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Thursday, April 23, 2015

How to distinguish a cooperative contract from a procurement contract in US federal law

The US Court of Appeals for the Federal Circuit case CMS Contract Mgmt. Servs. v. Mass. Hous. Fin. Agency 2013-5093 (Fed. Cir. Mar 25, 2014) is final; the US Supreme Court Petition for Certiorari was denied on April 20, 2015.  

The gist of this case, as I see it, is that an agency relationship created by the federal government and a third party to deliver the government's services to its clients is not a procurement contract; but, a contractor relationship created to enable the third party to assist the government to perform its task of serving its clients is a procurement contract.  Feel free to correct me if this interpretation is wrong.

As usual, you cannot rely on the rendition here; read the decision at the link if you really need to know about it.
The Federal Grant and Cooperative Agreement Act (FGCAA) sets forth the type of legal instrument an executive agency must use when awarding a federal grant or contract. 31 U.S.C. § 6301. In pertinent part, "[a]n executive agency shall use a procurement contract as the legal instrument . . . when . . . the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit or use of the United States government." 31 U.S.C. § 6303. When using a procurement contract, an agency must adhere to federal procurement laws, including the Competition in Contracting Act (CICA), 41 U.S.C. § 3301, as well as the Federal Acquisition Regulation (FAR).

In contrast, an "agency shall use a cooperative agreement as the legal instrument . . . when . . . the principal purpose of the relationship is to transfer a thing of value to the [recipient] to carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring . . . property or services." 31 U.S.C. § 6305. The FGCAA notes that "substantial involvement is expected between the executive agency and the [recipient] when carrying out the activity contemplated in the [cooperative] agreement." 31 U.S.C. § 6305(2). When using a cooperative agreement, agencies escape the requirements of federal procurement law.

Section 8 of the Housing Act of 1937 authorized HUD to provide rental assistance benefits to low-income families and individuals. These benefits included payments to owners of privately-owned dwellings (project owners) to subsidize the cost of rent. Traditionally, HUD entered into Housing Assistance Program contracts (HAP contracts) directly with project owners and paid the subsidies directly. However, the 1974 amendment to the Housing Act gave HUD a second option—to enter into an Annual Contributions contract (ACC) with a Public Housing Agency (PHA). The PHA would then enter into HAP contracts with project owners. HUD provided the PHAs funds to pay the subsidies to the project owners.

In 1997, when many of the HAP contracts under the 1974 amendment were beginning to expire, Congress enacted the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), which permitted HUD to renew existing HAP contracts. MAHRA defined "renewal" as the "replacement of an expiring Federal rental contract with a new contract." MAHRA was enacted at a time when HUD was facing extensive budget cuts.

It had just announced a plan to reduce staff by one-third by the end 2000. MAHRA's "Findings and Purposes" noted that HUD "lacks the ability to ensure the continued economic and physical well-being of the stock of federally insured and assisted multifamily housing projects." Thus the 1997 Act addressed this problem through "reforms that transfer and share many of the loan and contract administration functions and responsibilities of the Secretary to and with capable State, local, and other entities." MAHRA § 511(11)(C).

Accordingly, HUD began to outsource certain contract administration services. While outsourcing these services, HUD still had the obligation under the 1983 amendment to engage a PHA for any new HAP contracts. Thus, on May 19, 1999, HUD initiated a nationwide competition to award an ACC to a PHA. The ACCs were performance-based; that is, in addition to "basic" administrative fees, PHAs could earn "incentive" fees by entering into HAP contracts beyond the number specified in their contract. With existing HAP contracts, HUD's Request for Proposals (RFP) stated that it would assign such contracts to the PHA, and that "the PHA [would] assume[] all contractual rights and responsibilities of HUD pursuant to such HAP contracts."

The RFP stated that "[t]his solicitation is not a formal procurement within the meaning of the Federal Acquisition Regulations (FAR) but will follow many of those principles."

In response to the 1999 competition, HUD awarded 37 of the PBACCs. PBACCs were awarded in the remaining jurisdictions through later competitions. PHAs administering these PBACCs assumed the title of Performance-Based Contract Administrators (PBCAs).

On February 25, 2011, HUD chose to re-compete the PBACCs to ensure that the "Government was getting the best value." Many PBCAs adamantly opposed HUD's decision to re-compete and requested that, at a minimum, incumbent PBCAs get priority consideration. HUD denied this request on the ground that stricter competition would lead to greater savings for the government. In July 2011, HUD announced awards for all jurisdictions and stated that its decision to re-compete the PBACCs saved HUD more than $100 million per year.

