Agencies Do Not Have Unlimited Discretion to Cancel Solicitations, Says the COFC

In its recent decision, the Court of Federal Claims decided whether and when an agency can cancel a FAR part 15 procurement and start from scratch. Agencies have historically been afforded extremely broad discretion in cancelling solicitations. But in this case, the court agreed with the protester that cancellation was wrongful. It also laid out the details of a proper versus improper solicitation cancellation quite nicely. Thus, this landmark decision provides crucial guidance on the subject for agencies and federal contractors alike.

The court decision in Seventh Dimension, LLC v. United States, 160 Fed. Cl. 1 (2022), concerned an Army solicitation for “role player and direct support to field and situational training exercises in all ARSOF courses” for the U.S. Army John F. Kennedy Special Warfare Center and School. The solicitation was 100% set aside for service-disabled veteran-owned small businesses (SDVOSB). It anticipated a single-award of an indefinite-delivery, indefinite-quantity (IDIQ) contract, under which firm fixed-price (FFP) task orders would be issued.

Initially, the Army received nine proposals and established a competitive range. The Army amended the solicitation fifteen times, most of which were issued after initial proposals were due. One such amendment, issued after the Army initiated discussions, amended the solicitation to require the contractor provide land training facilities as well. Based on the amendment, the Army allowed final proposal revisions from those in the competitive range.

Seventh Dimension protested this amendment at GAO. But GAO denied the challenge, finding the amendment reflected the Army’s needs, provided sufficient detail to offerors, and was reasonably within the Army’s discretion. After that, the Army made the award to another offeror, Aquila.

Seventh Dimension then successfully protested Aquila’s SDVOSB status with SBA, leading the Army to retract its source selection decision. The Army established a new competitive range and resumed its selection process. This time around, the Army made the award to yet another offeror, Reservoir. After that, Seventh Dimension filed another GAO protest, this time, challenging the award to Reservoir on the basis that Reservoir’s key personnel and proposed training facility did not meet the solicitation’s specifications. The Army ultimately decided to take corrective action in response to that protest. It cancelled the award to Reservoir, terminated the corresponding contract, and expressed its intent to “assess whether the requirements of this acquisition are still valid.” That GAO protest was dismissed accordingly.

In the end, the Army decided (as expressed in multiple internal memorandums) to cancel the solicitation. Essentially, the Army explained that it had reviewed the scope of this solicitation and another contract in order to save money. It determined the United States Army John F. Kennedy Special Warfare Center and School would no longer require the contractor to provide land and facilities. The contracting officer said the Army had to cancel the solicitation “due to extensive changes to their requirement.” It cited to GAO precedent for the assertion that the Army could cancel a solicitation if it had “a reasonable basis” to do so, and it gave an example of “when a solicitation does not accurately reflect the agency’s requirements, [and] particularly where cancellation . . . and the issuance of revised solicitation would present the potential for increased competition.” As such, the Army concluded that cancellation was proper here because “[w]ith a revised PWS (which reflects the [Army]’s current requirement) and a reduced scope in terms of ceiling value, it is reasonable to assume that there will be additional competition for this effort.” The contracting officer also explained that the new IDIQ, with a lower ceiling value, could be established to accommodate the planned changes and government estimates. As such, the Army formally announced its decision to cancel the solicitation and issue a new solicitation due to “significant budget reductions[,] which have resulted in extensive changes to their requirement,” including the removal of the facility requirement.

After that, Seventh Dimension filed its first protest with the Court of Federal Claims, alleging that the Army’s cancellation determination “lacked a rational basis, was pretextually driven, and violated provisions of the FAR and SBA regulations.” After yet another corrective action by the Army–and the corresponding dismissal of the initial Court of Federal Claims protest (without prejudice), the Army eventually stood behind its cancellation decision. As such, Seventh Dimension filed again with the Court of Federal Claims. And this time, the court took a look at the Army’s procurement and ultimately, agreed with the protester that cancellation was improper.

