GAO: VA’s Market Research Improperly Compared Apples to Oranges, Violated Rule of Two

Under the VA’s Rule of Two, the VA is required to set aside solicitations for veteran-owned businesses if there is a reasonable expectation of receiving offers from two or more such businesses capable of performing the required work at a fair and reasonable price. But how reasonable does the VA’s expectation have to be in a given procurement? GAO recently reviewed the reasonableness of VA’s efforts and found them lacking.

In Academy Medical, LLC, B-418223 (Jan. 31, 2020), GAO considered a VA procurement for distribution and management of medical and other supplies for various VA medical centers and other government agencies.

A little background is helpful. Initially, the VA anticipated making 20 awards for supply management for each of the 20 Veteran’s Integrated Service Networks (VISNs) across the country. Based on market research, the VA determined that six of the VISNs had sufficient SDVOSB competition so those would set aside for SDVOSBs. The remaining 14 VISNs would be full and open.

Prior to the deadline for proposal submission, the VA was confronted with a slew of bid protests from prospective offerors. These protests likely challenged the solicitation terms (GAO doesn’t say).

In the face of multiple protests, the VA took corrective action. First, the VA reevaluated its market research. Since firms had already submitted proposals in response to the earlier solicitation, The VA considered these proposals and updated its market research. The VA also reached out to various SDVOSB firms that had responded to earlier requests for information but had not submitted a proposal.

With the updated market research, VA came to a decidedly different conclusion about SDVOSB set-asides. Instead of setting aside specific regions for SDVOSB participation, all VISNs would now be competed on an unrestricted basis.

Second, the VA made an about-face on whether Service Contract Labor Standards (SCLS) applied to the solicitation. In the previous iteration of the procurement, service contract rules applied, but in the later version of the solicitation the VA determined that only a small fraction of the solicitation cost involves distribution services, so services was not the “principal purpose” of the solicitation. Accordingly, the VA removed the SCLS from the later solicitation.

Academy Medical challenged the decision to not set aside any VISN for SDVOSBs or VOSBs. It argued that the VA relied on outdated data for its market research and therefore its decision was not reasonable. The old data consisted of the proposals received in response to the earlier version of the solicitation.

GAO agreed, stating that “we have found unreasonable the decision to issue a solicitation on an unrestricted basis where that decision is based on outdated or incomplete information.” Where two solicitations are the same, an agency can rely on proposals from a canceled procurement.

But this solicitation changed materially from the prior iteration because of the removal of the service contract rules. “[R]emoving the requirement to comply with the SCLS likely had a material effect on the competitive field” because it was so burdensome to comply with the service contract rules (offerors would have had to realign their labor categories in a compressed time frame to comply with the SCLS). Even the contracting officer stated that he removed the service contract requirements from the solicitation because requiring prime vendors “to strictly adhere to wage determinations for specific labor categories in this instance would be unfair.”

GAO concluded that the VA’s market research was not reasonable because it did not take into account the change in solicitation requirements from the prior version that had included the service contract requirements. It goes to show that GAO may sustain a protest where the VA does not carefully determine whether two or more veteran-owned businesses can do the work; updated market research is a key part of that determination.

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