Chaedrol GAO Protest Log 202408: ICF, NextStep, SPA (updated AI edition)

Knudsen Systems, Inc. - B-422433.2

You should care.

Category: Discussions

Date: August 9, 2024

URL: https://www.gao.gov/products/b-422433.2

In this case, Knudsen Systems, Inc., protested the agency's decision to restrict the solicitation for SONAR sounding sets to small businesses, arguing that the agency's market research was insufficient to support such a set-aside. The protester claimed that the agency failed to evaluate whether two or more responsible small business concerns could comply with the nonmanufacturer rule after the agency discovered an error in its initial market research assumptions. GAO sustained the protest, emphasizing that the agency's flawed market research did not adequately demonstrate a reasonable expectation of receiving competitive proposals from small businesses. As a result, the GAO highlighted the importance of thorough market analysis in procurement decisions and mandated that the agency reassess its set-aside determination in light of the correct application of the nonmanufacturer rule.

Digest

Protest is sustained where agency's market research was insufficient to conclude that agency would likely receive proposals from at least two responsible small business concerns that could meet solicitation's requirements at a fair market price, and therefore, agency's decision to restrict solicitation to small businesses was unreasonable.

Key takeaways (citations removed)

Set asides:

Under section 19.502-2(b) of the FAR, commonly referred to as the “rule of two” requirement, agencies are required to set aside for small business participation, a procurement valued over the simplified acquisition threshold, when there is a reasonable expectation that offers will be obtained from at least two responsible small business concerns, and that award will be made at a fair market price. FAR 19.5022(b).
Generally, we regard such set-aside decisions as a matter of business judgment within the contracting officer's discretion that we will not disturb absent a clear showing that it was unreasonable. The decision whether to set aside a procurement may be based on an analysis of factors such as the prior procurement history, the recommendations of appropriate small business specialists, and market surveys that include responses to sources sought announcements. The use of any particular method of assessing the availability of small businesses is not required. . The assessment must nevertheless be based on sufficient facts so as to establish its reasonableness.

Market research and nonmanfaucturer rule

A contracting agency's investigation to determine the availability of responsible small business concerns for set-aside purposes must address not only the existence of small businesses that might submit proposals, but also their capability to perform the contract; the fact that multiple small businesses are identified in the course of market research is not necessarily determinative. Where the nonmanufacturer rule applies to a set-aside, and the agency's market research fails to consider whether the firms identified in the market research can comply with the rule, the market research is unreasonable.
Our review finds--and the record confirms--that the Navy failed to assess whether there were two or more small businesses that could comply with the nonmanufacturer rule. Specifically, the agency's market research and set-aside decision were based on the Navy's mistaken assumption that the SBA had issued a class waiver for all of NAICS code 334511. By its own admission, the Navy was operating under this assumption until November 2023. COS at 2. As a result, all of the subsequent actions taken--and documents produced--by the agency relied on the erroneous assumption that the nonmanufacturer rule did not apply to the procurement.[

Prejudice

The agency has acknowledged that KSI would be ineligible for award once the solicitation was amended to include the nonmanufacturer rule requirement. COS at 5 (stating “it was determined that KSI was ineligible for award due to the nonmanufacturer rule.”). Because we find the Navy erred by failing to perform a proper “rule of two” analysis--to determine whether there was a reasonable expectation that offers will be obtained from at least two responsible small business concerns that could perform the work of the amended terms of solicitation--KSI was competitively prejudiced by the agency's unsupported decision to set aside the procurement, which substantively affected the protester's ability to compete.