The final complaint at the Court of Federal Claims alleged four counts:

(1) the Army’s cancellation of the Solicitation based on changed training requirements and contract type lacks a rational basis and contravenes procurement law (Counts I and II); (2) the Army’s decision to cancel the Solicitation is pretextual (Count III); (3) the Army’s decision to cancel the Solicitation is conclusory and insufficiently documented (Count IV); and (4) the Army violated statutory and regulatory obligations in cancelling the Solicitation (Count V).

The court stated that, in its review, it would apply the standard contained in the Administrative Procedure Act (APA). Explaining the deference provided to agencies under such standards, it said:

[T]his Court affords considerable deference to an agency’s procurement decisions.” In reviewing an agency’s procurement decision, the Court “determine[s] whether ‘the contracting agency provided a coherent and reasonable explanation of its exercise of discretion.’” The Court “will uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.”

The court also explained that, on the other hand, it would “not put words in an agency’s mouth or invent supporting rationales the agency has not itself articulated in the administrative record; post hoc explanations for agency decisions ordinarily will be rejected.”

In reviewing each party’s position in this case, he court first explained that “the government generally has broad discretion to assess and define its needs,” and “[t]he Federal Circuit has confirmed that such discretion extends to the decision of whether to amend or cancel a solicitation based on changed circumstances.” But as the court also stated, “[a]n agency’s discretion, however, is not boundless.” It said, “[i]ndeed, not only has Congress imposed limits on the Executive Branch regarding when it may cancel a solicitation but also the Executive Branch has imposed limits upon itself via the FAR.”

The court first looked to the statutory provisions that may guide its decision. It said:

Congress has instructed: “[An] agency shall award a contract with reasonable promptness to the responsible source whose proposal is most advantageous to the United States, considering only cost or price and the other factors included in the solicitation.”

Then, it coupled this provision with another section of the same title, which “in turn, provides that “[a]ll sealed bids or competitive proposals received in response to a solicitation may be rejected if the head of the agency determines that such action is in the public interest.”

In the court’s interpretation of these statutes, it explained that the two “must be read together to require an award unless the head of the agency properly determines that” it is in the “public interest” to reject all proposals. The court said, “[t]hus, the statutes, read together, set up two mutually exclusive alternatives: (1) award a contract pursuant to the operative solicitation; or (2) reject all proposals (and cancel the solicitation).”

The court then looked to the FAR’s implementation of these statutes, explaining that:

“The source selection authority may reject all proposals received in response to a solicitation, if doing so is in the best interest of the Government.” FAR 15.305(b) (“Proposal evaluation”) (emphasis added).19 FAR 15.305(b) thus swaps out “the head of the agency” in favor of “[t]he source selection authority” and “the public interest” in favor of “the best interest of the government.”

The court did point out that, in supporting its cancellation decision, the Army did not cite to nor rely on these statutes or this provision of the FAR. Instead, it relied on a separate section of the FAR, which covers amending a solicitation, and which requires the contracting officer to issue a solicitation amendment to cover any agency changes to a requirement or terms and conditions. The court then drew attention to the cancellation provisions of the FAR provision the agency relied upon, noting such were “[o]f dispositive significance to this case.” Those provisions explain:

If, [1] in the judgment of the contracting officer, [2] based on market research or otherwise, [3] an amendment proposed for issuance after offers have been received [4] is so substantial as to exceed what prospective offerors reasonably could have anticipated, [5] so that additional sources likely would have submitted offers had the substance of the amendment been known to them, [6] the contracting officer shall cancel the original solicitation and issue a new one, [7] regardless of the stage of the acquisition.

In applying these provisions to the facts here, the court said that only the first, second, fourth, and fifth elements were at issue. In the court’s words:

[T]his case comes down to whether the CO reasonably exercised her “[1] judgment . . . [2] based on market research or otherwise” that the Army’s proposed amendment “[4] is so substantial as to exceed what prospective offerors reasonably could have anticipated, [5] so that additional sources likely would have submitted offers had the substance of the amendment been known to them.”

