The Navy made a big mistake hiring a small company

In procuring sonar equipment, the Navy didn’t dig deep enough into the finer points of the small business rules. In an isolated small company, the question of whether a bidder could be a non-manufacturer showed how complicated things can get. Haynes Boone acquisitions attorney Zach Prince joined Federal Drive with Tom Temin to provide details.

Tom Temin: And Zach looks like they twisted their anchor chain on this one, which should be a pretty easy acquisition.

Zach Prince: Yes they did Tom.

Tom Temin: Well, tell us more about that.

Zach Prince: of course Therefore, this is a procurement conducted by the Naval Undersea Warfare Center. They were buying sonar equipment, which is a tool for measuring the depth of water below the lowest projection of a vessel. So the Navy set aside this procurement for small businesses after they did market research. The famous Rule of Two states that if there is a reasonable expectation that an agency will receive bids from at least two responsible small businesses and the award would be at a fair market price, then the agency must set aside the procurement for the small businesses . what happened here The problem is that there is a rule called the non-manufacturer rule. That rule is that if you’re a small business that’s going to sell a product to the government, or you have to manufacture that product, or you’re selling someone else’s manufactured product, that manufacturer has to be a domestic small business. . There are a few other qualifications there as well. But the Navy, when they did their research here, they thought, “Oh, the non-manufactured rule doesn’t apply because there’s a class deviation that the Small Business Administration issued for the snake code,” at least that’s how they read it originally. that That is why they requested proposals for two offers on that basis.

Tom Temin: right And one of those bids was a non-manufacturer, which the Navy thought would be fine because of the class equipment code deviation that included sonar.

Zach Prince: Yes, that’s right. So Knudsen Systems, or KSI, was one of the deals here. There are only two, and they complied with the RFP. The RFP was very clear that the non-manufacturing rule does not apply here. It did not have the non-manufacture provision. He said the class exemption applies. So KSI thought he was compliant and submitted a proposal.

Tom Temin: all good What happened then?

Zach Prince: Well, lo and behold, after they submitted their proposal and the Navy evaluated it, the Navy realized, wait a minute, they misread the waiver and the waiver actually only applies to a very specific type of equipment that’s for aviation, no for everything under the code of the serpent. And so they informed KSI, “Sorry, you’re disqualified because you’re providing a Canadian-made good.”

Tom Temin: right So did KSI say, “Well, sorry, see you later,” or did they protest?

Zach Prince: They quickly protested to the GAO. And GAO, I think, would have sustained that protest as well, but the Navy said, “Don’t worry, we’re going to take corrective action.” We are going to modify the RFP’. From what you say, clearly what is required here the non-manufacturer rule applies. We will have discussions with bidders and allow revisions of proposals. Well, sure, that’s not going to help KSI, is it? Because they still have a good one coming from Canada. They don’t manufacture this. So instead of presenting a new revised proposal, they protested again and that’s how we got here.

Tom Temin: right And before we get to that second protest, if they were a reseller of equipment made by a small company in the United States, would they be OK?

Zach Prince: Yes, that’s right. Unfortunately, they were not.

Tom Temin: all good We’re talking to Zach Prince. He is an acquisitions attorney and partner at Haynes Boone. So they protested again about the amendment the Navy made trying to fix things?

Zach Prince: Yes, that’s right. They therefore contend that this amendment was inherently flawed because the Navy’s analysis, i.e., its market research that led it to void this procurement, was based on an incorrect assumption that the non-manufacturing rule did not apply. So when they went out and did some research and decided, “Oh, at least there’s, I think they said five potential bidders here.” They thought that the bidders were offering someone’s good and it didn’t matter who was good, right. But really, what mattered was that there would be at least two bidders supplying a good, whether it was manufactured by that small company in the US. USA or other small business in the US. USA And they never did that kind of analysis. So the argument was that they should never have put this aside or at least they should have been forced to go back and do some new market research before deciding to put this recruitment aside.

Tom Temin: right So it appears that Knudsen Systems Inc., KSI, was going to be left out of this contract no matter what the Navy did.

Zach Prince: Yes, that’s right, unless the Navy opens it up to full and open competition.

Tom Temin: In that case, a small company could offer something from a large company, and presumably Canada is fine to put together a Navy ship. It’s not from China or something.

Zach Prince: Yes, I think that is true. Therefore, they did not go into any analysis on Buy American (Act) or Trade Agreements Act. But I think it would probably be fine. The Navy is already buying stuff from KSI. In fact, it looks like they are buying essentially the same thing that KSI offered here under a prior procurement, whether it was full and open or because the Navy misunderstood the application of the non-manufacture rule. That’s not entirely clear from the protest, but KSI for full and open would presumably be fine.

Tom Temin: Yes, interesting. KSI knew this. Seems like they could have brought it up earlier in the recruitment. But be that as it may, what did the GAO say in the second protest?

Zach Prince: GAO agreed with KSI. The GAO generally will not overturn an agency’s decision to set aside procurement for small businesses unless it is clearly unreasonable. And here, it was clearly unreasonable because they had no market research. Their market research just considered the wrong set of facts. Yes, there are probably at least a few deals that could sell small businesses and sell the product the Navy needs. The problem was that only one of them was apparently made in the US

Tom Temin: right I guess I don’t know if these teams are 10 million dollar things, 1 million dollar things, or do people buy them for 10,000 and put them on yachts? We do not know that from the presentation of these facts. us?

Zach Prince: No, the contract here would be about two and a half million. So presumably that’s buying a couple of pieces of equipment, and they’re not necessarily very expensive, but there’s not, apparently, that level of domestic industry, at least with small businesses.

Tom Temin: right So what should the Navy do then? they should come back

Zach Prince: They should go back out and issue a new RFI and see what kind of responses they get. Initially, they issued an RFI for their market research and got responses from potential bidders here. But that was based on the belief that it didn’t have to be a household item made by small businesses in the U.S. Now they should be specific. There are small companies that are going to offer something that meets the non-manufacturer rule. And if only one that is the prize of the year answers and says, “Yes,” then that should be full and open and they should go out and look for it again.

Tom Temin: right So for a company like KSI, it’s a small, women-owned company, but it represents a non-US manufacturer that could, in fact, be big. We don’t know who is from Canada. So the only way to get certain contracts is through full and open even if they are a small women’s business.

Zach Prince: Yes, that’s right. The other option for the Navy here, I mean, the agencies could always ignore the GAO. Then they have to explain to Congress why they did that, so it almost never happens. Or they could say, “we just have an urgent and compelling need for this, and they’ll issue justification and approval and proceed that way, essentially as a sole source.” But I didn’t understand when I read this decision that the Navy argued that they just need it so much, so quickly that they have to go that route.

Tom Temin: yes Well, in the meantime, keep your ships in deep water waiting for these new sonar machines. Maybe?

Zach Prince: maybe

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