In re TFab Manufacturing, LLC

• Decision Date: 18 June 2009
• Docket Number: B-401190
• Parties: Matter of: TFab Manufacturing, LLC
• Court: Comptroller General of the United States

Matter of: TFab Manufacturing, LLC

No. B-401190

Comptroller General of the United States

June 18, 2009

William K. Walker, Esq., Walker Reausaw, for the protester.

Maj Walter Dukes, U.S. Army Materiel Command, and Kenneth Dodds Esq., Small Business Administration, for the agencies.

Frank Maguire, Esq., and John M. Melody, Esq., Office of the General Counsel, GAO, participated in the preparation of the decision.

Daniel I. Gordon, Acting General Counsel.

DIGESTS

Protest challenging propriety of solicitation provision--stating that offerors must meet requirements under Limitations on Subcontracting (LOS) clause separately for services and supply portions of work under solicitation--is sustained where provision is inconsistent with Small Business Act which provides for application of either services or supply portion of LOS clause, but not both.

DECISION

TFab Manufacturing, LLC, of Madison, Alabama, protests the terms of request for proposals (RFP) No. W58RGZ-08-R-0438, issued by the Department of the Army for improved data modems. TFab maintains that the RFP improperly applies the Limitations on Subcontracting (LOS) clause by applying it separately to both the supply and services portions of the contract. ^[1]

We sustain the protest.

The RFP, issued on July 9, 2008 as a total small business set-aside, provided for the award of an indefinite-delivery, indefinite quantity contract. Contracting Officer's Statement (COS) at 3. The RFP called for both hardware requirements and engineering services requirements. COS at 2-3. The RFP incorporated FAR sect. 52.219-14, the LOS clause, as follows:

LIMITATIONS ON SUBCONTRACTING (DEC 1996)

(a) This clause does not apply to the unrestricted portion of a partial set-aside.

(b) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for--

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

(2) Supplies (other than procurement from a nonmanufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.

(3) General construction

(4) Construction by special trade contractors

Id. ; RFP at 45.

The LOS clause implements subsection 15(o) of the Small Business Act, 15 U.S.C. sect. 644(o), which establishes the 50% subcontracting limitations in paragraph (b)(1) (services) and paragraph (b)(2) (supplies) of the LOS clause. See also Small Business Administration (SBA) Regulations, 13 C.F.R. sect. 125.6 (2009).

Proposals were received from several small businesses, including TFab. COS at 3. The contracting officer questioned TFab regarding its compliance with the LOS clause, since TFab's proposal specifically indicated "an approximately 95 percent exemption" from the 50% subcontracting rule for the required services. Id. at 3-4. The contracting officer was concerned "that the protester's proposal for how the services CLINS were to be performed amounted to a significant pass through to a large business." Id. at 4. On February 12, the contracting officer issued RFP amendment No. 17, which clarified the manner in which the Army intended to apply the LOS clause, as follows:

V. Offerors are cautioned that this acquisition is a Small Business Set-Aside and is subject to the requirements of FAR clause 52.219-14, Limitations on Subcontracting. This acquisition contains both Supply and Service contract line items, both of which are separately subject to FAR clause 52-219-14, Limitations on Subcontracting. Offerors are cautioned that CLINs described as Cost Plus Fixed Fee CLINs are considered to be an important part of this procurement and not incidental to the production/fixed fee CLINs. Accordingly, offerors must meet the requirements for Small Business Set-Aside with regard to these CLINS.

RFP, Amend. No. 17, sect. A-16.V. All offerors, including the protester, submitted revised proposals by the March 17 closing time. COS at 4. This protest was filed prior to the closing time.

ARGUMENTS

TFab asserts that the above provision added by amendment No. 17 improperly applies both subparagraphs (b)(1) (services) and (b)(2) (supplies) of the LOS clause to require small business offerors to agree to perform at least 50% of the cost of both the services and supply portions of the contract. TFab contends that the clause does not provide for such a "hybrid application"; rather, properly applied, the clause requires the agency to determine the principal purpose of the contract--here, services or supplies, but not both--and then apply the paragraph of the LOS clause corresponding to that work.

The Army responds that the services and supply requirements set forth in the RFP historically have been obtained through separate acquisitions, each of which was subject to the appropriate LOS provision, COS at 2-3; AR at 1-2, and explains that the two requirements now have been combined because it was determined to be "advantageous to have one vendor responsible for both the service and supply components." AR at 2. The Army states that it was concerned that combining the requirements could push small businesses out of the competition for either the services or supplies portion of the procurement--via a pass-through subcontract to a large business--if both of the subcontracting limitations were not imposed, and that it was within the agency's discretion to apply the LOS clause in a manner to avoid this result. Id. In this regard, the contracting officer states that, in combining the requirements, she felt it "only fair to ensure that both efforts were subject to the limitations on subcontracting, so that the services portion would be reserved for small business and not permitted to be a pass-through to large business." COS at 5.

ANALYSIS

We agree with the protester that the LOS clause does not provide for dual application of the 50% requirement. The clause, on its face, establishes separate subcontracting limitations "in the case of a contract for" four distinct types of work. Paragraph (b)(1) establishes subcontracting limitations, not with regard to services generally, but with regard to "a contract... for Services." Similarly paragraph (b)(2) establishes subcontracting limitations, not with regard to supplies generally, but with regard to "a contract... for Supplies." There is no language in the clause that contemplates a hybrid services/supply contract; more specifically, there is no language that provides for applying both paragraphs (b)(1) and (b)(2) in a single acquisition to require small business firms to agree to perform at least 50% of both services and supply work under a single contract. We read the language of the clause as indicating that the applicable LOS clause paragraph is to be applied to entire contracts, rather than portions of contracts, and that the clause contemplates that the contracting agency must choose among the paragraphs.

In AFL-CIO v. Donovan, 582 F.Supp. 1015, 1020 (D.D.C. 1984), aff'd, 757 F.2d 330 (D.C. Cir. 1985), the court reached a similar conclusion in interpreting applicability of the Service Contract Act (SCA), 41 U.S.C sections 351-358 (applicable to contracts "the principal purpose of which is to furnish services") and the Walsh-Healey Public Contracts Act (WHA), 41 U.S.C. sections 35-45 (applicable to contracts "for the manufacture or furnishing of materials, supplies, articles, and equipment"), statutes in para materia with subsection 15(o) and the LOS clause. Specifically, in interpreting the relevant provisions of the SCA, the court found that text that "refers to 'the contract' without any reference to line item specifications" indicated that the SCA "was intended to apply to entire contracts, not to individual line items." Agencies' implementation of the SCA and WHA is consistent with this interpretation; the contracting agency must make a determination whether a requirement is for services or supplies in order to determine which of the two statutes is applicable to an acquisition. See Information Handling Servs., 70 Comp. Gen. 35 (1990), 90-2 CPD para. 306 at 3 (regulations implementing the SCA and WHA contemplate an initial determination by the procuring agency as to which statute applies to a particular procurement); Tenavision, Inc., B-231453, Aug. 4, 1988, 88-2 CPD para. 114 at 2 (regulatory scheme implementing these statutes envisions an initial determination by the contracting agency as to which statute applies to a particular procurement). This determination requires identification of the principal purpose of the contract. See AFL-CIO v. Donovan, 757 F.2d 330, supra, at 345 (SCA applies only when principal purpose of contract is for services); Southern Packaging & Storage Co. v. U.S., 458 F.Supp. 726, 734 (D.S.C. 1978), aff'd, 618 F.2d 1088, 1090 (4th Cir. 1980) (acquisition of field rations would be exempt from coverage under SCA...