On March 22, the Government Accountability Office (GAO) sustained a protest challenging an agency decision finding the protester ineligible for award under both the Omnibus Diplomatic Security and Antiterrorism Act of 1986 (Security Act) and the solicitation’s System for Award Management (SAM) registration requirements. GAO disagreed with the Department of State’s (or Agency) arguments, holding that Pernix Federal LLC’s (Pernix) submissions complied with all requirements of the prequalification process and the solicitation.
The decision clarifies that stand-alone entities that prequalify as de facto joint ventures are eligible for award. In addition, unless the Agency can show otherwise, it is impossible for de facto joint ventures to register in SAM.gov, and therefore, a requirement premised on SAM.gov registration is unreasonable.
The Procurement at Issue
On November 27, 2019, the Department of State issued a “synopsis” advising potential offerors of its intention to award a contract for the design and construction of a new consulate compound in Turkey. The procurement consisted of the following three phases:
- Offerors were required to submit a pamphlet identifying contracts and subcontracts successfully completed “involving work of the same general type and complexity as the solicited project and having a contract or subcontract value of at least $116,250,000.”
- Offerors, prequalified under Phase 1, would be invited to submit a proposal.
- Offerors, prequalified under both Phase 1 and Phase 2, would be invited to submit a proposal in response to a Phase 3 RFP.
On January 28, 2020, Pernix submitted its Phase 1 submission, specifically identifying Pernix as the offeror in its pamphlet. Pernix—officially dubbed Pernix Federal Solutions LLC—is a de facto joint venture formed between Pernix Group, LLC and BE&K, a wholly owned subsidiary. The pamphlet contained a cover letter written on Pernix letterhead stating: “We are including a FY20 Certification pamphlet for [Pernix] and its de facto joint venture partners Pernix Group, Inc. and BE&K Building Group, LLC with respect to the Phase 1 Request for Proposal noted above.”
Additionally, letters from Pernix Group and BE&K, included in the Phase 1 submission, confirmed: “Pernix Group, Inc. has entered into a de facto joint venture relationship with its wholly owned subsidiary’s BE&K Building Group and Pernix Federal LLC and as such its technical and financial resources will be utilized in support of completing the above referenced project.”
Subsequently, on August 18, 2020, Pernix made its Phase 2 submission. Here, Pernix submitted information identifying the members of its design-build team and demonstrated its prior construction experience. Pernix identified two construction projects performed by each de facto co-venturer illustrating the company relied on the experience of both Pernix Group and BE&K. For both Phase 1 and Phase 2, the agency identified “Pernix Federal (de facto JV with Pernix Group & BE&K) & HOK Inc.” as being a pre-qualified entity.
On September 30, 2023, the Department of State awarded the contract to Pernix Federal, LLC. However, B.L. Harbert International LLC, a disappointed bidder, filed a protest with GAO, arguing that Pernix did not meet the required definition of a U.S. person. A Department of State notice stated de facto joint ventures “must have at least one firm or organization that itself meets all the requirements of a U.S. person listed in Section 402.” Importantly, the notice also stated that de facto joint ventures were defined as those organizations “where no formal agreement has been reached, but the offering entity relies upon the experience of a related U.S. person firm that guarantees performance.”
About a month later, on October 27, the Agency notified GAO it would take corrective action to confirm Pernix’s eligibility for award and that the entity was in fact the offeror expressly prequalified under Phase 1 and 2.
On December 8, 2023, the agency notified Pernix that the de facto joint venture was not the entity prequalified under Phases 1 and 2, was not eligible to submit a proposal under Phase 3 and therefore could not be awarded the contract. In addition, the agency argued that the de facto joint venture “was not registered in SAM at the time of the Phase 3 proposal submission,” making it ineligible for award. Pernix protested the agency’s corrective action decision.
Discussion
First, the Department of State argued that the entity that prequalified under Phase 1 and Phase 2 must be the same entity that submits a proposal under Phase 3. In other words, to be eligible for award, the entities must be the “same.” However, the agency contended that because Pernix qualified as a de facto joint venture in Phase 1 and as a stand-alone entity for Phase 3, it should have been excluded from the competition. The agency stated, “Pernix was required to maintain [its Phase 1 structure] unless it sought prequalification under [the Security Act] as a different entity—it never did.” Pernix disagreed, arguing that agency regulations allowed this—GAO agreed with Pernix’s reasoning.
GAO stated that “consistent with the agency’s regulations, the prequalification requirements permitted a ‘de facto joint venture where no formal agreement has been reached, but the offering entity relies upon the experience of a related U.S. firm that guarantees performance’ to be eligible to participate in Phase 3 and submit a proposal in response to the RFP.” The regulations do not indicate that de facto joint ventures to be separate legal entities themselves. Therefore, GAO found that Pernix was the “offering entity” of the de facto joint venture which relied on another firm’s experience. GAO stated, “[W]e find that where a company chooses to utilize a de facto joint venture to qualify as a United States person in Security Act procurements, it can qualify as a de facto joint venture and submit any subsequent responses from a stand-alone entity, i.e. the offering entity, and still be considered the same entity that was prequalified.”
Second, the agency argued that Pernix’s failure to register its de facto joint venture in SAM made it ineligible for award. It points to language in the RFP that states, “Offerors, including any offeror organized as a joint venture, to include a de facto joint venture, must have an active SAM registration at the time of proposal submission and throughout the procurement process.” However, Pernix argued that registering a de facto joint venture in SAM is impossible, and therefore, the agency’s removal of Pernix from the competition was unreasonable.
Again, GAO agreed with Pernix. After quickly disposing of an argument that a challenge of the agency’s interpretation of the RFP requirements was untimely, finding it is appropriate for consideration according to the “significant issue” exception, GAO found that “the agency ha[d] not reasonably explained how a de facto venture could comply with the requirement to be registered in SAM . . . As a result, the agency has removed Pernix from the competition because of Pernix’s failure to comply with a requirement that the agency does not refute is impossible to meet.” Moreover, the requirement that a de facto joint venture be registered in SAM (an impossibility) would eliminate all de facto joint ventures and unduly restrict competition.
Key Lessons and Takeaways for Contractors
Given the nature of its work, the State Department frequently relies on international contractors. De facto joint ventures are one way the agency can ensure more contractors are eligible to compete on its procurements. However, as contractors similarly situated to Pernix understand, the Agency has long had difficulty harmonizing various requirements with the unique position that de facto joint ventures occupy. This decision illustrates the following points:
- De facto joint ventures may prequalify using their joint venture status, and the agency can award the contract to a stand-alone entity.
- De facto joint ventures are not required to register on SAM.gov.
