Avoid Costly Mistakes With VA Rule of Two Small Business Set Aside Rules FAR 19.502-2

There has been recent litigation as to the  small business VA rule of two small business set aside rules and agency assessments before using the FSS Schedule. This can be a problem especially when filing a government contract bid protest at GAO or Court of Federal Claims under FAR 19.502-2 or other VA regulations.

The FAR generally demands that “[c]ontracting officers shall provide for full and open competition.” 48 CFR 6.101(b). The Federal Supply Schedule (“FSS”) exists as one of the tools for achievement of the overarching policy.

The Veterans Benefits, Health Care, and Information Technology Act of 2006 requires the Secretary of Veterans Affairs to set annual goals for contracting with service-disabled and other veteran-owned small businesses. 38 USC 8127(a). To help reach the agency small business goals, a separate small business set-aside provision known as the “Rule of Two” provides that a contracting officer “shall award contracts” by restricting competition to veteran-owned small businesses if the officer reasonably expects that at least two such businesses will submit offers and that “the award can be made at a fair and reasonable price that offers best value to the United States.”  38 USC 8127(d). Two exceptions provide that the contracting officer “may” use noncompetitive and sole-source contracts for contracts below specific dollar amounts.

 The US Supreme made a sweeping decision directing that the Department of Veterans Affairs (VA) must apply its Rule of Two small business rules to foster contracting with Veteran-owned small businesses across the board. Apparently, the contracting agency was merely using the rule to meet its small business contracting statutory goals instead of the true intent of the rule.

In See Kingdomware Techs. v. United States, No. 14-916, 597 U.S. ___ (June 16, 2016)., the US Supreme Court decided in 2016 that small business contracting set-asides imposed by the Veterans Benefits, Health-Care and Information Technology Act of 2006 (the “2006 Act,” codified at 38 USC 8127) are mandatory, apply even when the agency has already met its annual small business contracting goals, and extend to Federal Supply Schedule (FSS) purchase orders. See Kingdomware Techs. v. United States, No. 14-916, 597 U.S. ___ (June 16, 2016). 

In Kingdomware, the Supreme Court had to decide the legal issue of whether the VA must use the set aside for small business rule of two every time it awards contracts or whether it must use the Rule of Two small business rules only to the extent necessary to meet annual minimum goals for contracting with veteran-owned small businesses.  The Court ruled that the Department must use the regulation when awarding contracts, even when the Department will otherwise meet its annual minimum contracting goals.

Mandatory Application of the VA FSS Small Business Set Aside by Agencies 38 USC 8127 and FAR 19.502-2

FAR 19.502-2 and the 2006 Act requires the VA to establish annual goals for contracting with veteran owned (VOSB) and service-disabled veteran owned (SDVOSB) small businesses.[[N: See 38 USC 8127 (a)(1)(A) (“[T]he Secretary [of Veterans Affairs] shall . . . establish a goal for each fiscal year for participation in Department contracts (including subcontracts) by small business concerns owned and controlled by veterans who are not veterans with service-connected disabilities.”); 38 USC 8127 (a)(1)(B) (“[T]he Secretary shall . . . establish a goal for each fiscal year for participation in Department contracts (including subcontracts) by small business concerns owned and controlled by veterans with service-connected disabilities.”)]] The provision at issue in Kingdomware was 38 USC 8127 (d), which states:

[F]or purposes of meeting the goals under subsection (a)…  a contracting officer of the Department shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States. 

Small Business Set Aside VA FSS Schedule Government Contracts: The General Services Administration (“GSA”) established the FSS Schedule to give Government agencies with a “simplified process for obtaining commercial supplies and services at prices associated with volume buying.”

Under the VA FSS Schedule, government contractors agree to provide goods and services at set prices for a stated period of time. This allows federal contracting agencies to procure services and supplies and using a small business set aside vehicle directly from the FSS Schedule instead of using traditional full and open competition. Contractors should understand that:

• Agencies have wide discretion to decide the method of contracting to use, including the FSS. Tyler Constr. Grp. v. United States, 570 F.3d 1329, 1334 (Fed. Cir. 2009).
• The FAR specifies as a matter of contracting priority that an agency is encouraged to obtain goods and services from FSS contractors before purchasing from commercial sources, which include privately owned VOSBs and VA SDVOSBs. 48 CFR 8.004.

GSA Small Business Rule of Two Set Aside Contracting and VA FSS Schedule Discretion FAR 19.502-2

The VA government contract process under FAR 19.502-2 and applicable VA rules has developed policies to meet its small business goals. Therefore, in a bid protest, offerors may not want to argue that the VA federal contracting process has to use the GSA small Rule of Two set aside contracting inquiries before using the VA FSS Schedule. This will be a losing argument.

Instead, bid protestors must focus on any abuse of discretion or unreasonableness of the Agency’s source selection process. Protestors must focus on whether the agency followed the solicitation requirements or somehow conducted an unreasonable evaluation.

Bottom Line

There is no requirement supporting a GSA small business set aside VA Rule of Two small business contracting inquiry before using the VA FSS Schedule before using the FSS. See Kingdomware Technologies, Inc. v. United States, No. 2013-5042 (June 3, 2014).

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Avoid Costly Mistakes With VA FSS Rule of Two and Government Contracts.