No Good News for Small Businesses in Recent GAO Decision

November 6, 2015

The Government Accountability Office (GAO) recently released a decision in the matter of FedServ-RBS JV, LLC, B-411790, October 26, 2015, that offers little assurance for small companies seeking to form SBA-approved joint ventures in pursuit of government business. Though consistent with GAO precedent and apparently in concert with Small Business Association (SBA) regulatory guidance, the decision puts significant cost risk on aspiring joint venture partners and forces contracting agencies to award to second-place bidders if the SBA fails to timely approve a joint venture request.

On May 29, 2015, the Army Corps of Engineers received five timely proposals for a competitive 8a set aside contract. One of the proposals was from the protester, FedServ-RBS JV. FedServ, an 8a participant, and RBS, a non-8a small business, formed the joint venture in advance of the proposal and submitted their JV application to the SBA on June 4, 2015. On June 16, the SBA responded with a deficiency letter setting forth certain apparently curable missing items from the application. FedServ-RBS unfortunately did not respond to the letter immediately, and provided an updated JV application that the SBA received on July 2.

The Corps of Engineers, meanwhile, had already completed its evaluation process and had determined that the JV’s proposal offered the best value to the government. On June 25, the Corps notified the SBA that the JV was the apparent awardee and sought a formal determination of the JV’s eligibility. On July 1, one day before receiving the updated and corrected JV application from FedServ-RBS, the SBA notified the Corps that the JV was not eligible for award. After receiving this determination, the Corps reevaluated the remaining proposals and ultimately selected another bidder, to whom it awarded the contract on July 9. FedServ-RBS timely protested.

GAO rules and precedent allow for protests of certain SBA actions, but only in limited circumstances and generally only when it is alleged that the SBA violated or misapplied regulations. Here, though such misapplication of regulation was alleged, the GAO ultimately found that SBA had acted in accordance with regulations and that the Corps was not obligated to wait longer than the five-day notice-of-intent-to-award period for the SBA to complete its review of the joint venture application. GAO denied the protest.

Under SBA regulations, there exists no requirement that SBA review joint venture applications until SBA is notified that the joint venture has been selected for award. Furthermore, the regulations require that SBA notify the procuring agency of the ineligibility of the joint venture within five working days of the notification of apparent awardee status if SBA has not then approved the joint venture. So the GAO’s decision seems completely correct, if unsatisfying.

The result, of course, is that FedServ and RBS spent a lot of money forming a joint venture and submitting a proposal with no assurance of eligibility, and the Corps was denied the ability to contract with the company that submitted the best proposal. And the SBA is left seemingly with two bad options – reviewing dozens or hundreds of joint venture applications in advance, knowing that a vast majority of the applicants will not be selected for award anyway, or negatively impacting small businesses’ opportunities to win contracts because five days is insufficient time to adequately review and approve a joint venture agreement.

The SBA can, and often does, begin review of joint venture applications in advance. In fact, it appears that they did so in this case, and that the joint venture did not respond promptly to the SBA’s deficiency letter. But such an ad hoc approach that is primarily dependent upon resources and workload should be considered for regulatory reform to give contractors some assurance of eventual eligibility and to give procuring agencies comfort that proposals they evaluate and select for award will be able to accept the contract.

If you have questions or would like specific information about the GAO decision discussed in this issue of GovCon Now, please contact the author, Ron Fouse.

If you would like additional information about McGuireWoods’ government contracts group, please contact any of the attorneys listed.