In a recent decision, the U.S. Court of Federal Claims denied a pre-award protest challenging a solicitation's small business subcontracting goal of 40% of the total contract value, holding that this goal was within the high level of discretion afforded to the agency. See FirstLine Transp. Sec., Inc., v. United States, 12-601C, 2012 WL 5939228 (Fed. Cl. Nov. 19, 2012).
Federal agencies have two sets of small business goals, one for prime contracting dollars and another for subcontracting dollars. Agencies periodically negotiate these goals with the U.S. Small Business Administration ("SBA") and are evaluated against these goals in SBA's annual "procurement scorecard." Regarding the subcontracting goals, agencies have various tools at their disposal to meet these goals. For example, agencies can require that prime contractors subcontract a percentage of the prime contract work to small or other socio-economic classes of businesses. Alternatively, agencies can make the amount of small business subcontracting an evaluation criterion in an otherwise full-and-open competition, enabling prime offerors to earn evaluation credit by teaming with small business subcontractors.
When the protest was first filed, Firstline involved a solicitation that appeared to establish a hard small business subcontracting requirement. In Firstline, the Transportation Security Administration ("TSA") issued a solicitation for security screening services at the Kansas City Airport. The relevant section of the solicitation stated that the:
“Government anticipates an overall Small Business goal of 40 percent,” and that “[w]ithin that goal, the government anticipates further small business goals of: Small, Disadvantaged business[:] 14.5%; Woman Owned[:] 5 percent; HUBZone[:] 3 percent; Service Disabled, Veteran Owned[:] 3 percent.”
In response to pre-proposal questions about this requirement, TSA responded that the subcontracting goal represents "40% of the total contract price" and not 40% of the total subcontracting dollars. When asked how the 40% goal would be factored into an offeror's overall evaluation and score, the agency responded: "if the successful offeror fails to negotiate a subcontracting plan acceptable to the contracting officer … the offeror will be ineligible for award.” TSA referred prospective offerors to this answer when asked "[w]ill offerors with less than 40% be disqualified?"
After the plaintiff, FirstLine Transportation Security, Inc. ("FirstLine"), initiated its bid protest, TSA amended its response to responses to several questions and clarified that "[f]ailure to meet the stated 40% small business participation goal would not necessarily render a proposal ineligible for award" and cited to the TSA's commitment to "ensuring that the government-wide goal for participation of small business concerns…" is met. FirstLine argued that this "goal is a requirement in disguise" because Section M.4. Of the solicitation mentioned the subcontracting plan under the heading of "Compliance/Responsiveness."
As a result, FirstLine alleged that this term (1) dramatically limited competition, in violation of the Competition in Contracting Act, ("CICA") and (2) created, in effect, a partial set-aside. The Court began its analysis by stating:
"If the Court were issuing this solicitation instead of this agency, it may well have based the rather aggressive small business goals on more robust market research, and it likely would have stated the goals as a percentage of subcontracting dollars, as FAR Part 19 authorizes."
However, the court, in an exercise of judicial restraint, found the "40 percent goal is a rational expression of the Government's policy of affording small business concerns ... the maximum practicable opportunity to participate as subcontractors…"
FirstLine argued that the solicitation violates CICA's mandate to achieve full and open competition because it the limits offerors that are eligible to perform 40% of the work. The court found this argument meritless because, as amended, the solicitation provided that the 40% standard was merely a goal and not a requirement. The court further posited that the solicitation "simply reconfigures the terms on which potential offerors must compete," and does not limit the field of offerors. Under the solicitation offerors are now expected to compete on their ability to find and partner with certain types of small businesses in addition to offering their own services. The court, seeing nothing prejudicial about this, added that "nothing in the FAR expressly prohibits TSA from establishing the 40 percent small business participation goal, the Court finds that FirstLine has, at best, established that the agency is working within a regulatory gray area."
In this "gray area," agencies are afforded a high level of deference under the Administrative Procedure Act ("APA"), 5 U.S.C. §706. Limited by the "highly deferential rational basis review," the court found that the 40% goal was a rational expression of the government's policy encouraging small business participation. Pointing out that nowhere in the FAR is it prohibited that a subcontracting goal be in terms of total contract value, the court also found it reasonable for the agency "to establish a goal and then allow offerors to compete in finding innovative ways to meet or approximate that goal." The court also found that FirstLine was not competitively prejudiced by the terms of the solicitation because all offerors must work from the same community of small businesses and failing to meet the 40% goal will not result in removal from the competition.
Lastly, FirstLine argued that the 40% goal would in effect operate as a partial small business set-aside without complying with the set-aside requirements of the FAR. The court rejected this argument, again emphasizing that the 40% standard is a goal and not a requirement; therefore, as the amendment to the solicitation stated, failure to achieve the 40% goal will not itself render a proposal ineligible for award. The court explained that the terms of the solicitation are "simply not that draconian: it does not speak in terms of failing to meet a bright-line threshold, but rather in terms of 'fail[ing] to negotiate a subcontracting plan acceptable to the contracting officer before contract award[.]'" The court did suggest, however, that the agency amend Section M.4 of the solicitation to remove any possible ambiguity regarding the 40% small business participation goal.
For contractors, this decision illustrates that some agencies are being increasingly aggressive with their small business subcontracting goals, and that, under the APA, courts will give a high level of deference to agencies in this area.