How does a company challenge small-business set-asides?

The following question was asked by a corporate official: We want to compete in a procurement that is currently restricted to small businesses. However, our company is not considered to be "small." How can we get the agency to open the procurement to all prospective offerors?

It can be difficult to convince an agency to open a procurement to large-business participation after an initial decision has been made to set the procurement aside exclusively for small businesses. However, there are several typical strategies that can be used. Of course, the likelihood of success depends upon the facts of the particular case.

As a general rule, Federal Acquisition Regulation (FAR) 19.502-2 requires an agency to set-aside the entire amount of an acquisition exclusively for small-business participation if the contracting officer has a reasonable expectation that offers will be obtained from at least two responsible small-business concerns and that awards will be made at fair market prices.

Moreover, once a product or service has been successfully acquired on the basis of a small-business set-aside, future requirements must be procured in the same fashion unless the contracting officer makes a specific finding that the receipt of two small-business offers, or contract award at reasonable prices, will be unlikely. See FAR 19.501(g).

The contracting officer has considerable discretion in this area. Therefore, a large business that wishes to compete should approach the contracting officer first. Sometimes, a large business can show that the agency has selected the wrong Standard Industrial Classification (SIC) code.

Alternatively, the company may be able to demonstrate that the likely competitors are not, in fact, small businesses under the applicable code. See FAR 19.102. For example, a small business that plans on subcontracting a disproportionate amount of the work to a large business may jeopardize its ability to compete for a set-aside award.

Thus, on services contracts set aside for small businesses, at least 50 percent of the cost of contract performance related to labor must be expended for employees of the small-business concern. See FAR 52.219-14(b)(1). If a large business will perform the bulk of the work on the contract, that fact may provide good grounds for challenging the set-aside decision.

Compare Pacific Information Management Inc., B-224506, Aug. 14, 1986, 86-2 CPA 186 (An offeror that planned to subcontract a substantial portion of the underlying work to a large business had created a "constructive joint-venture" and was ineligible for award as a small business.).

In some cases, the large business may be able to show that the prices that the small-business concerns can be expected to offer will not be fair and reasonable. However, this can be difficult to do before the proposals are submitted. Therefore, many times a large business will decide to submit a "courtesy" offer in response to a solicitation set-aside for small-business consideration.

The agency cannot award the large business a contract on such an offer. However, the agency may look to the large business offer in deciding whether the price offered by any small business is fair and reasonable.

If the agency becomes convinced that the small-business prices are unreasonable, it may dissolve the small-business set-aside and recompete the requirement on a full and open basis. See, e.g., Stitziel Co., B-251560, April 13, 1993, 93-1 CPA 315 (The contracting officer acted reasonably in dissolving a set-aside where the price offered by a small business was 12 percent higher than the offer of a large business and 22 percent higher than the government estimate.).

Compare Browning Ferris Industries, B-209234, March 29, 1983, 83-1 CPA 323 (award to small business at a price 36 percent higher than "courtesy" offer of large business was not unreasonable). Obviously, the contracting officer has considerable discretion in this area, but any final decision must be reasonable under the facts. See Vitronics, Inc., B-237249, Jan. 16, 1990, 90-1 CPA 57 (The contracting officer erred in dissolving a set-aside based solely on the fact that the small-business offer was 6 percent higher than that of a large business.).

If a large business is dissatisfied with an agency's selection of an applicable SIC code for a procurement, it may appeal that decision to the Small Business Administration. See FAR 19.303(c). A company also may protest to the SBA if it believes that a particular offeror has misrepresented its size status. FAR 19.302 (protests against small-business representations).

However, the General Accounting Office will not consider protests that challenge the selection of an SIC code or the size status of a particular firm. See 4 C.F.R. 21.5(b)(1).

On the other hand, a company may be able to protest to GAO or another available protest forum an agency's decision to set-aside a procurement for small businesses in the first instance, if it believes the decision to be unreasonable. However, the burden on the protester is high. See, e.g., Keene Corp. v. United States, 584 F. Supp. 1394, 1401 (D. Del. 1984).

Clearly, given the contracting officer's wide discretion in this area, a company should always try to convince the contracting officer of the merits of its position before it pursues any other remedy.

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Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C. His column can be read on the World Wide Web at FCW's home page at http://www.fcw.com. Readers are encouraged to submit topics by e-mail to carl@carl.com or by voice-mail to (703) 876-5151, extension 2965.