The Navy made a big mistake in a small business procurement

In acquiring sonar equipment, the Navy didn’t go deep enough into the fine points of small business rules. In a small business set-aside, the question of whether an offeror could be a non-manufacturer showed just how complicated things can get. Haynes Boone procurement attorney Zach Prince joined the Federal Drive with Tom Temin to provide details.

Interview transcript: 

Tom Temin: And Zach sounds like they got their anchor chain twisted up on this one, which should have been a pretty simple procurement.

Zach Prince: Yeah, they did Tom.

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Tom Temin: Well, tell us more about it.

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

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

Zach Prince: Yeah, that’s right. So Knudsen Systems, or KSI, was one of the offers here. There are only two, and they complied with the RFP. The RFP was very clear that non-manufacture rule does not apply here. It didn’t have the far provision for non-manufacture. It said that class waiver applies. So KSI thought it was compliant and submitted a proposal.

Tom Temin: All right. 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 read the waiver wrong and the waiver actually only applies to one very specific type of equipment that’s for aviation, not for everything under the snake’s code. And so they informed KSI, ‘Sorry, you’re disqualified because you’re providing a good manufactured in Canada.

Tom Temin: Right. So KSI said, ‘Well, sorry, see you later,’ or did they protest?

Zach Prince: They quickly protested the GAO. And GAO, I think, would have sustained that protest too, but the Navy said, ‘Don’t worry, we’re going to go take corrective action. We’re going to amend the RFP.’ So it says, clearly what’s required here the non-manufacturer rule applies. We’ll have discussions with the offerors and will allow revisions to proposals. Well, of course, that’s not going to help KSI, right? Because they’ve still got a good that’s coming from Canada. They don’t manufacture this. So instead of submitting a new, revised proposal, they protested again and that’s where we landed here.

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Tom Temin: Right. And before we get to that second protest, if they had been a reseller of a piece of equipment made by a small business in the United States, they would have been OK?

Zach Prince: Yeah, that’s right. Unfortunately, they weren’t.

Tom Temin: All right. We’re speaking with Zach Prince. He’s a procurement attorney and partner at Haynes Boone. So they protested again over the amendment that the Navy did trying to fix things?

Zach Prince: Yeah, that’s right. So they argue that this amendment was intrinsically flawed because the Navy’s analysis, that is their market research that led them to set aside this procurement, was based on a incorrect assumption that the non-manufacture rule was not applicable. So when they went out and did research and decided, ‘Oh, there are at least, I think they said five potential offerors here.’ They were thinking offerors were providing a good of somebody and it didn’t matter who’s good, right. But in reality, what mattered was that there would be at least two offerors who are supplying a good, either manufactured by that small business in the U.S. or from another small business in the U.S. And they never did that type of analysis. So the argument was that they never should have set this aside or at least they should be required to go back and do new market research before deciding to set aside this procurement.

Tom Temin: Right. So it sounds like Knudsen Systems Inc., KSI, was going to be out of this contract no matter what the Navy did though.

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

Tom Temin: In which case, then a small business could offer something from a large business and presumably Canada’s OK for putting on a Navy ship. It’s not from China or something.

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Zach Prince: Yeah, I think that’s right. So they didn’t go into any analysis about Buy American (Act) or Trade Agreements Act. But I think likely, it would have been fine. The Navy is already buying stuff from KSI. In fact, it seems like they’re buying essentially the same thing that KSI was offering here under a prior procurement whether that was full and open or it was because the Navy misunderstood the application of the non-manufacture rule. That’s not totally clear from the protest, but KSI for full and open would have presumably been fine.

Tom Temin: Yeah, interesting. KSI knew this. Seems like they might have raised it earlier in the procurement. But be that as it may, what did GAO say on the second protest?

Zach Prince: GAO agreed with KSI. GAO generally is not going to overturn an agency decision to set aside procurements for small businesses, unless it’s clearly unreasonable. And here, it was clearly unreasonable because they had no market research. Their market research was just considering the wrong set of facts. Yeah, there probably are at least a few offers out there who could sell that are small businesses and sell the product the Navy needs. The problem was only one of them apparently manufactures themselves in the U.S.

Tom Temin: Right. I guess I don’t know whether these pieces of equipment are $10 million things, $1 million things, or do people buy them for 10,000 and put them on yachts? We don’t know that from the presentation of these facts. Do we?

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

Tom Temin: Right. So now what should the Navy do then? they should go 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 they got responses from the eventual offerors here. But that was predicated on the belief that it didn’t have to be a domestic item manufactured by small business in the U.S. Now they should be specific. Are there small businesses that are going to be providing something compliant with the non-manufacturer rule. And if only one that is the actual award a year responds and says, ‘Yeah,’ then this should be full and open and they should go out and reprocure it.

Tom Temin: Right. So for a company like KSI, that is small woman-owned business, but is representing a non-U. S. manufacturer that might, in fact, be large. We don’t know who it is from Canada. Then the only way they could get certain contracts is through full and open even though they are a small woman owned business.

Zach Prince: Yeah, that’s right. The other option for the Navy here, I mean, agencies could always ignore GAO. Then they have to explain to Congress why they did that, which is why it almost never happens. Or they could say, you ‘we just have an urgent, compelling need for this, and they’ll issue justification and approval and proceed that way, essentially as a sole source. But I didn’t get the sense from reading this decision that the Navy argued that they just need this so badly, so quickly that they have to go that route.

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

Zach Prince: Maybe.

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