Now, the Army’s position here was that:

(1) the word “judgment” provides the CO with maximal discretion to cancel a solicitation, (2) the phrase “based on market research or otherwise” places no constraint on the CO’s judgment, (3) notwithstanding the “so substantial” language, a proposed amendment need not constitute a cardinal change to warrant cancellation of a solicitation, and (4) it is sufficient if resolicitation may increase competition.

But the court rejected the agency position and court summarized its conclusion on the applicable rules as follows:

In sum, where (1) a proposed solicitation amendment would so substantially alter the fundamental nature of the procurement such that it would essentially be a new and different procurement (i.e., where the amendment would constitute a cardinal change), and (2) the CO has some concrete basis for believing that additional sources likely would participate in the competition if they were aware of the proposed amendment, an agency cannot arbitrarily limit the field of competition by transmitting the amendment only “to all offerors that have not been eliminated from the competition.” Rather, in such a case, the agency must reopen the competition to any prospective offeror by cancelling the solicitation and starting over from scratch. The FAR clearly permits a cancellation for such purposes at the very least up until contract award — i.e., “regardless of the stage of the acquisition.”

Thus, here, the “key predicate question” was whether “an amendment proposed for issuance” is
“so substantial” as to constitute a cardinal change, and the court explained that such must be determined on a case-by-case basis. The court noted that the FAR commits such an assessment, in the first instance, to the contracting officer’s judgment “which, along with the required impact-on-competition assessment, must be ‘based on market research or otherwise.’” It also noted the “the competing statutory requirement to award the contract (unless properly cancelled),” which naturally constrains the contracting officer’s authority in the FAR. The court explained:

Although the FAR permits the CO to exercise “judgment” regarding whether a proposed amendment would constitute a cardinal change that “likely” would have competition implications, that “judgment” must be “based on market research or otherwise.” If such “judgment” is reasonably exercised — again, “based on market research or otherwise” — to conclude that a proposed amendment would constitute a cardinal change such that there likely would have been greater competition had the substance of the proposed amendment been known, then the CO “shall cancel” the procurement and start over.

After explaining the rules at issue, the court applied the rules to the facts of the matter to ultimately determine that “[t]he Administrative Record Does Not Support the Army’s Decision to Cancel the Procurement.”

First it looked to whether the contracting officer based her judgement on market research or otherwise, and it found that she had not. The Army actually conceded that point, stating “[t]he contracting officer did not have any market research[,]” the decision was based “solely on FAR 15.206(e)”; and “did not rely on FAR 15.305(b)” since the contracting officer “did not base her decision on the need to reject all proposals[.]”

In response, the Army argued that FAR 15.206(e) did not require market research, instead it allowed the contracting officer’s decision to be based on something “otherwise” per the regulation. The court said that such a position was

consistent with the government’s argument in its briefs that “the regulatory standards for the cancellation of a negotiated procurement are so extraordinarily permissive that they impose no constraints upon a contracting officer’s discretion beyond what reasoned judgment requires.” The government thus argues that “as applied to the cancellation of a negotiated procurement, the APA standard reduces to nothing more than rational-basis review.”

But the court did not agree. It explained that the Army’s interpretation of the rule effectively deleted the regulatory phrase “based on market research or otherwise.” In fact, the court said, the Army “goes so far
as to assert that the CO’s mere ‘assumption that additional firms may well be interested in participating in a competition’ is acceptable, if it is reasonable.’”

And relying on the noscitur a sociis canon of construction, the court rejected such an interpretation. Instead, the court interpreted the phrase “based on market research or otherwise” to mean “based on market research or evidence similar to market research.” It said that such “may include information or data already in an agency’s possession or perhaps even an agency’s concrete experience[.]”

But here, according to the court, the Army did not provide any citation to the administrative record to support this decision, because “the administrative record is devoid of any facts, beyond the changes themselves, supporting the CO’s judgment ‘that additional sources likely would have submitted offers.’”

The court reiterated that it “must be clear about the relationship between the agency decision at issue and the administrative record[,]” and the contracting officer’s decision under review “has to be tested against the record that underlies it.” The court said:

The APA requires more from the Army than a mere hypothesis or conjecture that competition likely would increase were the Solicitation cancelled; it requires reasoned judgment based on evidence or facts contained in the administrative record. A plaintiff succeeds on the merits where the administrative record lacks evidence to support an agency’s determination.

