Government Contracts Monitor

VA’s Rule of Two Applies to IDIQ Contracts

March 7, 2016

By: Eric Whytsell

Most contractors are familiar with the “Rule of Two,” which in general requires acquisitions to be set aside if the government determines that there is a reasonable expectation that offers will be received by at least two small (or service disabled veteran-owned, etc.) business concerns and that award can be made at a fair and reasonable price. But what happens if the government determines that it needs to award multiple contracts but has no reasonable expectation that it will receive proposals from enough offerors to award the number of contracts it will require? The recent decision by the Government Accountability Office (GAO) in Spur Design, LLC, B-412245.3 (February 24, 2016) provides the answer, at least with respect to the Department of Veterans Affairs (VA) version of the Rule of Two.

The protest involved the VA’s decision not to set aside for service-disabled veteran-owned small business (SDVOSB) or veteran-owned small business (VOSB) concerns any portion of a solicitation for architect/engineer (A/E) services. The services were required to support nine Veterans Integrated Service Network (VISN) medical centers in three different states. The solicitation stated that the VA intended “to award an adequate number of [IDIQ] contracts” for those VISN needs. It also required offerors to have “an established bonafide working office within a 200 mile radius” of one of the VISN medical centers because the agency contemplated that the firms “primarily work with the closest medical center.” However, the solicitation made clear that task orders could be issued to support any of the VISN medical centers and that offerors “must be capable of responding to and working on multiple task orders concurrently.”

After determining that, based on its projected needs for the next five years, it would need to award a minimum of 14 contracts, the agency conducted market research to determine the availability of small business concerns in the region that could perform the services sought. Through those efforts, the VA identified 48 service-disabled veteran-owned small business (SDVOSB) concerns, only 11 of which were listed under one of the NAICS codes assigned to the procurement. However, because it anticipated needing at least 14 contracts, the agency determined that the 11 SDVOSB concerns were not sufficient to satisfy its requirements and instead ultimately concluded that only a set-aside for small businesses (not SDVOSB concerns) would be appropriate.

Prior to the proposal due date, Spur Design, Inc. filed an agency-level protest challenging the VA’s decision not to set aside the procurement for SDVOSB concerns and protesting the solicitation’s 200 mile radius restriction. When that protest was denied, Spur filed its protest at GAO, arguing that the VA’s decision not to set the procurement aside for SDVOSB concerns was in contravention of the VA Act’s Rule of Two, which is implemented by the VA Acquisition Regulation (VAAR) §§ 819.7004 and 819.7005. GAO agreed and sustained Spur’s protest.

There was no dispute in the record that the agency had failed to meet the literal requirement set forth in the VA Act’s Rule of Two. Nevertheless, the VA maintained that it was not required to set aside the procurement, or any subset of the procurement, for SDVOSB concerns because the agency had to award a minimum of 14 contracts and the number of SDVOSB concerns capable of performing the required work was insufficient to meet those needs.

When GAO asked the parties to brief the question of whether the VA Act’s Rule of Two applies to multiple-award IDIQ contracts, the agency responded in part that “38 USC 8127(d) means that a set aside is required when there will be two or more SDVOSB offers per contract.” However, the plain language of the VA Act says no such thing. Instead, the VA Act focuses on whether the “contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.” 38 U.S.C. § 8127(d). As GAO noted, “Nothing in the language of the VA Act supports the agency’s position that in the context of multiple-award contracts the VA Act’s Rule of Two requires set asides only when there will be two or more SDVOSB or VOSB offers per contract.”

The VA did not even attempt to argue that its implementing regulations exempt, or even address, whether the VA Act’s Rule of Two applies to multiple-award IDIQ contracts. It merely asserted that “common-sense and sound business judgment” dictate that the VA Act’s Rule of Two should not be applied when the number of qualified SDVOSB concerns is less than the agency’s anticipated minimum number of awards because it is impractical. According to the VA, “blindly apply[ing]” the Rule of Two to require set asides of multiple-award IDIQ procurements in such cases would rob the government of the benefits of competition and leave it with an inadequate number of contracts to meet its needs. The agency contends that such an outcome “was surely not the intent of Congress.”

GAO rejected these arguments. Reviewing the VA Act’s legislative history, GAO noted that the relevant language changed the previous permissive approach that allowed (but did not mandate) set asides when the Rule of Two was met by clearly requiring set asides to SDVOSB concerns, then VOSB concerns, to the extent the Rule of Two is met, prior to considering whether to award to any other category of small business contracting preferences, including small business concerns. VAAR §§ 819.7004, 819.7005. Given this, GAO did not find reasonable the VA’s decision not to set aside all or part of this acquisition for SDVOSB or VOSB concerns where its market research yielded fewer of these concerns than the anticipated number of contract awards. Simply put, the agency does not have the discretion to ignore the requirements of the VA Act and the VA’s own implementing regulations simply because it anticipates making multiple awards under an IDIQ contract.

GAO recommended that the VA revise its solicitation to properly address its statutory requirement to set aside this acquisition for SDVOSB or VOSB concerns. As a result, Spur will likely have a better competitive position in this procurement, vying against a small number of other SDVOSB concerns instead of those firms plus a significantly larger field of small business A&E competitors. And we now know that, at least for the VA Act’s Rule of Two, two is the magic number for offers even if the agency thinks it needs multiple contracts.

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