“Rule of Two” Applies to Task and Delivery Orders Under Multiple-Award ID/IQ Contracts Alert - October 28, 2008
GAO Holds That “Rule of Two” Applies to Task and Delivery Orders Under Multiple-Award ID/IQ Contracts
October 28, 2008
Joseph Hornyak - Northern Virginia
Megan Mocho Jeschke- Northern Virginia
In a decision that is shaking up the federal government contract community, the Government Accountability Office (GAO) has held that the so-called “Rule of Two” applies to task and delivery orders under multiple-award, indefinite-delivery indefinite-quantity (ID/IQ) contracts. The “Rule of Two” is short-hand for the rule set forth in both the Federal Acquisition Regulation (FAR) and the Small Business Administration (SBA) regulations that a contracting officer must set aside a procurement exclusively for small businesses if there is a reasonable expectation of receiving fair market offers from two or more responsible small businesses. As discussed below, in Delex Systems, Inc.,1 the GAO held that task and delivery orders under multiple-award ID/IQ contracts held by a mix of small and large businesses must be set aside if the Rule of Two test is satisfied. In so ruling, the GAO has effectively re-written the ordering clauses of many multiple-award contracts – giving small businesses more than they bargained for when the contracts were awarded, and giving large businesses less.
The Delex Decision
In 2003, the Navy made eight awards of the training systems contract (TSC) II, a multiple-award, ID/IQ contract to acquire the capability to analyze, model and simulate, design, and develop training and simulation products and systems with a base ordering period of eight years and a total project ceiling value of $3 billion. At the time of award, four of the eight awardees were small businesses and four were large businesses. According to the contracts, the Navy could, at its discretion, set aside delivery order competitions for the small business contractors, but unrestricted competitions would also be conducted. The delivery order competition in question was initially issued as a small business set-aside. However, after the contracting officer modified the contracts to include the new small business recertification clause found at FAR 52.219-28, two of the four small business contract holders were unable to recertify their size status as small. The Navy withdrew the set-aside and informed the contractors that the delivery order competition would be held on an unrestricted basis. This prompted one of the small business contract holders, Delex Systems, Inc., to file a bid protest at the GAO.
Delex argued that FAR 19.502-2(b), which embodies the Rule of Two, applied to the issuance of delivery orders under the multiple-award contracts. Applying the Rule of Two would mean that if there was a reasonable expectation of receiving offers from two small business concerns for the delivery order, the Navy was required to set aside the delivery order competition for small businesses. The Navy contested Delex’s proposition that the Rule of Two applied to the issuance of delivery orders under multiple-award contracts. It argued that because FAR Part 6, which provides the requirement for contracting officers to comply with the small business provisions found in FAR Part 19, does not apply to the issuance of delivery orders, the Navy was not required to follow the Rule of Two.
After soliciting input from the SBA, GAO held that while the Navy correctly determined that FAR Part 6 did not apply to the issuance of delivery orders, it was nevertheless required to comply with FAR Part 19 and the Rule of Two. Based upon its review of the legislative history, GAO determined that the FAR, and in particular FAR Part 6 which implements the Contracting in Competition Act, was never intended to override the policies of the Small Business Act that are found in FAR Part 19. Rather, competition provisions within the FAR are to be applied in harmony with the Small Business Act’s policies. The Navy was therefore not exempt from FAR Part 19 and was required to comply with the Rule of Two in issuing delivery orders under its multiple-award contracts.
Implications of the Delex Decision
The Delex decision limits the discretion contracting officers have under the ordering provisions of multiple-award ID/IQ contracts. Like the contracts in Delex, many multiple-award ID/IQ contracts have been awarded to a combination of large, small and sometimes even 8(a) contractors. Almost all such contracts have a tailored “ordering” clause (typically found in sections G or H) that describes the process for issuing task or delivery orders, including detailed procedures for soliciting proposals or quotations and selecting the awardees. The ordering clauses often address the extent to which orders will be set aside exclusively for the small business holders of the underlying contracts. In many cases, the Delex decision imposes a constraint on the issuance of orders that does not appear in the ordering clause itself.
For example, the ordering provisions in the Department of Homeland Security’s EAGLE contracts2 (over 50 awardees) contemplate that task order competitions may be set aside for small businesses, but give the government wide discretion to determine when a competition will be set-aside versus unrestricted.3 The Delex decision clearly means the contracting officer loses the flexibility contemplated by the clause. Similarly, the ordering clause in the Air Force’s WERC contracts (27 awardees) permit the contracting officer to consider a variety of factors, including specific capabilities and proximity to the work site, in determining which offerors will be given an opportunity to compete for orders.4 Arguably, the Delex decision effectively re-writes the clause because the identified factors can be considered only after the contracting officer applies the Rule of Two. Moreover, if there are two or more holders of the underlying ID/IQ contract, it is difficult to imagine a situation where there would not be a reasonable expectation of receiving fair market offers from at least two responsible sources.
Another interesting aspect of the Delex case is that it illustrates the harmful impact of SBA’s controversial re-certification rule, which became effective on June 30, 2007.5 This rule was implemented through FAR clause 52.219-28, entitled “Post-Award Small Business Program Representation,” which the Navy inserted into the TSC II contracts in 2008. Pursuant to this clause, two of the TSC II contract holders that were small at the time of award were required to recertify as other-than-small.6 When the multiple-award contracts were awarded in 2003, these companies obviously thought they were getting a valuable “hunting license” for resulting delivery orders, including those set aside for small businesses. However, because of the recertification rule in FAR 52.219-28 and the Delex decision, these companies will have far fewer opportunities to win orders under the TSC II contracts. This experience will be shared by many other small business government contractors that have either outgrown their size status or been acquired by larger businesses in the recent past.
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1 B-400403, Oct. 8, 2008.
2 The EAGLE contracts are multiple-award ID/IQ contracts intended to serve as a DHS-wide platform for acquiring information technology (IT) service solutions in five functional categories. In 2006, DHS awarded 28 EAGLE contracts on the “small business track” and 25 contracts on the “unrestricted track.” The acronym “EAGLE” refers to Enterprise Acquisition Gateway for Leading Edge Solutions.
3 See section G.4.3. of Eagle contracts.
4 The WERC contracts are multiple-award ID/IQ contracts for construction and environmental services. Of the 27 awardees, at least 15 are small businesses.
5 See 13 C.F.R. § 121.404(g).
6 FAR 52.219-28 requires “rerepresentation” of size status in three instances: (i) after the fifth year of a “long-term” contract (defined as a contract longer than five years in duration); (ii) when the contract is transferred pursuant to a novation agreement; or (iii) as a result of a merger or acquisition, whether or not a novation agreement is executed. It appears the contractors in Delex were required to rerepresent their size status because the contracts were “long-term” contracts.
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