror unfavorably.  And, the VA’s “lack of experience” determination ignores the fact that small businesses often team with more experienced teammates–but have not yet identified those teammates at the time they respond to a RFI.

Equally troubling is the VA’s finding that the small businesses currently lacked the personnel to perform the contract.  No viable small business has an entire home oxygen team sitting around the home office, waiting for a new contract to arrive while enjoying eight hours of Facebook each day on their employer’s dime.  Indeed, if the contract is a follow-on to an existing services contract, Executive Order 13,495 requires the new contractor to make offers to incumbent service employees, not staff the contract with existing personnel.

The same rationale applies to equipment and facilities.  A small business is unlikely to spend its precious resources leasing warehouses and home oxygen equipment in a particular VISN in the mere hope that it will one day be able to use those facilities and equipment on a contract.  Rather, it is common for such equipment to be obtained after award (or obtained from later-identified teammates).

Third, the small businesses apparently had no opportunity to contest the “high risk” Dun & Bradstreet ratings.  And even if those high ratings justified the VA’s action, they applied to only three of the five small businesses, leaving two remaining under the “rule of two.”

Finally, although it is not clear what impact the VA’s contacts with the four other VISNs played in the GAO’s decision, in my opinion, those contacts were utterly irrelevant.  Just because four other VISNs issued similar solicitations as unrestricted did not prove that two or more small businesses were incapable of fulfilling VISN 16’s requirements.  Different businesses may bid on similar work, depending on the location of that work.  Further, those four VISNs could also have relied on flawed market research themselves in foregoing set-asides.  Two (or four) wrongs don’t make a right.  And, wouldn’t a proper inter-VA market survey look at similar contracts in all VISNs, not just four that happened to issue them on an unrestricted basis?

In short, the American Medical Equipment Co. case suggests that an agency may forego a set-aside whenever it does not receive at least two responses to an RFI from small businesses that: (1) have recently performed similar contracts for the same agency; (2) currently possess the necessary personnel, equipment and facilities to perform the contract; and (3) have received positive D&B financial scores.  Of course, in many–perhaps most–cases, agencies will not receive two such responses, opening the door to unrestricted procurements.

Let’s hope that American Medical Equipment Co. is an outlier, and not a sign of things to come.