And here, the court found the Army’s decision to cancel the solicitation was “conclusory” and failed to meet the FAR’s requirements. It said that the lack of record evidence here in support of the Army’s decision was sufficient for the court to rule in favor of Seventh Dimension on the merits.

In another attempt to justify the cancellation decision, however, the Army pointed to the change in contract type, stating:

Here, neither the offerors of existing proposals nor the offerors of proposals eliminated from the competitive range could have anticipated such a sweeping change in contract type. This material change completely alters an offeror’s proposed pricing. Cancellation is the only option that is reasonable and logical and per the FAR.

But the court also disagreed with the Army on this count.

The court said, the Army’s “memorandum d[id] not invoke a statutory or regulatory basis for cancelling the Solicitation but d[id] summarize a number of changes to the Special Forces Qualification Course and related exercises that Army wanted to implement[,]” and “[t]here [wa]s no discussion or analysis of why the IDIQ contract contemplated by the ARSOF Solicitation was inadequate to meet the Army’s needs.” The court added that the “memorandum contain[ed] no explanation of why the contemplated IDIQ could not meet the Army’s needs” because the original solicitation had no requirement to spend a set amount. The court said, “it is a ceiling, not a floor” and also that “an IDIQ is by its nature flexible in terms of both ordering quantities and scope of services.”

The court explained:

[N]ot only is there zero evidence in the record to substantiate that assertion, but also the relevant
standard is not whether an offeror “may view” the revised solicitation more favorably, but rather whether “additional sources likely would have submitted offers had the substance of the amendment been known to them.” No evidence in the record supports that proposition. Moreover, the idea that “an offeror may prefer the guarantee of work through a FFP contract” — in lieu of an IDIQ — is undermined by the Army’s own asserted reasoning for preferring an FFP vehicle: “a[n] FFP contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss.”

The court added:

As for whether other offerors “of existing proposals” or “offerors of proposals eliminated from the competitive range could have anticipated such a sweeping change in contract type,” that conclusion similarly is inapposite with respect to the justification FAR 15.206(e) requires for cancellation (as it has nothing to do with whether yet “additional sources likely would have submitted offers”).

Finally, the court pointed out that the Army initially did not value the land training facility requirement as being substantial (in response to Seventh Dimension’s initial GAO protest)–but then relied upon the “substantial” nature to argue its point in this protest. The court said: “at a minimum, the government’s flip-flop critically undermines the Army’s justification for cancellation; at worst, the government’s new position is barred by the doctrine of judicial estoppel.”

In its conclusion, the court explained: “the CO and the government before this Court point to no facts in the administrative record justifying the Army’s cancellation of the Solicitation pursuant to FAR 15.206(e).”

The court also pointed out here, that the “lack of a viable explanation for the proposed amendment here is particularly troubling where, as here, the cancellation comes at the eleventh hour and when there is only one viable, awardable offeror remaining.” But the court did find that the record here did not support Seventh Dimension’s allegations of bad faith and dismissed that count of the protest.

In its conclusion, the court granted Seventh Dimension’s motion for judgment on the administrative record and denied the agency’s same motion. The court vacated the agency’s cancellation of the solicitation, demanded it be reinstated, and offered the agency two choices: Within sixty days, the agency could “[a]ward a contract to Seventh Dimension pursuant to the reinstated solicitation” (consistent with the FAR) or it could “[i]ssue a new cancellation decision in compliance with the applicable statutes and regulations as explicated herein.”

* * *

This decision could provide hope for contractors on the receiving end of a cancelled solicitation–which happens quite frequently in the government contracting world, again, especially given the vast discretion historically allotted to the cancelling agencies. The court here, in a very lengthy and thorough decision, provided immense insight into when and how an agency may cancel a FAR part 15 procurement and start over–and it clarified that agencies will be afforded discretion, but that discretion is certainly not unlimited. It must be supported, at a minimum, by an agency’s reasoned judgment based on evidence or facts contained in the administrative record.

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