Nonprofits employing workers with disabilities have different procurement rules from other companies

Editor’s note: A Melwood spokesman reports that, contrary to what the interview stated, after the court dismissed Melwood’s initial, pre-award protest, no award took place. Melwood lodged a second, pre-award protest that the court considered timely and agreed to take up the case. The Government agreed not to award the contract prior to the judge’s ruling on the matter.

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Can nonprofit contractors under the AbilityOne Program compete with one another on price, as if they were regular contractors going after a solicitation? That’s what the Court of Federal Claims was asked to rule on. The case got to the heart of what the AbilityOne program is all about. Federal Drive with Tom Temin got the latest from Smith Pachter McWhorter attorney Joseph Petrillo.

Interview transcript:

Tom Temin: Joe, first of all, give us the background on the AbilityOne Program, the rules surrounding it and how the whole thing generally operates.

Joe Petrillo: Sure, the Javits-Wagner-O’Day Act, or JWOD in government speak, set up a socioeconomic program to help employ people who are blind and severely disabled. And it did that by giving a contracting preference to nonprofits who use such people in more than 75% of the direct labor they provide.

Tom Temin: And this goes back many years.

Joe Petrillo: Many years. This program has been around for a very long time, and it’s evolved over time, but it’s been stable for for some period now. It’s a very large program – and actually, it involves about $4 billion worth of goods and services sold to United States government, they employ over 45,000 blind or severely disabled people in all 50 states, and it has a huge amount of coverage. The contracting process, the process of awarding and pricing the contracts, proceeds under procedures established by AbilityOne in their regulations. So they have power to make this program work, preferential program work through regulations.

Tom Temin: And by the way, where does AbilityOne live in the government.

Joe Petrillo: It’s an independent agency of the federal government. AbilityOne establishes these regulations, as I’ve mentioned, and they are federal agency. And as is relevant to this case, the pricing process is very different from what you have in an ordinary competitive procurement. First, the nonprofit is selected for the contract through some evaluation process of its technical and other capabilities. And after the selection is made, then price is established in a process of negotiation, including the government agency that’s going to be awarding the contract and using the services or goods, the nonprofit that’s going to be performing the contract. And an outfit called Source America, another organization that administers this part of the program for AbilityOne, that’s the process. So first, you figure out who the awardee is, then you negotiate the price.

Tom Temin: But in this case, then AbilityOne tried to do something completely different.

Joe Petrillo: Right. Apparently, around 2015-2016, Congress started getting interested in the idea of having competition among these nonprofits in price as well as other features. And they asked the section 898 panel, which was established under the National Defense Authorization Act of 2017, to study whether there should be price competition in JWOD procurements. And the section 898 panel thought it might be a good idea to have a best value trade off as part of these procurements. So AbilityOne did not change its regulations, but it set up a pilot program by issuing an interim policy, and it’s selected the facilities contract at Fort Meade for the pilot program. The current contractor for that facilities contractor was a JWOD entity called Melwood Horticultural Training Center. And they were not interested in competing on price so they filed a bid protest with the court of federal claims when the procurement was announced. The Justice Department moved successfully to dismiss that case because it was premature, the procurement had taken place. The procurement went forward after the court dismissed the case and Melwood apparently did not get the award. And so they filed a second protest. They lost the competition, protested a second time and the court of federal claims now had to look at the main issue, which is can the AbilityOne program be conducted with price competition in this context?

Tom Temin: We’re speaking with Joseph Petrillo. He’s a procurement attorney with Smith Pachter McWhorter. So this gets to the crux of the whole issue – what did the court decide in the second protest?

Joe Petrillo: The issue that Melwood raised was that the pilot program established by this interim policy conflicted with the statute and regulations that Jay wants statute said that these procurements have to be conducted under ability ones regulations, and those regulations did not contemplate the type of price negotiation that was included in the pilot program. They were the old system of select the nonprofit first, then negotiate price not having price competition among the nonprofits. The issue sounds technical, but it’s important the regulation process is one that involves notice by the agency have an intent to issue a regulation. There’s then a comment period, and usually the regulation isn’t effective until after the comments are considered agency explains what it’s doing. Why maybe changes the regulation and issues formally, ability, one sidestepped all that by issuing an interim policy? And the court basically said, No, you can’t do that. This is such a fundamental change, it has to be done through the regulatory process.

Tom Temin: So that procurement then is back to ground one, and the policy that AbilityOne was trying to field, what is the status of that then? How can they have a policy of competition, but there’s no way to try it out?

Joe Petrillo: Well, there is a way the AbilityOne can proceed. The court suggested that AbilityOne probably has the right to change its regulations to adopt this type of a pilot program. But it has to go through the regulatory process. And that’s going to take some time. The court in the meanwhile, permanently enjoined AbilityOne from awarding the contract that had competed under the interim policy and permanently enjoined them from awarding another contract under that interim policy for the Fort Meade facilities contract. I think there are some interesting policy issues involved in whether or not there should be such a price competition. On the one hand, you could see that perhaps having a price competition might lead to a more attractive price, and that might make the AbilityOne program more interesting and more attractive to federal agencies – they might be inclined to put more contracts into it. On the other hand, the point here is to employ people ho are blind and severely handicapped, and presumably aren’t going to be as productive as people who are differently abled. So to the extent that you’re competing with price, the nonprofits may have an inducement to employ fewer of those blind and severely handicapped people in the performance of the contract. And these are difficult policies that needs to be considered and weighed.

Tom Temin: Sure. And those people are often employed under different labor regulations, and therefore don’t always have to get paid minimum wage in many cases. And so if you have the agencies that they work for or the nonprofits that they work for, competing on price that could even depress wages for people that as a society, we’ve decided we want to help.

Joe Petrillo: Yes, there are some really interesting and complicated policy issues here to try to figure out how to help the most people in the best way.

Tom Temin: Well, the ball is an AbilityOne’s court to this point, if it really wants to go ahead with this system of price competition, it’s got to go through the rulemaking first.

Joe Petrillo: Yes, that’s what they would have to do to proceed. And Congress has been sort of thinking about this area, but they haven’t really decided what to do, so they might weigh in at some point as well.

Tom Temin: Joseph Petrillo is a procurement attorney with Smith Pachter McWhorter. Thanks so much.

Joe Petrillo: Thank you, Tom.

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