When you solicit commercial services, make sure you and bidders define the terms

The Agriculture Department recently lost a contract award protest. It was attempting to purchase commercial style services for evictions and foreclosures for ho...

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The Agriculture Department recently lost a contract award protest. It was attempting to purchase commercial style services for evictions and foreclosures for homes behind in their loan payments. It all hinged on what the department meant by “commercial services.” The Federal Drive with Tom Temin talked about all this with Smith Pachter McWhorter procurement attorney Joe Petrillo.

Interview transcript:

Tom Temin: I guess the first question is, who knew the Agriculture Department was in the housing loan business?

Joseph Petrillo: It is; it has a program called the Rural Development Single Family direct loan program, which is I guess what it says. It’s loans to family farms. But sometimes they go wrong. And there’s a default, in which case the government has to treat this as a mortgage foreclosure in essence, and they were seeking services to do that. Foreclosures, evictions, property preservation, appraisals, and bankruptcies. And these are services that are also sold, obviously to commercial lenders for the same purposes. They issued a solicitation under the rules for commercial services contracts. And those rules require that the contracts have two different types of clauses. One, clauses that are required by law, statute and executive order, and two, clauses that are consistent with customary commercial practice. Unless the government has some kind of unique need and needs a different kind of clause. Agencies are also supposed to conduct market research to determine what are the customary commercial practices for the item or service it’s going to procure. Prior to the submission of offers. Orlans protested two provisions of the solicitation, which had become provisions of the proposed contract.

Tom Temin: This was one of those commercial providers then.

Joseph Petrillo: It is a company that provides these services and it wants to participate and compete, for the Agriculture contract.

Tom Temin: So this was a pre award protest?

Joseph Petrillo: It was actually pre-offer submission. It’s protesting the terms of the solicitation. And generally, you’ve got to do that before offers or bids are due. The protests concern two provisions of the proposed contract as being contrary to our customer commercial practice. One was that property preservation and maintenance has to be paid on a fixed monthly price per property. So you get a certain amount of money each month for property and preservation and maintenance, regardless of what the property is. The other provision is that foreclosure services were paid only when the government receives unencumbered title to the property. That’s at the very end of that process of foreclosure. Orlans submitted the protest and backed it up with a very detailed sworn declaration from an employee with 15 years of experience in this area of work. And that employee also summarized 24 years of experience the company had with mortgage default services.

Tom Temin: So then the implication is that this is deep knowledge in what the reality of commercial services is, even if that’s not what Agriculture Department put in their solicitation.

Joseph Petrillo: Exactly. And the details, as reported by GAO in the declaration, were as follows: Industry practices apparently had evolved because of the subprime lending crises in the 1990s and 2008. The reaction to those crises had increased the complexity cost and risk of foreclosures, and the services and actions in connection with those. As a result, both of the instances that were protested had changed. There had been a transition from itemized fixed fees at one price per property — monthly fees — to fixed fees for different services for property preservation and maintenance. So property that requires more types of services is going to have more of those services performed and paid for on a fixed fee per service, as opposed to some monthly fee that applies to all different properties.

Tom Temin: Got it. We’re speaking with Joe Petrillo, he’s a procurement attorney with Smith, Pachter, McWhorter. So this stuff gets very arcane. And it sounds like basically what we’re saying here is that Agriculture Department needed to do more learning and due diligence on what to ask commercial providers about these types of commercial services that are super specialized?

Joseph Petrillo: And how they get paid for the work that they do. That was also the case for foreclosure services. They had transitioned from payment of the delivery of unencumbered title — in other words, the end of the process — to milestone payments, so they’re going to be get paid a certain amount of money when certain things happen. Ironically, the innovators of that milestone payment process were two other federal agencies: Fannie Mae and the Federal Housing Financing Agency.

Tom Temin: Well, one’s a federal agency, one is something that is under federal receivership, but it’s ostensibly a private corporation.

Joseph Petrillo: Yeah, indeed, that is true, but it’s operating under law, or a charter.

Tom Temin: Like the Postal Service.

Joseph Petrillo: That’s a good analogy. Agriculture initially objected to the protest with the argument that the declaration wasn’t enough. But GAO felt, based on the experience the declarant had and detail and explanation of what customary commercial practice was and how it evolved, it was adequate evidence. Agriculture then pointed to what it called its market research. And that was done in a fairly usual way for government contracts. Before the solicitation was issued, Agriculture issued a request for information to industry, and Agriculture pointed to the responses had gotten in saying that there really wasn’t any customary commercial practice for these two items. GAO examined the questions in the RFI and the answers that had been submitted. And it noted that the questions didn’t explicitly ask what was the customary commercial practice. Instead, Agriculture had asked about different aspects of the solicitation it had issued and asked for comment on those. [USDA] wasn’t really looking at what was done ordinarily in the industry; it was looking at how the offerors felt about these terms and conditions. So in this instance, Agriculture really hadn’t conducted market research to determine customary commercial practice. GAO sustained the protest, and now Agriculture has a choice: It has to change the solicitation to reflect customary commercial practice, or get a waiver if its needs are somehow unique as a government agency, and it can’t follow customary commercial practice.

Tom Temin: So the lesson learned here then is whatever commercial practice you’re buying, make sure you know what is commercial practice, or ask the right questions, such that you can get accurate answers from industry on what is current commercial practice.

Joseph Petrillo: I think that’s a very good way of summarizing this lesson for federal agencies. When you go out and RFI, use that as a way to fill in any gaps you have in your market research on what customary commercial practice is. The other thing that’s noteworthy here is the issues that were being raised here have to do with the level of risk accepted by the contractor. Not being paid for long periods of time until the foreclosure process is over is one of those, having to carry those costs. Another issue, which goes to risk is the fixed monthly price per property: Some properties are going to require a lot of work some less. The interesting thing here is that when you depart from commercial item procurement, commercial service procurement, when vendors complain that the solicitation puts too much risk on them in the non commercial area, those protests almost always lose. GAO almost always says, “Well, you know, this is the risk you’ve got to bear and we’re not going to tell agencies how to describe what they need.” In the commercial item procurement, though, if the level of risk is not consistent with customary commercial practice, then you’ve got a problem as an agency. You’ve got to justify it in accordance with some unique federal requirement or else follow what the practice is.

Tom Temin: Yeah, well a house to foreclose on that needs maintenance is a house to foreclose on that needs maintenance. And that’s pretty much cut and dried, whether it’s a farmhouse, I guess, or a nice prewar six in Manhattan.

Joseph Petrillo: Well, we’ll see what Agriculture does in this instance, but you’re making a lot of sense to me.

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