Appellants were awarded multiple contracts in multiple states; however, a number of other PBCAs and PHAs were not as fortunate. This led to a total of 66 post-award protests being filed with the Government Accountability Office (GAO). Among other things, protestors argued that the PBACCs were procurement contracts and that HUD had not complied with federal procurement laws.

On March 9, 2012, HUD re-issued its solicitation for competition. However, for the first time, HUD expressly characterized the PBACCs as cooperative agreements, and thus, outside the scope of federal procurement law. HUD also announced that it was choosing not to allow PBCAs (including Appellants) to compete for PBACCs outside their home states. This change in policy excluded from consideration many applicants, including Appellants, who HUD previously determined in 2011 provided the government the best value.

Appellants filed pre-award protests with the GAO, arguing that the PBACCs under the NOFA are procurement contracts and thus subject to federal procurement laws.

The GAO agreed with Appellants that the PBACCs are procurement contracts. It rejected HUD's argument that the PBACCs "transfer a thing of value" under 31 U.S.C. § 6305 merely because HUD is required to provide funds to the PHAs to make subsidy payments to project owners. The GAO found that, although the payments are made through a depository account to the PBCAs, the PBCAs have no rights to, or control over, the payments and that any excess funds and interest earned on those funds must be remitted to HUD or invested on its behalf.

The GAO also rejected HUD's argument that the administrative fees paid to the PBCAs qualify as a "transfer [of] a thing of value." The GAO found that the purpose of the fee was not to assist the PHAs in carrying out a public purpose. "Rather, . . . the  administrative fees are paid to the PHAs as compensation for . . . administering the HAP contracts." In other words, the fees merely cover the PHAs' operating expenses.

The GAO determined that "the circumstances here most closely resemble the intermediary or third party situation, ... where the recipient of an award [i.e., a PBCA] is not receiving assistance from the federal agency but is merely used to provide a service to another entity which is eligible for assistance." As such, the principal purpose of the NOFA and ACCs to be awarded under the NOFA is for HUD's direct benefit and use. Thus, the GAO held that the PBACCs are procurement contracts. Specifically, these agreements procure the contract administration services of the PBCAs.

However, on December 3, 2012, HUD announced on its website that "[t]he Department has decided to move forward with the 2012 PBCA NOFA and plans to announce awards on December 14, 2012." An agency's decision to disregard a GAO recommendation is exceedingly rare. The Court of Federal Claims has explained that it "give[s] due weight and deference" to GAO recommendations "given the GAO's long experience and special expertise in such bid protest matters."

Soon after HUD's announcement, Appellants filed pre-award protests in the Court of Federal Claims asking it to enjoin HUD from proceeding with the NOFA. Appellants argued that the PBACCs under the NOFA are procurement contracts.

The Court of Federal Claims ruled in favor of HUD.   Appellants appealed.

This court agrees with Appellants that the PBAACs are procurement contracts and not cooperative agreements. Based on this record, the primary purpose of the PBACCs is to procure the services of the PBCAs to support HUD's staff and provide assistance to HUD with the oversight and monitoring of Section 8 housing assistance. HUD acknowledged its intention "to procure the services of contract administrators to assume many of these specific duties, in order to release HUD staff for those duties that only government can perform and to increase accountability for subsidy payments." HUD sought new ways to conduct its business[,] such as the Request for Proposals for outside contractors to administer HUD's portfolio of Section 8 contract[s]." HUD has also consistently described the role of the PBCAs as "support" for HUD's Field Staff.

The record belies HUD's argument that the housing assistance payments it makes to the PBCAs are a "thing of a value" within the ambit of 31 U.S.C. § 6305. HUD has a legal obligation to provide project owners with housing assistance payments under the HAP contracts. Transferring funds to the PBCAs to transfer to the project owners is not conferring anything of value on the PBCAs, especially where the PBCAs have no rights to, or control over, those funds. Likewise, the administrative fee paid to the PBCAs do not constitute a "thing of value" either. While money can be a "thing of value" under 31 U.S.C. § 6305 in certain circumstances, the administrative fee here appears only to cover the operating expenses of administering HAP contracts on behalf of HUD.

At most, HUD has merely created an intermediary relationship with the PBCAs "[w]here the [PBCAs are] not receiving assistance from the federal agency but [are] merely used to provide a service to another entity which is eligible for assistance." "The fact that the product or service produced by the intermediary may benefit another party is irrelevant." In the case of an intermediary relationship, "the proper instrument is a procurement contract."

Because the PBACCs at issue are procurement contracts, and because HUD concedes it did not comply with federal procurement laws, the decision of the Court of Federal Claims must be reversed and remanded for disposition consistent with this opinion.

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