The VA’s “rule of two” for service-disabled veteran-owned small businesses provides a powerful contracting preference. Thanks to the rule of two, the VA awarded 23.39% of prime contracting dollars to SDVOSBs in Fiscal Year 2019, compared to 4.39% governmentwide.
But the rule of two has its limits. Importantly, before issuing an SDVOSB set-aside, the Contracting Officer must have a reasonable belief that “the award can be made at a fair and reasonable price that offers best value to the United States.” And, as a powerful federal court recently held, the fact that an SDVOSB’s prices have been accepted by the GSA under the Federal Supply Schedule program does not require the VA to accept those prices as fair and reasonable in a rule of two analysis.
In Land Shark Shredding, LLC, No. 2020-1230 (2021), the U.S. Court of Federal Claims considered an appeal involving a contract for shredding and pill-bottle destruction services at VA facilities in Miami and the surrounding area.
Before issuing the solicitation, the VA performed market research through the FSS and identified three SDVOSBs, four VOSBs, 37 small businesses and seven large businesses that were “potentially capable” of providing the services. The Contracting Officer then published a formal Request for Information. Three businesses responded to the RFI: two small businesses, and Land Shark Shredding, LLC, an SDVOSB.
Based on this market research, the Contracting Officer issued the solicitation under the FSS using a “tiered” structure. All businesses could submit proposals, but the solicitation stated that offerors would be evaluated in four tiers: first SDVOSBs, then VOSBs, small businesses, and all other businesses.
Three companies submitted offers: Land Shark, a non-SDVOSB small business, and a large business. Land Shark’s total proposed price over five years was $2,819,101.20. The small business, SafeGuard Document Destruction Inc., bid much lower: $474,034.80. The large business’s price was slightly higher than SafeGuard’s.
The VA determined that Land Shark’s price was unreasonably high. Because there were no VOSB offerors, the VA then proceeded to the third tier: small businesses. The VA concluded that SafeGuard’s price was reasonable, and awarded the contract to SafeGuard.
Land Shark filed a bid protest in the U.S. Court of Federal Claims. Land Shark argued, among other things, that its prices were fair and reasonable because they were published on the FSS and because FAR 8.404(d) states that “GSA has already determined the prices of supplies and fixed-price services, and rates for services offered at hourly rates, under schedule contracts to be fair and reasonable.” Therefore, Land Shark contended, it was improper for the VA to exclude Land Shark and move to the next tiers.
The Court of Federal Claims ruled in the VA’s favor, and Land Shark appealed to the Federal Circuit.
With respect to Land Shark’s argument regarding fair and reasonable pricing, the Federal Circuit wrote that the very next sentence of FAR 8.404(d) says that “ordering activities are not required to make a separate determination of fair and reasonable pricing, except for a price evaluation as required by FAR 8.405-2(d).” The court continued:
Furthermore, nothing requires the contracting officer to defer to the FSS in making the determination that an award could be made at fair and reasonable prices that offer the best value to the United States.
The fact that a separate determination is not required does not mean that it cannot be performed, and in any event, such an analysis is required here under [FAR] 8.405-2(d).
The court noted that Land Shark “bid more than five times as much as the low bidder and the [I]ndependent Government Cost Estimate]”, supporting the Contracting Officer’s judgment that Land Shark’s price was unreasonably high. The Federal Circuit affirmed the lower court’s ruling and denied Land Shark’s appeal.
The Land Shark Shredding case is a good reminder that, as powerful as the Rule of Two is, it has its limits–and one of those limits is the Contracting Officer’s determination that an award can be made at fair and reasonable prices.
That doesn’t mean, of course, that the VA cannot or will not pay more to use an SDVOSB in appropriate cases. But where, as here, an SDVOSB’s proposed pricing vastly exceeds that proposed by other offerors (and estimated by the government), even the fact that those prices have been accepted by the GSA under the FSS won’t necessarily preclude the VA from awarding to a non-SDVOSB.
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